Breaking New Ground in Infrastructure FinancingTue, 11/01/2016 - 14:51
Q: What are the most significant challenges fund managers face when choosing projects?
A: In Mexico, even though toll roads appear to be a mature business, revenues are not efficiently managed. Businesses that are elastic to prices and that cannot store capacity must apply price discrimination and establish various pricing structures to ensure adequate revenue management. There are several toll roads in Mexico that have the ability to generate larger cash flows but lack revenue management. Companies cannot re-establish their pricing because they have structured bonds that do not permit new price structures and thus they must prepay debt to implement revenue management. Private equity funds can play an important role in the transition until previous leverage is refinanced.
Q: What patterns have emerged in energy and infrastructure that make it optimal for investment?
A: The new legal environment will produce opportunities not only in oil and gas but also in power. With the new PPP law, there are opportunities for many new projects such as the relocation of existing infrastructure, large rail, multimodal developments and airports. The government’s weaker financial situation is caused by accounting for cash flow liabilities instead of assets. It is optimal for the government to monetize brownfield assets and then use the proceeds to build new infrastructure. The last administration carried out the privatization of the FARAC toll roads and it is likely that these actions will continue with airports as well as toll roads.
Q: What strategic alliances is Ainda creating as it positions itself in the energy and infrastructure markets?
A: Ainda has joined forces with Goldman Sachs Merchant Banking Division and we are preparing a package of CKDs for energy and infrastructure valued at over MX$21 billion (US$1.1 billion). We formed this strategic alliance with Goldman Sachs to meet our fiduciary responsibility to our investors and as a way to embrace the opportunities that present themselves. The countless prospects that are developing in Mexico will create demand for our expertise in the Mexican market and Goldman Sachs will benefit greatly from having a local team that knows how to identify and manage potential projects.
Q: Why is it important to establish a formal investment process for potential projects?
A: It is necessary because we believe the fiduciary responsibility between the investor and the fund administrator must be well defined from the outset. Establishing the detail of the investment process ensures the investor is well aware of the fund manager’s responsibilities. Ainda was the first fund manager in Mexico to join the United Nations Principles for Responsible Investment and implement a code of conduct and ethics. These components were put in place as a way to establish a more transparent relationship between investors and fund managers for how activities would be carried out. The role the government plays in ensuring that these types of measures are put in place by investment funds is as important as sectoral cooperation.
Q: How will financial vehicles and project partnerships impact the development of Mexican infrastructure?
A: Fibra E is an excellent financial instrument but there are very few potential assets that can actually be transferred into a Fibra E. There are many physical assets that have yet to produce cash flow under the new legal system and thus have no proven track record. Although those assets may be old, they should not be considered mature. Fibra E and CKDs are not mutually exclusive but complementary, and in the future CKD investors could divest into a Fibra E. These financial vehicles are far more effective when used together to invest in diverse infrastructure projects.
Joint ventures and USPs are generating a presence in the Mexican infrastructure market and will increase the number of projects in the country. If an investor proposes a joint venture to PEMEX or CFE, the project can go forward without a bidding process as long as the company’s board approves the project. When carrying out a project with the Ministry of Transport, the project could fall under a PPP scheme as a USP and the company that took the initiative could have an advantage in the bidding process.