PPPs: a Strong Ally for Project DevelopersWed, 02/19/2014 - 10:48
The enactment of the Public-Private Association Law came in early 2012, creating broad access to public-private partnerships (PPPs) for the first time in Mexico. Prior to this law being implemented, the Mexican government had included PPPs within the federal system, but these were only accessible in highly restricted conditions.
Pedro Resendez Bocanegra, Partner at Greenberg Traurig, says the law firm was engaged by the Mexican Construction Chamber (CMIC) and helped it to propose regulations about PPPs to the government. “So far we have been successful with a couple of clients that have already submitted PPP proposals to the government,” he adds. Greenberg Traurig has seen how this process is transferring the critical decisions for renewable energy projects to the private sector. Rather than relying on the government, the private sector is tabling proposals and is working with the government on financing and project development. “Instead of having a rigid law, we are seeing more flexible regulations which show that the government is supporting the private sector in proposing projects,” Resendez Bocanegra acknowledges.
Greenberg Traurig has been involved in the bidding and financing of major projects. Resendez Bocanegra uses the project financing granted by Korea’s Nexon Bank, where the whole risk was allocated within a project’s assets, as an example of the increasing challenges for firms such as Greenberg Traurig. “For example, we drafted CFE’s independent power producer (IPP) contracting model. Even though CFE is using the same model with some changes applicable to the renewable energy sector, what has promoted the growth of renewables is not necessarily the legal instruments,” Resendez Bocanegra notes. “Wind power is almost cost competitive with combined cycle or even offers a cost advantage,” he says. When his firm started considering helping IPPs work with renewable energy, the problem was that renewable energy was simply too expensive. “CFE by law has to buy the cheapest energy, so now that renewable energy rates are becoming competitive, there is no reason not to do a renewable energy or combined cycle project.” The second issue with renewable energy is the intermittence of some renewable sources, which requires a diverse energy mix. Mexico shifted most of its energy to combined cycle and natural gas, which was a good decision. Now we can start exploring renewables,” states Resendez Bocanegra.
The current legal framework can help create synergies between natural gas and renewable energies. Instead of competing, they can complement each other. Mexico’s regulation does not impede or favor non-renewable resources and, from Resendez Bocanegra’s perspective, this is the reason why renewable projects are becoming a reality in Mexico. “The private sector is taking the risk. There are three or four large wind and solar projects in Mexico where a private developer took the risk to invest in renewable energy because their off-takers did not want to depend on CFE or on the rate that CFE decides to charge.” Resendez Bocanegra says the looming challenge is transmission, despite it not being a legal issue. He believes the market needs to be reorganized and is placing trust in the Energy Reform. “Changes need to be made in order to enable private parties to build more transmission lines with CFE, and to transmit electricity through contracts with private parties. We need to change the structure of the Mexican electricity market: we need an independent operator because the current one, CENACE, is part of CFE. The transmission lines are all owned by CFE and this creates conflicts when deciding to start a renewable energy project or an IPP,” claims Resendez Bocanegra.
As the Energy Reform moves forward, renewable actors anxiously wait to see where the secondary laws will stand. “Based on previous experiences, if secondary laws are left until the end, the expected results might not be achieved. I believe that secondary laws are essential, and the government has to ask the players how they would be willing to invest.”
In the meantime, the renewable energy market continues to move forward and this translates in Greenberg Traurig being increasingly consulted about renewable projects ahead of non-renewable ones. This situation is expected to continue throughout 2014 since the law firm is seeing a large number of investors with resources available to invest in renewable projects, a sign that the renewable sector is becoming profitable. This may well be linked to the development of small and medium-scale projects that can be developed by teaming with private off-takers, or with state and local governments. This evolution represents a very attractive opportunity for private equity, and Greenberg Traurig is well aware of that. “We have decided to focus on Mexico. We have been here for a long time, we are committed to the country, and we know how to develop projects here, but also know how to bring financing to Mexico,” adds Resendez Bocanegra.