The Opportunity in Mexican RoadsThu, 11/01/2018 - 12:49
Mexico’s labyrinth of roads and highways interconnects the country’s main industries and is a backbone for the country’s economic development. Although this backbone has been improved greatly throughout the years, Carlos Redondo, Country Manager Mexico of ROADIS, believes Mexico still has many opportunities for growth. “There is a clear necessity for more road infrastructure. There is a great deal of private capital and the regulatory framework is also good. We need more projects,” he says.
The national road system is composed of more than 377,659km, of which 49,652km make up the federal system. According to WEF, Mexico ranks 52nd of 138 in road infrastructure competitiveness, CANACAR has identified a 150,000km road deficit and McKinsey Global Institute says the country must invest an additional 1.1 percent of its GDP to bridge the infrastructure gap. Throughout the sector, the debate on whether the gap is due to a lack of projects or a lack of money always re-emerges. Redondo explains that Mexico has limitations when it comes to infrastructure planning since planning does not normally surpass a six-year term. He says this complicates development as a country requires a long-term vision.
ROADIS is an international platform controlled by PSP, a Canadian pension fund with international presence. The company operates the Saltillo-Monterrey and the Perote-Banderilla highway and Xalapa beltway. It began operating in Mexico after it purchased the two assets from Isolux Corsan.
According to his experience in Mexico, another important limitation is the number of profitable projects on offer. “Although the different government entities have many projects, it is not that easy for the private sector to participate in them. Their viability can be an issue,” says Redondo. “Viable projects mean they have been developed correctly from the start. This implies that aspects such as rights of way (ROW), engineering and thorough traffic studies have already been carried out.”
After generating viable projects, the question of where the money should come from arises. Redondo believes that the road infrastructure gap cannot be filled by private or public sector resources alone but recommends a combination of both, depending on the risk profile and social benefits.
The Saltillo-Monterrey highway, for instance, was a successful project, not necessarily in the sense of it being the most profitable but because of the effort made for its completion with various governmental entities working closely with private companies. “The project ran into all the typical issues any construction project encounters, such as rights of way and cost overruns, but together we searched for the mechanisms that would allow us finish the project,” Redondo says.
In the last few years of the Peña Nieto administration, SCT tendered various maintenance, rehabilitation and operation contracts (MROs) to develop and improve roads in the quickest way possible. Redondo says that this is not the optimal project scheme for ROADIS, as these contracts are short-term concessions with a high construction component. “ROADIS prefers long-term concessions that will allow us to take full potential of the highway while offering our customers high-quality services. Long-term concessions provide companies the appropriate time frame to implement innovative operational and financial solutions. This allows the company to recover the investment and also face the challenges that may have arisen during the construction and initial years of operations,” says Redondo.
While Redondo says the company prefers to have control with a preference for large assets and brownfield projects, he stresses that ROADIS’ strategy is flexible. “We can participate in greenfield projects, with a certain component of construction and a certain level of proven traffic,” Redondo says. “The ROADIS team brings broad experience in both construction and operations.” According to him, a key element of the added value that ROADIS provides is that, because it is controlled by a Canadian pension fund, the company’s ethics and transparency are embedded in all of its processes and how it carries out its business. “Because we are a combination of a long-term investor with expertise in operation and management of both brownfield and greenfield projects, we have greater flexibility,” he says.