Logistics & infrastructure sector

Logistics & infrastructure Nordic Investment in Mexico Logistics & infrastructure sector

The purpose of this document is to be only a general reference on certain areas of interest. The application and effect of the law may vary depending on the specific data included herein. Omissions or inaccuracies are possible due to the changing nature of the laws, rules and regulations. This document is distributed based on the understanding that the authors and editors are not bound to offer legal, accounting and tax advice, nor other professional services. Therefore, this document cannot replace direct accounting, tax or legal professional advice, or any other type of advice. Before making any decision or taking any action, we recommend calling upon a professional of PwC Mexico. Even though we made our best effort to base the contents of this document on reliable sources, PwC Mexico is not responsible for any mistake or omission resulting from the use of this information. The data included in this document is provided as found in the original source, without guaranteeing its integrity, precision, accuracy or assuming the responsibility for the results obtained through its application; and without any other kind of guarantee, expressed or implicit, including but not limited to performance, commercialisation and convenience guarantees to reach an specific goal. PwC Mexico, its affiliated companies/firms, partners, agents or employees cannot be held accountable for any decision or measure implemented by you or any other person based on this information, as well as for any resulting damage or harm, specific or similar, including a notification about the possibility of such damage.

Overview When the newly elected President, Enrique Peña Nieto (EPN), made his first public speech on December 1st 2012, there was great enthusiasm among the private sector. The President established as one of his central public policies the development of new infrastructure, starting with the new National Infrastructure Plan (PNI), which is to be published during the first half of 2014. The comeback of passenger trains running between some cities in the country has been proposed. It is expected that there will be considerable investments in other transportation systems, security, water and health infrastructure. The recently published Public Private Partnership (PPP) Law is expected to boost the flow of private participants, since it will empower companies to propose new infrastructure projects, even those not considered originally by the federal (or a local) government. Almost everything needs to be transported from point of departure to destination, and the transportation sectors, ships, logistics, storage, intermodals, airplanes and tractor trailers have all experienced growth. If the foreign trade represents 60% of the economy and is growing at a rate of 10%, the transportation and logistics sector is growing faster than GDP. Production costs in Mexico are lower than those in the coastal cities of China and transportation time to market is faster, less costly and since it requires less energy, it becomes the key to sustainability. Another advantage for the logistics industry is the major infrastructure that has been built in recent years and the loosening of customs treatments, which allows for faster and more efficient time in transit from Mexico to the US ports, manufacturing plants and border crossings. Mexico is now 1.5 days by truck and around 2.5 days by rail from the US. As a result, manufacturing for export is growing at a considerable rate and just-intime logistics movements require the importation of components and the exportation of finished or semi-finished goods within a few days where demand exists 1. Public authorities, international analysts, the business community and the general public agree that this could be Mexico s moment to deliver on the growth promise. However, Mexico needs to increase its investment in infrastructure in order to achieve sustainable economic growth. Mexico invests ~4.5% of its GDP in infrastructure (2011), and it is considered that investments should be at the level of ~7% to 8% of GDP in order to achieve growth rates similar to those of top countries within the OECD. According to the Ministry of Transport and Communication (SCT), it invested USD ~4.9 billion in 2011, when investment in road infrastructure accounted for the greatest percentage, ~78% of that total. 1 Sources: ProMexico, Opportunities in logistics infrastructure in Mexico. 25.2.2014 http://negocios.promexico.gob.mx/english/12-2012/art01.html PwC Mexico Infrastructure in Mexico, trends and investment opportunities 2013. PwC Mexico 1

Investment in Infrastructure 2000-2011 (as a % of GDP) 3.0 3.1 3.1 2000 +5% 3.5 3.5 Source: Ministry of Treasury; Investment Unit. 3.9 4.0 4.1 4.3-3% 4.8 4.7 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ministry of Transport and Communications Budget (2011; % over USD 4.9 billion) 78% Roads 4.92% 7.75% 4.2%.81%.65%.32% 100% Railroad Communications Ports Others Airports Technology 4.5 Total Geographic advantages The Mexican road network covers more than 350,000 kilometres, of which almost 50,000 are federal roads, easily connecting all the major cities of nation. The railway network extends over 26,000 km, and is mainly used for freight. Mexico has 2,900km of navigable rivers and coastal channels, mostly connected with ports on the country s east coast. The main sea ports are Veracruz and Altamira on the Gulf of Mexico and Ensenada, Lázaro Cárdenas and Manzanillo on the Pacific coast. Grupo TMM, the largest logistics and integrated transport company in Latin America, dominates maritime services and port management in Mexico. In addition to TMM, Hong Kong-based conglomerate Hutchison Port Holdings (HPH) is a major player in Mexico s port sector. It operates terminals under concession in Ensenada, Lázaro Cárdenas, Manzanillo and Veracruz. Another specialist operator is Vopak Terminals of the Netherlands, which run terminals in Veracruz, Altamira and Coatzacoalcos. Mexico s ports are ranked in 75th place out of 142 countries by the World Economic Forum. This puts Mexico third in the region in terms of the markets covered, behind regional outperformers Panama and Chile. In the past nine years, the logistics sector has grown three times faster than GDP. Source: Ministry of Treasury; Investment Unit. 2 Nordic investment in Mexico

Federal Government priority During his presidential campaign, Enrique Peña Nieto leveraged on a personal strategy to generate confidence among voters, the so called Commitments (Compromisos), which are publicly promoted actions that are expected to be accomplished during his administration. Enrique Peña Nieto established a total of ~255 commitments grouped under several topics such as Science & Education, Security, Health, Water, Politics, Transportation, Tourism, Economy, the Environment, Sports and Human Rights. Of these commitments, ~140 are related to infrastructure and ~85 refer specifically to transportation infrastructure. Later on, during his first days as President elect, Enrique Peña Nieto engineered an agreement with the main political forces, an initiative called the Pact for Mexico (Pacto por México), which contains a set of 95 specific agreements, of which 10 are directly related to infrastructure. Although there is no clear or linear relationship between the Commitments, the Pact for Mexico and the Federal Budget, the relevance of new infrastructure in the new government s agenda may be inferred. Infrastructure commitments expected to be executed during the presidential period 2013-2018 1 (number of projects) 152 infrastructure commitments 19 24 9 7 1 92 transport infrastructure commitments 1 5 6 6 Transport Health Water Science and Education 92 66 Tourism Security 1 8 Logistics Massive transport Railroads Ports Airports Roads Source: PwC analysis based on different public sources. Notes: 1 The security commitment includes 10 different projects. PwC Mexico 3

2013 Budget The 2013 budget for transport and communications outlines investment opportunities for the private sector. Some of the most relevant figures are as follows: USD ~1.81 billion for road infrastructure construction USD ~1.04 billion for road maintenance programmes USD ~0.13 billion for port infrastructure USD ~0.10 billion for feasibility studies The National Infrastructure Plan (PNI) The strategic document that establishes the national strategy and guidelines for Mexico s development is the National Development Plan (PND: Plan Nacional de Desarrollo), which was published in 2013. Based on the strategic guidelines established in the PND, the Ministry of Transport and Communications (SCT) published the Infrastructure and Communication Programme (Programa de Inversiones en Infraestructura de Transporte y Comunicación) in July 2013. Based on this programme along with Health and Water Programmes, the National Infrastructure Plan (PNI: Programa Nacional de Infraestructura) will be drafted and published in 2014. This plan will draw up the projects that are expected to be executed over the next six years. 4 Nordic investment in Mexico

Economic Infrastructure Road projects by federal state in alphabetical order (number of projects) Railroads: This could be considered to be one of the most relevant areas of opportunity. Following are the three main projects expected to be executed during this administration: Mexico City Queretaro: USD ~4 million for feasibility studies Mexico City Toluca: USD ~6 million for feasibility studies Mérida Q. Roo: USD ~2.4 million for feasibility studies Roads: Roads remain the principal transportation infrastructure in Mexico, based on the assigned budget and the share of freight and passenger mobility. Many roads are expected to be built or upgraded during the new Federal Administration. Also, Public Private Service projects for road maintenance are expected to be an attractive opportunity for companies. Based on presidential commitments, several road projects are expected to be executed throughout Mexico. These figures are expected to be a minimum target, and it is quite possible that the final figure will be higher. Baja California Campeche Chiapas Coahuila Oaxaca Puebla Querétaro Quintana Roo 1 2 7 3 4 5 2 1 Colima Durango Estado de México Guanajuato San Luis Potosí Sonora Tabasco Tamaulipas 2 1 6 3 1 1 2 3 Hidalgo Jalisco Michoacán Morelos Tlaxcala Veracruz Yucatán Zacatecas 2 4 5 2 1 6 1 1 Source: PwC Analysis based on the presidential public commitments. Ports: Although the main port project in recent years (Punta Colonet) has been put on hold, and several concession processes to operate port terminals have been completed in recent years, there are still investment opportunities in this sector. The expansion of the port of Veracruz may be the biggest project that could be pushed through during this presidential period. Even when it faces some environmental issues and opposition by the local inhabitants, the relevance of this port as part of the nation s logistics platform may outweigh these difficulties. Also, investments are expected in ports such as Manzanillo, Tuxpan, Campeche and Guaymas, to name just a few 2. 2 Sources: ProMexico, Opportunities in logistics infrastructure in Mexico. 25.2.2014 http://negocios.promexico.gob.mx/english/12-2012/art01.html PwC Mexico Infrastructure in Mexico, trends and investment opportunities 2013. PwC Mexico 5

Freight transport As China rebalances its economy towards domestic consumption, and labour costs within the country have risen, a number of developing economies around the world have seen the benefits as their markets become more attractive to international manufacturing companies. Mexico is reaping the benefits of this trend, with wages now cheaper than in Asia. A major upside risk for operators in the Mexican freight transport sector comes from the growing trend of nearshoring - the practice of moving production centres closer to consumer markets. Also, increasing oil prices, rising wages, and weather disruption to supply chains is causing companies to look towards Mexico when considering where to base their production centres. The advantages of nearshoring in Mexico are lower freight costs, faster time-to-market rates and lower inventory costs. This trend should be of huge benefit to Mexican freight transport operators, as more production centres within the country mean higher volumes to transport to the US consumer markets. Road Haulage The majority of overland freight transport is road freight. In 2009, road haulage volumes, at 451,000 tons, make up approximately 80% of Mexico s total, followed by rail at around 15% and inland waterways at around 4%. According to BMI growth is projected to average around 2,6% by 2017. The road haulage sector growth is supported by the macroeconomic trends and the growing consumer demand. This strong growth in rail freight began in the 1990s with the privatisation of the sector and companies such as Kansas City Southern de México (KCSM) have invested heavily in developing the rail networks and linking them up with those in the US and providing significant nearshoring opportunities to US importers. One of the advantages of shipping throughout Mexico is that Mexican ports are not subject to the US harbour tax. The recovery of the US economy and the American consumer will give a strong boost to companies in the road freight business as manufactured goods will be shipped north of the border. More Mexican road haulage companies have been applying to the US Federal Motor Carrier Safety Administration (FMCSA) for admittance to the NAFTA US-Mexico cross-border trucking pilot programme, enabling them to carry freight on both sides of the border 3. 6 Nordic investment in Mexico 3 Source: BMI Mexico freight transport 2014

Shipping Maritime Freight Mexico remains dependent on the US economy. The US growth continues to have serious risks, and any decline in its growth will affect Mexico. The Mexican economy is still dependant in large part by the re-export (maquila) goods sector, highlighted by the strong connection between the growth in the importation of intermediate goods and the economic activity index (IGAE). The NAFTA trade has grown significantly between Mexico and the US, although there is still a shortage of Mexican trucking companies signing up to transport cross-border trade. Sound macroeconomic policies should help Mexico register sustained levels of economic activity and steady levels of growth, together with growing consumer power and export growth, should boost throughput. With the US consumer demand growing slowly, 2012 saw Mexico s container trade enjoy its second consecutive record year, with strong growth in box throughput across the country s facilities. Industry Data Port of Manzanillo - total tonnage growth in 2013 was estimated to hit 2.1%, for a total of 27.7mn tonnes. Port of Veracruz - total tonnage growth in 2013 was estimated to hit 1.1%, for a total of 21.2mn tonnes. Mexican Cargo Volumes to Rise by 80% The volume of cargo to pass through Mexico s ports is expected to increase by 80% by the end of 2018. According to reports by the Journal of Commerce, the volume is predicted to total 508mn tonnes a year by the end of the current administration. At present, some 282mn tonnes pass through the country s ports every year. The Mexican government has allocated US$4.34bn for several projects in the country s port sector. The proposed projects involve building two new harbours, 12 specialised terminals and a cruise ship terminal 4. Mexican cargo volumes to rise by 80% Air freight, mn tonne-km Inland waterway freight, mn tonne-km Rail freight, mn tonne-km Road freight, mn tonne-km Source: BMI Mexico Freight transport 2013 4 Source: BMI Mexico Shipping report 2013 PwC Mexico 7

Important Mexican ports Port of Manzanillo Terminal Internacional de Manzanillo (TIMSA) is located in the port of Manzanillo, a key hub and transshipment port on the west coast of Mexico. TIMSA is well positioned to support trade between Asia and metropolitan areas such as Mexico City and Guadalajara, as well as the industrialised states of Jalisco, Queretaro and Guanajuato. Mexico s industrial heartland takes full advantage of the export of finished goods to international markets and of the importation of raw materials. The most significant recent development in Manzanillo has been the construction of the SCT2, which is expected to more than double the port s existing handling capacity. A 34-year contract to develop and operate the terminal, known as TEC II, was given to ICTSI in December 2009. Manzanillo has retained its status as the country s leading container handling port, with throughput of nearly 2mn twenty-foot equivalent units (TEUs). The most significant recent development in Manzanillo is the advancement of plans to build a second container terminal in the harbour, which is expected to be able to handle more than double its present capacity. The terminal s construction will be completed by 2016. Port of Veracruz Internacional de Contenedores Asociados de Veracruz (ICAVE) is located in the Port of Veracruz, a major hub and trans-shipment port serving the east coast of Mexico. ICAVE is the busiest terminal in the harbour, handling approximately 80% of Veracruz s container throughput and 20 % of all containers handled in the country. ICAVE began operations in 1995 and joined HPH in 2001. The facility is located due east of Mexico City on the Gulf of Mexico. It boasts a full range of containerhandling equipment, backed by the latest IT, and offers on-site customs services, making it the ideal port interface between Mexico and the rest of North America. Port of Lázaro Cárdenas Lázaro Cárdenas Terminal Portuaria de Contenedores (LCT) is a hub and trans-shipment port located in the state of Michoacan on the Pacific coast of Mexico. The terminal commenced operations in 2003. It is situated in the highly industrial deep-water port of Lázaro Cárdenas. LCT is significantly closer to Mexico City than Manzanillo. LCT is a sheltered port that can accommodate vessels of up to 150,000 tonnes, including the latest generation of container vessels. The construction of the first phase of the new terminal has recently been completed, giving LCT a land area of 63 hectares, three berths and a total quay length of 930 metres. To complement its rapidly expanding range of services, LCT will soon build the second phase on 85 hectares of land adjacent to the new terminal 5. The new container terminal to be opened at the Mexican port of Lázaro Cárdenas can bring competition to the US ports of LA and Long Beach and West Coast, which are both already concerned over potential traffic loss once the Panama Canal expansion is completed 6. Nordic developments The Maersk Kalamata was the first vessel to call at Specialised Container Terminal 2 (SCT 2) in Manzanillo. The service involves a weekly call at the terminal on a trade route that runs Yokohama - Manzanillo - Lazaro Cardenas - Balboa - Buenaventura San Antonio - San Vicente. The terminal is operated by ICTSI subsidiary Contecon Manzanillo. The Swedish-Norwegian shipping company Wallenius Wilhelmsen Logistics (WWL) is expanding its service from Veracruz in Mexico and the service, which runs between Mexico and the US east Coast, offers from two to three monthly services 8 Nordic investment in Mexico 5 Source: HPH Global business, http://www.hph.com/globalbusiness/business.aspx?gid=56_2013 6 Source: BMI Mexico Shipping report 2014

from September 2013. The service is also connecting Mexico to other countries, including Belgium, Germany and the UK. Danish shipping company Hapag-Lloyd has launched a new service line connecting Puerto Progreso in Mexico to Kingston, Jamaica. The service line is intended to facilitate trans-shipments between Asia, Europe and the Americas. Danish terminal operator APMT is investing in a new container terminal at the Port of Lázaro Cárdenas, which has been developed with consideration to capturing trade bound for the US. Government Earmarks US$4.34bn for Port Projects According to Mexico s Department of Transport and Communications, the Mexican government has allocated US$4.34bn to several projects in the country s port sector. The proposed projects include the construction of two new ports, 12 specialised terminals and a cruise ship terminal. The projects also include the expansion of six ports with infrastructure for new short-sea shipping services. Additional details on the proposed projects will be revealed with the release of the national infrastructure plan 7. Conclusion The current scenario for Mexico s logistic and infrastructure sector seems to be a land of opportunities both for local and foreign companies. There will be investments in almost every single sector: Roads: Most of the budget of the Transport Ministry is concentrated in this area. Ports: The port of Veracruz is expected to at least double its capacity, with other investments in smaller parts. Airports: The main project will be a new airport for Mexico City, which is expected to reduce the saturation that is facing. Railroads: The current government has an aggressive plan to boost the passenger trains, and it has already published a tender process for the construction of one of them. If foreign companies want to profit from these opportunities, they must understand the local environment both from a business perspective as well as the political one. The understanding of the Mexican law and the way the tender processes are conducted is crucial for companies to close deals. Also, finding the right local partner will be very important if foreign companies want to leverage on their networking and minimise the risk of a given project. PwC has been present in the infrastructure sector for almost two decades in Mexico, and it is the leader in Public Private Partnership project structuring, having advised both private companies and the federal authorities in the development of infrastructure. 7 Source: BMI Mexico Shipping report 2013 PwC Mexico 9

2014 PricewaterhouseCoopers, S.C. All rights reserved. PwC refers to the Mexico member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/mx for further details. MPC: 041404_GM_Infrastructure This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC Mexico helps organisations and individuals create the value they re looking for. We re a member of the PwC network of firms in 157 countries with close to 184,235 people. We re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/mx