Investors in Mexican infrastructure projects have faced some uncomfortable unknowns. The new federal PPP (public-private partnership) laws aim to attract foreign investment and give investors and contractors a more certain – and more familiar – environment.
Mexico is gearing up for an infrastructure surge. In May 2013 president Enrique Peña Nieto – elected to a six year term in December 2012 – announced a five year plan that provides for spending of $316bn on infrastructure by 2018.
The infrastructure spend is part of President Peña’s wide ranging plans to boost economic growth in Mexico. One plan has already been implemented: the energy constitutional reform ends the monopoly of state-run electricity and oil companies and opens the energy sector to private investors and partnerships.
President Peña’s proposed expenditure for infrastructure is 35% greater than that of previous president Felipe Calderon. Calderon’s five year plan kickstarted infrastructure spending and scheduled more than $230bn of infrastructure projects between 2006 and 2012. Mexico has much to catch up on, however. The World Economic Forum’s Global Competitiveness Report ranks Mexico’s infrastructure 65th out of 144 countries, and fewer than 40% of Mexico’s roads are paved.
MORE CERTAINTY FOR INVESTORS AND CONTRACTORS
Foreign investors have put money into Mexican infrastructure since the mid-1990s, but there were no specific laws governing PPPs.
The new federal PPP law was published in January 2012, and the related regulation in November 2012. The current guidelines were enacted in December 2013. The law includes several features that will give developers and investors greater certainty.
Key changes include:
• A thorough, transparent bidding process. Requests for proposals will be widely published, and contracting authorities have to prepare feasibility studies for prospective PPPs. Bidders can present unsolicited proposals; they can recover reasonable bid costs and will have a financial advantage at a public bid stage.
• Minimum mandatory terms. The terms protect investors’ and developers’ interests and allow flexibility (e.g. clearly defined rights and obligations, risk sharing, liquidation damages on default), but the parties define the detail.
• Clearer rights for investors. These include rules on taking security interests in tangible and intangible assets, temporary step-in rights and compensation rights if a contracting authority terminates a contract.
• Dispute resolution via arbitration. The right to domestic or international arbitration expressly exists and is consistent with the UN Commission on International Trade Law Model Law on Commercial Arbitration. Arbitration awards can be enforced.
Latin America’s PPP story
In the 1990s, many Latin American countries turned to PPPs to fund large infrastructure projects aimed at economic growth. That first wave of PPP projects hit some bumps, as have PPP projects in other regions. But the story of PPPs in Latin America is one of iterative development.
In the past 20-plus years, several Latin American governments have introduced and refined PPP laws to make them more practical and effective. Chile, widely rated as a PPP success story today, first introduced PPP legislation in 1991, amended it twice and later suffered an embarrassing corruption scandal in 2002.
Colombia used its first PPP in 1993 and introduced a PPP law in 2012. In 2012, Brazil made several changes to its 2004 PPP laws. Mexico has its own PPP project history. In 1997, the government rescued 23 public-private-funded toll roads it had launched in 1989. The programme of 52 toll roads was plagued by problems, including errors in traffic volume estimates, relatively short 15 year concessions and poor project planning. Many toll roads already had financial problems when the Mexican peso crisis hit in 1994, and they were unable to meet their US dollar denominated debt payments. The government’s rescue vehicle was a new entity, Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas, that has now re-privatised many of these toll roads on 30 year concessions with Mexican peso denominated debt.
Some features of the new law are remedies to problems faced by the 1990s toll road projects.
A law that addresses investors’ concerns
Investors and developers that started PPP-type projects under pre-2012 law faced tricky times. There was no clear federal PPP regime, only piecemeal secondary procedures and decrees. Contractual arrangements had to fill the gaps left by the non-existent PPP law, with the risk that contract terms would contradict sector regulations. Investors and developers also had none of the backstops they had come to expect in other jurisdictions.
Investors had no step-in rights to take control of a developer that defaulted on its obligations, and legal disputes had to be settled in Mexican courts rather than through international arbitration, which is common in other jurisdictions. The lack of a clear legal framework often resulted in project delays, legal uncertainty and unclear allocation of risk.
The new regulations follow PPP practice in major jurisdictions – many of the concepts and approaches will be familiar to those in the infrastructure industry – and are flexible enough to accommodate three distinct types of PPP: “pure” (government pays), “self-sustained” (user pays) and “combined”.
Mexico will likely become a significant infrastructure market in the next five years. Uncertainties around this untested federal PPP framework are balanced by the fact that the framework is well structured, based on proven models from other jurisdictions, and the momentum and appetite to ensure the success of this new regime.