Ernesto González
Managing Director
Macquarie Infrastructure and Real Assets (MIRA)

Opportunities for Companies Willing to Take the Risk

Tue, 11/01/2016 - 15:45

The government appears caught between a rock and a hard place. Budget cuts mean it must tap the private sector to meet the objectives of the NIP. Although the private sector is keen to bridge the gap, many companies want to see a transparent regulatory framework first. “The government should remain consistent when announcing a given methodology, as this must be applied equitably across the board,” says Ernesto González, Vice President of Investment & Finance at Macquarie Infrastructure and Real Assets (MIRA). “It should also be proactive in anticipating potential conflicts that these changes in regulations could give rise to.”

A number of factors have hit the economy this year, especially low oil prices, the country’s revenue staple. Some investors have also looked north with concern as the US Federal Reserve is expected to raise rates, but González says that while a rate hike would likely trigger an increase in borrowing and equity financing costs, that should not cloud Mexico’s infrastructure investment climate. “I do not see a significant impact because the fundamental infrastructure demand will remain and the only change would be that it will cost more to bridge this gap.” The use of PPPs must measure the risk on a case by case basis, especially since investor pools have different risk appetites. “There are significant amounts of capital out there and it all depends on the amount of risk each investor is willing to assume.”

The deceleration of Mexico’s oil and gas industry is pushing Mexico to make several policy changes to ensure steady growth with the government preparing further budget cuts for 2017. The Ministry of Transport will receive a 26 percent cut to its budget, which translates to the completion of fewer projects on the NIP. With fewer opportunities available in traditional infrastructure like roads, MIRA has decided to drive the structure of its own projects from the ground up. “One of the biggest challenges we are finding in Mexico is that there are very few investible opportunities with well-structured assets and contracts, so we are focusing on making our own,” says Gonzalez. In Coahuila, it acquired a PV project in which it did not rely on the Energy Reform but instead found off-takers for the project and offered a win-win situation whereby it provided savings through electricity bills and at the same time a strong return on investment. Although the energy sector is attracting most of the limelight, the transportation and social infrastructure sectors are just as in need of investment.

Although MIRA is interested in electricity generation projects and expects to spend more time on transmission as years pass, transportation has quite a bit of market activity focused on roads and in social infrastructure. Hospitals and universities, for example, are presenting opportunities for MIRA. The company expects to participate in PPPs for the health sector, even though there are great risks present. “The way to mitigate these types of risk is to spend a great deal of time with the relevant stakeholders within the PPP auctions and ensure they are addressing the risk factors that most investors worry about,” he says.

The Port of Veracruz also is undergoing expansion in the next few years and MIRA is primarily focusing on the many greenfield opportunities it can add value to. “We believe these projects provide greater growth opportunities and risk adjustment that are more aligned with our strategy,” González says. “The greatest challenge in this expansion will be securing the traffic flow, which will then secure the revenue stream that will allow us to finance it. The successful bidders will be those that partner with some of the large international transportation companies.”

The government promoting alternative investment vehicles for the development of infrastructure is a positive sign for the industry. “To a certain extent, Mexico’s vehicles can be a little cumbersome when compared to those in other countries but this can be attributed to the fact they are new and that players are trying to navigate the waters,” says González. “The biggest challenge will be to clarify the rules of the game for the investor base.” He adds that Mexico should learn from the best global practices of how large infrastructure projects are structured through auction type settings. “The improvement can be made by carrying out a comprehensive planning stage and focusing more on the long term,” he says.