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There's a history-making election coming up. In a year when nearly every one of its neighbors experienced sinking economies, there is a national GDP growth figure that is expected to come in at a respectable 3% this year…at a time when GDP overall in Latin America will be negative. And we predict that figure will average 5-7% over the next few years. The same economy sees a growing demand from an increasingly deregulated market for technology and service "parity" with its northern neighbors. And then there's energy demand that is growing much faster than GDP, while capacity investment has remained dangerously low since 1994. Mexico is looking like the place for operators, equipment vendors and EPC firms to be in 2000, and beyond.

Energy & GDP
More than most emerging markets, Latin American infrastructure investment requires a deft touch. Periodic economic and political waves crash over the region, generally from outside sweeping away previously applauded economic and constitutional initiatives. 1999 has been particularly hard: regionally, GDP growth will be in the red, and countries such as Argentina, Colombia, and Venezuela are expected to see their economies shrink in the 3-6% range.

But Mexico is different…and has been for the last three years. With the exception of a disastrous 1995, Mexico's economic growth has topped those of its neighbors by an average of almost 3% per year (See Table 1). With a solid springboard of growth—and the consensus that this performance will continue into the new millennium—Mexico has watched its electricity demand surge ahead of GDP by an average of 2.8% each year. (See Table 2) All of this while government investment in power infrastructure has dropped every year since 1993…to less than $300 million last year. Performance has been so impressive that it is likely the country will join Chile as the only major countries in the region with coveted investment grade credit ratings.

What's Needed?
Even by conservative estimates, Mexico will consume over 200,000 GWh in 2005, a 50% increase from 1998. To achieve such an increase will require over $12 billion in new generation investment alone, not to mention extensive upgrades to Mexico's aging transmission grid.

Investment sources for Mexican and most Latin American infrastructure projects became scarce following Russia's loan default in August of 1998, and the grave situation was further exacerbated by Brazil's devaluation in January. Barring some form of guarantee from the Mexican government, investors have been hesitant to put money into projects such as large generating plants for a market in which future return appears shaky. In addition, Mexico's political situation has hindered necessary reforms—and investors have been particularly disappointed by the failure of Mexico's Congress to pass the so-called Tellez reforms of the electricity sector. The result is that Mexico shows sustained inability to adequately address a growing power demand and a rapidly aging infrastructure, at a time when GDP expansion is consistent and growing. (See Table 2)

Forces: The Weak and The Strong

So what's happening?
Mexico finds itself trapped by a confluence of strong and weak market forces. On the strong side, CG/LA Infrastructure President Norman Anderson points to the "unbundling" of Mexico's gross domestic product (GDP) from that of its Latin American neighbors. Because of NAFTA and through raw proximity, Mexico is developing a growing alignment with the United States economy. The Mexican Border region is rocketing: exports are expected to reach $64 billion next year. A Federal Energy Regulatory Commission (FERC) ruling in April 1999 opened the region to access by competing energy exporters. At the same time, the speed of technology change, cross-border issues, and a growing demand-side revolution are driving the country's power demands.

The other strong force that will create private sector opportunities—throughout the value chain—is the rapid development of new technologies in the energy sector. This is being spurred by deregulation in the United States marketplace. And the business opportunities that are created will quickly pass through the semi-permeable border that separates the two countries.

This trend will be energized by the service revolution that is about to hit Mexico. It turns out that Mexican consumers have rapidly increasing indices of the basic technologies driving the internet revolution—including, among the country's nearly 100 million people, one of the highest growth rates of Internet access in the hemisphere. This will drive change as consumers demand a level and quality of service that their relatives in the United States already receive—and for which they are already equipped.

The forces and interests in Mexico that work against this revolution are comparatively weak. Key among these "weaker" forces are political resistance, and the on-going resistance to increased private participation by the CFE. CG/LA Infrastructure believes these forces will continue to influence the marketplace, but savvy executives should begin to move into Mexico now. Change is already occurring, and anyone who waits until after the July 2000 presidential elections will have already lost a tremendous amount of time—real opportunities exist now.

Another fact to note is Mexico's current generation openings—the large-scale IPP bids being managed by CFE—are in trouble. Eight independent power producers' (IPPs) projects have been awarded, and several self-supply contracts have been granted, most recently in Mexico City. Not only are these efforts moving slowly, but there is serious question about their financeability. It appears that four of the first eight projects will be financed, only with multilateral assistance. The result is a program in crisis—and unless something is done soon on the generation side, Mexico may be facing a crisis of the proportion currently experienced by Brazil.

The picture, therefore, is interesting. Mexico's economy is growing much faster than anyone could have predicted. Power demand, made up of about 60% industrial load, is growing faster than GDP growth—by a wide margin. And the country is on the verge of investment grade credit rating. This is a picture in which business opportunities, especially in the electricity sector, will abound.

At the same time, the country is hamstrung by a bureaucracy without the funds needed to ensure adequate investment in electricity—the very staff of industrial life. The programs that have been adopted, including the latest IPP scheme, always fall short of expectations. And bureaucracy still will not let go. Clearly the stage is set for the dam to break—and as CG/LA's Anderson suggests there are cracks throughout—cracks that already mean business opportunities and that will increasingly widen.

(This analysis of Mexico was provided to Power Online by CG/LA Infrastructure, a consulting firm providing strategic market analysis and competitive intelligence to companies and policymakers in the Latin American power industry. For more information about the reviews offered by CG/LA Infrastructure, contact: Luis Ruis at lruis@cg-la.com or 202-776-0990.)