CIC - Construction Intelligence Center

Proposed referendum on the fate of new US$13 billion airport poses risks to Mexico’s construction industry

24 Sep 2018

The outlook for the construction industry in Mexico remains positive but the potential cancellation of the US$13 billion New Mexico International Airport (NAIM) project, following August’s announcement by Mexican president-elect Andrés Manuel López Obrador (AMLO) to hold a referendum in October 2018 on the fate of the new airport, presents significant downside risks to the growth forecast.

Mexico’s construction industry has struggled to generate growth momentum, having contracted by 1.1% in 2017 and set to expand by just 0.4% in 2018, according to the latest forecast update by GlobalData. There are a number of major infrastructure projects in the pipeline that will support the industry’s expansion over the coming few years; GlobalData forecasts annual average growth of 3.9% in 2019–2022. However, the growth forecast will be revised down in the event that the NAIM project is cancelled. 

 

The referendum, which is to be held in the last week of October – even though the president-elect will not take office until December 1st 2018 – comes as an early test of how the incoming administration’s relations with the business sector are expected to play out. It also puts into doubt billions in investment. Since its announcement in 2014, the construction of the airport has been the focus of controversy; and has been repeatedly criticized by AMLO for being too expensive and mired in corruption. 

 

The new airport, which is expected to replace the existing Benito Juárez International Airport in Mexico City, is already about one third complete and is the largest infrastructure project of the administration of outgoing President Enrique Peña Nieto. If people vote to cancel it, it would mean losses of around US$5.2 billion already invested in the project. It could also result in legal action against the incoming administration, which could further deter investor confidence in Mexico’s infrastructure markets.

 

Several leading domestic and international construction companies are currently involved in the NAIM project as contractors, including Carso Infraestructura y Construcción, a subsidiary of Grupo Carso; Constructora y Edificadora GIA +A; Empresas ICA; PRODEMEX; and Spanish Acciona and FCC Industrial e Infraestructuras Energéticas. These and other companies and investors could be deterred from investing in future infrastructure projects in Mexico given the increased level of uncertainty surrounding infrastructure policy. 

 

GACM, the state-owned airport company managing the construction of the NAIM project, has issued about US$6 billion in bonds to finance the project, in addition to US$1.6 billion raised in March 2018 through an infrastructure investment trust in which local pension funds invested. Nevertheless, in July, GACM suspended four tenders until the incoming administration resolves the future of the new airport. The tenders included the construction of a fuel-distribution network and runway lighting. The decision did not affect any contracts that had already been awarded or the construction itself, but sends a signal that the sector is already becoming cautious to promote further investment.

 

According Javier Jiménez Esprirú, the next head of the Secretary of Communications and Transport (SCT), if people vote to continue the project, the government could decide to use a mix of public and private financing to save taxpayers’ money. If they opt to cancel it, he said the government would keep the current Benito Juárez International Airport in Mexico City, and expand the military airport nearby at Santa Lucia with a terminal and two new runways to serve as a second airport. That would cost an estimated US$3.7 billion, he added. However, because the existing international airport and the military airfield are just 25 miles apart, some aviation experts believe that government’s alternative proposal could increase the likelihood of collision. In addition, with technical studies still needed to confirm the feasibility of the alternative airport, construction of the project would not start until 2019 or 2020 at the earliest.