Alberto de la Parra
Partner
Jones Day
/
View from the Top

Long-Term Planning for Project Surety

Wed, 11/01/2017 - 09:57

Q: What measures can companies implement to protect their projects against changes in political administrations?

A: Investors must ensure that their concessions are respected, regardless of how elections unfold. The solid legal framework in place helps to maintain the certainty of concessions. Most companies hold international bonds or equity stakes, especially large developers. These types of deals are protected by NAFTA, among many other free trade agreements, which is why the Canadian and Mexican governments have asked that Chapters 11 and 19 of NAFTA be respected. These chapters regulate foreign investment and the arbitration and dispute resolution when investment is not respected in a country. Mexico is among the countries with the most free-trade agreements in the world and Chapters 11 and 19 form a good framework for protecting investment in concessions.

Q: Why should there be more PPPs to develop infrastructure in Mexico?

A: The more we create PPP schemes and the more pension funds invest in the projects, the more guarantees the projects will have. We have not seen as many PPPs because it is always more expensive for the government to finance a project through a PPP than through a budget. For the private sector, access to funds is more expensive than for the government. To finance a project using the private sector or PPP, that financing will be charged at the higher private-sector rate so that the government is essentially paying more than it would for a fully-public project. There have been few unsolicited proposals and those have not worked as expected when the PPP law was amended. But the government is now pursuing more PPPs for toll roads and some electricity projects because these are the ones that are more attractive to the private sector, which means the government can leverage itself more favorably.

Q: In terms of developers or the government, who has responsibility for land rights?

A: Land rights are always an issue and vary from project to project. For instance, eminent domain provided for hydrocarbon projects grants preference to the oil industry over any other activity. But acquisition of a plot of land is more an issue of negotiation with stakeholders. In transport and telecommunications projects, it is difficult because each piece of land must be negotiated separately. In the past, the government would expropriate the land or negotiate the right of way but now that responsibility across the entire project sits with the developer. If in the end there is no possibility of obtaining the right of way, the government can expropriate the rights of way, upon request from the developers.

Q: What new projects will be tendered in 2017-2018?

A: The possibility of the high-voltage transmission lines being ready by the end of this year would be a great triumph, and it could be under a PPP scheme or a service agreement contract with CFE. PPPs have gained momentum not only because of budget constraints but because the Energy Reform requires more activity in infrastructure development. We have seen it with the opening of the gasoline stations and retail sales in Mexico by private entities. There are many projects in gasoline transportation and storage, which are not necessarily related to the government but that are being carried out by the private sector. All of these are mostly financed through similar schemes, in which even commercial and Mexican development banks are interested. The difference is that development banks have more appetite for long-term financing than commercial banks. Commercial banks are giving shorter, 10-year financing while development banks offer 20-year financing.