Why Mexico Must Accept Public-Private Infrastructure Partnerships

A little over a year ago, I wrote a LinkedIn article about public-private partnerships as a means of strengthening Mexico’s energy sector. With the secondary laws now in place and the first contracts assigned, this argument has been reinforced. In my opinion, this is the only viable way to develop the country's energy and infrastructure.

Clearly, the public sector has more limitations than it did a year ago. For example, PEMEX remains the world's most indebted oil company, with liabilities approaching US$79 billion and accounts payable to suppliers exceeding US$21 billion. Consequently, the plan to achieve financial independence by 2027 will not be realized, as we predicted months ago. We will therefore likely see further federal government assistance soon. Meanwhile, Moody’s downgraded Mexico’s sovereign rating to Baa3 (one notch above speculative grade), citing rigid spending and government support for PEMEX as key factors contributing to fiscal risk while the deficit remains above 4% of GDP. In this context, every project financed with private capital reduces pressure on the country’s public debt.

Water infrastructure deserves the same attention as energy infrastructure. Two-thirds of the country’s territory consists of arid or semiarid areas; water stress puts up to one-third of GDP at risk; and Conagua’s budget has fallen from 0.26% to 0.1% of GDP in just over a decade—well below the 1.3% that ECLAC considers necessary. Of the country’s 435 plants, 137 are out of operation. Cases such as the Acuapue treatment plant in Puebla, developed under a public-private partnership, show that the same shared-capital model currently used in the energy sector can be replicated in desalination, water treatment, and water reuse, as already envisaged within the 2024–2030 National Water Plan.

Below are the main benefits that explain why strategic partnerships — joint development contracts at PEMEX, joint investment schemes at CFE, and equivalent schemes in the water sector — have become the solution:

• Capital without additional tax burden — PEMEX has already awarded 10 mixed contracts based on cost recovery and profit sharing, and CFE completed a process that awarded more than 7,400MW of renewable generation with US$8 billion in private investment — capital that does not affect the deficit or the sovereign debt trajectory.
• Preservation of government leadership — Unlike the previous farmout model, the current schemes maintain a majority government stake — 54% in CFE projects and no less than 40% in PEMEX projects — which reduces political resistance to market opening and facilitates continuity across administrations.
• Transfer of technical and technological capacity — The private partner contributes engineering, operational expertise, and financial discipline that accelerates the execution of projects which, if left entirely to the public budget, would face years of delays.
• Risk diversification — Rather than having the government bear the entire risk of financing, construction, and operation, these schemes distribute that risk among actors with different capabilities and risk appetites.
• Expansion to the water sector — The same model makes it possible to accelerate the construction of desalination plants and wastewater treatment and reuse facilities in areas experiencing critical water stress, thereby alleviating pressure on overexploited aquifers without relying exclusively on Conagua’s budget.

Although mixed models allow for private capital participation, they are still far from being the ideal contractual vehicle, as they have limitations that complicate capital decisions (especially for global companies with greater experience and resources) primarily due to the lack of elements that provide security for long-term investment. Here are a few:

• Legal certainty – In various forums I have had the opportunity to attend, the consensus among executives, investors, and rating agencies has been that judicial reform continues to cause unease among stakeholders who must commit capital for 20 or 30 years under stable rules.
• Transmission bottleneck – Electricity generation awarded by CFE is growing rapidly, while the national transmission grid lacks sufficient capacity to move the generated energy. For example, in the Yucatán Peninsula, available transmission capacity is considerably lower than what is required for projects already awarded; this poses a risk to developments currently in progress, which are likely to reach an impasse by producing energy that cannot be transmitted.
• Institutional Coordination – As has been the case with various projects, such as the “Southwest Gateway” gas pipeline, the timelines of PEMEX, CFE, CENACE, CENAGAS, state governments, and even municipal governments are not synchronized, leading to discrepancies between the planning, execution, and commissioning of various projects. This has led to projects being finished but not connected, as is the case mentioned where natural gas is there but not able to reach the Yucatan peninsula until other pipelines are finished.
• Limits as a Substitute for Fiscal Consolidation – Strategic partnerships complement, but do not replace, a credible fiscal path. The ability to attract capital depends largely on Mexico maintaining its investment-grade rating. If this rating is compromised and the fiscal deficit is not brought under control, the effects could be devastating for most projects where financing costs are one of the most important variables.
• Fracking and deepwater exploration – The vast potential of unconventional reservoirs and deepwater exploration is not compatible with mixed contracts; contractual models aligned with global standards are needed to allow for farmouts that enable international companies to bring in capital and technology. It is encouraging that discussions with PEMEX and SENER are continuing today to assess alternatives. 

On the other hand, the government recently announced an MOU between PEMEX and Petrobras. This is good news, but there is a long road ahead to reach tangible investments, specifically considering the huge gaps between Petrobras' governance and business-independent model compared to the limited and dependent PEMEX model. 

Conclusion and Recommendations

Today, strategic partnerships are no longer merely an option for energy policy but have become the primary path to growth in a fiscal environment with limited room for maneuvering. PEMEX and CFE lack the financial capacity to fund the transformation outlined in the strategic plan on their own, and, on the other hand, the federal government certainly does not have the resources to maintain financial support indefinitely without jeopardizing its sovereign credit rating.

The challenge in the coming years will not be deciding whether partnerships with the private sector are necessary, but rather swiftly resolving the institutional bottlenecks that currently prevent already-committed capital from materializing into operational projects. For companies interested in participating, the recommendation remains the same as it was a year ago: analyze and prioritize contractual certainty through legal and regulatory due diligence and continue to build long-term institutional relationships. Today, management cannot be limited to mere public relations but must involve a genuine alignment of long-term visions with the government; without these elements, no partnership model — no matter how well designed — will be sustainable over time.