Mexican President Felipe Calderon’s administration can boast of some progress in renewables and infrastructure procurement. Its support of renewable energy has spurred the installation of more than 700MW of wind generating capacity and its landmark public-private partnership (PPP) law needs to clear one more vote in Mexico’s chamber of deputies. But whether this progress continues after Calderon’s term ends in 2012 is unclear even if most market participants expect a degree of continuity.

Until recently, Mexico had just 88MW of installed wind capacity. This is very low, considering its southern state of Oaxaca has, in the words of the International Finance Corporation (IFC), “one of the best wind resources in the world”. A 2003 US Department of Energy National Renewable Energy Laboratory report found that there were 6,637km2 boasting good to excellent wind resources, defined as average wind power density greater than 400W per m2, in Oaxaca – enough for roughly 33,000MW of installed capacity.

Since the 2008 renewable energy law the industry has picked up dramatically. More than 700MW of capacity has been procured as either independent power producer (IPP) or self-supply projects, including Eurus (Acciona), La Ventosa (EDF Enmergies Nouvelles), Oaxaca I (Cobra) and Oaxaca II to IV (Acciona).

Progress on road concessions has been more mixed, with Calderon’s administration coinciding with the blockbuster sale of the first Farac concession in 2007 – and extremely patchy progress since then. The president has pushed a new PPP law which was approved by the country’s Senate in October, and would create a clear and concise legal framework, eliminate right-of-way (ROW) acquisition issues and speed the evaluation and design of concessions. It is awaiting approval by the Mexican Chamber of Deputies, which is expected by April 2011. The law will also apply to social and other municipal infrastructure concessions.

But building wind capacity and changing how PPPs are procured takes more than ample supply and removing, in the words of one local sponsor, “nonsensical” bureaucratic impediments. The Comision Federal de Electricidad (CFE), the country’s energy regulator, only has four more IPP wind projects planned for procurement through 2012. The Secretaría de Comunicaciones y Transportes (SCT), Mexico’s communications and transportation ministry, made slow progress awarding the FARAC II and III concessions, and tweaks to concession packages, and a variety of incentives, including low-cost government debt, have failed to produce substantial progress.

Wind starts to meet its potential

Mexico’s wind power industry has clearly benefited from a legislative boost. First, the government passed the Renewable Energy Usage and Energy Transition Financing Act in November 2008. While the law did little to change the overall constitutional framework under which renewables generators work – for example, the CFE still must buy the cheapest power available – it did open the door to self-supply wind projects. In April 2010, a law followed that reduced the wheeling tariff for renewable energy by 70%. This act brought the market cost of renewable power significantly closer to its conventional equivalent and, arguably made the sector more competitive and attractive to developers.

“The wheeling administration change and the fact that we now have 500MW of [wind] power done, have put Mexican wind on the screen to developers,” says Cheryl Edleson-Hanway, a principal investment officer at the IFC. Three wind plants reached financial close this year – two, La Ventosa and Eurus, were supported by multilaterals but Mexico’s first wind IPP project, Oaxaca I, was also the first wind deal to feature commercial banks.

Banco Santander and BBVA closed on roughly $150 million in bank financing for ACS subsidiary Cobra’s $220 million Oaxaca I project on 29 July. The debt for the 103.5MW plant priced at between 200bp and 300bp over Libor and matures in 8.25 years with a 15-year amortisation profile. Mexico’s state-owned development bank Banobras and Spanish development bank ICO also participated in the financing. As with all IPP plants, the offtaker is CFE, which signed a 20-year fixed price power purchase agreement.

Two multilateral-supported wind projects developed under the self-supply regulations closed earlier in 2010. Acciona’s 250.2MW Eurus wind plant, also located in Oaxaca, closed on a total of $375 million in financing in June. The IFC, Inter-American Development Bank (IDB), CAF, DEG, Proparco, ICO, Nacional Financiera and Bancomext provided the 15-year senior debt and BBVA and BES each took parts of a $62 million IFC/IDB B loan. An additional $30 million came from the IDB-administered Clean Technology Fund of the Climate Investment Fund and a $36 million subordinated IFC C loan. The total cost of the project, for which Cemex is the offtaker, is $600 million.

The other project was EDF Enmergies Nouvelles’ 67.5MW La Ventosa plant that closed on roughly $110.66 million in peso-denominated financing from US Ex-Im ($80.66 million) and the IDB and IFC ($30 million). The $200 million project uses 27 2.5MW Clipper turbines and sells power to four Wal-Mart subsidiaries under 15-year contracts.

Acciona is likely to be the next sponsor to approach banks with its 306MW Oaxaca II and IV deal, which it won in March 2010. Given the momentum created by the last three deals, market participants expect commercial banks to provide much of the financing for the Eu450 million ($607.7 million) project. Financial close is expected in the first quarter of 2011. CFE is the contracted offtaker for the plants, which were tendered under the IPP programme.

“The IPP scheme is bankable,” says one energy developer working in the country. He cites the overwhelming interest sponsors showed in the two tenders during procurement. For Oaxaca II to IV, Iberdrola, Recursos Eólicos de México (ACS) and Enerfin Sociedad de Energía (part of the Elecnor group) submitted bids along with Acciona. A banker in the country adds that his institution is very interested in the Oaxaca projects because they are “comfortable” with CFE as an offtaker, and with the reliability of the wind resource.

But where the country’s fledgling wind industry goes after the remaining four 300MW projects in the CFE’s pipeline are tendered is anyone’s guess. When Calderon’s term is up in 2012, the industry will loose a champion and numerous obstacles, including the CFE’s lowest cost requirement, and transmission capacity constraints, still stand in its way.

But market participants see opportunities in IPP deals. “There are not enough blue-chip offtakers left to do such a project,” said one sponsor working in Mexico, referring to the self-supply scheme. The CFE could add more IPP projects to its pipeline, and Oaxaca certainly has the capacity for additional production, but with political turnover imminent in 2012 it may also opt to wait.

Roads continue to disappoint

The economic slowdown following 2008’s credit crunch hit toll roads in Mexico hard. According to a report by Fitch, traffic volumes fell 3.6% in 2009 after a rise of 3.2% in 2008. Concurrently, revenue fell 4.3% after a 1.6% rise a year earlier. While these drops are not as dramatic as those in 1995 after the Mexican peso crisis, the rating agency was not as optimistic about the recovery.

“There is concern regarding how long it will take toll roads to recapture lost traffic given the extent of the current global downturn,” wrote Astra Castillo Trevizo, an analyst at Fitch.

Sponsors, banks and advisers are more optimistic. While all acknowledge that traffic declined last year, most say that the rebound is already occurring. It’s the SCT, according to the private sector, that is holding up deals. “The ministry of communications [SCT] is a bottleneck,” said a Mexico City-based banker. “Road concession activity has slowed down significantly in 2010, not because of a lack of projects but because of the ability of the ministry of communications to put them out.”

Oscar de Buen Richkarday, subsecretary for infrastructure at SCT, offers a third reason for the decline in road tenders – construction risk. He says sponsors have less of an appetite for this risk, which was a large part of the Farac packages. The ministry has addressed this issue by splitting up projects, combining greenfield and brownfield assets, and making Banobras and FONADIN financing available to developers. Richkarday says sponsors can expect three to four road tenders in the coming year.

Referring to the SCT’s decision to abandon and retender Farac II and III, a sponsor working in the Mexican market says the bids for the road packages came in lower than the ministry expected because it had based its expectations on outdated traffic and valuation data. He is hopeful that when the ministry retenders the concessions, it will have a more accurate estimation of the value of the roads. The next to be retendered, Farac Noreste (a section of the original Farac III concession), could be open for bidding as soon as December.

Farac II, the southern Pacific coast package, was pulled and split into four smaller concessions, in 2009. However, only the Norte package has come to market, receiving a high, and successful, bid of Ps$3.2 billion ($257.7 million) from Carlos Slim’s IDEAL. The project includes 181.5km of brownfield toll road from Culiacan to Mazatlan and a new 22km bypass around Culiacan.

Farac III was tendered as a 30-year real toll concession for 219km of highway between the Mexican state of Tamaulipas and the Texas border. It consisted of 31km of greenfield and 188km of brownfield construction. A consortium including CCR, Macquarie and Mota-Engil subsidiary Ascendi submitted the highest bid for the project at Ps$8.388 billion in March 2010. But the SCT rejected the bids as too low, and has since split the package into a number of smaller concessions, including Noreste and Michoacan.

The pending PPP law, as currently written, will not significantly change Mexican road concessions. As previously mentioned, it addresses some of the concerns of developers – notably ROW and design and evaluation issues – but it does little to simplify the bureaucratic process through which concessions must pass. Market participants unanimously agreed that the law was a good step forward but was unlikely to change the speed at which concessions are tendered or the role of Banobras or FONADIN in financing them.

Project legacy

Although both renewables and road PPPs have moved forward under Calderon, not all of his efforts inspire a positive reaction. A banker in Mexico City calls the president’s initiatives “politically driven” in order to keep his party in power past 2012. Calderon, elected in 2006, is limited to one six-year term. They note that all the projects currently in the pipeline will either be completed or under construction before the election. “Mexico doesn’t necessarily need wind,” they say. “Coal- or gas-fired power plants are a lot more cost-effective”.

As if to prove that there is still strong lender appetite for gas-fired power plants, Mitsui and Tokyo Gas closed on $750 million is acquisition financing for Gas Natural’s 2,233MW capacity Falcon IPP power portfolio on 29 September. The Japan Bank for International Cooperation provided a $450 million loan and SMBC, Mizuho and the Bank of Tokyo-Mitsubishi UFJ $100 million each in 15-year debt to finance the $1.2 billion deal.

On the roads side, despite their complaints, developers are doing well. This month, OHL Mexico raised Mx$9.7 billion ($793.7 million) in an initial public offering on the country’s Bolsa stock exchange. The issuance included 368,225,185 primary shares and 21,197,798 secondary shares priced at Ps25 per share. While it did not raise as much money as the sponsor hoped, it was Mexico’s largest IPO since the 1990s. Banco Santander and Credit Suisse were global coordinators and BBVA and UBS were joint bookrunners. OHL has been successful in closing project deals at the state level, and signed on Ps5.5 billion in debt for its Ps7 billion Viaducto Bicentenario, which was awarded by Mexico State, earlier in 2010.