Uncertainty not In the Law but in Enforcement

Infrastructure in Mexico continues to be a local game when it comes to financing, with the support of FONADIN and Banobras. “There are very few non-Mexican banks that are working in infrastructure and the main question is, why not? Especially if many are already participating in other sectors in the country,” asks Manuel Romano, Partner-in-Charge at integrated law firm Jones Day.
The answer may lie in the PPP scheme. After it began to be more widely adopted in 2000, the mechanism became a way of professionalizing the sector and allowing private players to play a larger role in bridging the infrastructure gap. “Through PPPs we could get more US and Canadian firms involved in the industry,” says Romano. “This would also promote stricter guidelines for anti-corruption and transparency, which are probable reasons why international players are hesitant to enter the infrastructure industry.”
Increasingly, the private sector is becoming more involved in infrastructure through these schemes and the country’s health and road sectors are encouraging its participation. But there are far more complex factors at work in Mexico’s failure to attract international infrastructure companies, says Romano. “In Mexico, it is not a matter of legality because the laws are well-crafted,” he says. “Complications arise during the implementation. The PPP Law for instance is based on the success stories of Chile, Spain and Colombia.” But, he adds, Mexico’s environment has unique nuances that were not properly taken into account when the law was drafted.
Take for instance road infrastructure’s biggest headache: Rights of Way (ROW). ROW is regularly an issue in the development of new roads and MTS projects such as the Mexico-Toluca Interurban Train. To help alleviate developers’ headaches with ROW, Romano says that the PPP Law intended to improve processes by removing the need of a full appraisal from INDABIN, allowing the private sector to assume full responsibility for negotiations to liberate ROW. “In practice, it is an entirely different story,” he says. “Mexico has various issues that no law can resolve. Companies have all the legal instruments to expropriate parcels, but it is impossible in some cases.” Although the legal basis is well laid out, he says enforcement is hazy or even non-existent.
Closely linked to this issue is another that continues to gain traction in Mexico: neighbors. The Chapultepec CETRAM was a project intended to serve as a transportation hub to rescue one of Mexico City’s most important streets. The project involved the construction of an underground mall, offices and hotels along Chapultepec Park, improving security and restoring an important part of the city. “Again, it was not a problem of legality,” says Romano. “Neighbors began opposing the project and to this day, the project is halted. There was nothing the investor could do, even with the power of the law behind it.”
Apart from ROW and community issues, the complex nature of infrastructure projects calls for the diversification of risk through project finance. Romano believes syndicated loans can be a good option to reduce risk levels for a participant. PPPs allow developers to share the risk, which is the scheme’s attraction in these types of projects. But he says many developers have failed to consider risk allocation and have overleveraged themselves to participate because they feel they bid aggressively. “Without risk sharing, the liability rests solely on the shoulders of one party,” Romano says. “If something does not go according to plan, then a company could lose a lot. Aggressive bidding on projects that could ultimately end up costing twice more than expected, could potentially push companies to delay the project and like a house of cards, lead to lawsuits or even the cancelation of contracts.”