Infrastructure Essential to Develop Southern Mexico: AindaBy Peter Appleby | Thu, 10/01/2020 - 10:14
Q: What were the opportunities and problems related to the signing of Ainda’s toll road contracts in Chiapas and Mexico-Guatemala?
A: Chiapas has two main toll roads. One from Tuxtla Gutierrez, the capital, to San Cristobal de las Casas, an important tourist destination, and another that links Mexico with Guatemala. The latter is the most important connection between the two countries. The concession we signed covers both toll roads, which have significant need to resolve bottlenecks and prevent accidents.
The difference in elevation between Tuxtla Gutierrez and San Cristobal de las Casas is 1,712m or 5,616ft. There is only one lane going up and one lane coming down. The width of the road means that accidents happen when cars try to pass one another, especially when a slow-moving truck is going up toward San Cristobal de las Casas. On the road between Mexico and Guatemala there are also bottlenecks and heavy congestion.
The idea was to resolve these problems. To do so, the law establishes the possibility to expand a concession title. To build an additional lane from Tuxtla Gutierrez to San Cristobal de las Casas, we established a partnership with Aldesa, which as of May 2020 has become part of China Railway Construction Corporation. We believe this is a good example of a major multinational deciding that it wants to have a local partner. This means the role we are playing is beyond providing financial resources. The economic benefit will also be seen in the spillover effect during construction. This is always positive but particularly now with the fallout from COVID-19. The project will create 1,500 direct jobs during construction and a further 3,700 indirect jobs. This will lead to a considerable positive impact on Chiapas’ local economy. At the moment, the road concession is the most important investment project in the state of Chiapas in terms of employment.
A secondary effect is on southern Mexico. To develop the region, we must do things different. I believe there are three main things we need to do. The first is improve connectivity, which naturally leads to infrastructure projects. Second, we need to reduce the cost of energy, mainly electricity, by providing natural gas. The third point is related to the improvement of education.
Ainda believes that our project is a positive contribution to improving the connectivity of Chiapas within the state, as well as between Chiapas and the rest of Mexico and Guatemala.
Q: This project complies with the UN’s Principles for Responsible Investment. Why is this important to Ainda?
A: Ainda strongly believes in environmental responsibility, as well as in having a strong social and corporate governance (ESG). From a personal perspective, ESG has been a part of my life since university. Ainda is the first signatory of the UN Principles for Responsible Investment in Mexico. When a company joins this principle, it receives a rating. Ainda is graded A+. Responsibility for sustainability and the environment is very much embedded in our company.
For me, the G is the most critical part of the ESG model. Without corporate governance, the environment and sustainability side can be wallpaper: nice to say but without any follow up. Ainda’s corporate governance structure and independent board members make our position clear. Our board members are world class and truly independent. Among them are Enrique Barón Crespo, the former President of the European Parliament and Spain’s former Minister of Transport, Tourism and Communication. We also have people like Ginger Evans, who oversaw the construction of the Denver International Airport, and Louis Ranger, the former Deputy Minister of Transport for Canada. Having the right people in place is key to a corporate governance that is enforced. In projects on the ground, this implies understanding their impact on the local community, understanding how to include the local community and making people part of the project and ensuring the project generates employment for locals.
Q: How does this project underline the importance of the National Infrastructure Agreement?
A: Governments have fewer resources than they did before due to the COVID-19 pandemic. Another important point is that International Financial Reporting Standards (IFRS) that were modified in 2016 entered into effect in 2019. For infrastructure projects, these modifications imply that off-balance sheet financing is no longer acceptable. All financing must be included on the balance sheet. This means that the degrees of freedom that governments have in regard to financing major projects have been restricted. This, I believe, suggests that the government should not undertake projects that the private sector is better equipped to do and that projects must be structured in accordance with IFRS. In the case of Ainda’s toll roads projects, we are fulfilling these requirements. The project uses solely private resources and the structuring ensures there is no liability for the federal government nor does it increase the government’s indebtedness. Ainda and its partner are taking all the risk.
Q: How does Ainda evaluate the projects it undertakes?
A: Ainda rarely participates in tenders. In most cases, we have exclusivity over the projects. This tends to be because we are uniquely able to add value to the project. Our uniqueness within the industry is our differentiator and we tend to concentrate on that when pursuing joint-venture projects. We also like projects that have a solid base so that, if things go wrong, we know we will come away with something. Projects must also have upsides that are not based on assumptions. We consider upsides only when they are linked to to-dos. This means that the upside becomes a benefit when we perform well.
Q: What are the opportunities Ainda will be working toward in the coming years?
A: We see huge opportunities in many areas of Mexican infrastructure. That includes transportation, water, power and oil and gas. Each area has its unique dynamics and only through deep knowledge of each one of these sectors can new white spaces be found.
For example, on toll roads, throughout the world there is both social benefit and money being left on the table. In any business where the elasticity of demand is important and production cannot be stored – the airline industry, hotels, telephone companies, are such examples – companies must offer price-value packages. There is a need to discriminate through price to meet the most socially optimal product offering. But with toll roads this is not done. In most countries, the only algorithm used for toll roads is Uber’s: a change in price depending on congestion. But there are two alternative algorithms that are more powerful. One has to do with frequency of use, like the models used for subway ticket options – single ticket, daily ticket, monthly ticket and so on – which is relatively simple to apply to toll roads.
The other algorithm is what I call the “McTrío.” This is based on the idea that it is not optimal for the price of a long haul to be the summation of the use of the three toll roads that were necessary to traverse. The elasticity of demand for a person using three toll roads on a trip is not the same as for a person only making use of one toll road. The summation, therefore, does not maximize profits. This is another white space.
Ainda Energía & Infraestructura is a private equity fund management firm investing in essential infrastructure and energy works across Mexico. The company brings a team of experts from diverse backgrounds including government, transportation and law.