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Analysis

Is the PPP Model the Answer to Green Funding?

Tue, 11/01/2016 - 10:04

Mexico is facing a budget crunch that is impacting its ability to build much-needed infrastructure, and PPPs are stepping in. The private sector is gaining an increasing foothold in everything from roads, bridges and airports to energy. The input is good for Mexico from the standpoint of funding, but not everyone is happy with the arrangement, especially with projects that directly impact communities. That the new infrastructure is needed goes without question as the country’s economy and population grow.

The World Economic Forum ranks Mexico 59th of 140 countries in global infrastructure competitiveness, yet it is the 15th  largest economy in the world. GoldmanSachs projects that by 2050, Mexico will be the world’s fifth largest economy with a peak population of over 140 million. Current and projected growth aside, all-important oil prices have put a damper on government finances. The drastic drop in crude prices, which fell as low as $US35 from just under $US100 in the last two years and now hovers around $US45, has put a serious crimp in government revenues. That forced deep budget cuts in 2016 with plans for more slashing in 2017. The result is obvious: less money to go around, including funds allocated to the development of sustainable infrastructure. To make up the shortfall, the CMIC estimates the private sector will pitch in with over MX$200 billion (US$10.5 billion) to complete current NIP projects.

While the government may welcome PPP involvement in its infrastructure plans, when it comes to developments closer to the hearts of communities, such as parks and green spaces, the public has a different view: tell us everything, or stop. “Social discontent occurs when projects do not effectively include communities in the planning and development process and this can hinder continuity,” says Gabriel Ballesteros, Partner at law firm Ballesteros Mureddu. “The instability highlights the significance of understanding the needs of both citizens and the private sector.”

In the case of Corredor Cultural Chapultepec, a project designed to transform one of Mexico City’s main arteries into a luxury commercial space, filled with office buildings and space for pedestrians, the public’s response was loud and clear. The response was a resounding “no”. “Mexicans are very concerned with their everyday lives, but not so involved in the big picture of the development of Mexico City,” says Iván Hernández, Director General of Ludens. “Although not a positive development from the start, this large-scale project captured the attention of citizens.”

Citizens blocked construction of the development because they felt the project did not take into consideration sustainable urban planning. Among the concerns were that it would establish a barrier between neighborhoods and create unlit and dangerous areas at its borders. The public did not have access to the details of the PPP, raising red flags about where the money was going to be invested, says Hernandez. “There has been a significant lack of transparency in the planning of that project and this has fueled discontent in the community,” Hernández says. A limited number of proposals were accepted for the project, making it a relatively secretive tendering process, and the render dedicated more than 12,000m2 of the 110,896m2 project to commercial developments. Although the project included an elevated park, it was not enough to convince the people to vote in favor of its construction.

A SYMBOL OF VITALITY OR POVERTY OF SPIRIT?

Parks and green spaces “can be a symbol of a neighborhood’s vitality and character, or an emblem of its disorganization and poverty of spirit,” says the Project for Public Spaces, a nonprofit dedicated to sustaining public spaces. Mexico City has many beautiful neighborhoods but there are also many that have been largely overlooked. The World Health Organization recommends urban areas should incorporate at least 9m2 of green areas per inhabitant in a city and research also suggest that these green areas should be no more than a 15-minute walking distance from homes to promote healthy urbanization. Mexico City provides its inhabitants with only 5.3m2 of green space per habitant, according to a study from the Institute of Ecology of UNAM.

The latest study on green areas in Mexico City was carried out in 2009. The Future of Green and Wooded Areas of Mexico City, by the Environmental Attorney and Land Management (PAOT), considered public and private green areas, including rooftops and medians. It concluded the total area of forestry in either parks or at roadsides was 78.1km2, representing 12.8 percent of the total urban area. The total area of spaces with grass and bushes was 34.8 km2, or only 5.7 percent of urban area. In total, 112.89 km2, an equivalent of 18.5 percent of the city’s 1,495km2, were recorded as green areas. Mexico City’s most expensive neighborhoods include Polanco, Condesa, Chapultepec and Roma. These are the city’s design, innovation and economic hubs and also have the most wellkept and attractive green spaces. Average rents run about MX$16,000-38,000 (US$842-2,000) per month for a 180m2 apartment, above the average price of MX$15,831, (US$833) according to rental agency Inmuebles24.

ARTZ, Grupo Sordo Madaleno, Mexico City

On the outskirts of the city, the view is much different. In the Iztapalapa neighborhood the difference in green spaces, urban planning and the way rapid urbanization has taken its toll is on full display. According to PAOT, Iztapalapa has a population of 1.8 million, which represents 20 percent of Mexico City’s total population. When comparing Iztapalapa and Miguel Hidalgo, home to the most luxurious neighborhoods, Iztapalapa has a density of 15,635 people per km2, while Miguel Hidalgo has a density of 7,523 people per km2. When comparing the amount of green areas, Miguel Hidalgo has approximately 12.5m2 per habitant while Iztapalapa has 0.6 m2 per person, mostly along roads and medians. According to the ICSC, Mexico is expected to see a 30 percent rise in commercial real estate developments through 2025, meaning approximately 760 developments that add up to 23.3 million m2. The goal of these, according to architects and real estate developers, is to create cities within a cities. Mixed-use real estate development combines housing, commercial and work spaces.

FINDING THE MIDDLE GROUND

To gain public acceptance, the community needs to be involved from the beginning. Alternative ways of thinking may be necessary, where the public works in conjunction with the private sector. In 2004, the Probosque Chapultepec Trust was created by the private sector to preserve, rehabilitate and remodel Mexico’s most famous public park, Chapultepec. Mario Schjetnan, Director General of GDU has led the rehabilitation of the park since then. He points to the public’s participation for its success. “The involvement of the citizens has made this project very unique in Mexico and it is a wonderful example of a project led by the private sector and citizen participation,” says Schjetnan. The fund ensures the park is in exceptional condition allowing it to have a ripple effect on its surroundings. Mexico City’s most expensive neighborhoods and lucrative businesses are located around Chapultepec. Working with the government is an additional challenge, says Schjetnan. “The political involvement creates many variables that are not particularly technical but together make the project more intricate and require intense negotiation.”

Developing parks through PPPs is extremely complicated due to the conflict of interests of both parties, says Miguel Donavan, Director of property management consultant Currie & Brown. But finding a middle ground where the public gets what it needs and investing companies can make a profit can lead to the development of sustainable cities. Innovative business models that take into consideration human and environmental aspects and the commercial interest of the investor are needed, he says, pointing to the concept of unsolicited proposals (USP)as a way forward. USP could encourage the creativity of the public sector to enter the realm of social infrastructure but only if the regulatory framework is correct. Donavan says using PPPs to construct social infrastructure is far more difficult because the demand and return on investment (ROI) are not clear.

“USPs can be complex to implement but they work well when projects are self-funded, the need is identified and the solution is at hand,” he says. “This way the only step the company must take is simply asking for permission from the government, especially since the private sector is assuming all of the risk.” The creation of sustainable spaces will allow local economies to prosper and enhance the quality of life in such sizeable cities, he says. According to US News & World Report’s list of best countries to live, Mexico ranks 27th of 60. If PPPs or similar alternatives are used innovatively, especially in the creation of green spaces, how much higher can it go from there?