REVIEW

Build the Basics

Investment in much-needed infrastructure is boosting Mexico’s construction sector, which had been in the doldrums since 2008.

The Mexican construction industry continued its recovery in 2011, following the global economic crisis in 2008, helped along by public investment in infrastructure. According to data from the National Institute of Statistics, Geography, and Information Technology (INEGI), while the sector contributed 1.2% to GDP in 2008, it contracted by -7.2% in 2009, and stayed in the red for 20 months, reflecting the severity of the slowdown in the industry. Over 2011, the sector managed to stage a rebound, reaching 5.1% during the January-February period of 2012, giving industry leaders a much-needed motivational boost. The government’s pledge to stimulate the sector through the development of infrastructure seems to be paying off. “Our economic growth and the government’s new public polices will allow for the investment of more that 5% of GDP in infrastructure,” Federico Martínez Urmeneta, President of Tradeco, told TBY.

The total value of the construction sector in 2010, according to figures presented by the Mexican government, totaled $70 billion. The majority, around 48%, was allocated to PEMEX investment projects, followed by the building of houses and multi-use buildings (16%) and highway construction (12%). The larger areas that received investments were Mexico State (20%), Mexico City (17%), Nuevo León (13%), Jalisco (7%), and Veracruz (6%).

Mexico has also sought to streamline the permit process, and currently 11 procedures are required to be granted permission to construct. This puts the country ahead of the Czech Republic, China, and India, where as much as three times the work is required. Construction permits can be obtained in just over 100 days in Mexico, while in China it can take over 330 days, or over 410 days in Brazil, according to the World Bank.

PROJECTS

Among Mexico’s most impressive construction projects in recent years is the Baluarte Bicentennial Bridge, joining the states of Durango and Sinaloa. At 403 meters above the Baluarte River, the cable-stayed bridge is the highest bridge in the Western Hemisphere. Recently inaugurated by Tradeco, the bridge forms part of the “superhighway”; a $1.5 billion investment by the Mexican government that will cut driving times between the interior city of Durango and the Pacific port at Mazatlán from six to just over two hours. The modern transportation link between the Gulf of Mexico and the Pacific Ocean is expected to bring economic development to one of the least-developed areas in the country. For Martínez, “this will develop a lot of jobs and investment in Mazatlán and Durango.” The Project will also be key for trade. “Goods from Asia can now travel directly through Mazatlán on a non-stop highway to their destination within Mexico or the US,” he said. At present, goods from Asia travel through San Diego or Los Angeles. “Another aspect of the bridge is its potential to lower the cost of transporting exports to Asia,” he added.

ICA, the largest construction company in Mexico, which was in charge of building the drainage system in Mexico City in the 1970s, is
also now extending it to double its capacity with the construction of one of the world’s longest water tunnels, stretching 60 kilometers across the region. At the end of the tunnel, ICA is also building the largest water treatment plant in Latin America, a long-term concession carried out in partnership with Impulsora del Desarrollo y el Empleo en America Latina (IDEAL).

ICA has also constructed the majority of the subway system in Mexico City, and has worked in almost every sector building roads, airports, tunnels, bridges, gas pipelines, and oil platforms. According to ICA’s CEO, Alonso Quintana, “a company like ours is not only a builder, but is also a large sponsor.” ICA has become a true integrator of projects. “We build, but we also structure financing and innovative new ways of contracting, to put less stress on the government,” he said.

Through its partnership with Fluor Corporation of the US, it targets projects from PEMEX such as oil refineries and platforms as well as combined-cycle power plants. Quintana emphasizes that this is not merely civil construction, but engineering procurement and construction (EPC) work. ICA expects to expand through EPC work into mining. “We have just begun to work with mining companies, and we expect future growth in that business,” he said. Quintana believes PEMEX must go deeper in terms of offshore drilling and sees “more investments in the oil industry in the coming years.”

Mexican construction companies have also proven to be successful on the international stage. With major projects across Latin America, the industry has managed to make up for slowdowns in one market by moving resources and workers to other regions. ICA, which is looking at Panama, Peru, and Costa Rica in particular, is a clear example of internationalization. For Quintana, these countries are becoming more stable, investment grade companies with good economies and no deficits, like the Mexico of seven or eight years ago. “These countries are beginning to demand the kind of projects we have carried out in Mexico, such as hydropower dams, roads, water tunnels, and subway systems,” he indicated. Some of their projects in Panama include important roads and the widening of the Panama Canal, which is expected to lead to the development of ports in the region.

INDUSTRY SUPPORT

In 2007, Mexico’s government pledged to stimulate the construction sector as a way to spur the country’s economic growth through the National Infrastructure Program (NIP). The NIP includes several infrastructure projects and upgrades for dams, electricity plants, roads, railroads, airports, ports, low-income housing, and commercial development. It acknowledges the importance of combining public and private resources to improve infrastructure, which is considered one of the best options to increase competitiveness. One of its goals for 2030 is to be ranked in the top 20% of the World Economic Forum’s Infrastructure Competitiveness Index. Amongst its most immediate goals is to expand the federal highway network, build 1,418 kilometers of railroad and five new ports, and to expand 22 more, as well as build three new airports, and expand 31 more.

As a complement to the NIP, on January 2012, Mexico enacted the Law on Public-Private Partnerships (PPP Law). The new PPP Law is intended to regulate the formation of partnerships between the public and private sectors in an effort to provide services and build infrastructure to improve social welfare and increase investment levels in Mexico. It implements a framework for PPPs to allow better cooperation between the Mexican government and the private sector in the construction of infrastructure, although it cannot be applied to certain projects reserved for the government, such as the oil industry.

This new law allows the government to sign contracts with private companies for up to 40 years, and provides more legal certainty for private investors. It contemplates the equal distribution of risk, access to financing, as well as contractual penalties and sanctions in the case of default by one of the parties. According to ICA’s Quintana, “for a private player like ICA, the law means having a more transparent view of the long term and partnerships with the government, as well as incentives to bring together funds and invest our capital in long-term infrastructure projects.”

CEMENT

Today, the Mexican cement industry is one of the strongest and most competitive in the world. Mexico’s major manufacturer, CEMEX, is one of the leading cement manufacturers globally with a presence in over 50 countries. According to the Mexican Institution for Cement and Concrete, (CANACEM), the Mexican cement industry is working at 80% of its installed capacity, generating 20,000 direct jobs, 120,000 indirect jobs, and has over 30,000 sale and distribution centers across the country.

From the original 300 projects of the NIP, over 50% are complete, and it is expected that another 30% will be concluded by the end of 2012. In order to contribute to the NIP, cement-manufacturing firms invested over $2 billion in new plants or in improving existing ones over recent years.

Six companies dominate the Mexican concrete market: CEMEX, Holcim-Apasco, GCC Cemento (Grupo Cementos de Chihuahua), Cooperativa La Cruz Azul together with Cementos y Concretos Nacionales, Corporación Moctezuma, and Lafarge.

Industry experts agree that cement will remain the main construction material in Mexico well into the 21st century.