Environmental Technologies Industries

Environmental Technologies Industries

Market Plans

Mexico Environmental Export Market Plan

10. Financing Programs and Resources

Mexico’s overall financial situation has improved in recent years. Private environmental investment has benefited from this recovery, but major public environmental infrastructure investments have lagged behind, even during the recent period of robust economic growth.

Many factors explain why those urgent investments have not materialized at the required speed. Mexico, despite being the 14th largest world economy, is a highly heterogeneous country where a modern vigorous export led economy coexists with extreme poverty. Therefore, environmental programs and projects in Mexico take place not at the pace resulting from their urgent nature, but at a pace based on the country’s capacity to afford them. Significant environmental progress was made during the last administration, but there is simply not enough government funding to pay for all the necessary programs and infrastructure.

To complement government expenditures for the environment with other monies, Mexico has always been able to access long-term multilateral financing lines, which have supported top environmental projects. Private-sector participation in environmental expenditures works under a different logic. Large national, multinational, and quasi-governmental corporations view the investment required to comply with environmental regulations as an added cost to doing business and as necessary to being environmentally responsible. Smaller companies, however, have a great deal of difficulty financing such investments. Gaining access to credit is critical if those companies are to comply. At present, financing for environmental projects is not readily available from the Mexican private-sector banking system.

Other environmental infrastructure projects require a clear pay-back structure to attract private investment, and this requirement has been a limitation for many municipal water and waste projects. To correct these deficiencies, the government has created programs such as APAZU and FORTEM to develop the necessary conditions for attracting private investment.

Domestic Financing

Local financing for environmental infrastructure and equipment comes from many sources including directly from federal secretariats, from federal funds destined for local governments, and from special programs implemented specifically to finance environmental protection.

BANOBRAS

BANOBRAS, the national public works bank, is the most important player offering financing to support environmental investments. The bank is also the principal conduit for infrastructure-related loans and grants from bilateral and multilateral institutions. BANOBRAS has various programs to support state and municipal authorities. The most important are described below.

Program for Potable Water, Sewer, and Sanitation.

The goal of the Program for Potable Water, Sewer, and Sanitation is to offer financing for municipal infrastructure expansion. The program can be accessed by state and municipal water authorities, as well as by private concessionaires providing municipal services. Under the program, BANOBRAS provides loans at attractive rates for developing new infrastructure or for efficiency improvements. The program also offers a credit enhancement guarantee program to support municipalities in promoting private investment in BOT or concession structures. The guarantee consists of a revolving contingency trust with a credit line for up to six months for paying the concessionaire if the municipality fails to do so. BANOBRAS has the right to recoup these payments from the municipality’s federal revenue sharing.

FORTEM.

Under FORTEM, the program for strengthening state and municipal authorities, BANOBRAS provides technical assistance and collaborates in developing preinvestment studies for state and municipal environmental and other infrastructure projects. The program’s objective is to improve the financial management and collection structures of state and municipal governments. Most of this funding comes from the Inter-American Development Bank, and the priority areas are potable water, sewer, and sanitation; basic infrastructure; urban equipment; paving and transportation; and institutional strengthening.

FORTEM represents a good opportunity for U.S. companies offering training, consulting, and technical services, as well as for suppliers of water metering systems; equipment to fix leaks; budget administration software; verification and monitoring equipment; and municipal waste transportation and disposal technologies, equipment, and services.

FINFRA.

Managed by BANOBRAS, FINFRA, the Fund for Infrastructure Investments, has been an important support for the development of infrastructure projects, especially water-related projects. FINFRA offers equity for BOT or concession projects, thus reducing the risk to the concessionaire.

FINFRA provides subordinated capital for up to 40 percent of the total investment cost of the project, and venture capital for up to 35 percent. FINFRA can also combine subordinated and risk capital and can finance up to 49 percent of the total investment. Finally, FINFRA can combine both instruments with other BANOBRAS credits for up to two-thirds of the total project cost.

FINFRA provides advisory services and works with local authorities to structure viable projects. Some municipalities believe FINFRA is not a good option, because structuring a project using the fund’s capital can take more than a year. FINFRA’s position is that a detailed analysis is necessary to ensure project viability by defining the correct project size and capital structure.

FINFRA played an important role in restructuring municipal water concessions that were severely affected by the 1994 economic crisis. The fund managers were able to successfully restructure most projects even after the high-interest-rate period following the steep peso devaluation of 1994. Since 1995, FINFRA has restructured projects worth over $270 million and continues to be active in this area. FINFRA remains the best financing option for BOT or concessions in Mexico.

NAFINSA

Nacional Financiera (NAFINSA) is another government-owned bank active in managing funds obtained from multilateral institutions. Its focus has been on industrial promotion, and it has financed some environmental equipment. Its current role is to support small and medium-sized industries in Mexico. NAFINSA is not active in major environmental project financing.

Multilateral Institutions

Multilateral financial institutions have traditionally supported the Mexican government by financing projects at the federal, state, and municipal levels, as well as by financing private companies implementing the environmental and other infrastructure projects that contribute to the country’s economic, social, and sustainable development.

By law, only the federal government can receive these credit lines and is the entity responsible for repaying the credit extended. Those funds are then transferred to the government’s banking institutions, where they are managed on behalf of the specific objectives for which the credits were granted. BANOBRAS is the main entity responsible for channeling the financing to states and municipalities. Multilateral funds are obtained in foreign currencies, and BANOBRAS issues lending in Mexican pesos. BANOBRAS does charge an interest rate premium to protect the capital base of these loans from potential exchange rate fluctuations. Therefore, funds obtained from BANOBRAS are more expensive than those offered by the multilateral institutions, but they are less expensive than those offered by commercial banks in Mexico. Lending rates in Mexico have traditionally cost up to 2,000 points over inflation.

The three most important multilateral institutions active in providing loans to Mexico are the World Bank, the Inter-American Development Bank, and the Overseas Economic Cooperation Fund through the Japan Bank of International Cooperation.

World Bank

The World Bank is the world’s largest source of development assistance, providing nearly $16 billion in loans annually to its client countries. Traditionally, the World Bank has been the dominant multilateral lender to Mexico. Although in recent years the number of loans to the Mexican government has decreased, World Bank lending to the private sector has increased, and this experience has been very successful (see GIRSA case study). All World Bank loans to Mexico are provided through the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC). The instruments offered include cofinancing, trust funds, guarantees, and money grants for pilot projects. The World Bank also provides training and cooperation programs.

Within projects that have World Bank support, the executing agency is responsible for organizing the tenders as well as for selecting the contractors. World Bank–funded projects are bid through international tenders, making those projects attractive to U.S. equipment and service suppliers.

Inter-American Development Bank

IDB is the second largest multilateral agency providing financial support to Mexico. Within the environmental sector, the IDB has been focused on financing water infrastructure, including important loans to the Valley of Mexico Sanitation Project, the Aquifer Recharge Project in the Federal District, and PEMEX’s program to treat wastewater at its petrochemical complexes. In addition to these specific projects, IDB has been the main source of funding for FORTEM.

Bilateral Financing

NADBank

NADBank is one of the most important sources of bilateral public-sector credit at a low cost. The bank provides long-term loans and loan guarantees for environmental projects within 100 kilometers of the U.S.-Mexico border. NADBank’s mission is to leverage private- and public-sector investment in environmental infrastructure projects in the border region. NADBank must charge an interest rate that is at least one percentage point above U.S. Treasury rates for securities with comparable maturities.

NADBank can lend only to projects certified by the Border Environmental Cooperation Commission and only in U.S. dollars. As with multilateral loans, those funds are channeled through BANOBRAS, typically raising the cost of capital to municipalities.

Case Study 10.1 Girsa Group

In February 2000, with financing from the World Bank through IFC, Girsa, a Mexican diversified chemicals producer, obtained an investment grade rating that allowed the company to tap U.S. institutional investors for the first time.

IFC provided $105 million toward a $240.6-million project to enable the company to make more specialized products and thereby improve its competitiveness in international markets. The investment included a loan of $45 million from IFC’s own account and a B loan of up to $60 million. The B loan was privately placed by Cr�dit Suisse First Boston with a group of U.S. insurance companies. Duff and Phelps Credit Rating Company assigned a BBB– rating to the transaction (above Mexico’s sovereign rating at that time) on the basis of Girsa’s underlying credit quality and the preferred creditor status of IFC, which helped mitigate substantially sovereign transfer and convertibility risk.

Girsa is using the financing to modernize, expand, and undertake an investment program to enhance global competitiveness in its business units, which include synthetic rubber, phosphates, consumer products, laminates, polystyrene, carbon black, phenol, and acrylic sheets.

The investment was IFC’s second in Girsa. The first was to finance the company’s efforts to improve its environmental standards, close obsolete plants, and become a more efficient producer.

NADBank’s resources come mainly from the U.S. and Mexican governments. In addition, the U.S. EPA has provided funds to NADBank to construct wastewater infrastructure. NADBank and BECC also operate different programs and funds for infrastructure development. The most important is the Project Development Assistance Program, which provides funds for technical assistance in project preparation, and the Border Environmental Infrastructure Fund, which provides grants to environmental projects. Most of the funds administered through PDAP and BEIF are provided by the U.S. EPA. Thus far, those funds have totaled more than $211 million.

Border Environmental Cooperation Commission

BECC provides technical assistance to municipalities and localities on the border and assists in preparing projects. During 2000, BECC had a budget of $3,068,000 ($1,534,000 provided by each country). In 1998, 1999, and 2000, this budget remained the same; however, for 2001, the U.S. Congress authorized $1,995,000 to increase technical assistance to municipal waste projects. The Mexican side is in the process of approving that budget. That increase, combined with funds from PDAP, represent important opportunities for U.S. companies willing to provide technical assistance for the development of municipal waste and wastewater projects in the border area. Active projects are listed in Table 10.1.

Currently, BECC has over 150 project certification requests, with an estimated value of $1.5 billion. This amount represents only one-third of the environmental needs in the border region, according to a study by the Southwest Center for Environmental Research and Policy and the University of Texas in El Paso. BECC estimates it will require additional funds of $17 million through PDAP and $350 million through BEIF to develop all these projects.

BECC/NADBank Program, 2001–2005

The board of directors of NADBank expanded the institution’s mandate with the objective of increasing its participation in developing environmental infrastructure in the border area. According to the expansion agreement, BECC and NADBank will be able to certify and finance, respectively, a wider range of environmental infrastructure projects. The new range will allow the institutions to consider infrastructure for hazardous waste disposal, improvement of air quality through more efficient transportation systems, and domestic water taps and wastewater connections, among other areas. The border institutions are also planning to increase their territorial coverage by expanding the border region from 100 kilometers from the boundary to 300 kilometers in each direction.

Table 10.1 Active BECC-Approved Projects (in U.S. dollars)

		*Project*
*City*	*Technical Assistance from BECC*	*Typea*	*Total Cost (millions)*	*U.S. Subsidies (millions)*
Finished construction: Agua Prieta, Sonora Matamoros, Tamaulipas Puerto Penazco, Sonora Ensenada, Baja California	69,049 -- 132,789 --	MW WW MW WW	2.01 1.10 2.25 8.19	-- -- -- --
Under construction: Ciudad Acuna, Coahuila Cuidad Juarez, Chihuahua Matamoros, Tamaulipas Mexicali, Baja California Naco, Sonora Nogales, Sonora Piedras Negras, Coahuila Tijuana, Baja California	85,000 77,644 145,100 250,267 98,678 491,344 85,500 51,849	WW WW MW WW PW/WW PW WW WW	80.35 31.16 12.98 57.56 1.10 39.00 57.42 19.52	16.73 15.66 -- 20.62 0.60 -- 8.40 18.50
Under design: Manantiales, Coahuila Reynosa, Tamaulipas San Luis Rio Colorado, Sonora Tecate, Baja California Tijuana, Baja California (Ecoparque)	-- -- 495,000 150,000 38,704	WW/MW WW WW PW/WW WW	17.50 83.40 13.50 7.81 0.18	-- 33.50 5.93 3.71 --
Total, all projects	2,170,944		434.83	123.65

a. Project types are: WW = Wastewater; MW = Municipal Waste; PW = Potable Water.
Source: BECC.

The border institutions will also promote the completion of a strategic plan to prioritize actions for infrastructure development. In 2000, the U.S. General Accounting Office published a document on environmental challenges in the border region. This study analyzed the performance of BECC and NADBank over the past few years and determined that a strategic plan would improve the operation of those entities. The proposed plan includes a deep diagnosis of the environmental infrastructure needs, the definition of strategies to overcome obstacles for the development of new projects, and the identification of measurable goals to evaluate progress.

For 2001–2005, BECC and NADBank will seek to better coordinate their efforts with other government and non-government institutions as well as to promote their experiences in other regions of Mexico and Latin America.

NADBank is expected to become more active in financing projects because of the expansion of its mandate. The number of opportunities for environmental projects in the border is still large, and projects in this area mature faster than in the rest of Mexico.

U.S. ExIm Bank Financing

Mexico has been the U.S. ExIm Bank’s largest customer in Latin America for the past seven years, but its experience dates back to the 1930s. The U.S. ExIm Bank has a long and successful history with the Mexican government, Mexican financial institutions, and Mexican industries. The bank offers short-, medium-, and long-term loan guarantee, credit, and project-financing programs to support U.S. exports to Mexico. It has supported projects in the environmental, telecommunications, oil and gas, electricity, and transportation sectors.

Exports of environmental equipment may be supported by the U.S. ExIm Bank’s long-term loans and guarantees (up to 10 years’ repayment) or medium-term loans, guarantees, and insurance (up to seven years’ repayment). The U.S. ExIm Bank lends to creditworthy private entities, as demonstrated by their financial statements, commercial track record, and credit history. The bank will accept public-sector entities on their own if they are creditworthy.

Much of the U.S. ExIm Bank’s support for Mexican businesses buying U.S. goods has been through its insurance program, the Credit Guarantee Facility Program. A credit guarantee facility is a line of credit extended by a U.S. bank to a public- or private-sector Mexican bank or large corporate borrower. The line is then guaranteed by the U.S. ExIm Bank. Mexican companies wishing to purchase U.S. goods or services on credit can approach participating Mexican banks for credit. A list of credit guarantee facilities is available from the U.S. ExIm Bank.

The U.S. ExIm Bank will consider the following private banks as borrowers or guarantors: Banco Serfin/Santander, Banco Inbursa, Banco Internacional (Bital), Bancomer/BBV, Banco Mercantil del Norte (Banorte), Banco Nacional de M�xico (Banamex), and Banco Regional de Monterrey. U.S. ExImBank will also consider the following three Mexican government-supported banks: Banco Nacional de Comercio Exterior (BANCOMEXT), BANOBRAS, and NAFINSA. Other banks may also be acceptable, but they are reviewed on a case-by-case basis.

Exporters can apply for a letter of intent from the U.S. ExIm Bank when negotiating a sale of capital goods or services. The letter of intent will be issued within seven business days and indicates the bank’s willingness to finance a potential sale. The U.S. ExIm Bank will also consider making limited recourse project loans in Mexico where reasonable assurance of repayment is based on the project’s cash flow rather than a guarantor.

The U.S. ExIm Bank has established an environmental exports program, which increases the level of support it provides to exporters of environmentally beneficial goods and services, as well as to exporters participating in environmentally beneficial projects. That program affords exporters a special level of support in conjunction with either the U.S. ExIm Bank’s insurance program or with its loan and guarantee programs. The program underscores the bank’s resolve to reach out to small and large exporters alike with qualifying exports. Interested companies can request further information from the Engineering and Environment Division of the bank.

Private Financing

Except for some multilateral financing earmarked for specific projects, nonrecourse financing of environmental projects is not available in Mexico from any source. Environmental projects in Mexico have not been able to produce an attractive pro-forma revenue stream to attract private financing. Under previous schemes, most notably in the water-sector BOT program, there was a tacit payment warrantee from the federal revenue-sharing allotment of the state government. Those schemes have since been eliminated, leaving municipal and state environmental projects without a viable payment-guarantee structure. Environmental projects of major corporations have moved forward because of the strength of a company’s balance sheet, but such projects are rarely financed against the projects’ own expected cash flow.

A priority of the Fox administration is to promote private participation in all sectors of the environment. To do this, the new government plans to financially strengthen municipal institutions while at the same time helping them expand coverage of their services. The government’s ultimate goal is to create the necessary conditions to attract private financing for environmental projects.

Some private environmental funds have been active in Mexico financing projects sponsored mainly by private corporations. In the mid term, as municipal authorities become stronger, those funds may expand services to finance municipally sponsored projects. Opportunities are not widespread, but there are good examples of creditworthy municipal service providers, such as the Monterrey water authority and Monterrey solid waste authority (SIMEPRODESO).

Credit Enhancements

Because strengthening the financial structures of municipal authorities will take considerable time, most environmental projects in Mexico will continue to require federal support. Support from multilateral and bilateral institutions will also assist in the development of projects by reducing project risk and financing costs.

BANOBRAS, through FINFRA, provides credit risk enhancement to municipal and local governments to support projects being planned under the Potable Water and Sanitation Program. FINFRA will pay the concessionaire for up to six months if the local authority fails to do so. Although concessionaires should try to include the FINFRA guarantee in their contracts, they are advised not to use it. A direct negotiation with the local government is better in the long run because if the guarantee is used, FINFRA will impose heavy penalties on the local government and will pay itself directly from the federal revenue-sharing funds going to that local government. Those terms can strain a long-term relationship between the concessionaire and the local government.

Another proven method of reducing project risk is use of a multilateral or bilateral bank guarantee program. Such programs generally provide private investors with an assurance of repayment.

U.S. companies interested in developing environmental infrastructure projects under concession or BOT schemes in Mexico must pay special attention to the repayment clauses in their contracts. Most municipalities in Mexico are financially weak. Although many can cover operational costs, only a few have enough resources to guarantee repayment of long-term investments.