Environmental Technologies Industries

Environmental Technologies Industries

Market Plans

Mexico Environmental Export Market Plan

1. Economic, Political and Financial Issues

Economic Performance and Trends

The Mexican economy performed well in 2000, achieving the highest economic growth rate of any Latin American country. Official year-end figures published by the Banco de México (the central bank) for 2000 indicate that the gross domestic product (GDP) grew 6.9 percent, while a downward trend in inflation continued. Inflation in 2000 declined to 9.0 percent, the lowest level since before the 1994 economic crisis. Expectations of further growth and stability bode well for the continued expansion of the Mexican environmental market and of opportunities for U.S. environmental companies.

Mexico’s positive performance in 2000 was driven by prudent fiscal and monetary policy, as well as by renewed business confidence and a positive international environment. Internationally, Mexico benefited from strong growth in the U.S. economy along with increasing world prices for oil. Despite the expected slowdown in U.S. growth and a fallback in oil prices, economic analysts still forecast Mexico to have continued strong economic growth in 2001.

Positive business and consumer confidence are also driving Mexico’s economic resurgence. Private investment grew 12.4 percent in 2000, and private consumption grew 8.7 percent, fueled by increased employment and a slight improvement in real wages. This growth follows period where economic uncertainty cooled business investment, particularly hurting investments in the environmental area, which were deemed nonessential.

Another economic improvement that will greatly aid U.S. companies is the stability of the peso-dollar exchange rate. Past fluctuations in this exchange rate have had a very negative effect on the Mexican environmental market. The costs of imports in pesos skyrocketed, living standards fell, and long-term environmental projects could no longer be financed because of extremely high borrowing costs.

Figure 1.1 Mexico’s Economic Performance, 1994–2002 (percent)

= forecast

Source:

Banco de México; forecasts by BBVA-Bancomer.

The Mexican government has adopted a floating exchange rate whereby market conditions determine the exchange price. This policy, combined with positive international conditions and prudent fiscal and monetary policy, has brought stability to the peso, as Figure 1.2 shows.

Mexico continues to import at a higher rate than it exports, causing the country’s current account deficit to reach approximately 3.3 percent of GDP for 2000. Capital inflows, particularly U.S. foreign investment (see Figure 1.3), have covered this shortfall, and Mexican international reserves are strong. Growing foreign confidence in Mexico’s economic fundamentals should continue to result in strong capital inflows.

Mexico’s positive economic performance in the past few years and the signing of the North American Free Trade Agreement (NAFTA) have more than doubled trade between the United States and Mexico in the past five years.

The new administration of President Vicente Fox has signaled that it will continue to pursue and strengthen the recent economic policies that have provided the framework for Mexico’s economic turnaround. Those policies include prudent fiscal and monetary policy to ensure that internal demand does not generate inflationary pressures. For example, the new administration plans to reduce federal expenditures immediately if government revenues from oil fall below target. The short-term goal is to reduce the public sector’s deficit to under 0.5 percent of GDP. Over the medium term, the government has pledged to achieve a balanced budget.

The Fox administration also intends to push for structural economic reforms to improve Mexico’s overall economic efficiency. Among those reforms are significant overhauls of Mexican labor and tax laws. In March 2001, the administration presented the Mexican congress with a proposal for a complete reform of the Mexican tax code. This initiative’s most controversial topic is a proposed 15-percent sales tax on foods and medicines, which were previously exempt. The administration is betting heavily on the passage of this reform, which is its only current means for abating the public sector’s deficit and raising additional income for social expenditures.

The Fox administration is forecasting economic growth for 2001 at 4.5 percent, with an inflation target of 6.5 percent. It estimates that the average exchange rate will be MXP 10.1 per $1, with an end-of-period value of MXP 10.7 per $1 or a nominal adjustment of around 11 percent from current levels. See Table 1.1 for a full range of government macroeconomic projections. Private-sector analysts are predicting lower growth and slightly higher inflation (3.7 percent and 7.8 percent, respectively), caused by a slowdown in the U.S. economy and lower oil prices.

Figure 1.2 Exchange Rate, 1995–2002 (Mexican pesos per U.S. dollar)

f = forecast
Source: Banamex-Accival.

New Political Mandate: Commitment to the Environment

Vicente Fox, a former Coca-Cola executive and governor of the state of Guanajuato, was elected president on July 2, 2000, ending 71 years of dominance of the Mexican presidency by the ruling party, Partido Revolucionario Institucional (PRI, Institutional Revolutionary Party). President Fox ran as the candidate for the coalition Alianza por el Cambio (Alliance for Change) formed by the National Action Party (PAN) and Partido Verde (PVEM, Mexican Green Environmental Party).

During the presidential campaign, Fox emphasized the importance of protecting Mexico’s environmental resources. He particularly noted the significance of the fight against pollution in the country’s metropolitan areas and spoke of the need for environmental protection as a national security issue.

President Fox took office on Dec. 1, 2000. In one of his first actions, he restructured the Secretariat of the Environment, Natural Resources, and Fisheries (SEMARNAP). The restructured agency was renamed the Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT, Secretariat of the Environment and Natural Resources). Under this restructuring, the fishery activities were delegated to the Secretariat of Agriculture, Figure 1.3 Foreign Direct Investment in Mexico, 1995–2000 (billions of U.S. dollars) Cattle Raising, Rural Development, Fisheries, and Feeding (SAGARPA). In addition, the new SEMARNAT will be more involved in regulatory activities and will take over some planning responsibilities that were spread among decentralized entities. One of the main ideas is to convert the Instituto Nacional de Ecología (INE, National Institute of Ecology), which currently plays an important regulatory role, into a research center more specialized in environmental investigation and information systems and less dedicated to issuing regulations. INE will be SEMARNAT’s think-tank.

The Fox administration is expected to promote an increase in private participation in most environmental sectors and to minimize the federal government’s spending on subsidies and project development. This privatization can be achieved only by strengthening the financial and operational capacity of state and municipal authorities that are responsible for providing services; by creating a regulatory framework that allows tariff adjustments while protecting the interests of users; and by developing better coordination among the different levels of government to ensure a long-term relationship with private investors. The administration also plans to increase the pace of decentralization efforts started by the past administration to strengthen local control over potable water, wastewater, and municipal waste services. President Fox stated that he will increase cooperation with the United States over environmental issues, especially in the border region.

Figure 1.3 Foreign Direct Investment in Mexico, 1995-2000 (billions of U.S. dollars)

e = estimate
Source: Banamex-Accival.

President Fox’s government is expected to create a favorable environment for private investment in environmental projects. A strong signal in this direction is the president’s recent proposal to increase water prices by 50 percent to cover the real cost of water and help pay for needed infrastructure. Legislation changes will be required to implement this plan, and three levels of government will be involved in decisions; hence, the changes will take time to implement. Meanwhile, projects with federal or multilateral funding will continue to represent the largest public-sector opportunities in the environmental arena.

Table 1.1 Government Macroeconomic Projections

	2000e	2001p
Gross domestic product:
Real GDP (percent)	6.90	4.50
Nominal GDP (MXP billion)	5,496.0	6,133.1
GDP deflactor (percent)	11.00	6.80
Inflation:
Dec.–Dec. (percent)	8.90	6.50
Nominal exchange rate:a
Average (MXP to	9.50	10.10
Interest rates (28-day CETES):b
Nominal, average (percent)	15.20	12.40
Real (percent)	6.80	6.20
Current account:
Millions of dollars	18,958.50	22,800
As percentage of GDP	3.30	3.80
Public balance:
As percentage of GDP	0.93	0.50
Support Variables:
U.S. GDP:
Real growth	5.00	3.00
U.S. inflation:
Dec.–Dec. (percent)	2.90	2.50
Oil price (Mexican oil mix):
Average price ($ per barrel)	25.80	18.00
Average volume of oil exportsc	1,678.00	1,825.00
External interest rate:
LIBORd (percent)	6.60	6.50

e = estimated p = projected
a. Because Mexico has a flexible exchange rate regime, these numbers cannot be interpreted as an exchange rate projection. However, for the purpose of calculating some items of the budget, these references were used.
b. Certificados de la Tesorería de la Federación.
c. Thousand barrels per day.
d. London interbank offered rate.
Source: Secretariat of Finance, General Guidelines for Economic Policy, 2001.

The administration will promote all environmental areas. This commitment has been evidenced by the inclusion of the secretary of environment in three different cabinet-level policy-making groups. As a starting point, the government recently presented its first far-reaching environmental program aimed at protecting and restoring water resources and forestry in Mexico. The program, called the National Crusade for Forests and Water, will be the basis for many specific projects that will involve private investment, technologies, and services.

Financial Issues Affecting the Mexican Environmental Market

The Fox administration will promote strategies to revive private-sector investment in major environmental projects, particularly in the areas of water and municipal waste. Since the early 1990s, the Mexican government has aggressively pushed through many legal and regulatory reforms designed to increase the participation of private-sector firms in all aspects of the environmental sector. The government has sought to promote private-sector participation not only to bring in much needed capital but also to increase the efficiency of the services.

As a result of these reforms, many environmental projects, totaling hundreds of millions of U.S. dollars, were structured under various concession arrangements whereby the private company would take most of the project risk. In the 1990s, many U.S. and foreign environmental companies were given build-operate-transfer (BOT) contracts to construct municipal wastewater facilities, concessions to operate water systems, or concessions to build and operate municipal landfills.

At the time, it was hoped that such arrangements marked the beginning of a huge market opportunity for foreign environmental firms and particularly U.S. companies. Unfortunately, the fallout from the Mexican economic crisis in 1994 and institutional and financial problems at the local level stalled many of those projects. As a result, hundreds of millions of dollars of much needed private investment in potable water, wastewater, and municipal waste projects has not gone forward.

Those market and financial impediments have created a huge backlog of environmental projects. Mexican federal, state, and local governments, in concert with multilateral groups, have sought to identify and overcome those obstacles to allow this potentially lucrative market to flourish. Major impediments are as follows:

Investors and lenders are seeking high interest rates because of the sector’s past difficulties.
No program is in place to subsidize needed environmental infrastructure in cases where the project is not financially feasible from a private investor’s standpoint.
In many areas, residents are not accustomed to paying for water, wastewater, or municipal waste services and, therefore, are reluctant to do so.

Although water and municipal waste services are provided at the local level, the local institutions lack the experience and financial viability to support major environmental projects.

A number of programs have been proposed, and some have been implemented to overcome these impediments and reinvigorate the environmental market. Finding ways to finance those major environmental projects will greatly enhance the potential market opportunities for a broad spectrum of U.S. companies. The most important funding programs implemented thus far to promote environmental projects are shown in Table 1.2.

Table 1.2 Federal and Multilateral Funding Programs

Implementing Entity	Program Description
Comisión Nacional del Agua (CNA, National Water Commission) a	Under the Potable Water Program for Urban Zones (APAZU), a federal program, a municipality can request grants for water and wastewater investments in exchange for committing to improve its operational efficiency.
Banco Nacional de Obras y Servicios Públicos (BANOBRAS, National Bank for Public Works)	Through its Fund for Infrastructure Investments (FINFRA), BANOBRAS provides risk capital and subordinated capital to major projects, as well as grants to fund project feasibility studies.
North American Development Bank (NADBank)	The Joint U.S.-Mexican lending institution provides loans and loan guarantees for wastewater treatment and solid waste projects on the U.S.-Mexico border.
U.S. Environmental Protection Agency (U.S. EPA)	The agency provides grants for water infrastructure in the border area.
Secretariat for Social Development (SEDESOL)	SEDESOL provides grants for solid waste projects, pre-investment studies, and technical assistance.
Japan International Cooperation Agency (JICA)	Through the Japan Overseas Economic Cooperation Fund (OECF), JICA provides credit lines for water infrastructure and wastewater treatment plants.
U.S. Export-Import Bank (U.S. ExIm Bank)	U.S. ExIm Bank provides loan guarantees for the acquisition of U.S. environmental equipment and services.
U.S. Trade and Development Agency (U.S. TDA)	U.S. TDA provides grants for feasibility studies and promotes U.S. exports to infrastructure projects overseas
Inter-American Development Bank (IDB) and BANOBRAS	IDB and BANOBRAS fund a program for the strengthening of state and municipal authorities (FORTEM), as well as the Aquifer Recharge Project in the Federal District (Mexico City).
World Bank	World Bank programs include the Natural Disaster Management Program, the Water Resources Management Project, and Mexico City Air Quality Improvement II (under negotiation).

a. Name will change to CONAGUA.

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