The truth behind public infrastructure in Mexico
The truth behind public infrastructure in Mexico
Despite public tiffs, private companies are cashing in on president López Obrador’s building splurge.
About six years ago, the CEO of a construction company could well have asked; why bother with Mexico? The rise of Mexican president Andrés Manuel López Obrador unleashed a sense of gloom across the industry. The neo-liberal age had ended, declared the president. Now came a leftwing government with a penchant for “Franciscan austerity”—in reference to the Catholic religious order’s utter devotion for living in extreme poverty.
Many interpreted the president’s words to mean the end of public-private infrastructure projects and a new age of a small handful of projects firmly driven by the State.
It was a short-lived mirage. After a slow start, the second half of the López Obrador administration has seen sharp increases in public spending to rates not seen since 2008, according to data by México ¿cómo vamos?, a public policy nonprofit. A lot of this is linked to election-time handouts. Another large chunk is going to infrastructure.
For those firms clever enough to ride the changing ideological tides, the López Obrador administration has neither been stingy nor has it closed off from the private sector. What changed were what sorts of projects got attention and how companies got access to them.
Mexican infrastructure under López Obrador
The way the government goes about public works is very different now than it had been in previous administrations. The most striking of these changes has been the introduction of the armed forces into every aspect of public life. The Mexican army and navy are now in charge of policing, custom houses, administering maritime ports, medical logistics—there’s even a battalion for the arts, charged with safeguarding Mexico’s cultural patrimony and identifying forgeries.
Infrastructure has most notably been militarised. The country’s largest projects are now in soldierly hands including new railways, hospitals, airports, and the necessary hotels, roads, storage facilities needed to service them. The government argues that this is a time and money saver—the army doesn’t need to turn a profit, after all. It is also awfully convenient that projects assigned within the State needn’t be competitive or made available for public scrutiny, the opposition will often retort. According to Mexicanos Contra la Corrupción, an anti-corruption watchdog, 80% of this administration’s contracts have been directly adjudicated.
No matter how opaque the process of awarding these projects has been though, one thing is clear: There is no way the Army and Marine Engineering Corps can manage the mammoth task of building so much of Mexico’s infrastructure.
So, how are the Armed Forces managing?
The private sector by any other name
Today there are just a handful of contractors in Mexico with the capacity to take on State-sized projects—Prodemex, Carso, Peninsular, Indi, Mota-Engil, and Aldesa, to name some of the biggest.
A large infrastructure contractor is really just the first subcontractor, a Prodemex employee who has signed an NDA told The Mexico Political Economist. When the government awards a project, the company then goes about hiring others to complete specific tasks. These go from the plumbers who install the toilets in a school to the highly specialised companies that set up the card readers at a toll booth.
Some of these subcontracted services are hired internally or to specialist spinoffs. Companies like Prodemex or Carso are particularly keen to keep tech solutions in-house because they tend to offer better margins. But for a company to hire and administer every process needed throughout a construction would mean having a mismatched capacity during moments of high or low demand. It would also mean that these large generalist firms would lose out on the expertise that certain specialist firms possess to build, say, a nuclear power plant. (Mexico currently only has one.)
The Mexican armed forces today are no different from a massive construction company. Consequently, it has had to delegate much of its construction work to the very companies that seemed to be left out of the equation early in the administration.
This hasn’t meant a return to business as usual though. The same opacity with which the armed forces have been given contracts has been passed down to their subcontractors, who rely even more on contacts rather than competitive bids to get projects. Less tantalisingly for the construction companies, if anything were to go wrong with a bridge or hospital, the armed forces have the ability to pass on liability to subcontractors.
The opacity of handing out contracts behind closed doors keeps the private sector off the public books. But it also somewhat clashes with the government’s vision of a military-led infrastructure programme. To keep up appearances, the generals’ first ask is often for construction firms to paint their machinery olive green, the anonymous Prodemex employee said.
Public-private partners
If the armed forces have become comfortable leaning on the private sphere, so too have companies learnt to move towards a more pragmatic approach regarding the government.
Of the large construction firms mentioned above, Mota-Engil and Aldesa are foreign—Portuguese and Spanish, respectively. Early on in López Obrador’s tenure this was seen as a death sentence. Sacyr, another Spanish construction company, all but left Mexico after a bust-up with the government over cancelled projects. The president’s economic nationalism has threatened to run out a good number of other international companies.
But as time went on, even foreign companies started to see the way forward.
TC Energy is currently one of the biggest gas pipeline contractors working with the Mexican State. Anyone doing their homework would quickly realise what the “C” stands for, yet the company’s good relationship with the government gets plaudits even from the opposition.
Beyond having the capacity and specialisation that the State might not, TC also boarded the government with a novel approach. After running close to a Sacyr-style conflict with the administration, TC Energy instead opted to negotiate. The resulting compromise was a genuinely public-private partnership in which the state-run electricity company, CFE, became a stakeholder in TC Energy’s pipeline.
The government thus ‘Mexicanised’ a foreign endeavour and will benefit from any future dividends. TC Energy got to do business in the country, allied to a specialist in navigating Mexican regulatory maze—the State itself. These new and unexpected bedfellows can now get to the business of providing cleaner gas to dirty diesel powered electricity plants, as well as fueling the government’s dream of taking nearshoring to the Mexican southeast—whose main issue is unreliable electrical supply.
This particular alliance squares a tricky circle when it comes to nearshoring. As discussed in a previous issue of The Mexico Political Economist, the biggest perceived threat to nearshoring is unsuitable infrastructure. Throughout the current administration, Mexican construction companies have hedged their bets, expanding globally and hoovering up foreign investment to help build the factories of the nearshoring boom. The latter still need the roads, power plants, air and maritime ports to keep churning out goods. These are being built, albeit to an insufficient extent. Only those companies moving with the political tide will reap their rewards.
Here are your action points:
The Armed Forces do not have the bandwidth nor the specialisation to build all of Mexico’s infrastructure. Identifying where these deficiencies lie is the key to landing a contract.
Firms that prove to be reliable (and liable) partners are most likely to catch the government’s eye.
Set up a call with The Mexico Political Economist to get further insights on this topic.