The Guide to Infrastructure and Energy Investment

Developing Transport Infrastructure to Support Industry: Mexico

Pursuant to the Mexican National Development Plan, as well as the Fourth Government Report prepared by Mexican government, dated 1 September 2016, one of the main goals of the Mexican government is to have a transport infrastructure that allows for lower costs in carrying out economic activities.[1]

General overview

The aim of the transport infrastructure is to increase competitiveness in Mexico and facilitate movement of merchandise.

According to recent information provided by the Mexican Ministry of Economy, some of the most relevant economic facts about Mexico are:[2]

  • Mexico’s GDP ranks 14th in the world, with its economy accounting for 1.7 per cent of the global total;
  • as of 2015, Mexico had imports of approximately US$395 billion. For the period January–June 2016, imports amounted to US$185,947 billion;
  • as of 2015, Mexico had exports of approximately US$380.7 billion dollars. For the period January–June 2016, exports amounted to US$178,830.9 billion; and
  • for the period January–June 2016, Mexico had direct foreign investment of US$14,385 billion, an amount that represents 4.6 per cent more than in the same period in 2015. The amount was reported by 2,197 companies with foreign capital participation and 859 trusts;
  • according to the World Economic Forum, Mexico is ranked 57 out of 140 countries based on the Infrastructure Competitiveness Index.[3] Infrastructure ranks include:
  • quality of overall infrastructure: 65;
  • quality of roads: 54;
  • quality of railroad: 61;
  • port infrastructure: 57;
  • air transport infrastructure: 55; and
  • quality of electric supply: 73;
  • currently, the Mexican transport infrastructure includes:[4]
  • 377,660km of highways and additional roads within the country;
  • 26,727km of railroads along the country;
  • 76 airports, 1,388 airfields and 408 heliports; and
  • 117 ports and terminals;
  • additionally, in connection with the energy industry, current transport infrastructure includes 26,854km of oil and gas pipelines.[5]

Transport infrastructure development has been a main priority for the Mexican government. Pursuant to the latest report issued by the federal government, from September 2015 to August 2016, 10 transport infrastructure projects were concluded with a total investment of approximately 11.1 billion pesos, an amount associated with a goal of approximately 520km. It is estimated that 10 additional projects will be concluded in 2016, with an investment of more than 22 billion pesos and a goal of 310 additional kilometres.

Some of the most representative transport infrastructure projects under execution or projected to be developed within the next years are detailed below.[6]

Airports

The new Mexican International Airport is currently under construction. It is one of the biggest and most relevant infrastructure projects in the past decades, with an estimated investment of 180,123 billion pesos.[7] In its first stage, it is planned to accommodate 68 million passengers and 740,000 operations per year. The main relevant aspects of the project include:

  • 90 fixed gates;
  • 30 remote positions;
  • three operational tracks with a maximum development of six operational tracks; and
  • two terminals.

Its operation is proposed for 2020.

Additional actions have been carried out to increase the airport infrastructure:

  • modernisation of the Chetumal airport;
  • construction of a new airport in the Istmo region; and
  • modernisation of the airport in Atlangatepec, Tlaxcala.

According to official information, from September 2015 to August 2016, 644,000 tons of merchandise was transported by aircrafts.

In order to support industry, the government aims to develop regional airports and improve their interconnection under schemes that may guarantee their operation.

Highways

Many new highways have been developed, in order to connect different states and cities.

In 2016, the government intends to invest more than 90.2 billion pesos. The public sector will contribute 64.4 billion pesos and the private sector will contribute 25.8 billion pesos to this amount. From September 2015 to August 2016, modernisation of 93km of road was carried out, with investments of 4,100 billion pesos.

Railroads

From January to August 2016, 17,313.2 billion pesos has been invested in different projects, mainly in connection with urban railroads and construction of different railroad tracks in the states of Guanajuato, Colima, Durango, Jalisco, Chiapas, Aguascalientes and Tamaulipas.

Ports

Among the most relevant projects in this sector that have already been concluded are:

  • container terminal II, and the multiple uses terminal of Manzanillo, Colima;
  • equipping of container terminal I of Lazaro Cardenas port; and
  • the modernisation of Guaymas port.

In 2016, it is estimated that there will be investment of 10,877.3 billion pesos. Modernisation and construction of ports is a priority for the federal government – from December 2015 to August 2016, 292.5 million tons were moved.

Currently, four port projects are at the development stage:

  • construction of a passenger terminal in Puerto Vallarta;
  • modernisation of Ciudad del Carmen port;
  • modernisation of Seybaplaya port; and
  • extension and modernisation of Progreso port.

All executed and projected works are intended to increase the installed capacity to 376 million tons per year.

Private participation in the development of transport infrastructure

Private investments for the development of infrastructure have gained particular relevance in the past years. Many government projects have involved private participation by means of special schemes and mechanisms that have allowed private companies to partially fund important projects. This does not just involve transport infrastructure such as highways, ports, airports and pipelines, which have made new important investments possible throughout Mexico in different industries, but also social infrastructure, such as hospitals and health clinics.

Public-partnership associations (PPAs)

On 16 January 2012, the Public-Private Partnership Law was published in the Mexican Federal Official Gazette.[8] The main purpose of the referred law was to allow and regulate private participation in the development of projects and activities in which free participation of the private sector is allowed.

On 21 April 2016, modifications to the Public-Private Partnership Law were published in the Federal Official Gazette in order to give more flexibility to the authorisation procedure referred therein.

Some of the main benefits of this law include the following:

  • It allows the government to avoid or defer infrastructure costs without giving up their benefits. This offers the chance of achieving greater efficiency in the construction of infrastructure, and reduces state costs.
  • It encourages the attraction of new technologies, leading to better quality projects and accelerated progress in building infrastructure, while promoting competition and competitiveness among private consortiums.
  • It provides security and certainty to private actors and companies in long and complex infrastructure projects.

In Mexico, PPAs have been used by the Ministry of Communications and Transportation, mostly for the construction of highways, using the scheme given above.

In the 2016 federal budget, Mexican Congress approved 4,707.5 billion pesos for the execution of three projects under the PPA scheme, which included modernisation of several roads and highways, as well as the construction of a new highway in the state of Puebla.

Strengthening of the transportation infrastructure within Mexican territory has been a main objective of the government, which aims to have a logistic platform to support industries’ activities and movement of the merchandise they produce.

Pursuant to information given by the Ministry of Communications and Transportation, as of November 2015, 17 highways have been concluded out of 52 that will be concluded by the end of 2018, with private company investment.[9]

Concessions

Concession schemes have been used by government for different transport services such as airports and railroads, as well as for the construction of highways.

From 2012 to August 2016, concession title holders have invested approximately 13,023 billion pesos in more than 28 airports. This includes, among other infrastructure works, the construction of new airport terminals, and modernisation of existing infrastructure.

Additionally, much of the current highway transport infrastructure has been constructed by means of the concession scheme, which includes the development, construction, operation and maintenance of the infrastructure constructed under this scheme.

The concession scheme has been one of the most important schemes of recent years, implemented by government in order to construct and expand the land transport network.

The National Infrastructure Fund and the National Development Bank

The National Infrastructure Fund (FONADIN) is a major trust created by the Mexican government that mostly aims to fund and support infrastructure projects, among others, in areas such as transportation and communication; natural resources; water; and tourism.

According to official information, from January 2013 to August 2016, FONADIN has granted economic support of approximately 53 billion pesos for infrastructure projects with a high economic and social impact. Such investments totalled approximately 132 billion pesos.

Pursuant to information released by FONADIN, FONADIN has supported 35 highway relevant projects in different Mexican states by means of different financial schemes.

The Mexican National Development Bank (BANOBRAS) is in charge of financing infrastructure projects in Mexico, and supports infrastructure projects by means of two business lines:

  • sub-national finance:
  • packaging small clients into bankable financial vehicles; and
  • cooperating with commercial banks through financial guarantees; and
  • project finance:
  • tailoring financing to reduce the risk on the projects early stages; and
  • cooperating with commercial banks through financial guarantees and loan syndications.

From January to June 2016, BANOBRAS granted credits for a total amount of 21,037 billion pesos, which represented 30 per cent of the annual goal of 2016. 19 per cent of the credits granted were for the development of transport infrastructure.

FIBRA-Es and certificates for projects investments: new financing structure

In September 2015, Mexico’s president announced the creation of two new financing vehicles for energy and infrastructure projects. Such vehicles are known as ‘FIBRA-Es’ and ‘certificates for projects investments’.

FIBRA-Es are expected to work in a similar fashion to those applicable to real-estate projects, or to master limited partnerships, with the exception that FIBRA-Es were created specifically for energy and infrastructure projects.

On 17 September 2015, the National Banking and Securities Commission published a preliminary draft of the regulations applicable to the FIBRA-E through the Federal Commission for Regulatory Improvement. Simultaneously, the Mexican Tax Authority published the tax regime for the FIBRA-E on its web portal.

FIBRA-E operates in a similar way to a trust, in which a financial institution acting as trustee issues values in the form of stock market certificates of energy and infrastructure. Additionally, the trustor or sponsor contributes to the FIBRA-E by means of its share participation in qualifying Mexican companies devoted exclusively to operating assets related to hydrocarbons, power and infrastructure. These include:

  • oil storage, transportation, refining, and processing/treatment;
  • natural gas distribution, transportation, storage, compression, processing, liquefaction and regasification;
  • petroleum products and petrochemicals transportation, storage, and distribution;
  • electrical power generation, transmission and distribution;
  • highways, roads and railroads;
  • urban transportation systems; and
  • ports and marine terminals.

In exchange sponsors will receive the above-mentioned certificates. Qualifying companies must derive at least 90 per cent of their revenues from the type of energy and infrastructure activities.

It is important to consider that the FIBRA-E structure is not intended to finance new speculative projects, but existing cash flowing ones. The purpose of FIBRA-E is to increase the profitability of such projects.

The Mexican energy reform and the need for transport infrastructure

Current transport infrastructure situation

As of today, oil products are transported to service stations by means of tank vehicles mostly owned by PEMEX; oil and gas pipelines; and marine routes in which products are transported by means of oil vessels.

In connection with maritime transportation, it is relevant to consider that, as of today, it represents the only viable means of delivering oil products in regions such as the north-east and the Yucatan peninsula, where market conditions have not made the construction of pipelines economically viable.

The current national port infrastructure is composed of 117 ports and terminals: 59 in the Mexican Gulf and the Caribbean.

Regarding railway transport infrastructure, only 4.7 per cent of the total infrastructure is used to transport oil products, with approximately 1,130km covering two main routes from the oil refinery located in Madero, Tamaulipas to San Luis Potosi state; and the oil refinery Cadereyta, Nuevo Leon to Durango state.

In connection with the national oil pipeline system, the system is approximately 8,946km, with an operative capacity of 3,980 million barrels, which allows oil products to be transported through five regions.

The energy reform and the coming investment opportunities

Before the amendments to Mexico’s Federal Constitution in 2013, the Mexican energy industry was completely banned from private investment. All activities related to oil and gas were reserved for the state, and were carried out and performed only by the state oil and gas company, Petroleos Mexicanos, SA (PEMEX) and its subsidiaries. In this regard, all transport infrastructure related to the oil and gas industry was formally constructed, owned and operated by PEMEX and its subsidiaries.

On 20 December 2013, Articles 25, 27 and 28 of Mexico’s Federal Constitution were amended allowing participation of private companies in hydrocarbons projects, among them, activities related to the development of transport infrastructure.

The Mexican government’s goal is to attract private companies to invest in the Mexican energy industry, reduce the fuel and electricity costs, as well as to maintain or, in any case, increase Mexico’s oil production through exploration and extraction contracts to 500,000 barrels in 2018 and 1 million barrels in 2025.

In order to achieve the oil production goal, the government has released a five-year term exploration and extraction bidding plan (2015–2019).[10]

The new Programme contemplates an exploration and extraction surface of 235,070km², and establishes four bidding rounds for exploration and extraction fields and areas to be executed from 2015 to 2019, with an average of 104,778.6 billion barrels of crude oil equivalent.

The Programme considers bidding for 237 extraction oil fields: 169 onshore; 39 offshore in shallow waters; 13 of extra-heavy oil; 12 in the oil field known as Chicontepec; and four in deep waters (meaning a depth equal to or more than 500m and less than 1,500m between the surface of the sea and the seabed).

All of these fields will be divided and bid for in the four different rounds expected in the Programme, except for the four deep-water fields, which are expected to be bid for in round two.

Regarding the exploration of conventional hydrocarbons, it is estimated that 72 areas will be bid for: 26 onshore, 17 in shallow waters and 29 in deep waters.

In connection with the 29 deep-water areas, these areas are expected to be divided and bid for according to the following plan:

  • Round 1: six areas;
  • Round 2: nine areas;
  • Round 3: six areas; and
  • Round 4: eight areas.

Exploration of non-conventional hydrocarbons considers 24 onshore areas, which will be divided into, and bid for in the four above-mentioned rounds.

The Programme announced by the government details all of the above-mentioned fields and areas, not just the rounds in which they are expected to be bid for, but also their locations and the resources of each field and area.

As of 5 September 2016, the government has called for six different tenders, four of them included in Round 1 and two included in Round 2. Out of these tenders, 30 exploration and extraction of hydrocarbons contracts have already been awarded to private companies.[11]

The information above is highly relevant as, in the coming years and because of the new exploration and extraction projects that will be executed by private companies as a result of the awarded contracts, expansion of the current hydrocarbons transport infrastructure system will be required in order to efficiently transport extracted hydrocarbons and natural gas from the different oil and gas blocks to the points where such products will be commercialised, as well as to attend to the needs of the industry and deliver products such as gasolines and natural gas throughout the country.

According to official information from the Ministry of Energy,[12] in past decades, demand for oil products has increased significantly. Nevertheless, Mexico has experimented with underdevelopment of the industrial transformation and transportation infrastructure in order to attend domestic demand, which has resulted in a significant increase of importation of such products.

During 2015, the oil products demand in Mexico was for approximately 1,410.8 million barrels of oil. Out of this total, 634.5,000 barrels were imported.

The expected demand for oil products from 2015 to 2029 is high and, according to the Ministry of Energy, is expected to have an annual average growth as follows: gasolines, 2.7 per cent; diesel, 3.6 per cent; and jet fuel, 4.3 per cent.[13] Further details are as follows:

  • The total demand increase for gasolines 2015–2029: 1,147 million barrels by 2029.
  • The total demand increase for gasolines 2015–2029: 673 thousand barrels by 2029.
  • The total demand increase for jet fuel 2015–2029: 124 thousand barrels by 2029.

It is also relevant to consider that the immediate need for transport infrastructure is also required by companies in the energy industry that are already incorporating new business schemes derived from the recent announcement made by the Mexican government in which, as of April 2016, permits to import gasolines and diesel have been granted.

According to information released by the Ministry of Energy, as of 25 August 2016, 114 permits to import gasoline have been granted to different companies, while 164 have been granted for diesel and 23 for jet fuel.[14]

Companies in the energy industry that are already settling in Mexico intend to enter into the commercial activities related to the service stations. As of October 2015, the number of service stations in Mexico was 11,431.

Transport infrastructure, mainly oil and gas pipelines, will be highly necessary in order to attend to the needs of the new projected service stations that will start opening and operating throughout the country.

Special attention has been given to the development of the gas pipeline infrastructure in the past years. Nevertheless, as mentioned, transport infrastructure for oil products will be required by the energy industry and, therefore, investing in these type of projects will be required in the short term.

As an example of what has been mentioned, in August 2016, a major gas company known as TransCanada,[15] jointly with another company known as Sierra Oil & Gas and TMM Group, announced their proposal to develop and construct transport infrastructure in order to attend the increasing demand of oil products in the central Mexican region. The estimated investment of the project will be US$800 million, and its purpose is to transport oil products from the Mexican Gulf region into central Mexico.

The above-mentioned project includes the construction of a marine terminal in the state of Veracruz; an oil pipeline of approximately 265km; and a storage terminal in central Mexico.

National Natural Gas Storage and Transport System plan[16]

The National Natural Gas Storage and Transport System plan (the Plan) establishes which area is considered as strategic to secure the efficient development of the system in terms of capacity or access to new routes.

This Plan takes as a basis all projects contained in the 2014–2018 National Infrastructure Plan. The Plan includes more than 5,150km of gas pipelines.

The Plan represents a major opportunity for investment in Mexico, as it considers 12 different projects, as follows:

ProjectLength (km)Estimated investment (MMD)Estimated bidding year
Tuxpan-Tula 263 400 2015
La Laguna-Aguascalientes 600 1,000 2016
Lazaro Cardenas-Acapulco 331 456 2016
Tula-Villa de Reyes 295 420 2015
Villa de Reyes-Aguascalientes-Guadalajara 355 555 2015
Jaltipan-Salina Cruz 247 643 2015
Salina Cruz-Tapachula 440 442 2016
South of Texas-Tuxpan 800 3,100 2015
Colombia-Escobedo 300 N/A 2016
Los Ramones-Cempoala 855 1,980 2017
Compression Station El Cabrito N/A 60 2015

Pursuant to the latest information provided by the Ministry of Energy, as of August 2016, 78 per cent of the gas pipelines projected to be developed for 2019 are already under construction or are already compromised.[17] This means that since 2012, 2,386 additional kilometres of gas pipelines have commenced operations. 1,278km are in the construction phase, and 4,098km have already been awarded, which represent investments of approximately US$12,000 billion.

Furthermore, the Ministry of Energy has recently announced that the newly created National Centre of Natural Gas Control intends to bid, within the coming months, on new transport infrastructure jointly with PEMEX and the Federal Electric Commission.

As of August 2016, there have already been many gas pipeline projects bid for and awarded, which are expected to operate by 2019 at the latest, and in which many different private companies have participated.

Considerations

It is clear that Mexico has paid special attention to transport infrastructure by means of executing and promoting projects in all areas related to highways; railways; ports and airports; and hydrocarbons transport infrastructure.

Important and major infrastructure works, such as the newly projected Mexico International Airport, intend to attract new investments for Mexico as well as benefit the Mexican economy and the industries located within the territory.

Transport infrastructure projects are key to attracting investments into Mexico, as well as strengthening all major industries, including the energy industry, which, as mentioned, has just opened completely to private investments.

In connection with the energy industry, activities related to the hydrocarbon sector, from upstream to midstream and downstream, have been completely opened for investment and private participation. In this regard, relevant infrastructure projects regarding transportation of products, mostly oil products and natural gas, are expected to have an important role in Mexico.

The government has maintained tight communications with energy industry participants in order to regulate the market according to best international practices, aiming to encourage new companies to invest in Mexico.

Businesses have also sped up their licence and permit requirements in order to participate in the market and offer their services to all foreign companies that are already settling in Mexico.

Mexico has and represents major investment opportunities for private companies in all transport infrastructure areas. Different financial schemes may be implemented to fund and develop the infrastructure needed. However, most of all, as the government knows that infrastructure is the key to economic growth and development, in past years, government support for its construction has been essential for major companies.

Notes

  1. Fourth Mexican Government Report, available at www.presidencia.gob.mx/cuartoinforme/.
  2. Mexican Ministry of Economy, available at www.gob.mx/se/documentos/comercio-exterior-informacion-estadistica-y-arancelaria-importaciones-y-exportaciones-por-sector-pais-2009-2016-por-acuerdos.
  3. World Economic Forum, ‘The Global Competitiveness Report 2016–2017,’ available at https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1.
  4. National Infrastructure Program 2014–2018, available at http://presidencia.gob.mx/pni/.
  5. Mexican Energy Ministry, ‘Mexican oil industry diagnosis.’ May 2016, available at www.gob.mx/cms/uploads/attachment/file/92090/DGP_Diagn_stico_petrol_feros_Mayo_2016_FINAL.pdf.
  6. See footnote 2.
  7. Mexican Transport and Communications Ministry, available at www.aeropuerto.gob.mx/costo-financiamiento.php.
  8. Mexican Chamber of Deputies. Public Private Partnership Law, available at www.diputados.gob.mx/LeyesBiblio/pdf/LAPP_210416.pdf.
  9. Ministry of Communications and Transportation, available at www.gob.mx/sct/prensa/en-2016-arrancara-el-esquema-de-apps-en-carreteras-murrieta-cummings.
  10. Five-Year-Term Programme (2015-2019) for Exploration and Extraction Tenders.
  11. National Hydrocarbons Commission, available at www.cnh.gob.mx.
  12. Mexican Energy Ministry, ‘Diagnosis of the Oil Industry in México.’ May 2016, available at www.gob.mx/cms/uploads/attachment/file/92090/DGP_Diagn_stico_petrol_feros_Mayo_2016_FINAL.pdf.
  13. Idem.
  14. Energy Ministry, ‘Permits granted to import oil products.’ Available at www.gob.mx/sener/articulos/permisos-otorgados-por-sener-para-la-importacion-de-petroliferos?idiom=es.
  15. TransCanada México. Press release, 2 August 2016, available at www.transcanadamexico.com/transcanada-sierra-oil-gas-y-grupo-tmm-anuncian-propuesta-de-infraestructura-para-almacenamiento-y-transporte-de-productos-refinados-en-mexico/.
  16. Energy Ministry, ‘Five-Year Term (2015–2019) for Expansion of Natural Gas Transportation and Storage System Bidding Plan.’ Available at www.sener.gob.mx.
  17. Mexico Ministry of Energy, available at https://www.gob.mx/sener/prensa/avanza-la-implementacion-del-mercado-de-gas-natural-al-poner-en-operacion-2-mil-386-kilometros-de-ductos-pjc?idiom=es.

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