The U.S./Mexico border infrastructure finance conference spotlights strategies to attract private capital - Special NAFTA Issue

Business America, Oct 18, 1993 by Jay L. Camillo

The same forces that have required the participation of private capital in the other infrastructure fields are at work in the transportation sector where the use of toll roads has become more and more widespread on both sides of the border. The government of Mexico has used this policy quite effectively recently to finance toll roads. Despite the rising popularity of this method of financing, several problems associated with this type of financing remain to be resolved. Concession periods allowed to the private sector developer, for example, have commonly been too short, reflecting the short-term financing that is frequently extended to construct the road. Costs cannot be recovered in the short concessionary period allowed, and the concession must be extended. Sometimes, the roads do not generate the traffic volume that was anticipated. This problem is frequently related to the abbreviated concessionary period problem.

The government can help facilitate private finance of transportation projects by mitigating risk areas outside private sector control. Specifically, government entities can build flexibility in toll rates, allowing those rates to be raised if the actual traffic volume does not reach the anticipated levels, assume some of the political risk to attract international capital, facilitate a transparent and timely permitting process, and act as a guarantor in the early stages of a project when revenue streams are not as sizeable or predictable.

The government can increase its equity positions in border transportation projects that can be financed with a combination of public and private sector money. Government funds can become "patient money" that can afford to wait for their paybacks at the end of the asset life of the project, and provide coverage upfront in bridge financing for the early portion of the project when project revenues are not sufficient for the private sector to finance it alone. This can create a situation where financing can actually match the life of an asset like a road project.

Conference attendees agreed that the future trend in the area of transportation infrastructure will be toward partnership between the public and private sectors rather than the outright privatization of transportation infrastructure.

Challenges in the Independent Power Generation Sector

Mexico's total installed electrical generation capacity is 24,518 megawatts--about the total amount of electrical generation capacity available in the state of Ohio. Rapid economic growth, particularly in the border region, has dramatically increased electricity consumption. In fact, it is estimated that Mexico's power requirements will double over the next 10-12 years. By the year 2000, the government hopes to add 17,000 megawatts to the country's electricity generation capacity.(1)

Private investment has been sought in recent years by the Comision Federal de Electricidad (CFE), Mexico's national electric utility. New investment regulations were published this year, opening the electricity sector to independent power producers.