Infrastructure Development Relies on New Financial Vehicles

Q: Why is using CKDs an efficient method to finance infrastructure development and how is GBM Infaestructura using them?

A: In 2016, GBM Infraestructura raised its second fund totaling MX$10.5 billion, where it issued MX$9 billion through the BMV and raised the equivalent of 20 percent of the total fund itself. CKDs are a perfect vehicle to attract long-term capital and deploy it in Mexican energy and infrastructure projects because of their lifespans. Their useful life generally lasts between 20-30 years and only Afores can engage in such long-term capital investments. Pension funds are withdrawn upon retirement, which allows Afores a long-term investment window. Despite Afores’ allocation in alternative investments being small compared to countries with more developed private equity, most of GBM Infraestructura’s money comes from these institutional investors.

Q: To what extent will GBM Infraestructura start using new financial vehicles?

A: We want to start using CerPIs because there are notorious benefits in regulatory compliance and associated costs. GBM Infraestructura sees CerPIs as another version of CKDs because they are very similar. Both are listed vehicles and both entail definite fiscal advantages, especially for Afores. However, CerPIs’ compliance requirements are similar to that of a credit vehicle in the US. Moreover, Fibra Es are starting to gain market traction. Investors like holding onto material and operating assets, and Fibra Es are an asset to which institutional investors can hold on once the project’s construction phase is over. CKDs and Fibra Es are complementary; GBM Infraestructura expects to use Fibra Es in the near future for CKD divestment purposes.

Q: What kinds of projects does GBM Infraestructura focus on?

A: We address both greenfield and brownfield projects. By the end of 2017, 85 percent of our portfolio’s value will be bolstered by GBM Infraestructura’s existing toll-road and water concessions. There are more opportunities for riskadjusted returns in new projects than in mature projects because of the capital amount coming from institutional investors such as private equity funds, whereas foreign pension funds prefer to place capital in mature assets. The issue is getting the returns that we need from mature projects while continuing to work on new ones.

Q: Which subsector provides the highest ROI to GBM Infraestructura’s investors?

A: GBM Infraestructura works mainly in water, energy and toll roads. In the company’s first fund water projects were a great value creator. With the second fund, a substantial part of the pipeline seems to be geared toward energy projects as a consequence of the Energy Reform, especially in midstream electrical power developments. The toll-roads sector is experiencing less movement. GBM Infraestructura is very selective about the projects we consider because we want the second fund to replicate the success of the first fund. As a country, we must enforce a rule of law that ensures the legal framework for concessions to attract foreign private equity. Also, projects must have firm concession titles, be financially feasible, produce stable long-term returns, require high initial capital expenditures and be protected against inflation. GBM Infraestructura looks for specific characteristics in revenue streams that give investors a natural hedge in volatile markets.

Q: What challenges impact toll-road projects the most?

A: In greenfield toll-road projects the key issue is in obtaining rights of way for developers to build the project within the expected timeline since delays in construction mean higher costs. New projects from tender guidelines usually have funds destined for rights of way but as the project is developed, some price negotiations can surpass the project’s planned budget because the last parcels to be liberated are always the most expensive. Contingency for these projects can cause overruns on the planned costs of between 10 and 15 percent due to unplanned but necessary work and rights of way.