A new airport for Mexico City has been on the table for more than two decades. Under former president Vicente Fox, the Mexico City Airport Group, GACM, started construction on an airport just outside the city in 2002, but machete-wielding farmers refused to give up the communal farm land and thwarted the project.

Under Fox’s successor, Felipe Calderón, the airport added another terminal in 2007 to ease congestion at Latin America’s second-largest airport. It quickly filled up. In 2012, 28.7 million passengers passed through its gates, pushing the airport to capacity. The following year, that figure had jumped to 31.5 million.

Now, GACM is having more luck, getting the green-light in January for what is expected to be the most sustainable airport in the world. The facility, designed by architects Foster & Partners and Fernando Romero, will use solar power and capture rain water and will be the world’s biggest gridshell structure.

Some 50 million passengers will be able to fly in and out each year after its scheduled completion in 2020, and capacity extensions are available to bring that to as many as 120 million. Its three runways are being built on the same land the farmers defended more than a decade ago.

The airport is the flagship project of President Enrique Peña Nieto’s infrastructure plan, which calls for more than 7.7 trillion pesos ($511.1 billion) to be invested in Mexico’s ports, highways, pipelines, airports, telecommunications services and railroads over the next four years.

The cost is almost double what the president announced when he took office in December 2012, and four times as big as the previous administration’s goal.

Peña Nieto unveiled the beefed-up plan in April 2014, saying the country needed infrastructure development to accompany his administration’s reforms, including a revamping of Mexico’s public–private partnership (PPP) laws.

The government planned to put up about 60% of the cash to finance the projects, around half of which are in the energy industry. But falling oil prices have pushed spending cuts of 3% this year, so the government will need to seek more private investment.

Mexico’s finance ministry estimates that the 740-plus projects will add between 1.8% and 2% to its GDP during the four-year period.

“Expectations are high with regards to new projects for the next three to four years,” says Bernardo García Franco, head of project finance at BBVA Bancomer’s Latin American corporate and investment banking department.

Competition mounts

Already, Mexico’s largest builders, Grupo Carso, ICA, OHL México and Pinfra, have been positioning themselves to win concessions.

“We have seen a very intense competition,” says Víctor Bravo, chief financial officer of ICA, the country’s largest infrastructure company. “In Mexico, there are a lot of projects, a lot of interest, in the tender offers. We have a lot of companies that we haven’t seen before. Now they’re here.”

Sergio Hidalgo, chief executive officer of OHL México, says that with the government’s budget constraints, opportunities for private involvement will grow this year and next. “If the government really wants to fulfill all its infrastructure plans and achieve its goals, it is going to have to look at the concessionaires to develop that part of the plan,” he says.

Several companies that had debt for projects launched a long time ago, started to refinance a couple of years ago, says Astra Castillo, a director at Fitch Ratings. “The rush to get that liquidity was to participate in these rounds in the tender offerings of these new projects. It’s a big challenge for them because they need to coordinate the funding.”

Highway developer Pinfra is a case in point. It paid off a bond secured by revenues from its Mexico City–Toluca toll road with a 4.5 billion peso bank loan finalized in August and a July 7.5 billion pesos equity offering.

Others may have to sell some holdings to free up cash to participate in more tenders, says José Espitia, manager of Banorte’s bond analysis and an infrastructure analyst. OHL México underscored this point when it agreed to sell 25% of two subsidiaries for 8.8 billion pesos in January.

Project bonds are also increasingly popular forms of replacing construction loans for banks once the project is operational. ICA’s Bravo says the company sees capacity in the project bond market for further financing, and plans to continue tapping that market. For others, it is becoming a well-trodden path.

“Every time we finance over the long term, once the project enters operations, we go to the market immediately,” says César Vértiz Pedemonte, head of project finance at Santander’s Mexico office.

In the past, toll road bonds typically required 80% of the highway’s revenues to be earmarked to repay the debt. As investors become more comfortable with the structure, that required amount is falling.

Performance to date of project bonds sold after construction is completed has earned the instruments a good reputation among investors, says BBVA Bancomer’s García Franco. Extending that enthusiasm to deals coming to market while the project is still being built may be more difficult, he says.

“There are already several projects at a brownfield stage that could be ready to go to market,” he says. “However, since current conditions in the capital markets are not optimal, sponsors are waiting for the right time. When that happens, we will see more activity for project bonds.”

While local capital markets are limited compared to the international ones, Mexican pension funds are set to offer one pool of capital to finance the development, says Fitch’s Castillo.

“Every three months they receive more funds, and the investment objectives of these funds is very similar to the infrastructure projects, because they offer good returns over generally long-term periods, and protections.”

But for the bigger projects, like the airport, Mexico will need foreign investors to participate, she adds.

The government has said it will come up with about 7.5 billion pesos ($500 million) for the Mexico City airport, but needs to attract another 6 billion pesos ($400 million) in private investment.

GACM, which is building the airport, already has a $1 billion syndicated loan. Equity contributions are next on the list: later this year, the construction consortium plans to meet investors to drum up interest for at least $1.5 billion in equity. It hopes to close that in the second half. Syndicated loans and mid- and long-term bonds are set to make up the third batch of financing for the airport.

Bumps in the road

Yet even before the financing start to take shape, the ambitious infrastructure agenda faces a series of hurdles. The government’s budget cuts, market volatility and concerns over transparency are at the top of the list.

The infrastructure plan details more than $30.2 billion (452 billion pesos) of spending on highways, from public and private sources. And while the government has not changed the plan itself, it is cutting its own investment in highways this year by 4 billion pesos.

Major projects include the building of an elevated route over the Mexico City–Veracruz highway, a route from Palenque to San Cristóbal and the completion of a highway in Oaxaca. The projects have price tags of roughly $800 million, $760 million and $700 million, respectively.

The rail projects are similarly ambitious, entailing $10 billion of investment (150 billion pesos). Here, too, the government will rely increasingly on the private sector: it reduced its 2015 budget for the area by 3.3 billion pesos in February.

Already, some projects have been singled out for cuts. A $1.4 billion project to build a high-speed train in the Yucatán Peninsula was scrapped in January, at the same time as the government shelved one of the most celebrated projects, a $3.75 billion high-speed train between Mexico City and Querétaro. Such high-cost projects were set to benefit relatively small populations.

Yet there were other issues. Shortly after it was revealed that a company in the winning consortium owned the homes of Mexico’s First Lady and Finance Minister Luis Videgaray, Peña Nieto canceled the concession awarded on the Querétaro train project. A new bidding round is to come, in an effort to underscore clarity, legitimacy and transparency of process, the president’s office said.

Public outrage pushed Peña Nieto to appoint a new head of his corruption team and launch a probe into the matter.

Amid a falling peso, low oil prices and an economy growing below forecast, the controversy highlighted another stumbling block to the country’s ambitions.

“The most important goal, in general, for the country and for the development of the infrastructure plan, is that transparency and trust are kept,” says Adrian Garza, an analyst at Moody’s.

Yet investors and planners must look beyond short-term issues, says Gerardo Rodríguez, emerging markets strategist at BlackRock: “Infrastructure projects are for 30 years, 25 years, so you have to have a long-term view to think about potentially getting involved in infrastructure of this nature.” LF