Gustavo Arballo
President
Mexican Chamber of the Construction Industry (CMIC)
/
View from the Top

Steps to a Sustainable and Inclusive Construction Sector

Wed, 11/01/2017 - 11:35

Q: What is CMIC’s 2017-2018 forecast for the construction industry, especially with the elections around the corner?

A: CMIC expects 2018 to be as difficult as 2017. The real estate industry, especially the construction of medium and high-end residential buildings, mixed-use developments, shopping centers and tourism infrastructure, will likely play a leading role for the remainder of 2017 and in 2018. The Center for Economic Studies of the Construction Sector (CEESCO) estimates growth for 2017 from a contraction of -1 percent to a 0.5 percent expansion due to fundamental factors such as the 23 percent cut in the public investment budget compared with 2016, as well as increases in interest rates. A reduction of 40,000 jobs is expected in the event of a contraction or the creation of up to 20,000 jobs if there is growth.

From January to July 2017, the construction industry contracted 0.6 percent compared with the same period in 2016. It is likely that, for the remainder of the year, factors that inhibit investment and growth will include reduced public and private investment and the rise in the official interest rate to twice its 2015 level, which will make infrastructure projects more expensive. The result of the NAFTA renegotiation could also have an impact by restraining vital exports, in turn negatively impacting investment in industrial and commercial construction and services.

In 2018, the construction industry is expected to grow between 0.3 percent and 1 percent. Residential construction geared toward the middle and upper classes, as well as a robust tourism sector, commercial and service infrastructure will be the industry drivers in 2018. Risk factors include an even greater reduction in oil prices or oil production, continued inflationary pressures and an additional cut in 2018 expenditures for public investment in infrastructure.

Q: What are the construction sector’s concerns regarding the New Housing Law in Mexico City and the federal Human Settlements Act?

A: CMIC’s greatest concern within this context is the urban resilience required to adapt to redensification and transformation that entails generating vertical housing for inhabitants. We support both changes to the laws and urge prompt implementation. There has been an exodus of city dwellers due to the lack of housing for workers with incomes equivalent to less than 10 times the minimum wage who are eligible for INFONAVIT and FOVISSSTE, but we hope the new laws will address this and expedite access to housing for this demographic. Another result has been a rise in speculative practices and constant increases in the prices of urban land and houses due to the low supply of popular housing, with values ranging from MX$900,000 to MX$.5 million per dwelling. Additionally, with a lack of activity in popular housing, the construction industry working in this sector has become stagnant, resulting in job losses. In an effort to assist the current Mexico City government, CMIC’s members have identified plots of land that are eligible for use under the new housing law to encourage and facilitate the construction of housing for workers entitled to homes in urban areas. We want to promote the construction of 10,000 living spaces, which is only a fraction of what the inhabitants of this city require.

On the subject of the General Law on Human Settlements, we are interested in information about the adjustments that the local authorities will make to their regulations as well as to their urban development plans, and how this will impact the construction industry. We also wish to see clear commitments and actions that promote real changes in the human settlements of our country, toward competitive, connected, coordinated and equitable models.

Q: What would make the construction sector more attractive to both investors and contractors?

A: In the January-May 2017 period, credit granted by commercial and development banks to the construction industry fell 6.5 percent in real terms compared to the same period a year before. The total amount of credit provided to the industry in May 2017 was MX$489.8 billion, MX$3.9 billion less than in May 2016. This result is due to two factors that have reduced credit availability to construction companies. The first is the reduction in public works that has narrowed the opportunities to obtain a contract. Without a contract, there is no guarantee with which credit can be obtained. The second is the gradual increase in interest rates, which lifts the cost of credit and reduces available financing. On June 22, 2017, Banxico decided to increase the overnight interbank interest rate by 25 basis points for a third time to 7 percent. With this increase, the benchmark interest rate doubled compared to 2015 levels. Rising interest rates increase the cost of financing, inhibit investment and increase the cost of debt.

In recent years, private investment has been the driving force behind the growth of the construction industry since it represents 75 percent of the total investment in the sector. The reduction of public resources for the development of infrastructure opens up a range of opportunities for the private investor to participate in complementary infrastructure projects like roads, ports, airports, railways, telecommunications and water projects to maximize economic and social benefit.

But steps are being taken to address these issues. In Mexico, we now have the PPP law, which establishes a stronger legal framework for mixed participation, and allows for greater investment in infrastructure. In this way, the law has bolstered investor interest in the sector. It also provides greater legal certainty to the creation of projects that involve the joint participation of the public and private sectors. Within the law, there is the novel USP scheme that allows an investor the possibility of proposing a PPP project to the government. The main areas of opportunity in Mexico for PPPs seem to be hospitals, petrochemical and natural gas, water supply, sanitation, power generation, telecommunications, penitentiaries, schools, roads, railways, ports, transportation and housing.

Q: Which sectors represent the most important PPP projects for construction companies and what are companies looking for to encourage participation?

A: All sectors are of great importance for the construction industry, whether in hydraulic infrastructure, transport, hospitality, education, energy, penitentiaries, railways or ports. In this sense, CMIC recognizes the effort being made by the Ministry of Finance to promote PPP projects in such complex times to achieve competitiveness, economic growth and job creation. But to overcome the problems caused by federal budget cuts, the government needs to ensure that the processes of tendering, awarding and contracting PPP projects are carried out competitively, efficiently and under principles of transparency and accountability. We must also generate a more collaborative relationship between the public and private sectors, with the purpose of involving the private sector in the design, financing, construction, operation and maintenance of new infrastructure works, as well as the expansion and modernization of existing infrastructure.

Q: Looking forward, what are the sector’s top goals and how is CMIC working to ensure that it thrives?

A: Among the sector’s main goals is the implementation of a public infrastructure policy that allows proper planning, contracting, execution, operation and maintenance of infrastructure projects under conditions of economic viability and financial sustainability and with adherence to environmental impact. Therefore, the private sector and CMIC’s member organizations are working through consultation forums to make a public policy proposal oriented toward competitiveness and productivity, taking into account everything across the development cycle of the infrastructure. This includes project conception, planning and operation and maintenance, which help to improve efficiency and quality of infrastructure. In addition, we have set out to identify the strategic projects that the country needs, from a regional perspective, to create a National Sustainable Infrastructure Program by the year 2030.