Mexico’s Secretaria de Comunicaciones y Transportes (SCT) has had a tough year. The well-regarded undersecretary in charge of the roads programme Oscar de Buen Richkarday left in February and the procurements for three long-term toll road concessions were cancelled in the second quarter. Now, Fausto Barajas, the new undersecretary of infrastructure, wants to get things done before the 2012 presidential elections and says he is willing to use whatever methods necessary.

“My main task is to speed up the [concessions] programme,” says Barajas. Already, the ministry has relaunched the 309.6km Pacifico Sur toll road concession, handed the 213km Noreste roads package over to Banobras to finance as a public works project and is preparing to launch tenders for at least 10 additional deals either later this year or early in 2012. In addition, it was due to receive bids for the delayed 145.3km FARAC Michoacan highway concession on 15 July.

Barajas worked as technical secretary for infrastructure and tourism in the office of Mexican president Felipe Calderon before moving to the SCT. The move is viewed as a sign that the current administration wants to get projects under construction ahead of the June 2012 elections. Javier Koloffon, director of project finance advisory at Deloitte in Mexico, says that it was a good choice for the Calderon administration but he notes that the undersecretary is more focused on getting roads built than on using a long-term private concession model – a fact that could put off long-term investors in the market.

“The SCT will continue working on the same scope and models,” says Barajas when asked what changes to the concessions programme he plans to implement. “It’s about making the programme more efficient, [for example] trying to get the right-of-way process and environmental studies to move more quickly.”

This is not necessarily good news. Sponsors and lenders have a long list of issues with how the SCT manages the federal roads concession programme, including minimum technical reference values, right-of-way acquisition and the speed at which deals are processed. While everyone agrees that a quicker process will be good, sponsors may still be unwilling to bid or, if they do, may fail meet the pre-set reference values on the SCT’s long-term road concessions if the concerns they raise are not addressed.

Failure to shift

The Mexican federal road concessions programme, after a strong start with the first FARAC package in 2007, languished during 2009 and 2010. Attempts to restructure and rebid the second and third FARAC packages achieved only partial success. The SCT successfully awarded Pacifico Norte, part of the FARAC II package, to Ideal in 2009 but cancelled the procurements of both Noreste (FARAC III) and Pacifico Sur (the rest of FARAC II) for a second time in March and April, respectively. The SCT also cancelled procurement of the Ciudad Valles-Tamuin bypass toll concession in March. Sponsors and lenders say the structures need to change in order for the programme to move forward.

“The FARAC projects won’t move forward as we know them,” says a Mexico City-based lender. They say that the SCT’s expectations were “too high” and that the FARAC packages need to be shrunk and restructured in order to succeed in the market.

Barajas says that the values are correct. “Probably we have some opportunities to be more efficient in how we set the prices for the assets but the process and value is correct. I think we have to give more information and get more information from the potential bidders,” he adds.

A senior official at FONADIN, the Mexican government’s infrastructure fund, says the only reason that sponsors’ bids are below the project reference values is because of current concerns over the economy, security and the upcoming elections. If the SCT were to lower the bidding threshold to levels acceptable to potential sponsors today, then the winning concessionaires would be able to claim the appreciated values – to them the accurate values – when the current market uncertainty passes in two or three years time, they say.

The relaunched 30-year Pacifico Sur concession is representative of this position. The third tender for the toll road opened in June after the grantor rejected a Ps8 billion ($683.9 million) bid from Ideal in April. The undersecretary says the proposal was rejected because it failed to meet the minimum reference value for the road, which is reported to be roughly Ps14.5 billion. The structure, including the value, of the project remains unchanged.

“We are sending a message to the potential bidders that they can do a better effort,” says Barajas. “We think they are close and that’s the main reason we are relaunching the process.” Bids for the concession, which includes the highway connecting Guadalajara to Tepic and bypasses around both cities, are due on 5 August.

Rights-of-way acquisition issues are another sticking point. One international sponsor active in Mexico says it is the main concern they have with road concessions in the country. They cite changes in federal law that give land owners more avenues to object when the government wants to appropriate land, which can delay commercial and financial close by up to two years. The pending new public-private partnership law would address this but the bill, which passed the Mexican senate in October 2010, remains stalled in the national Chamber of Deputies and is not expected to pass before the elections.

Barajas says the ministry is working more closely with local and state governments to ease rights-of-way issues until the new legislation is passed. However, he says that he also wants more participation from the private sector.

Gabriel De la Concha Guerrero, chief investment officer at ICA, says that if Barajas’ comment means that the SCT plans to shift responsibility for acquiring remaining rights-of-way to the sponsor – as well as the blame if construction deadlines are not met – his firm will rethink participating in federal road tenders. He says that this would be a repeat of the mistakes made in the early 1990s.

After Pacifico Sur, the Ps5.54 billion FARAC Michoacan is the SCT’s only other concession in active procurement. The 30-year deal to finance, build, operate and maintain a toll highway in the state of Michoacan was launched under undersecretary de Buen in May 2010 and retains its original reference value. Azvi-Cointer, Coconal, Aldesem, Constructora Obras del Norte, FCC, GAMI Ingenieria e Instalaciones, Omega, Pavimentos de la Laguna, Pavimentos y Maquinaria, Pinfra, Supra Construcciones, Techint and Tradeco Infraestructura have expressed interest in the deal. Bids were due 15 July and the grantor is scheduled to announce the winner on 12 August.

FONADIN is participating in the procurement and Banobras financing is available should a preferred bidder be selected. The concession includes modernising the 56km Patzcuaro-Uruapan highway and construction of the 64.1km Morelia bypass and 25.2km Uruapan bypass.

To concession or not

As of June, the SCT had 53 pending projects, including 12 designated as long-term concessions, in its 2007-2012 infrastructure plan. How it gets these built is of little concern.

Under Barajas’ lead, the grantor transferred the Ps2 billion Noreste toll road to FONADIN to build as a public work instead of a concession. The ministry cancelled the procurement because it had not acquired all of the rights-of-way and permits necessary for a private investor to take control of the project. Barajas did not comment on whether its proximity to the Mexico-US border, where drug-related violent crime is a significant concern, influenced the decision.

Noreste was originally launched as a 30-year finance, build, operate and maintain concession along with FARAC II in 2007. CCR, Aldesem, Construobras de la Garza, Ideal, OHL Concesiones and Omega had already expressed interest in the deal when it was cancelled. The package included the 132km Cadereyta-Reynosa highway, 44km Reynosa-Matamoros highway, 37km Reynosa Sur II bypass as well as the Reynosa-Pharr, Los Tomates and Brownsville-Matamoros international bridges.

More proposed concessions may end up as public works. Since the grantor has made it clear that it is unwilling to budge on the issues of value and rights-of-way acquisition, bids for the 10 pending deals may not meet the grantor’s expectations and they, like Noreste, may also be converted to public works. Pacifico Sur, which has been tendered and failed twice, is a likely contender for this. It is unclear whether yet-to-be-launched tenders for the other planned road concessions (see chart) will succeed. But the SCT may not be the only one who has to give in this debate.

When the grantor’s pipeline slowed during 2009 and 2010, state-level concessions continued to provide deal flow that met investors’ appetite. This does not appear to be an option today. The state of Mexico, which surrounds much of Mexico City and one of the busiest state-level grantors, has already awarded the majority of its pipeline and market participants express concerns about the lack of experience and political risk with other jurisdictions. The result may be sponsors’ willingness to invest more equity on federal road concessions.

The SCT has had some smaller recent successes. It awarded the Ps4.7 billion Salamanca-Leon highway to a Coconal-led consortium in April. The sponsor is currently working with Banobras to structure a roughly $200 million peso-denominated loan for the 30-year design-build-finance-operate-maintain concession. The loan is expected to be syndicated after a scheduled third quarter financial close.

Barajas says that the ministry is in the midst of hiring 400 new staff members who will fill vacancies left by retirees as well as expand its capabilities. This answers repeated complaints from the private sector that understaffing at the ministry slowed the concessions programme.

Scepticism remains strong among investors. “It is completely unfeasible,” says De la Concha on whether the SCT meet its goals. “Of course they can issue as many bids as they want but that is very far away from developing successful projects. They haven’t been able to comply with those scheduled for 2009 and 2010, and this is not to mention how many problems still exist in the ones awarded in 2005 through 2008.”