Betting on Mexico's Telecoms

Q: Which of these infrastructure sectors do you think will be the most successful?

A: We are very bullish on Mexican infrastructure. We have been here for quite some time and have a relatively large team with a lot of on-the-ground experience. When examining Mexico’s demographics and fundamentals, they are very promising. This is also illustrated by the arrival of various companies to the country in recent years. We define infrastructure as investments that require large CAPEX expenditures and which we can contract on a long-term basis, allowing us to use project finance.

We focus on energy, both conventional and renewable, and we are also focused on transportation – more specifically, roads and ports. In the midstream sector, we are primarily focused on greenfield liquid storage. Finally, the telecoms sector is a promising because there continues to be a significant lag in this kind of infrastructure in Mexico, compared to countries like the US. Within each of those, we serve niche areas. For example, in power generation, we are not looking at any of the auctions since we find them to be overly competitive. We are trying to find angles in which we can build a relationship or solve a client’s specific problem.

Q: How would you evaluate the Telecommunications Reform and how did this impact your decision to invest in this sector?

A: We invested in the telecoms sector back in 2014. We started with a cluster of fewer than 200 towers, and we now have 1,700. At that time, when we looked at the market dynamics, we saw a very low penetration of towers throughout the country and many users per tower compared to developed markets. The Telecommunications Reform has had a favorable impact in that there was a bidding process for the Red Compartida. This program is expected to deploy a vast national network to expand coverage to end users and we are part of the backbone of this goal. Mexico Tower Partners has developed greatly from this, but we continue to see a lag in the penetration of cell phones and data usage per customer in Mexico compared to what we have seen in locations like the US and Europe. This is why we continue to be very bullish about telecommunications infrastructure.

Q: What challenges have you faced when participating in PPP concessions in Mexico?

A: The Ministry of Finance’s recently announced program of 13 PPP projects was fairly well-structured. The projects were geared toward i construction companies. Most of the contracts were refurbishment or construction contracts rather than investment opportunities. The problem is that some of these projects are simply too small for us.

I think one of the challenges with any type of project is matching the national need with local and state regulation and local and state interests. The program the Ministry of Finance released was fairly synchronized with some buy-in at each level, and this is why the projects worked well. On the other hand, some USPs today take time because they work from the bottom up and can be much more complex than PPP projects. Having said this, the USP scheme is one we really like and I believe it is an option we could pursue in the future. We are in discussions with a couple of construction companies that we are interested in working with on these kinds of proposals. In this area, the education sector interests us.

Q: What is your outlook for the change of administration in 2018?

A: We have the benefit of working in infrastructure and by definition, these are very long projects. When we look at investing in a project, of course the overall political landscape matters but ultimately, we are investing in projects where we feel we have identified a fundamental need that must be met. If there is a real need for an infrastructure project, it should be impervious to changes in political administrations. We focus on the fundamentals rather than the political landscape. Although political factors do not drive the investment decision, they will influence the discount rate or risk factor of the project and will impact the ability to secure third-party financing.