Latin Finance - November/December 2009 - 33

Financing Infrastructure: The Mexican Challenge By Fernando Aportela R egardless of internal configuration, resources, development stage, population and specific needs, almost every economy in the globe has made use of a homogeneous toolset in order to face and surpass the current financial turmoil: temporary expenditure programs and cautious but strategic investing. In this complicated international environment, Mexico is facing its own challenges: total value of its oil production is rapidly falling, foreign transfers are becoming scarce and international tourism is moving toward its local destinations, among others. Therefore, in addition to the global GDP reduction, the Country is experiencing conditions which harm the availability of public and private resources. These factors challenge directly the accomplishment of Mexico’s long term potential rate of growth. Investing in infrastructure is becoming necessary but expensive, public funds are limited and will be contested by employment preservation and social programs. Moreover, private funding is available but with a strong competition among nations. Although partnering with the private sector in public projects has demonstrated to be an efficient solution to close the infrastructure gap, the traditional schemes of association are becoming outdated. Regardless of the long term risk control and flexibility, the same Public Private Partnership (PPP) that can achieve important efficiency ratios when contracted in a stable economic atmosphere, in financial turmoil becomes costly for the public sector. In this scenario, the public sector could accept adverse trade terms for multiple years, even with conservative expectations of recovery in the mid term. To put it in simple terms, PPP can be expensive in present value when contracting in adverse economic and financial conditions. Therefore, the question that arises is: What is required to use PPP efficiently even during complicated economic times? One possible answer is to design an integral PPP strategy, capable of attracting efficient private resources even in changing environments. • Refinancing and securitization conditions: PPP transactions should be clear and flexible enough, not only to permit, but to promote the search and use of more efficient financing alternatives through the life of the project. • Competitive process: PPP regulation should make use of competitive dialoging in order to achieve the project’s technical requirements with a better use of resources. Being Mexico a Federation, an essential component of the infrastructure building effort will come from the Mexican States and Municipalities. In this sense, a key element to develop infrastructure at the local level is the legal framework. As a pioneer in the implementation of PPP schemes in the Nation, Protego has worked to amend 7 State-level constitutions (Coahuila, Durango, Michoacan, Sonora, Tabasco, Tamaulipas and the State of Mexico) to contemplate multi-annual budgeting for the first time in the Nation and in the complete design of 5 sub-national legal frameworks (Coahuila, Durango, Michoacan, Tabasco and the State of Mexico). Protego’s Public Finance and Infrastructure team advised the State of Mexico in the implementation of the first Sub-national PPP projects: In these transactions, the agreed payment to the private sector resulted lower than the ones originally estimated in early 2008. This is encouraging, considering that the bidding process finished during 2009, well into the international economic crisis. An important factor to get these results was an availability payment trust structured by Protego. This trust has an income stream coming from the payroll tax of the State of Mexico. Each PPP will receive timely payments from the trust if there are payment delays from the State and each of them will have a reserve fund. This financial mechanism gives an important security to properly service the private sector debt. This success story shows that with a robust legal framework, with flexible contracts and sound financial structuring, much of the possible negative effects of contracting PPP during economic crises can be avoided. Strong believers of healthy public finances and public private partnerships, Protego’s Public Finance and Infrastructure team foresee challenging conditions for Infrastructure development in Mexico, but with strong opportunities of promoting an integral PPP initiative that strategically and smartly could surpass the current economic constraints. The goal is to achieve a long term recovery and development targets. Mexican States and Municipalities will have an increasing important role in the provision of the public infrastructure. Given their fiscal constraints, their success is closely tied to their capability of developing long term strategic and sustainable partnerships. I From Protego’s point of view, this integral PPP strategy has to achieve and include the following: • Regulatory stability: Not only an appropriate regulatory frame work, but a homogeneous and standardized legal and contractual structure. • Public sector liquidity-risk control: Efficient prevision, definition and use of government’s budget for PPP contracts. • Synergies: Technical, legal and financial cooperation between federal and sub-national infrastructure plans. • PPP financing: Beyond traditional loan terms and structure, PPP require specific financing instruments, properly assessing the government and project’s risk profile. • PPP market development: PPP can be clustered and financed with a lower risk profile than individual transactions. sponsored statement

Latin Finance - November/December 2009

Table of Contents for the Digital Edition of Latin Finance - November/December 2009

Latin Finance - November/December 2009
Contents
Latam-China Flows
Petrobras Interview
Best Boutiques
Banks of the Year 2009
Itau Unibanco Interview
Mexico: How to Capitalize on Crisis
Colombia: Local Shop Repels Foreign Pretenders
Chile: Pefecting the Art of Retail
El Salvador: A Foreign-owned Bank Dominates
Infrastructure & Energy Awards
Private Equity Fundraising
Latin Finance - November/December 2009 - Latin Finance - November/December 2009
Latin Finance - November/December 2009 - Cover2
Latin Finance - November/December 2009 - Contents
Latin Finance - November/December 2009 - 2
Latin Finance - November/December 2009 - 3
Latin Finance - November/December 2009 - 4
Latin Finance - November/December 2009 - 5
Latin Finance - November/December 2009 - 6
Latin Finance - November/December 2009 - 7
Latin Finance - November/December 2009 - 8
Latin Finance - November/December 2009 - 9
Latin Finance - November/December 2009 - 10
Latin Finance - November/December 2009 - 11
Latin Finance - November/December 2009 - 12
Latin Finance - November/December 2009 - 13
Latin Finance - November/December 2009 - 14
Latin Finance - November/December 2009 - 15
Latin Finance - November/December 2009 - 16
Latin Finance - November/December 2009 - 17
Latin Finance - November/December 2009 - Latam-China Flows
Latin Finance - November/December 2009 - 19
Latin Finance - November/December 2009 - 20
Latin Finance - November/December 2009 - 21
Latin Finance - November/December 2009 - 22
Latin Finance - November/December 2009 - 23
Latin Finance - November/December 2009 - Petrobras Interview
Latin Finance - November/December 2009 - 25
Latin Finance - November/December 2009 - 26
Latin Finance - November/December 2009 - 27
Latin Finance - November/December 2009 - Best Boutiques
Latin Finance - November/December 2009 - 29
Latin Finance - November/December 2009 - 30
Latin Finance - November/December 2009 - 31
Latin Finance - November/December 2009 - Banks of the Year 2009
Latin Finance - November/December 2009 - 33
Latin Finance - November/December 2009 - 34
Latin Finance - November/December 2009 - Mexico: How to Capitalize on Crisis
Latin Finance - November/December 2009 - 36
Latin Finance - November/December 2009 - 37
Latin Finance - November/December 2009 - 38
Latin Finance - November/December 2009 - Colombia: Local Shop Repels Foreign Pretenders
Latin Finance - November/December 2009 - Chile: Pefecting the Art of Retail
Latin Finance - November/December 2009 - 41
Latin Finance - November/December 2009 - 42
Latin Finance - November/December 2009 - El Salvador: A Foreign-owned Bank Dominates
Latin Finance - November/December 2009 - 44
Latin Finance - November/December 2009 - 45
Latin Finance - November/December 2009 - 46
Latin Finance - November/December 2009 - 47
Latin Finance - November/December 2009 - 48
Latin Finance - November/December 2009 - 49
Latin Finance - November/December 2009 - Infrastructure & Energy Awards
Latin Finance - November/December 2009 - 51
Latin Finance - November/December 2009 - 52
Latin Finance - November/December 2009 - 53
Latin Finance - November/December 2009 - 54
Latin Finance - November/December 2009 - Private Equity Fundraising
Latin Finance - November/December 2009 - 56
Latin Finance - November/December 2009 - Cover3
Latin Finance - November/December 2009 - Cover4
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