The road ahead: will private funding get toll road infrastructure off the ground? (Special Report).

Five years after a flawed attempt to involve construction companies in the building and operation of toll roads ended in a US$7.3 billion bailout, the federal government has launched a new program to attract private investment to Mexico's deteriorating road network.

The Communications and Transport Secretariat (SCT) is hoping a mixture of subsidies, well-designed projects and a stable economy will pull in more than US$1.3 billion in private funds for nine new turnpike concessions.

The new concession rules were published in the government's Official Journal on August 29. They aim to draw a line under the previous failed partnership with the private sector that was toppled by poor planning and skyrocketing interest rates in the aftermath of the December 1994 peso devaluation.

The SCT promises a much more rigorous project design this time around. Concessionaires will be given the maximum term allowed by law--30 years--to recover their investments. Tolls will be made affordable to the turnpike user because the secretariat will fix maximum average tariffs and set guidelines on how these should be adjusted.

Oscar de Buen, chief of the toll roads unit at the secretariat, told BUSINESS MEXICO, "There will be a clear definition of risk and who is expected to assume it in the course of the concession and in general, a delineation of the responsibilities and obligations of the federal government."

Local press reports claim the government's economic liabilities will be limited to 30% of the total cost of each of the nine concessions comprising the first package, an assertion de Buen wouldn't confirm or deny.

What is certain, however, is that the SCT is planning to pitch in with an initial subsidy and a minimum income guarantee to make the program more appealing to banks and private capital. The secretariat has reportedly allocated an initial $2 billion pesos from infrastructure fund (Finfra) at state development bank Banobras for this purpose.

Finfra money will be released if toll revenues aren't projected to service the construction loan or if revenues fall short of expectations during the turnpike's operation.

"The idea is that the bank can be certain it is going to have a source of payment to be able to recover the loan it made to the project," says de Buen.

Nevertheless, the concessions won't be entirely risk free, as the SCT won't pledge that its traffic projections will bear out.

"We will provide (the concessionaires) with a study the secretariat has made to support the formulation of the project, " explained de Buen. "But we assume no obligation nor do we grant any guarantee regarding (traffic) capacity that might be reported in that study."

The first of the toll roads put Out to tender under the new concession rules is a 14-kilometer beltway past the city of Matehuala in the state of San Luis Potosi. Twenty companies have so far acquired the bidding rules for the project, which is likely to require an investment of $360 million pesos, de Buen said. Two more stretches will probably be put up for tender this year and a further six in 2003. The nine-road program is expected to require a total investment of $18.8 billion pesos.

POR LA LIBRE

To see what went wrong with Mexico's previous toll road scheme, get in your car and take a trip from Mexico City to Acapulco.

Two routes to the Pacific coast resort lie ahead. You can either fork out a total of US$81 for the privilege of cruising along one of Mexico's showpiece highways, the Autopista del Sol, or brave tire-busting potholes and unmarked construction sights on the freeway and back roads.

For affluent drivers, however, there really is no dilemma. Most people accustomed to the capital's smog-filled streets will gladly splurge the cash, if they have it, for the uncommon pleasure of doing 70 mph on a smooth stretch of tumpike that snakes gracefully around mountain curves.

Steep tariffs, however, explain why the trip is free of traffic snarls. At $1.21 pesos (8.5 U.S. cents) per kilometer, tolls are about five times higher than comparable turnpikes in the United States. Average toll rates on the Illinois Toll Way, for example, are 1.6 US cents per kilometer.

The price reflects the excessive cost of the highway's construction and the expense of rescuing the companies that built it.

"They (construction companies) badly misjudged the earth cuttings and caused landslides," one banker, who arranged financing for the Autopista in the early 1990s, told local media recently. He said a lack of accurate plans and costing inflated the project's budget by 275%.

When one section of the highway was complete, bidding for the next section would be opened to other contractors. Each of the nation's three largest construction firms--GMD, ICA and Tribasa--took turns improvising.

Confusion inevitably ensued. In one notorious example, a bridge across the Balsas River, halfway between Cuernavaca and Acapulco, had to be raised to clear a proposed hydroelectric project. But the energy plant was never built because of a legal dispute over a railroad. Officials at ICA said the Mezcala suspension bridge added $200 million pesos to the turnpike's cost overruns.

The benighted Autopista del Sd was one of the 23 concessions canceled by the government of former President Ernesto Zedillo after the program launched by his predecessor, Carlos Salinas, fell apart in 1995.

As interest rates soared in the wake of the peso devaluation, construction firms that had become highly leveraged in order to finance road building found themselves being crushed by debt burden. To make matters worse, concessionaires discovered that the government's traffic estimates were badly wrong. Even as vehicle flow dropped to a trickle during the 1995 economic recession, concessionaires kept tolls high in an attempt to recoup their investment.

Putting a stop to the fiasco, the government in August 1997 launched a $58 billion-peso bailout program. It took over bank loans, indemnified concessionaires and lowered tariffs by 15%.

TARMAC DEFICIT

Critics said the bailout was exorbitant; the government argued it gained 3,430 kilometers of highways. Whichever opinion you prefer, most would agree Mexico needs more and better roads.

The physical state of the 42,000-kilometer network of public roads has improved little in the last three years. An SCT report in December 1999 said 23% of public roads were in a good state of repair, 34% regular and 43% bad. The secretariat last September said 18% of public roads are in good condition, 48% regular and 34% bad. It also said it hopes to spend $4.97 billion pesos on preserving and maintaining them between September 2002 and August 2003. That would be an increase of 36% on the previous 11-month period.

Still, most observers say spending needs to rise further. The Mexican Construction Industry Chamber (CMIC) estimates the federal road budget covers just 32% of the country's investment needs. Low investment is hampering the nation's ability to compete with other industrialized countries, CMIC says. Spain, for example, spends 1.2% of its gross domestic product (GDP) on roads compared to just 0.2% in Mexico.

Construction firms in Mexico often complain the short federal budget cycle creates a permanent atmosphere of uncertainty. No one's sure how much the SCT will be allowed to spend in fiscal 2002-2003 until Congress revises the budget in December. The government has also been reining back spending in an attempt to keep the public sector deficit within congressionally approved limits.

"The exercise of (the SCT's) expenditure is lagging 25%, which is holding back (infrastructure) development," CMIC head Jose Luis Garcia Cantu told local media in September.

Over the past two years, the combination of slow economic growth and a hostile opposition in Congress have confounded President Vicente Fox's efforts to boost tax revenue.

Involving the private sector again is therefore a logical response to insufficient funding, argues de Buen.

"We need to look at different methods of increasing the resources we can direct to roads," he says.

One way could be to issue securities whose interest and principal payments would be based on toll road revenues.

The state of Chihuahua is likely to be the first to securitize its turnpikes. The program has already received an "AAA (mex)" credit rating from Fitch Ratings, and Santander Mexicano is promoting the issue, which is backed by revenues from nine toll roads across the state. The SCT is planning to raise funds from another three toll roads: Mexico City-Puebla, Mexico City-Queretaro and Queretaro-Irapuato. But SCT officials have been reported as saying the launch date has been postponed until 2003, pending an improvement in financial markets.

ECONOMIC DETONATOR 

Industry players and commentators have given a cautious welcome to the government's efforts to lure private capital back to the highways.

"To the extent that these roads could bring about private investment, of course they're going to help Mexico's development," said Raul Ancona, CMIC's vice president of transportation.

ICA, the largest civil engineering and construction firm, says it is examining the bidding rules for the Matehuala beltway, a concession that could be awarded as early as February.

"The thing is, we don't want to make the same mistakes as last time," said Luis Flores, director of communications at Mexico City-based ICA. "If we don't receive a great deal of risk, I think we could be interested in bidding again."

"The (concession) contracts are fine," said Mario Rodarte, director of the Center for Economic Studies for the Private Sector (CEESP). "The problem is, when the contracts aren't supplied with legal security, you can't invite investors (to bid for concessions)."

"This could be a good catalyst for the construction industry. It could revive an important part of the economy."

Andrew Watson is a freelance writer and a finance reporter for a Mexico City daily.