Eduardo de la Peña
Infrastructure and Capital Projects Partner
Deloitte
/
Insight

ZEEs a Possible Game Changer for Southern Development

Wed, 11/01/2017 - 10:25

Over the years, the Mexican infrastructure industry has developed its own chicken-and-egg quandary with the debate over whether development or investment should come first. To this day it remains unclear if it is the role of the government to build infrastructure that will attract investors or if private investment is needed from the outset. The development of Mexico’s Special Economic Zones (ZEEs) have brought the dilemma into the limelight, especially since the country’s southern states have the most underdeveloped infrastructure in the country.

“Whatever comes first, there has to be a mechanism in place that assures investors that the proper investment will be made in developing that zone’s infrastructure in the long term,” says Infrastructure and Capital Projects Partner at Deloitte Eduardo De la Peña. But past experience means investors have grown wary of these kinds of projects. De la Peña explains that there have been cases where investors would set up their companies and the supporting infrastructure that was promised would never materialize. “This assurance of investment can be done through a trust, a portion of the federal budget or a fund but there has to be clear proof for investors to see,” he says.

As a strategy to boost investment in infrastructure development, the government has decided to create ZEEs in Mexico’s southern states. Many countries have developed these zones but due to the lack of integrality of the projects, around half have been unsuccessful. “Globally, successful ZEEs are those that can effectively integrate themselves into the local economy,” De la Peña says. “The main challenge for a ZEE is to provide the private sector with the right incentives to develop in a certain area with the hope that in years to come it will change the face of that zone into a prosperous hub.”

To ensure that these zones are a success, the government created the Federal Authority of the Special Economic Zones (AFDZEE) to oversee their development. “AFDZEE was created to serve as the regulator for the ZEEs, a decentralized and independent entity with its own budget,” says de la Peña. But for it to work, it must convince the different levels of government to cooperate throughout the entire process and to gain the trust of international and national investors.

Mexico has a large infrastructure gap and ZEEs are only one idea the government has come up with to incentivize development. But although there are more initiatives to promote the use of PPPs for the development of infrastructure, many of these projects are not completed. According to De la Peña, there are three things that need to happen to close the gap: the public sector must strengthen its capacities, the private sector must become more involved and all projects must follow a national development strategy.

The participation of the private sector in the industry has been increasing throughout the years but in Mexico it does not participate as much as it could in comparison to other countries. Historically, the planning and structure of projects were carried out by the government and funding would come from the public purse but amid budget cutbacks, the authorities realized they had to create new ways to finance the country’s development. “The private sector grew accustomed to the government developing projects and creating tenders, where the former would assume little risk,” says De la Peña. “But now, the private sector must be more proactive in seeking projects that address real needs and fill the gap.” He suggests mechanisms like USP to boost development.

As for the public sector, De la Peña believes that it must ramp up its efforts. “This does not mean government agencies are doing a poor job but that they need to strengthen their teams,” he says. “When there are federal budget cuts, one of the first reactions is to eliminate government jobs, but in infrastructure, a lack of manpower to plan, analyze and review projects may lead to bigger project deviations. In an effort to save pennies, the government may end up losing dollars. The infrastructure planning units need to be stronger and able to attract talent from the private sector.” The heart of Mexico’s infrastructure is overseen by a relatively small team but it is important to invest in this asset so it can effectively identify valuable projects in Mexico.