The winds of industry: Mexico City looks to recover old business with ambitious new projects.

Mexico City is trying to beat Guadalajara--the nation's self-declared high technology and electronics capital--at its own game. In a bid to stem an exodus of industry from an increasingly services-oriented city, the capital's government is nurturing a clutch of projects it hopes will generate the best in technological education and provide well-paid employment to rival anything the tapatios can offer.

The industrial development plan, which mainly focuses on Mexico City's northern Azcapotzalco district, aims to tackle one of Mexico's most enduring paradoxes. How can a city that produces some of the most highly qualified technology and engineering graduates in the country also have one of the nation's highest rates of unemployment?

The problem, according to economists, is that beginning in the early 1980s, Mexico City began to de-industrialize as the manufacturing industry uprooted from the capital and migrated to cities where local taxes and environmental standards were lower. Some of them moved because of the capital's deteriorating infrastructure, while others left because of the uncertain, and expensive, water supply.

Between 1980 and 2000, about 22,000 medium- and large-scale companies, ranging from mechanical engineering firms to paper mills, relocated to states like Jalisco, Nuevo Leon, Puebla and the State of Mexico.

During those two decades, "the economic structure of the country changed dramatically from an economy based on import substitution to one focused on exporting goods," said industrial development consultant Gabriel Quadri.

"There was no longer an incentive to locate companies close to the largest city in the country because that wasn't where the markets were," said Quadri, a former general director of the Center for the Study of Sustainable Development for the Private Sector (Cespedes). "They moved to industrial cities, ports and close to the border with the United States."

Because of the economic turbulence that buffeted capitalinos during the 1980s and 1990s, city officials found it was nearly impossible to formulate and implement a long-term industrial policy. Conditions have improved since then. The opposition Party of the Democratic Revolution (PRD) took control of the city in 1997, and the national economy has grown and stabilized. If, as expected, his left-leaning party consolidates its control of the capital's legislature in the upcoming elections on July 6, an increasingly confident Mayor Andres Manuel Lopez Obrador is expected to grow bolder in his economic strategy.

"Mexico City desperately needs a coherent industrial policy," said Quadri. "[The capital requires] a policy that will re-industrialize the city with high-technology companies and that takes advantage of its well-educated workforce."

STRATEGIC ALLIANCES

Today that nascent re-industrialization plan centers on a 10-hectare project in Azcapotzalco. The Parque Industrial de Alta Tecnologia "Ferreria" is being developed by the Monterrey Institute of Technology (ITESM), one of the nation's top private universities, and the city government is helping promote the project. The ITESM will open the Universidad Tec Milenio campus on the site, which will also include a shopping mall, a hotel, a cinema complex and restaurants. The participation of the prestigious ITESM is already generating interest among high-tech companies, according to local officials.

"[ITESM] is making strategic alliances with software companies, such as Softek, the most important software developer in Latin America," said Mexico City Economic Development Secretary Jenny Saltiel.

Work has also begun on a nearby project that is being driven almost entirely by private-sector initiative. Tecno Parque Azcapotzalco will accommodate call centers, telecommunications companies, financial services companies and computer software and hardware developers. The two parks will generate 10,000 skilled jobs and represent two billion pesos of mainly private-sector investment, said Saltiel.

An additional 1.5 billion pesos of mostly private money will be spent to establish an environmental technology park on 16 hectares of wasteland in Iztapalapa, one of the capital's poorest districts. The Parque de Alta Tecnologia "Cabeza de Judrez" will be home to companies dedicated to developing water treatment technologies, alternative sources of electricity generation and biotechnology. Construction is scheduled to begin before December.

NEW LEASE ON LIFE

Local business leaders are hoping that a new-found enthusiasm for industrial development will lead to a facelift for Mexico City's oldest and most important industrial zone. Established 60 years ago by presidential decree, the Industrial del Vallejo today looks shabby and neglected.

"Seventy percent [of the park's infrastructure] is in poor condition," said Javier Pichardini, vice-president of the Vallejo Industrialists Association (AIV) that has been lobbying the city government for more resources. "[Vallejo] needs public investment to repair and modernize the drainage and water mains, as well as to renovate sidewalks and street lighting."

This 550-hectare park accounts for 18% of the 3,000 hectares of land available for industrial property use in Mexico City. Despite its 20% vacancy rate, the Vallejo is home to more than 500 companies, including the largest Procter & Gamble soap factory in Latin America. Vallejo tenants such as Coca-Cola, Gamesa, Wyett, Bristol-Myers Squibb, Siemens, Condumex and Nacobre generate US$2 billion year in sales and a whopping 300 million pesos a month in taxes.

Pichardini's association is trying to attract companies whose parsimonious water consumption and low pollution emissions meet tough local environmental regulations. But an overhaul of the Vallejo's infrastructure needs to be combined with flesh tax incentives and inform of Mexico City's fiscal code, he said.

Business organizations such as the Mexican Employers' Federation (Coparmex) are leading calls for reform, arguing that the tax levied on commercial rents, known as the predial, is applied inequitably and thus hits a small number of tenants disproportionately hard.

According to a report published in April by Coparmex, 100,000 predial accounts generate 50% of the total revenue accruing to city coffers from this tax, while 2 million accounts generate the rest. Coparmex argues a reduction in the 25% predial for commercial tenants would reduce rampant tax evasion in Mexico City while creating incentives for lessors to renovate their properties.

"How can landlords modernize their industrial premises to make them 'AAA' like in Houston or Orange County, California, with this level of rent tax?" said Pichardini.

After subtracting rent tax, income tax and lease administration costs on a commercial property, landlords typically make an annual profit between 2.5 and 3.6 percent, Coparmex calculates. That's a lower yield than they could make by investing in safe government bonds. By contrast, most businesses in California pay a rate of 13-15% for a similar property tax, according to Coparmex advisor Adolfo Kunz, who is president of real estate management firm Kunz y Asociados.

TAXING PROBLEM

Politicians are wary, however, of tackling the tricky issue of predial reform in an election year. The local legislature has the power to reset rates and determine the tax base but is currently unwilling to do so, Pichardini said. Therefore, reform proposals remain blocked. With nearly 90% of its revenues coming directly from the federal government, city officials are also likely to be cautious about tampering with a tax that grants the local government a substantial degree of autonomy. Even so, reform could happen in the second half of the year after Mexico City's Finance Secretariat brings its land registry up to date, according to Saltiel.

"Re-evaluation of property tax has to be based on many factors," Saltiel said. "You're not going to pay the same in areas like Santa Fe or Bosques de las Lomas as in zones of high social marginalization.

"Remember that although Mexico City is the country's most expensive city in many ways, it also offers some of the best opportunities ... it's a global city, it's a cultural and financial center," she said.

Pichardini argued the mayor should grant new Vallejo tenants multi-year exemptions from property taxes if the administration is to be consistent with the treatment of tenants involved in the Ferreria and Tecno Parque projects, as well as in the Historic Center and the Paseo de la Reforma renovation schemes.

"We need to be able to give companies reductions on their predial for up to five years, not just one year as is currently the case," said Pichardini, referring to the tax on business leases. "Foreign businesses setting up in China, for example, get income tax incentives that last ten years."

"The city's public works directors have been talking to Vallejo officials about how far we can help them within the scope of our limited budget," said Saltiel. She added, however, that the administration's priorities regarding tax incentives lie with the Historic Center, the Reforma corridor, the technology parks and properties affected by the construction of the San Antonio expressway interchange.

Fiscal incentives for these projects are renewable on an annual basis by the Mexico City legislature. By law, the tax breaks cannot exceed the mayor's tenure in office, which ends in 2006. For the time being, it seems Mexico City's "old economy" will just have to wait for the political wind to change.

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Provincial rivals Jalisco, Nuevo Leon and the State of Mexico have never been willing to play economic second fiddle to the capital.

Although Mexico City continues to be the most important area of the country in economic terms, its contribution to the country's gross domestic product declined to 22.8% in 2002, from 24% at the beginning of the 1990s. Some people blame the capital's smog, lack of clean water, traffic jams, crumbling infrastructure and high crime rate. Others argue hungry challengers have simply become more responsive to the needs of business.

The neighboring State of Mexico, for example, has simplified and deregulated the process of setting up a business so that even companies regarded as a high pollution risk can receive a response to their startup proposal in as few as 15 days. Approval can come even faster for the micro- and small-scale enterprise: just eight hours.

Edomex, as the most populous state is known, claims to have attracted an enormous 125 billion pesos in manufacturing, service industry, trade and infrastructure investment between September 1999 and April 2003. That figure includes US$425 million of foreign direct investment that arrived during the same period, thanks in large part to the rapid response policy, according to state officials.

"We've opted for more permanent incentives that don't depend on the fiscal situation of the government' said State of Mexico Undersecretary of Planning for Economic Development Salvador Herrera. "The impact has been very, very significant."

Jalisco found that historical happenstance favored its industrial development. Jesus Salmon, the state's director of investment promotion, traces the state's success in luring 50 high-tech companies (from 1975 to 2000) to IBM's setting up an electronic typewriter plant there in 1975. The one public and seven private universities in Jalisco's capital, Guadalajara, also undoubtedly played an important role in attracting tech companies.

"Amenities such as first-class hospitals, bilingual schools and Guadalajara's seven golf courses ensure that residents enjoy a higher quality of life than in Mexico City," said Salmon.

Industry still comes to Jalisco despite the tech industry downturn and less-than-dazzling fiscal incentives. Jalisco offers a 100% reduction in the 2% payroll tax during the first year of a new company's residency. Continued fiscal privileges depend on the number of jobs created, the level of wages, the physical location of the project and whether the company uses local suppliers.

Nuevo Leon also relies on topnotch amenities and infrastructure rather than tax incentives. Like Jalisco and the State of Mexico, Nuevo Leon lets municipalities grant full or partial exemptions from the predial rent tax to companies they want to invest there.

"We don't grant any subsidies to attract companies but we do supply services that are extremely valuable to them," said Nuevo Le6n Economic Development Secretary Carlos Zambrano, who is a relative of powerful Cemex boss Lorenzo Zambrano.

"We have the best education, the best electricity infrastructure, a natural gas supply that's been in place since 1930 and despite being situated in the desert, we have a water surplus," he said. "We also have the best transport infrastructure in the country: two airports, two railroad lines and some of the best freeways. We are closer to the U.S. East Coast than many cities in the U.S. Midwest."

Beat that, Mexico City.

--A.W.

Andrew Watson is a Mexico City-based freelance writer.