José María Garza
President of Construction and Development Division
Group GP
/
Insight

Stable Payments Essential for Private-Sector Success

Wed, 11/01/2017 - 14:50

As the public sector battles high levels of debt and smaller budgets, authorities are left with less capacity to close infrastructure gaps, fueling a greater need to promote private-sector participation in Mexico’s infrastructure industry. But considering economic challenges and inflation, the authorities must keep their end of the deal and ensure stable payment terms for private service providers to guarantee their continued partnerships with the public sector.

“PPP projects are almost the only option states have to meet infrastructure demand. For this reason, the government needs to make sure they have the capacity to make payments,” says José Maria Garza, President of the Construction and Development Division of Grupo GP. “Hospitals, for example, built through PPPs require companies to take responsibility for operations. Despite the responsibilities that are being assumed, service providers need guarantees for the payments that they were promised.” He warns that the delays can demotivate the private sector from participating in future public projects. In other words, these types of contracts have to be 100 percent bankable.

Considering the economy and inflation rates, missed payments can greatly impact the wellbeing of construction companies. According to Garza, 2017 is showing a backward trend compared to the steady inflation rates the industry experienced over the last 12 years. “The rise in prices of steel, concrete and labor are causing the cost of construction to go up along with interest rates,” he says. “If the government fails to pay its service providers five months in a row, companies have to deal with the costs associated with much higher interest rates.”

The country’s annual inflation rate has been on a steady climb in the past year but leapt to 4.72 percent in January 2017 from 3.36 percent in December 2016. It now stands around 6 percent on the back of a weaker peso and higher gasoline prices in the aftermath of that market’s liberalization. The central bank has reacted by pushing interest rates to an eight-year high. Inflation is causing the housing industry to become more expensive as well. Garza worries that if salaries do not increase at the same rate as inflation, people will not be able to afford housing. “It is important to have a balance between demand and supply to avoid oversaturating the market,” he says. “Monterrey for instance has too many houses in the market and not enough people willing or able to buy them.” He believes the best way to mitigate the risk of payment delays is by making sure advance payments are part of the contract. It also helps to treat suppliers as partners. Garza emphasizes that a company’s ability to supply materials can affect project completion. By seeing themselves as partners, suppliers become more committed to the project and its needs.

This is especially true for Grupo GP, a company that takes great pride in its reputation. “As a company, we never celebrate receiving a contract; we celebrate when we manage to complete a project on time and on budget while making a profit.” This attitude is increasingly important as construction bids become more competitive with no hard and fast guidelines to follow. “We manage risks by focusing on type, location and size,” he adds. “If a company takes on a project that is new, in a location in which it has never worked and on a scale that it has never managed, the project is considered high risk.”

Despite the challenges, Grupo GP sees potential in PPP projects and in Mexico. The company is participating in various projects. It is equally taking part in the construction of Line 2 and Line 3 of the metro in Monterrey, a project that faces difficulties due to the presidential transition. “We expect the metro to be operational in the next year or so as these issues clear up,” Garza says.

Among the group’s other important projects is the new Michelin plant in Leon, Guanajuato. The plant is expected to manufacture 5 million tires a year. The company has experience working with international firms such as BMW that tend to be more demanding than their domestic counterparts. “We are building two of the four buildings that BMW has planned for San Luis Potosi. It is challenging because we must meet the strict benchmarks and standards of a German company.”