By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The Mexican peso suffered its biggest rout in four months on Thursday, likely due to the realization dawning on market participants that the veteran populist Andres Manuel Lopez Obrador (or AMLO) may win the presidential elections on July 1. AMLO has led all the polls in Mexico for well over a year and is still 15 points ahead of his closest rival. And now he’s threatening to put an end to the country’s most expensive public infrastructure project, Mexico City’s new airport, which has been plagued by corruption, scandals, and cost overruns since its inception four years ago.
AMLO’s latest pledge has aroused fits of apoplexy among Mexico’s business elite, many of whom stand to rake in large sums of money from the project — no one more so than Mexico’s richest man, Carlos Slim, who told journalistsin Mexico City this week that suspending the project “would mean suspending the country’s growth.’’ Slim urged AMLO to reconsider his opposition.
Slim’s concern is not wholly altruistic. Grupo Carso, one of his many construction companies, is deeply involved in the building project. Three big contracts allegedly worth 94 billion pesos ($5 billion) are in the hands of consortia led by Grupo Carso or other firms owned by Slim and his family.
The first tender that Slim’s family won was for the airport’s architectural design, which was awarded to a firm run by Fernando Romero, a Mexican architect who is married to one of Carlos Slim’s daughters. British architect Nigel Foster led the design project, for which Fernando Romero Enterprises was reportedly able to bill Mexico’s government a cool $1 billion.
Other large Mexican companies involved in the project include ICA, which almost went under two and a half years ago after overdosing on dollar-denominated debt, Prodemex, GIA, and Grupo Hermes, which is owned by Carlos Hank, a billionaire banker with cozy ties to the current government. Two other major participants are the Spanish infrastructure giants Acciona and FCC, the latter of which is also majority-owned by Carlos Slim.
One of the biggest potential money earners for some of these companies will be the airport’s absurdly high maintenance costs once it’s built. Until recently, the site on which it’s being developed was home to a very large lake, which was drained before work began. But the ground still has extremely high water content and low resistance to stress. As the Mexican newspaper Proceso reported last year, this will inevitably result in very juicy contracts just to keep the land upon which the airport is built fit for purpose.
When the project to build the airport was first launched in 2014, it was broadly welcomed by the general public. Mexico City is one of the world’s biggest metropolises and its airport is Latin America’s busiest hub, yet it has no room for further growth since it is located slap bang in the middle of a built-up residential area. By contrast, the new airport, located 15 kilometers (over 9 miles) from the city center, would eventually have six runways built and 94 boarding gates on a site almost 5,000 hectares (12,355 acres) large. It would have a capacity of close to 120 million passengers per year, four times the current airport’s capacity, making it “one of the 3 biggest hubs in the world.”
But as soon as the project began, so, too, did the accusations of corruption. And in Mexico right now corruption is a hot-button topic, occupying top spot in many of the surveys of top voting issues, ahead of even drug-related violence.
The airport project is currently 50 billion pesos ($2.7 billion) over budget and it’s not even close to completion. Considering that at least 40% of the fundingis expected to be delivered through Public-Private Partnerships, which tend to include exorbitant long-term repayment costs, the eventual bill is likely to be far in excess of the original projected costs of 169 billion pesos ($9 billion).
Cost overruns are a particular cause of concern when there’s scant oversight of how the funds are being spent. According to the head of the congressional committee set up to oversee the project, Rafael Hernandez Soriano, there is so little transparency that it’s very hard to tell where exactly the money is going.
A mind-watering 70% of the contracts, some of which have a duration of 50 years (with the option of extending them to 100 years), were awarded without tender, in direct contravention of the Mexican government’s own anti-corruption laws. The deep opacity also extends to the government’s financing arrangements with international banks and the issuance of green bonds, Hernandez Soriano says.
Given how much money the project could generate in years to come for some of Mexico’s biggest companies and international banks, as well as how much has already been ploughed into it, Mexico’s business elite and their political minders will fight tooth-and-nail to ensure that AMLO does nothing to upset the apple cart. It’s still far from certain that AMLO will actually win the elections or indeed that he intends to go ahead with this plan; it could just be an electoral ploy to galvanise his base. But if he does win the elections and he does go ahead with the plan, every effort will be made to change his mind, including the threat of litigation and broader economic fallout.
The ratings agency Moody’s has cautioned that cancelling the airport project would have negative credit repercussions, not only for Mexico City’s current airport but the entire national sector. Marco Oviedo, Barclay’s chief economist for Latin America, went a step further, warning that cancelling the project would hurt the entire economy due to investors’ loss of confidence. For an open, liberalized economy like Mexico that depends so heavily on foreign direct investment, this is a big threat.
But until July, at the very earliest, the future of Mexico’s biggest public infrastructure plan is — if you’ll excuse the pun — up in the air. And that is the last place Mexico’s business elite, along with bankers and investors, domestic and foreign, want it. By Don Quijones.
Pemex lost $18 billion in Q4 2017, suffers from revenue shrinkage, falling oil and gas production, and $102 billion in debt. And now its world is changing. Read… How Much Longer Can Pemex Hang On?
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.