Is Mexico’s new investment program positive for the infra sector?

BnAmericas.-

The US$24.5bn economic stimulus package announced by Mexico is positive for the infrastructure sector, but further measures are needed to revert the slowdown in the construction industry in recent months.

This is according to José Luis de la Cruz, general director of IDIC, a local think tank specialized in the industrial sector.

“Some of the problems facing the construction sector are of a structural nature. If we look at what has happened between December 2012 and the present, the construction sector has seen its investment decrease during 60% of those 72 months. This structural problem has worsened during the last few months as a result of the government’s austerity policies in regard to public spending,” De la Cruz told BNamericas.

“The announcement of the plan is evidently positive, but it won’t be enough to solve the problem and provide the funds that are needed for housing and public infrastructure,” he said.

De la Cruz said that the government’s strategy to boost infrastructure investment needs to be for the medium term and not purely targeted for this year and next. “A medium-term plan is needed to provide feasibility to all the infrastructure projects the country needs to develop,” he underlined.

According to the analyst, actions similar to those outlined in the recently unveiled program would need to be included in the national infrastructure plan that the transport and communications ministry (SCT) has to prepare this year, as well as in other relevant regional and sectoral programs. In addition, establishing partnerships with the private sector is also necessary to make such plans more efficient.

“Something that still remains to be done is to generate an environment of greater confidence and collaboration with the private sector: both with the industrial sector that is executing the works, and with the financial sector that funds some of the resources needed. This must be accompanied by a detailed program for the participation of development banks Banobras and Nafin,” he said.

Although De la Cruz noted that slower private investment is common during the changeover in governments, Mexico’s current political context has also had an impact on the cautiousness of private sector investors.

“I think it’s essential to generate a strategy that can increase the private sector’s confidence in the decisions of the government. To show that rather than a political strategy, this recent announcement has a medium-term approach… and create certainty that these types of incentives and promotion of public-private investment will last throughout this government’s six-year term.”

In a document released Tuesday, IDIC said that the effectiveness of the projects and measures included in the recently announced program will depend on whether these actions include a “national content” requirement when it comes to the provision of supplies, machinery, equipment and the actual construction of the works.

“What we have observed in public works is a high level of reliance on imported intermediate materials when it comes to the construction process. In addition, a lot of the [infrastructure] tenders are won by foreign companies, which later subcontract local companies to execute the works. Thus, these foreign companies keep the financial benefits, while the local companies are hired at a low cost,” De la Cruz said.

According to the think tank’s director, this type of model would not be right for a program aimed at reactivating economic growth, given that such a goal requires an increase in domestic production. “The benefit of these types of announcements or strategies isn’t only related to the execution of the works, but also to the supply of intermediate materials. That’s where it should be understood that any government measure must make use of national content to maximize its effects.”

De la Cruz’s outlook for the use of national content in the sector remains positive based on certain measures implemented by the current government, such as the decision to include national content requirements in recent energy sector tenders.

“It’s very clear that Mexican companies have the capacity to compete [with international firms], particularly when it comes to civil works. That’s where some collaborative actions could be implemented so that the financial benefits [of obtaining public infrastructure contracts] don’t necessarily end up going to imported construction products, which, for example, in the case of some of the imported steel used in construction, don’t even meet national safety norms.” Keep reading […]

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