Alfredo Garcia Mondragón
Executive Managing Director
Siete Energy
Expert Contributor

Financing Challenges with Investment Projects in Mexico

By Alfredo Garcia Mondragón | Thu, 08/06/2020 - 09:21

The Energy Reform in Mexico was approved in December 2013. In its first steps, CRE, the regulatory body set up to oversee the electricity and downstream segments, sparked interest from international and national companies wanting to obtain permits to import fuel and operate fuel storage terminals while, at the same time, gaining access to fuel distribution and sales to the public.

More than a hundred permits to import fuel and nearly 70 storage terminals were granted. But now, investors are struggling with CRE’s slow authorization process and with the new presidential administration. The regulatory body has been left with very little budget and a reduction in personnel, which has led to an administrative paralysis of procedures for the management of storage terminals.

This has become a challenge for companies that have acquired this type of permit. Even if they want to continue with the investment process, they are at a disadvantage regarding access to financing to develop these projects because the government and regulatory entities are considered a risk factor for investment.

Due to the investment amounts, many businesspeople believe that the solution lies in corporate finance models. However, these models have disadvantages due to the typical terms that are imposed and the way they affect the liabilities and flow of a company. Also, companies have no way of checking pre-existing flows because many are newly created companies.

In the Project Finance concept, the terms are focused on the ability to generate flows that allow loan repayments, which in many cases tend to be in participations greater than 70 percent and even up to 100 percent. As well as the need for terms, such as grace periods due to construction stages and lack of flows, there is a need to adapt flows to a debt service response without exposing the company or the project.

Currently, Mexico's energy sector is experiencing a loss of investor confidence. The service companies that offer specialized solutions to PEMEX have been forced to reduce their technical staff to a minimum due to the lack of payments from the NOC, and their finances are at the point of bankruptcy. The downgrading of PEMEX's credit rating has made these companies unable to obtain working capital to continue operating.

On the other hand, the lack of regulatory certainty in the hydrocarbons sector, especially regarding fuels, storage and distribution, has not reduced investor interest because the project permits granted before 2019 are still in force. But investors are encountering difficulty obtaining the financing to develop them. Some storage projects with permits have been deferred because international investors have lost confidence in the country. These projects could be reactivated when the business environment is conducive to continuing them.

For the renewable energy sector, the interest in investing in a country like Mexico is great. It is a country with countless opportunities derived from a market supported by more than 120 million inhabitants; a national logistics network focused on road transport, with a developed manufacturing industry; in addition to the country’s more than 20 free trade agreements with the main economies of the world.

This sector is vital for Waste to Energy (WtE) projects, in which garbage can be processed and in some cases, generate enough electricity to lower the bills of the country's large cities. However, due to the lack of certainty for investors, these projects have been canceled and in many cases, the companies that offer project financing did not look at them as viable projects to finance.

Another problem is that with WtE projects, concessions of at least 15 years are needed to recover the investment, but the vision of the municipal administrations is short term, which is a matter of contractual definition in order to invest and reduce the risk of investment recovery.
Although investment in the hydrocarbon exploration and production sector continue to advance, it is not at a speed to reactivate this market segment. In addition, the fall in consumption has exacerbated as a result of COVID-19.

It should be kept in mind that exploration and production companies are developing their projects in many cases in initial cycles. Since the exploration, there have already been a couple of companies that returned the exploratory areas for having failed in the exploration and those that have been successful have only just entered the delimitation and validation stages of the discovered reserves. As a result, it will take several years to have an industry in which private companies hold more than 50 percent of national production. I estimate something like 10 years more.

But I believe there is enough time for the service industry that generates value for the sector to establish itself in the country. One of Mexico’s greatest advantages in the eyes of investors is its population, which is young and with enough professional diversity to meet the expectations of international companies that desire to invest in the country.

If legal and regulatory certainty return, the large financing firms will once again boost financing for large projects in Mexico.