ICIS VIEW: Infrastructure plans signal key shift in Mexico

Claudia De La Rosa

02-Dec-2020

  • Federal administration publicly lauds private sector contributions
  • Key business leader embraces administration efforts
  • Energy projects in public-private infrastructure plan unsurprising – sources
  • CFE to now allow private sector majority participation in new plants
  • Unclear who will operate natural gas projects in plan

HOUSTON (ICIS)–The federal administration’s new public-private programme aimed at bolstering Mexico’s economy shows the president’s willingness to begin to acknowledge Mexico’s difficult economic reality, which could assist in further opening dialogue on energy issues.
The energy part of the plan confirms the administration has begun to realise how much it needs the private sector to set up the economy to recover. Creating a perception of economic progress among the president’s voting base is key for his party to maintain a majority in Mexico’s chamber of deputies after June 2021 mid-term elections.
The plan announced on 30 November during president Andres Manuel Lopez Obrador (AMLO)’s morning press conference includes the Costa Azul LNG plant that has been planned by IEnova for more than two years.
It also includes six combined-cycle power plants to be built for state-run utility CFE.
Most of these plants were previously attempted by CFE in unsuccessful tenders, but the entity is now scheduled to partner with the private sector to build them. According to the report accompanying the announcement, private sector participation must be greater than 50% of investment for each project. Sources previously said CFE efforts to use a new master investment trust or its Fibra E investment vehicle would likely prove unsuccessful for building new plants like these on its own.

NATURAL GAS
Natural gas projects include two compression stations and a pipeline already included in the five-year gas planning document known as Plan Quinquenal released in November.
Those plans were recycled from a prior administration, according to a former government official. The pipeline to cross the Tehuantepec isthmus was in Plan Quinquenal as the 247km Jaltipan-Salina Cruz pipe.
In addition to supplying a future trade corridor and the existing Salina Cruz refinery, the project is also supposed to connect to the LNG export project the government recently announced for Salina Cruz. That project was absent from the 30 November announcement.
Daniela Flores, a former senior official in the gas unit at energy ministry SENER and now a consultant at Talanza Energy, said it is unclear if these projects will be integrated into the national Sistrangas pipeline system, something that could complicate operations in the future if CFE operates them.
Transmission system operator (TSO) CENAGAS is charged with managing Sistrangas operations and planning, though CFE owns some gas transport infrastructure.

OUTLOOK
The administration’s recent plan for energy will be considered at best unoriginal by some, but it points to AMLO’s growing awareness of the political consequences of abandoning orthodox economic policies.
As his political base has increasingly felt the repercussions of his unorthodox approach after coronavirus’ spread and his popularity has waned, AMLO has likely been influenced more easily to re-examine his relationship with the private sector.
This change is evident in the inclusion of Carlos Salazar in the 30 November announcement after periods of public rejection by AMLO. Salazar is the head of Mexico’s powerful business coordinating council CCE, and AMLO allowed him to give a lengthy speech during his daily press conference.
It focused on private sector involvement with the plan, which Salazar said would extend into a third set of projects to be announced at an undisclosed later date.
Salazar was also included in the 5 October conference announcing the first set of public-private projects, but his November speech was longer. Its focus on the merits and commitment of the private sector to Mexico’s economic recovery was likely aimed at garnering support from a business sector fatigued by overwhelming changes the administration has made to labour, business and energy regulations.
AMLO also initially refused to provide significant emergency support to medium and larger businesses. The increased collaboration comes after the International Monetary Fund (IMF) recommended on 6 October that the government promote private sector involvement in power projects. Mexico holds an IMF credit line.
Though Salazar highlighted the 400,000 jobs the public-private plan is expected to generate, Mexico’s economic recovery is expected to be a longer battle than in Brazil, Chile and Peru, according to a 1 December outlook from Moody’s Investors Service. The report says exporters like Mexico will depend increasingly on China’s economic outlook and international price dynamics. Mexico is also dependent on tourism and trade with the US, which are expected to limit its economic rebound in 2021 along with weak investment prospects and business sentiment.
AMLO’s administration appears to have begun to re-examine the importance of the business sector. If the relationship between the two proves fruitful, it could benefit AMLO and his party politically and intellectually.

Claudia Espinosa

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