According to the Consejo Nacional de Industriales Ecologistas (CONIECO, National Council of Environmental Industries), the Mexican environmental market was valued at $3.761 billion during 2000 and is expected to reach $4.212 billion by 2001, representing an increase of 7 percent. Figure 3.1 shows the breakdown of the market for 2000.
On a gross basis, Mexico invests more money in the environmental sector than any other Latin American country except Brazil. Nevertheless, environmental investment is low in Mexico (0.61 percent of GDP), according to an evaluation of 24 countries by the Centro de Estudios del Sector Privado para el Desarrollo Sustentable (CESPEDES, Private-Sector Center for Studies Toward Sustainable Development). The country was trailed only by Colombia and Venezuela, and was outspent by Chile, Brazil, and Argentina, as well as numerous countries outside the region. However, CONIECO expects that the Mexican environmental market will grow at a rate superior to 12 percent from 2002 to 2005 if current favorable economic conditions remain throughout that period.
For Mexico to boost its investment numbers substantially, it must find ways to increase private-sector investment in major environmental infrastructure projects. The new administration is expected to make a major push to alleviate obstacles to private-sector investment – particularly in making the population aware of the need for those investments and of the negative consequences of not moving forward.
Investments in the water and forestry areas are expected to register the highest growth rates among the different environmental areas. Fox’s government will prioritize restoration of Mexico’s surface water bodies, conservation of aquifers, reforestation, and protection of Mexico’s forests.
Market Shares and Increased Competition
U.S. technologies and services traditionally have dominated Mexico’s environmental market. U.S. companies provide 60 percent of the total market demand and 73 percent of the environmental import market. The closest competitors are Germany, Canada, Spain, and Japan, each with less than a 5-percent share of environmental imports. During the past five years, the number of environmental technologies and services providers in Mexico has grown significantly. It is common for international companies entering the market to create a joint venture with a local company. Some international companies have established a direct presence by incorporating a local subsidiary.
Increased competition in the market has initiated a move toward company consolidation, as many of the initial market participants were small companies not able to access major projects on their own. By merging, such companies can provide a more integrated suite of services. This consolidation phenomenon is expected to continue in the near term, making the market increasingly dominated by major players.
Figure 3.1 Mexico’s Environmental Market in 2000
The free trade agreement signed between Mexico and the European Union in 2000 is expected to increase the interest of suppliers from that region in the Mexican market. One advantage that those companies have over suppliers from other regions is that the euro is undervalued against the Mexican peso. Another advantage is that European firms can provide their clients with extremely competitive financing terms.
Environmental Investment Incentives
At present, Mexico offers two tax and import incentives to encourage private investment in environmental technologies:
Accelerated Depreciation: This incentive allows a company to deduct 100 percent of the value of an investment in environmental equipment on the acquisition or installation date. The deduction is applied against the company’s 35-percent corporate income tax liability.
Elimination of Import Duties: Environmental protection equipment can be imported duty-free into Mexico from every country, subject to conditions established by SEMARNAT and the Secretariat of Economy. For a product to be eligible for the incentive, it must be proven to be environmentally beneficial, a competitive product must not currently be manufactured in Mexico, and the buyer must complete an application to the Secretariat of Economy to ensure that the product is currently listed on the approved product list. This list is constantly being updated and revised.
The federal government offers several monetary incentives to municipalities, specifically for water and wastewater investments. One of the most important is APAZU, which provides federal monies to municipal and state water utilities that improve their commercial capabilities. A second is offered through NOM-001-ECOL-1996, which provides preferential potable water rates for municipalities and industries that apply high levels of treatment to their water discharges.
In cities having PROAIRE, companies that invest in improving their operations, either by minimizing air emissions or installing air pollution control equipment, can continue operating even during emergency air pollution contingency periods, whereas polluting companies have to decrease their operations by up to 50 percent.
President Fox has mentioned that the development of incentives will be a key priority in his environmental agenda. A special committee will be created under the authority of INE for the development of such incentives, including tax incentives, to be negotiated with the Secretariat of Finance.