Water and Waste Management Opportunities AboundWed, 02/19/2014 - 09:16
Q: What were the main opportunities you identified 20 years ago when you founded Promotora Ambiental, and how have these evolved to date?
A: The first comprehensive Mexican environmental law, known as the General Ecology Law, was enacted in 1988. From that point, we knew that Mexico would start adopting the standards of the developed world, particularly US standards. After finishing university, I decided to dedicate myself to an environmental cause. A study of the development trends in the US environmental industry carried out throughout the 1980s showed that the sector was growing fast, with about a third of the projects being linked to water, about a third involving municipal solid waste (MSW) and the remainder to deal with everything else. This study provided me with a roadmap to start focusing on water and MSW. Since I did not have the money to enter the water sector, which was more focused on building water treatment plants instead of efficient water use, I entered the MSW market by buying a small company that picked up garbage and adding recollection services, mostly for industrial and commercial customers in the Monterrey area. Over time, this small start-up became Promotora Ambiental. In 1992, we replicated our business model in Mexico City, Guadalajara, and Reynosa while beginning to look at getting into government contracts. We studied SIMEPRODE’s business, which was the only existing landfill operation in Monterrey at the time.
In 1996, we broke ground on our first landfill project in Monterrey. Increased competition benefited the generators as the gate rate began to come down. This refers to the charge levied upon a given quantity of waste received at a waste processing facility to offset its operating costs. Monterrey today has some of the lowest gate rates in the country, which impede landfills from reaching appropriate levels of profitability. In general, low gate rates are not good for the market as they incentivize low operating standards and little recycling. They also make the MSW business shady since people tend to cut corners and environmental risks increase as companies are not operating according to appropriate standards. But one way a project can bridge the profitability gap is to try and make money out of the gas a landfill produces to offset losses on the disposal side.
In 1997, we merged with a company called USA Waste, taking over their operations in Mexico. After a couple of mergers and a period of national expansion, we performed our initial public offering on the Mexican stock market and our private equity partners were able to exit their investment.
Q: How important have municipalities been to your growth as a company?
A: During the past 10 years, we did not receive much revenue from municipal governments. It is disappointing that corruption, bad practices and impunity have significantly increased during the past 10 years, particularly in the last five years. We recently lost a bid in the city of Monterrey, where we have successfully provided MSW services for the past 12 years. We offered a better price, in addition to a proven value proposition and highly regarded service model, yet the project was awarded to one of our competitors. This matter is currently the subject of a legal dispute. Sometimes in our industry, best business practices are not valued and it is frustrating to see the market stumble into bad behavior. The administration of President Vicente Fox passed laws that considerably empowered states while diminishing their accountability. Money was transferred to cities and states, with state congresses being allowed to allocate those funds as they saw fit. This embedded a direct conflict of interest: the authority in charge of supervising where the money went was the one spending it. The executive branch should start addressing some of the voids created during the last two presidencies. Both were very lax with state governments and let them act without consequences. During this time, Promotora Ambiental made the conscious decision to not grow much on the municipal side. We are focusing on the specialized private sector, recycling, water and soil bioremediation, hazardous waste and a few new niches that should open up with the Energy Reform. In addition, we have captured attractive growth opportunities outside Mexico. We recently acquired Environmental Management Group in Panama, we are expanding to Costa Rica, and we have an operation in Belize along with the Inter-American Development Bank. The undesirable issues surrounding the municipalities can be fixed through increased responsibility and improved regulation. Over the past 18 years, we have seen many municipal contracts with an excellent track record of environmental care. We believe these examples will be gradually replicated and the market will improve its standards.
Q: Which new opportunities do you expect to arise as a result of the recent reforms?
A: We are taking a serious look at water concessions by strategizing with a handful of multinational corporations and bidding for concessions that come up for offer. In one city, we were ready to bid but everything unraveled, due to excessive, impractical and unrealistic conditions. There was a gap between what the government expected to fetch from this concession and the actual value of the concession as estimated by the private sector. The city was requesting an upfront payment for the concession before any investment was made. This is different from cities like Aguascalientes, Saltillo and Cancun that offer shares in the project company to those investing in the project. Those are the types of projects that interest us. According to the global efficiency index, only 40% of the water injected into the Mexican grid is collected while the other 60% vanishes between physical and commercial losses. This is an incredibly poor performance when compared to other OECD countries. There are huge opportunities in this area, and significant investment is needed. We have framework agreements with international companies in place to help us develop such projects. We are seeking to implement a business model where a local operator that wants to develop the industry and put equity in place, partners with a big international player that wants a small amount of equity but is mostly interested in the fees. This makes the ownership and operating sides quite complimentary. Another element is the amount of pension fund money that has accumulated in the financial system. The structure regulators have provided for these funds to be invested in infrastructure projects. These funds will play a major role as the water industry matures. Mexico has the opportunities, financial resources, international operators, and several domestic companies that are committed to executing these opportunities. Finally, we are looking into renewable energies. We dabbled in wind in Oaxaca and looked at the Open Season scheme, but things got too complicated. Now, we are focusing on solar PV and landfill gas to energy. We may come back to wind at some point, but the conditions need to be right. The beauty of renewable energy projects is that they fit into our environmental philosophy, and long- term contracts with AAA off-takers provide a measure of predictability. Waste management projects are completely different: they involve a wide customer base, higher risks, less leverage and lower margins.
Q: Having diversified from being a waste management company to new business areas, what kind of company will Promotora Ambiental be in the future?
A: We operate under three different and separate umbrellas. The first is our waste management, environment and water business, the second is our renewable energy business and the third is our gas business. It makes sense for each business to operate separately, making it compelled to stand on its own. The fact that we are entering these other sectors makes sense, although it is challenging and any new business faces a seemingly endless uphill battle. I want our group to set high standards when it comes to social and environmental responsibility. It is very hard to transmit this message as customers frequently only see our operational side. We are making an effort to effectively communicate our social and environmental responsibility efforts and the results they achieve. We have been socially responsible since the beginning; however, we remain very discrete. We do not care if the market or the press see our actions, it is just the right thing to do. We believe the market will appreciate our system and values, and potentially join in our efforts.