Q: Why does the country need more involvement from the private sector in infrastructure development?
AC: We predicted that there would be a larger PPP boom after the first securitization of a PPP, which was ICA’s prison project. It was one of eight projects granted to private companies. The entire market thought it was a new beginning. It has been seven years since then and in this time, there have not been many PPPs at all. It has been slowed down because even though there are many PPP projects in Mexico, many involve national entities, which complicates things a bit. Municipalities and states normally do not have the best counterparty quality, making these projects far more difficult to finance, not only by the market but also by banks. It is an issue because one counterparty in these contracts can have a AAA rating and the other A-. Penitentiary projects have been particularly problematic. They have been downgraded and even though operations have been great from the company’s side, they are not receiving timely payments from the government.
CG: When the public sector manages public infrastructure, some argue that it is inefficient, that costs are higher over time and that there is a lack of transparency in the processes. When the private sector is brought into the picture, there is more attention placed on the project. Any small issue is magnified because the private sector is perceived as making a profit. When thinking about it broadly, the private sector makes profit from 20-30 percent of the capital structure because that is the equity and the rest is debt. There would be debt anyway if it were a public project but, in a PPP, the added equity return is in the single digits relative to total project cost. When comparing it to a public project, and this is true in many countries, overall cost increases can easily reach double-digits, possibly more than offsetting the cost of equity. The private sector is capable of delivering more efficiency but it attracts more attention because people are much more fearful that it is seeking to make money from the public sector.
In Canada, toll roads are not that viable. This means that road infrastructure projects must be done through availability transactions. The revenue risk is retained by the government and the private sector gets paid to build, operate and maintain that road. The risk allocation has also been tweaked, because sometimes there are risks that the public sector cannot handle, such as environmental elements and rights of way. The bottom line is that there is no one size that fits all. Rather than completely reversing the approach, tweaking the system to reduce the opportunities for the private sector to make too much money while delivering more for the public could be a better way to go.
Q: Is there a lack of liquidity in the market or are there not enough viable infrastructure projects?  
AC: There is liquidity in the market. Pension funds are extremely interested in infrastructure projects. Pension funds' balance sheets increase every two months because of contributions from workers. I can see why concessionaires and operators might say that there is not enough liquidity in the market, but the issue comes from bankability. PPP projects can be attractive but unless the contracts are strong, containing clear termination clauses and good counterparties, the bankability of the project limits the construction company’s or operator's ability to acquire financing.
CG: In public infrastructure, the government holds all the cards. For a country to have a good PPP law, the government should begin by creating contracts that are not only attractive to the private sector but which also have restrictions on profit, ensuring quality of services and maintenance. The public will then see the value. The rules are written by the government yet investors are willing to participate more. Infrastructure as an asset class is now global and there are many interested in investing in it. Mexico is one of the stronger emerging markets and is grabbing the attention of many across the globe. Ratings agencies provide an important input for investors on the quality of the credit.