Mexico Needs Better Legal Frameworks for Infrastructure ProjectsBy Gabriela Mastache | Tue, 12/31/2019 - 11:11
Q: Key Capital offers services that range from PPPs, debt raising and project finance. What is the company’s most in-demand service?
A: In general, I would say the process of structuring projects and transactions. The reason for this is because it is often hard to make projects happen. They are like a table that needs legs to support it. One leg is the legal structure, another the financial, and lastly the technical solution devised by engineers. We offer these three services under the same umbrella, creating an understanding of what is necessary for the project. This makes an attractive offer for companies.
Q: What is the principal obstacle in the process of structuring a project?
A: The biggest issue is that for many transactions, there is no precedent. In transportation, there are very few records of previous deals and projects. In the area of railroads, there are no legal frameworks to support the process. What we do in our consultancy is to look at successful projects that have taken place all over the world. We find comparable projects and look at how they were implemented.
Railroads are one of the principal motors of our economy. They are key for all kinds of industries. For this reason, it is a sector that needs to be developed and supported with new regulations that stimulate its usage. I believe that Mexico should adopt regulations based on US rules. Currently, you see a mixture of European and American standards being used in Mexico. This creates confusion and delays. The focus should be on US standards, which tend to be stricter in the rail transport segment.
Q: What opportunities do you see for public-private partnerships in infrastructure development?
A: Because the government has a limited budget, PPPs are key in building new infrastructure. If we look at roads, there are various potential projects that would only require small incentives from the government to be feasible and profitable for private stakeholders. For the private sector, PPPs are key because the government needs to provide the right-of-way for land. At the same time, it has a better picture of the population in the area of proposed infrastructure. There are various projects ongoing in Mexico at the moment. The payment largely comes from private parties, who take the commercial risks. These parties foresee a great benefit from new infrastructure for their businesses. We are happy to hear that sovereign funds are making proposals and unsolicited offers for specific infrastructure projects in Mexico. In terms of the private sector, which makes up half of our clients, we work with companies that are in agrobusiness, construction, real estate, finance, and more.
Q: What change in regulations would increase the incentive for private investments?
A: One of the biggest concerns of foreign investors is the rule of law in general. For example, there are no specific rules that lay out how you are going to deal with changing governments over the long term. When new administrations take over, you often do not know if they will retain the same priorities, or if they will understand the project. For this reason, we need long-term mechanisms to avoid and solve controversies. I would say the key is to develop specific arbitration methods, enforced by an independent and transparent arbitration body specialized in infrastructure. Another element that would be of great benefit is the creation of an open source platform for PPP contracts. This would allow legal consulting firms to discuss and create very good contract formats that would help prevent controversies. Right now, all contracts are different. A uniformly agreed upon format could then be used by government bodies at multiple levels too.
Q: What is one example of a success story for your firm?
A: One of our projects involved the construction of a junction for two railroads near Celaya. The Ministry of Communications and Transportation was faced with a lack of financial resources. We devised a financial model in which years of exclusivity rights, embedded in the concession title, were exchanged for investment in the building of the infrastructure. As a result, private stakeholders stepped in and financed the project. Through a legal mechanism, we basically found money that was not there before. The government aided throughout the negotiation process and acquisition of right of way. To achieve these kinds of collaborations, it is important to get across how infrastructure can benefit the area and local industries.
Q: What are your priorities for the next two years?
A: In general, we would like to participate in the key infrastructure projects of the López Obrador administration. We are already working on one, the Maya Train project. We would also like to participate in devising solutions for an airport in the metropolitan area of Mexico City. Furthermore, we would like to contribute to the interoceanic railroad and port project along the Isthmus of Tehuantepec.
Lastly, we will continue our pro bono charity activities in education. We would like to design a model for an institution that could manage the student scholarship and lending activities of the current government. This would allow the creation of a new way to make higher education accessible in this country. We have already been very involved in this area across Latin America through our collaboration with the American Association of Student Lending Institutions.
Key Capital offers a variety of services, including engineering, investment banking, project financing and consultancy. The company offers integrated solutions that combine legal, financial and technical-engineering dimensions for projects.