Ignacio García de Presno
Lead Partner of Global Infrastructure and Projects Group
KPMG
/
Insight

PPP Opportunities for Social Infrastructure

Wed, 11/01/2017 - 10:22

Mexico needs more hospitals, schools and watertreatment plants, but building them at a time of low public expenditure is difficult. As budget cuts hinder the government’s ability to develop these projects on its own, Ignacio García de Presno, Lead Partner of Global Infrastructure and Projects Group at KPMG believes PPP models are among the best options to satisfy the social infrastructure needs of the Mexican population.

“Part of the money in PPP project comes from taxpayers, so projects with strong social benefits must be prioritized,” he says. For a PPP project to succeed, the interests of the involved private and public parties must be aligned. The government is interested in social and political gains while private companies look for profits but both parties must take a series of actions and be willing to compromise to ensure success. Finding this balance is a substantial part of KPMG’s role as adviser to PPP projects.

On one side, “the government must distribute projectassociated risks according to each party’s ability to handle them,” says García de Presno. “Transferring all the risk to the private sector will make a PPP project extremely expensive if not prevent its completion in cases where companies default to protect themselves.” The public sector also needs to make projects attractive to private investment by initiating PPP proceedings, developing studies and acquiring essential approval for components like land and rights of way.

On the other side, private companies need to consider the social benefits of a project besides the economic gains they will receive from it. “The financial benefits of health and water projects may not be as significant as others, but their social benefit is great,” explains García de Presno. Companies also need to effectively assess the project viability and negotiate accordingly.

According to García de Presno, Mexico has all the necessary components to launch strong projects in the market. But he says risks, costs and timeframes must be defined clearly and in advance by the government so companies can properly evaluate the projects. “Planning and evaluation are important for companies to develop an effective project,” says García de Presno, “For example, the likely barrier for OHL in the Mitla-Tehuantepec highway project was the failure to properly evaluate the road and changes in financial conditions caused by the 2008 crisis.”

PPPs are increasingly used to fund and develop infrastructure developments. “Many water projects laid out in the NIP were delayed or suspended, so they have become urgent and present the greatest opportunities,” says García de Presno. Major cities, such as Mexico City, Monterrey and Guadalajara, already experience extreme water shortages, so huge investments are needed in water transportation, dams, aqueducts and water treatment. “Most industrialized cities are in the north and center of the country whereas most of the rainfall takes place in the southeast. The challenge is in transporting water to where the demand is,” he says.

NDP 2014-2018 includes the development of 84 water projects worth MX$417.8 billion throughout the country. The water segment that shows the largest lag is wastewater treatment. According to CONAGUA, only 3,810hm3 of 7,230hm3, or 52.7 percent of municipal wastewater, was treated in Mexico in 2015. Moreover, 2,220hm3 out of 6,770hm3, or 32.8 percent, of nonmunicipal wastewaters were treated in the same period, including that generated by industry. This means only 42.75 percent of all wastewater produced received treatment.

Northern areas of the country will be more prone to drought due to their arid climate. “Monterrey’s population is growing and so are the industrial needs of automotive companies installing facilities in the city,” García de Presno says. “The existing water and drainage supply will not be able to cope with the short and medium-term demand of the city.” Therefore, he says both the government and private companies must have enough foresight when planning water projects in the area.

Creating a successful PPP is a balancing act, and KPMG wants to continue playing the role of mediator between both parties as this model begins to really take off in Mexico. “Working through the PPP model is an art because aligning the interests of both parties requires a great deal of skill,” says García de Presno.