Business Opportunities in Mexico: PPP Infrastructure Projects Export Development Canada

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Business Opportunities in Mexico PPP
Infrastructure ProjectsExport Development
Canada
January 2009
IN COLLABORATION WITH
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EDC Facilitating Canadian Trade

• EDC is Canadas official export credit agency
  (ECA) offering financial solutions to help
  Canadian exporters and investors expand their
  international business
• We work in partnership with the public and
  private sectors to enhance the visibility of
  Canadian companies abroad
• EDCs financial services include financing,
  insurance and guarantees
• EDCs combined financing and insurance volumes
  reached 85.8 billion in 2008 (23 increased
  over 2007) while serving 8,312 Canadian companies
  (11 increase)

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EDC How We Add Value

• EDC PRODUCTS
• Accounts Receivable Insurance
• Protects Exporters accounts receivables against
  non-payment by their buyers
• Contract Insurance Bonding
• Guarantee of Exporters bid and performance bonds
  or any advances (ie. Down payments) received

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EDC How We Add Value, Contd

• MORE EDC PRODUCTS
• Financing
• Flexible, medium- or long-term financing for
  buyers of Canadian capital goods and services
  including Structured Finance (Project Finance)
• Canadian foreign investment financing can also be
  considered
• Political Risk Insurance
• Provided for Canadian companies investments or
  assets in a foreign country, as well as
  protecting project loans from political risks

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Global Financial Context

• Access to liquidity and financing is an issue for
  many companies around the world
• Mexico has traditionally relied on the US
  financial market

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PPP Infrastructure the National Infrastructure
plan 2007-2012

• Introduction
• Financing infrastructure projects
• Goals for 2012
• Relevant projects
• Links of interest

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Introduction
What We Want

• Raise the coverage, quality and competitiveness
  of our infrastructure
• Make Mexico one of the main worlds logistic
  platforms, taking advantage from our geographic
  position and our network of international
  treaties
• Promote balanced regional development, paying
  special heed to the central, southern and
  southeastern regions of the country
• Develop the infrastructure needed to increase
  trade and investment

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How to Achieve it
Introduction

• Establish a long-term vision that will
  comprehensively define the strategic priorities
  and projects that will drive the present
  Administration
• Substantially increase public and private
  resources allocated for the development of
  infrastructure
• Encourage the authorization of multiyear
  investment projects
• Provide efficient follow-up at the highest level
  for the development of strategic projects and
  identify and control in timely manner those
  factors that might jeopardize their execution
• Improve the planning, preparation, administration
  and execution of the projects, incorporating best
  practices and standards

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Introduction
How to Achieve it

• Develop projects that offer the greatest social
  benefits, based on their technical, economic and
  environmental feasibility
• Give solution to problems related to the
  acquisition of rights of way and simplify
  formalities for obtaining environmental
  authorization
• Strength the legal framework and actively promote
  public-private partnerships for the development
  of infrastructure
• Eliminate unnecessary regulations and inhibitors
  to investment, including, among other aspects,
  the revision and simplification of contracting
  procedures
• Improve coordination among federal, state and
  municipal authorities as well as with the private
  sector for the development of infrastructure

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Introduction
How to Achieve it
Sector Participation in GDP (Percentage)
Public Investment in Communications and
Transport (Millions of MXP, constant prices)
p/ Cifras preliminares al cierre de 2007,
conforme al Primer Informe de Ejecución / Cifras
con base al Índice Nacional de Precios al
Consumidor de enero-diciembre 2007,
INEGI. FuenteSCT
p/ Preliminary data Source INEGI
Today, growth in transportation and
communications is driven by budget allocations
average annual growth rate of 8.7
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Financing Infrastructure Projects
PPPs

• A concession is awarded through a public bidding
  process, granting the concessionaire the right
  to sign the service contract
• Fixed duration of service contract 15 to 30
  years
• The private firm provides services in exchange of
  quarterly payments.
• Periodic payments are based on highway
  conditions and traffic volumes.
• The payment is determined as a function of
• Construction, maintenance and operating costs
• Rate of return on equity, including financial
  costs
• Estimated annual traffic
• Duration of contract
• The Net Present Value (NPV) of periodic payments
  is the decision criterion to award the concession

Characteristics of PPP Model for Highways
Establishes an association between the SCT and
private firm to design, finance, build, maintain
and operate a highway
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PPPs
Financing Infrastructure Projects

• Planning and permits

Retained (managed by government)

• Regulatory changes

• Demand

• Design

• Construction

RISKS

• Productivity

Transferred(managed by private sector)

• Obsolescence and hidden faults

• Operation

• Financing

• Force Majored

Shared(managed by both parties)

• Archaeological findings

• Inflation

The main risks in PPP Projects-design, building,
operation and financing-, are trasferred to
private sector.
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Financing Infrastructure Projects
Assets Utilization Model

• SCT terminates the concession of highway assets
  to FARAC in exchange for an indemnization
• SCT prepares concessions formed by existing
  highways of high specifications, with more than
  10 years of continuous operation, and new
  highways to be constructed
• SCT grants the concessions to the private sector
  through public bids and pays FARAC back
• The concessionaire is responsible to operate,
  maintain and exploit the assets, and to construct
  and later operate the new highways in concession
• This model is a promising way to advance in the
  highway infrastructure development programs, and
  has generated interest in various national and
  international key players

Utilization of Highway Assets Utilization Model
is an innovative way to generate resources for
financing new infrastructure projects
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World Class Players
International (17) and National (12) have showed
special interest in the Pacific Project
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National Infrastructure Plan Objectives

• Railroads
• Construction 1,400 kilometers
• Roads
• Construction or modernization of 17,598
  kilometres of city and rural roads, of which
  12,260 km are part of 100 projects which will be
  completed during the present governments
  mandate.
• Take the percentage of the federal road system
  considered to be in good condition by
  international standards from 72 to 90.
• Reduce the accident rate from 0.47 to 0.25 per
  million vehicle-kilometres.
• Ports
• Construction of 5 new ports, or modernization of
  22 exisiting ports

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National Infrastructure Plan Objectives

• Aiports
• Construction of 3 new airports
• Construction or modernization of 31 existing
  airports
• Increase the load capacity by 50.
• Water Projects
• Improvement of sanitation and water conditions
• Increase sewage treatment capacity
• Modernization of 1.2 million hectares or
  irrigable land

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Relevant Projects
Multimodal Punta Colonet Project Most
important infrastructure project ever
Concept Great dimension multimodal project
developed by the SCT and the government of Baja
California It is located 88 miles south of
Ensenada, focusing in the operation and
transportation of container freight between Asia
and EUA Structure A container port facility
and railroad line with a link at the border with
North American Class 1 railroad system The
Government will grant three titles of concession
a) a Container Terminal b) a Railroad Line
c) a concession for the rail control
telecommunications network Impact The success
depends on its competitiveness in face of
alternate multimodal corridors. All projects has
been designed to be financed by private
sector The project will promote a substantial
improvement on the urban development
concessionaries will assume the costs to build
the basic urban infrastructure for the new
residential and urban areas The project could
achieve a capacity of 6 million TEUs in the year
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Links of Interest

• An English Version of the National Infrastructure
  Program can be found at
• www.infraestructura.gob.mx
• It is worth saying that Attachment A of the
  said document program, contains a list of more
  than 300 projects considered by this
  administration to be developed in the following
  years. Such attachment can be found in
• www.infraestructura.gob.mx/pdf/AnexoA.pdf
• Bidders calling are published in both
• www.compranet.gob.mx
• www.dof.gob.mx
• Provincial projects are described at Promexicos
  web page at
• http//207.249.24.103/wb/Promexico/proyectos_estat
  ales
• Assistance that might be required, will gladly be
  provided by ProMexico Toronto at
• toronto_at_promexico.gob.mx
• More links are available by ProMexico upon
  request.

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Seizing MDB-Funded Infrastructure Contracts
Two Principal Multilateral Development Banks in
the Region

• World Bank
• www.worldbank.org
• Inter-American Development Bank
• www.iadb.org
• If you are interested in bidding on MDB-funded
  contracts, you can download a free copy of the
  Guide for Canadian Businesses at
• www.edc.ca/infrastructure

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EDC Structured Finance Group
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PPP Experience

• Mandate to support the export of goods and
  services and foreign investment of Canadians
• Involved with PPP structures since 1997
• First transaction was in respect of the
  outsourcing of UK Defense Training Programs under
  the PFI model
• Application of PPP models has broadened
  substantially
• EDC has been actively involved with variants of
  PPP models utilized by different countries and
  sectors
• EDC has broadened its role in response to the
  needs of Canadians
• EDC is utilizing capital base and experience to
  catalyze asset ownership and contracts into the
  hands of Canadians

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PPP Structures

• Most common approach is a concession-based
  structure which awards the rights to a public
  infrastructure asset to the private sector
• Greenfield (DBFOM), Brownfield (OM)
• Two basic revenue structures
• Availability-based. Lowest bid wins.
• Significant construction element
• Assets cannot be tolled
• Government assumes traffic and revenue risk.
  Consortium assumes construction and operating
  risk
• Tolling-based. Highest bid wins.
• Focus is on owning, operating and upgrading
• Tolling escalation is key
• Consortium takes full traffic and revenue risk
  and operates as a private sector business

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What is Bankable?

• Concession must be financable. Lender rights
  are transparent.
• Tripartite agreement addressing security,
  termination provisions, step-in rights of lenders
• Adequate tail beyond tenor of debt
• There must be a favourable legal, Government and
  privatization regime
• Support of private (and foreign) ownership of
  public assets must be very clear
• Revenue should be resilient to economic cycles in
  the long-run
• By definition, infrastructure should be
  relatively low risk
• Simple assets
• Different elements are ringfenced into different
  financing structures based on complexity and
  ability of the consortium to deliver

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Common Structural Elements

• Use of short-term bank bridge loans followed by
  longer-term capital markets refinancing. Ratings
  becoming important.
• Less reliance on hard security and more reliance
  on termination regimes
• Aggressive leverage and modest debt coverage is
  no longer acceptable
• Significant hedge (cash stabilization)
  requirements
• Stapled tranching structures (term, capex,
  working cap)
• Consortium must have deep pockets and operating
  expertise
• PPP structures were developed to address the
  financial needs of the public sector.
  Ironically, it is now the private sector which is
  liquidity- constrained.

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Outlook on Mexico

• EDC is very active in the energy sector
• EDC is seeking to develop its overall presence in
  Mexico (including in the infrastructure sector)
• Mexicos financing regime is favourable to
  foreign lenders
• Mexico has a progressive PPP approach
• Notable concessions in the roads and ports
  sectors
• Broadening application to other public assets
• Transparency in tendering
• Plenty of foreign investment opportunity for
  Canadians

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EDC International Business Development Group -
Mexico
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EDC in the Mexican Market

• Mexico is a priority market for Canada and EDC
• Mexico is EDCs second most important market in
  terms of business volume after the United States
  and the first in terms of emerging markets. In
  2008 alone, EDC support in Mexico has totalled
  CAD 1.73 billion.
• Recognizing the opportunities to build on its
  business in Mexico, EDC established direct
  representation in Mexico city in April of 2000,
  and a second representation in Monterrey in
  October 2002.

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The Mexican Market

• Better rate for Mexico as of 2006
• More Flexible conditions for insurance
• More financial tools for Canadian companies and
  their Mexican partners

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EDC Strategy for Mexico

• Goal to match Canadian companies with needs of
  local market developing relationships with key
  decision makers and influencers.
• EDC local representative, based in Monterrey and
  Mexico City, to manage and grow relationships in
  the region.
• Leverage on EDC financial services to facilitate
  trade.
• EDC has established relationships with key
  players such as CFE and ICA.
• New focus on developing relationship with second
  tier and mid-market.
• Close collaboration with Scotiabank through a
  guarantee program.

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The Role of EDCs International Business
Development Group

• Business Development - Build and develop business
  for EDC and Canadian companies with existing and
  new counterparties.
• Account Management Develop account plans for
  key counterparties in order to develop our
  relationships and business.
• Transaction Support - Facilitate transactions for
  EDC Business Teams.
• Strategic Planning Develop country and sector
  specific strategies
• Market Intelligence - Provide market intelligence
  that can help to facilitate transactions and
  Canadas and EDCs ability to do business in
  emerging markets.
• Corporate Representation Build EDCs profile
  abroad and promote emerging markets in Canada

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Backed by market, sector and country
expertise EDC is able to take a long-term view
and provide continuity through market cycles in a
fast changing financial environment
Today, we are open for business in 200 countries
including 145 developing markets.
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Your contacts at EDC

• Marie-Claude Erian, Sector Advisor
• Infrastructure Environment
• Tel [phone]
• Email inf-env_at_edc.ca
• Nathan Andrew Nelson, Regional Manager - Mexico
  (MACC)
• International Business Development
• Tel [phone]
• Email latinamerica_at_edc.ca
• Marcos Pruneda, Regional Manager - Monterrey
• International Business Development
• Tel [phone] ext.3360
• Email latinamerica_at_edc.ca
• Al Hamdani, Director

Visit our website at www.edc.ca
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Global Infrastructure and PPP Projects