TBY talks to Héctor S. Ovalle Favela, President of Coconal, on road concessions, the new PPP law, and international partnerships in wastewater infrastructure.
THE BUSINESS YEAR What is the background story of Coconal?
HÉCTOR S. OVALLE FAVELA This is a company with 62 years of history behind it. Throughout this period, we have developed our business activities in Mexico by building substantial infrastructure projects including roads, bridges, dams, and airports. There are seven companies within the Coconal Group. In addition to Coconal, which is the construction company, we have three special purpose vehicles (SPVs). One of them manages road-infrastructure concessions of between 20 and 40 years, one operates and maintains these concessions, and the final one deals with the transport of materials and machinery. The last element of the group is Compañía Contratista Nacional, Coconal’s holding company. The company can trace its origins to Compañía Contratista Nacional’s establishment in 1950. Coconal has come a long way over the years. Today, we have about 3,500 employees and our turnover is approximately $400 million per year. Also, we operate and maintain 1,000 kilometers of highway, 550 kilometers of which we built. Along the roads for which we are responsible for operations and maintenance, we are installing security cameras every 3 kilometers. We have also installed emergency telephones for drivers. On weekdays, some 4,000 vehicles per day use our roads under concession, while on weekends the figure goes up to 12,000 vehicles per day.
How are your operations balanced between construction and management?
Construction is our main business activity today, with around 70% of our activity in the construction of public infrastructure projects. The remaining 30% are road concessions. We are presently the second most important company in terms of the overall number of road concessions.
What are some of the most important projects the company has carried out in the last five years?
The Toluca-Valle de Bravo Road, which is 70 kilometers long and had a budget of Ps3 billion, is one of the most complex and significant projects we have developed, because it is located in a protected natural area. In addition to that, the construction of the access road to the Manzanillo thermoelectric plant was also very important. It was about seven kilometers in length, and we finished the project in seven months. Finally, we are currently developing the 42-kilometer “Laguna beltway,” an 18-month-long project with a budget of more than Ps2 billion.
Since 70% of your business activity relates to public infrastructure projects, how do you anticipate the new public-private-partnership (PPP) law will affect the industry?
In Mexico, there are three types of contracting: public, where there is a very extensive regulatory framework; the concessions regime, which is well-structured; and the PPP model, which was quite vague before the introduction of the new law. The new PPP law, which is modeled on the PPP structure of the UK, is attractive for the sector because it gives solidity to private investments. In addition, public infrastructure projects will continue growing as the price of oil rises. In terms of road concessions, Mexico is at the limit; the country has 9,000 kilometers of toll roads, and I think we are one of the countries with the highest number of toll roads in the world. In this regard, the new PPP law will give fresh air to a very mature market. However, the impact on the sector is yet to be seen, especially because it still needs to be fully developed. The issue of public private partnership is in fact a very complex matter, and up until this point it has to a large extent clashed with the national regulatory framework.
What are the main challenges facing the further sophistication of infrastructure within Mexico?
I think the economic capacity of the country will depend on the price of oil and, above all, on future fiscal reforms that would enable the government to collect more taxation revenue. Additionally, the full implementation of the PPP regulatory framework and an upgrade of the out-of-date laws regulating the infrastructure segment are much needed. Finally, security is another challenge Mexico faces. However, I would also like to point out that the country has huge capacity and potential for growth; for example, there are about 250,000 kilometers of unpaved roads.
What is Coconal’s growth strategy looking ahead?
Coconal is well positioned in the road infrastructure segment, where we are a leading company, and we have gained the trust and confidence of Mexico’s population and business network. One of my top priorities is to expand our client portfolio because we have not reached many large clients, and we have much room to grow. In addition, we aim to start developing projects in the water and sewage treatment segment, which in fact is a very important segment for the whole country nowadays, as well as in solid waste, high-speed rail, and harbor infrastructure. These two areas offer a huge growth potential in Mexico. Finally, I think we have room to strengthen the logistics and machinery areas of our business.
How well developed is the wastewater management industry today, and how much competition exists?
Nowadays, there are only three companies that possess their own advanced technology and machinery for the sector. The company, therefore, aims to establish partnerships with leading foreign companies due to their broader and greater experience in the sector. We need to attract foreign companies within the wastewater management industry to come to Mexico. In order to do this, we need to improve the regulatory framework as well as security. Mexico needs foreign technology to improve the wastewater management and solid waste industries and make them more competitive.
What strategy is Coconal implementing to establish international partnerships?
At the moment we have business agreements with a couple of Spanish companies, and we are negotiating a potential deal with a company from Israel. However, we need to strengthen our international profile by making Mexico more attractive. I remember traveling to Europe about 10 years ago, and I found that European companies were very hesitant to come to Mexico at all, mainly because they did not believe in the country’s growth potential. This is changing, however, and the government should really invest more resources in promoting the country as an FDI destination.
What is your general outlook for Coconal for 2013?
The company is on the right path to continue growing and expanding its business activity in the near future. Our strategy is one of stretching our arm no further than our sleeve will reach, and that approach has always paid off for us. I believe we ought to continue this way by offering very competitive prices, producing high-quality finished projects, and providing excellent results for our clients.
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© The Business Year - October 2012