mexico - pwc · mexico's infrastructure sector has been stagnating over recent ... regulatory...

Q1 2014www.businessmonitor.com

MEXICOINFRASTRUCTURE REPORTINCLUDES 10-YEAR FORECASTS TO 2022

ISSN 1750-5372Published by:Business Monitor International

Mexico Infrastructure Report Q12014INCLUDES 10-YEAR FORECASTS TO 2022

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: November 2013

Business Monitor InternationalSenator House85 Queen Victoria StreetLondonEC4V 4ABUnited KingdomTel: +44 (0) 20 7248 0468Fax: +44 (0) 20 7248 0467Email: [email protected]: http://www.businessmonitor.com

© 2013 Business Monitor InternationalAll rights reserved.

All information contained in this publication iscopyrighted in the name of Business MonitorInternational, and as such no part of thispublication may be reproduced, repackaged,redistributed, resold in whole or in any part, or usedin any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consentof the publisher.

DISCLAIMERAll information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time ofpublishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business MonitorInternational accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of thepublication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind asto the accuracy or completeness of any information hereto contained.

CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9Infrastructure SWOT .................................................................................................................................. 9

Industry Forecast .............................................................................................................. 11Construction And Infrastructure Forecast Scenario ........................................................................................ 11

Table: Mexico Construction And Infrastructure Industry Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Table: Mexico Construction And Infrastructure Industry Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Transport Infrastructure - Outlook And Overview .......................................................................................... 19Table: Mexico Transport Infrastructure Industry Data, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Table: Mexico Transport Infrastructure Long-Term Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table: Major Projects - Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Energy And Utilities - Outlook And Overview ............................................................................................... 34Table: Energy And Utilities Infrastructure Industry Value Forecasts, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Table: Energy And Utilities Infrastructure Industry Value Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Table: Major Projects - Energy & Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Residential/Non-Residential Building - Outlook And Overview ......................................................................... 51Table: Mexico Residential & Non-Residential Building Industry Data, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Table: Mexico - Residential & Non-Residential Building Industry Data, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Table: Major Projects - Construction And Social Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Industry Risk/Reward Ratings ......................................................................................... 59Mexico - Industry Risk/Reward Ratings ........................................................................................................ 59

Rewards ............................................................................................................................................... 59

Risks .................................................................................................................................................... 60

Latin America - Infrastructure Risk/Reward Ratings ....................................................................................... 61

Populist Policies Perturb Investors ............................................................................................................ 66Table: Latin America Infrastructure Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Market Overview ............................................................................................................... 71Competitive Landscape ............................................................................................................................. 71

Table: Key Company Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Company Profile ................................................................................................................ 74Cemex ................................................................................................................................................... 74

Table: Cemex - 9M13 Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

ICA ....................................................................................................................................................... 78Table: Empresas ICA Financial Data, MXNmn Unless Otherwise Stated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Global Infrastructure Overview ........................................................................................ 83Global Industry Overview ......................................................................................................................... 83

Table: Latin America PPP Round-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Mexico Infrastructure Report Q1 2014

© Business Monitor International

Methodology ...................................................................................................................... 92Data Methodology .................................................................................................................................. 92

Definitions ............................................................................................................................................ 94

Infrastructure Risk/Reward Ratings ........................................................................................................... 96Table: Infrastructure Business Environment Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97



BMI Industry View

BMI View: We are maintaining our expectation that 2014 should see a recovery in the Mexican

construction industry, following a housing market crash and public sector inertia in 2013 which has

dragged growth into negative territory. Indeed, we have further downgraded our 2013 estimate to a 2.7%

contraction as the slump accelerated in Q3 2013. Despite this, we are holding our 2014 and 2015 growth

forecasts steady at 4.4% and 4.3% respectively, as we see the construction sector returning to trend. This

will be driven primarily by infrastructure and industrial construction projects, whilst we see the housing

sector stabilising, but remaining weak.

Infrastructure High On The Presidential Agenda

President Enrique Peña Nieto's US$315bn National Infrastructure Plan has outlined greater scope for

private investment into Mexico's infrastructure sector. Based on a strong track record, including presiding

over the country's first healthcare PPP in the State of Mexico, we expect the PPP law to gain significant

traction under President Nieto and over the coming years.

Mexico's infrastructure sector has been stagnating over recent years, and was further weakened by the lull in

activity driven by public sector sluggishness in the wake of the transition of power in early 2013. We expect

this to turn around in 2014, especially following the passing of a number of priority reforms, which should

allow focus to be placed on other areas of the economy, with infrastructure likely to be a priority. Indeed,

liberalising the energy and electricity sectors should allow for greater private sector investment into both.

Over the medium term we see the energy and utilities on track for the strongest growth. Between 2014 and

2018, we forecast annual average growth of 12.1% for the country's water infrastructure sub-sector, 7.6%

for power plants & transmission grids and 5.3% for oil and gas pipelines. In the transport sector, tangible

improvement into attracting private investors will need to be seen before we factor in stronger growth to our

forecast; however, we have upgraded our outlook for the rail sub-sector, based on a dedicated plan to

expand rail capacity in the country, which is showing signs of progress and has government support.

Energy Reform And Manufacturing To Drive Industrial Engineering

Energy reform is expected to provide a major medium term boost to the construction sector. We anticipate

that the opening up of Mexico's energy sector to private players will precipitate a significant expansion in

investment into the sector, this will require support infrastructure as new areas of exploration are opened up,



including electricity supply and transport links, as well as processing plants, on site infrastructure, and

pipelines and export infrastructure. We highlight ICA through its joint venture with Fluor as a major

beneficiary given its current dominance in winning Pemex contracts.

We also see potential investment into the manufacturing sector supporting industrial construction, as well as

driving demand for greater electricity capacity and new transport infrastructure. Mexico's manufacturing

sector has been performing well, benefiting from cheap relative wages and downward pressure on electricity

prices, as well as stronger demand from the US. We expect this trend to continue into 2014 and provide

demand for infrastructure projects.

Housing To Remain A drag

A crash experienced in Mexico's housing sector over 2013 is expected to have bottomed out. However,

whilst we do not see the situation deteriorating further, we do not anticipate a rebound over 2014. Rather the

industry will stablise as the remaining players adjust to the government's new housing policy. Over the

longer term, the policy should better align demand with supply and create a more sustainable housing

market in the country. Consequently, we see long term potential for growth and highlight that the remaining

players - Homex and Ara are well placed to pick up additional market share following the bankruptcy of a

number of their peers in 2013.

Residential and non-residential building industry value growth will be guided by the housing market.

Following a steep contraction in 2013 (17%), we expect a stabilising in 2014 (1%) and growth from 2015

(3.3% average growth between 2015 and 2022).



SWOT

Infrastructure SWOT

Mexico Infrastructure SWOT

Strengths ■ Large domestic industry means there is a high level of expertise available to

undertake major projects.

■ The government has endorsed private procurement of infrastructure projects.

■ Regulatory reforms open up new pools of capital to the market.

■ Infrastructure investment has been around US$50bn a year, equal to 5% of GDP,

according to the government.

■ New public-private partnership (PPP) law will offer investors greater security and

should unlock private investment potential in Mexico.

■ Fiscal reform opens the potential for greater public sector infrastructure investment.

Weaknesses ■ Several large-scale tenders have been postponed numerous times, eroding

confidence in the private sector.

■ Slow progress and uncertainty regarding the National Infrastructure Plan.

■ Strong ties to the US economy means that Mexico must take measures to distance

itself from volatility in the US market.

■ Construction sector has been in recession in 2013.

■ Housing market has been hit hard by the new National Housing Plan, with many

companies facing bankruptcy.

■ High corruption levels.

Opportunities ■ New National Infrastructure Plan includes US$315bn for infrastructure investment,

including transport, energy, water and power. The plan hopes to use private

investments for infrastructure investment.



Mexico Infrastructure SWOT - Continued

■ The winner of the 2012 election - Enrique Peña Nieto - has floated the idea of

liberalising the energy sector, which would open up significant new investment

potential and indirectly boost the construction sector.

■ Nieto has a strong history of infrastructure investment, especially private investment

into transport infrastructure.

■ Energy sector reform is hoped to open up the energy industry to new investment

which will support the infrastructure sector and provide contracts to local players.

Threats ■ Security risk and high levels of violence.

■ Institutional delays could continue to impact construction project implementation

through to 2014.

■ Housing market recovery is likely to take some time.



Industry Forecast

Construction And Infrastructure Forecast Scenario

Table: Mexico Construction And Infrastructure Industry Data

2011 2012e 2013f 2014f 2015f 2016f

Constructionindustry value,MXNbn 934.7 1,005.0 968.7 1,047.6 1,130.3 1,215.3

Constructionindustry value,US$bn 75.1 76.4 75.4 82.8 90.4 100.4

Constructionindustry, realgrowth, % y-o-y 4.8 3.3 -2.7 4.4 4.3 4.2

Constructionindustry, % ofGDP 6.5 6.4 5.8 5.9 5.9 5.9

Total capitalinvestment,MXNbn 3,160.5 3,502.7 3,655.1 3,920.1 4,237.6 4,563.9

Total capitalinvestment, US$bn 254.1 266.3 284.4 309.9 339.0 377.2

Total capitalinvestment, %of GDP 22.0 22.4 22.0 22.0 22.1 22.3

Capitalinvestment percapita, US$ 2,128.6 2,203.6 2,325.2 2,503.2 2,707.0 2,978.5

Real capitalinvestmentgrowth, % y-o-y 7.8 5.5 0.7 3.5 4.5 4.4

Constructionindustryemployment,'000 3,442.4 3,629.8 3,470.3 3,722.2 3,978.9 4,241.9

Constructionindustryemployment, %y-o-y 8.3 5.4 -4.4 7.3 6.9 6.6

Total workforce,'000 76,799.5 78,221.5 79,649.9 81,042.6 82,369.2 83,615.3

Constructionindustryemployees as% of totallabour force 4.5 4.6 4.4 4.6 4.8 5.1



Mexico Construction And Infrastructure Industry Data - Continued

2011 2012e 2013f 2014f 2015f 2016f

InfrastructureIndustry ValueAs % of TotalConstruction 40.5 41.8 47.7 49.3 50.2 50.7

InfrastructureIndustry Value,MXNbn 378.9 419.8 461.8 516.9 567.4 616.1

InfrastructureIndustry Value,US$bn 30.5 31.9 35.9 40.9 45.4 50.9

InfrastructureIndustry ValueReal Growth(%) 4.5 6.7 6.3 8.2 6.2 5.3

InfrastructureIndustry Valueas % of GDP 2.6 2.7 2.8 2.9 3.0 3.0

Residentialand Non-residentialBuildingIndustry ValueAs % of TotalConstruction 59.5 58.2 52.3 50.7 49.8 49.3

Residential andNon-residentialBuildingIndustry Value,MXNbn 555.8 585.2 506.9 530.8 562.9 599.2

Residential andNon-residentialBuildingIndustry Value,US$bn 44.7 44.5 39.4 42.0 45.0 49.5

Residential andNon-residentialBuildingIndustry ValueReal Growth(%) 5.0 1.2 -17.1 1.0 2.5 3.2

Residential andNon-residentialBuildingIndustry Valueas % of GDP 3.9 3.7 3.0 3.0 2.9 2.9

Cementproduction(includingimportedclinker), tonnes 38,297,341.9 41,399,702.8 41,848,796.9 43,993,846.6 46,815,949.3 49,703,368.3




2011 2012e 2013f 2014f 2015f 2016f

Cementproduction(includingimportedclinker), tonnes,% y-o-y 12.1 8.1 1.1 5.1 6.4 6.2

Cementconsumption,tonnes 40,172,840.4 43,347,323.1 43,848,864.8 46,065,954.7 48,960,457.0 51,924,376.4

Cementconsumption,tonnes, % y-o-y 15.6 7.9 1.2 5.1 6.3 6.1

Cement netexports, tonnes -1,875,498.5 -1,947,620.3 -2,000,067.9 -2,072,108.1 -2,144,507.7 -2,221,008.1

Cement netexports, tonnes,% y-o-y 224.4 3.8 2.7 3.6 3.5 3.6

e/f=estimate/forecast, Source: INEGI, CMIC, Banco de Mexico, USGS, BMI

Table: Mexico Construction And Infrastructure Industry Data

2017f 2018f 2019f 2020f 2021f 2022f

Constructionindustry value,MXNbn 1,307.4 1,408.4 1,517.3 1,637.8 1,768.2 1,912.5

Constructionindustry value,US$bn 109.9 119.9 132.5 144.9 159.3 170.8

Constructionindustry, realgrowth, % y-o-y 4.0 3.9 3.8 3.9 4.1 4.2

Constructionindustry, % ofGDP 5.9 5.9 5.9 5.9 5.9 5.9

Total capitalinvestment,MXNbn 4,947.3 5,387.6 5,867.1 6,401.0 6,983.5 7,633.0

Total capitalinvestment, US$bn 415.7 458.5 512.4 566.5 629.1 681.5

Total capitalinvestment, %of GDP 22.5 22.7 22.9 23.1 23.3 23.4




2017f 2018f 2019f 2020f 2021f 2022f

Capitalinvestment percapita, US$ 3,248.0 3,545.2 3,922.0 4,292.8 4,721.7 5,066.3

Real capitalinvestmentgrowth, % y-o-y 4.8 5.1 5.0 5.1 5.2 5.3

Constructionindustryemployment,'000 4,500.6 4,765.4 5,034.6 5,322.2 5,629.6 5,958.1

Constructionindustryemployment, %y-o-y 6.1 5.9 5.6 5.7 5.8 5.8

Total workforce,'000 84,787.0 85,900.1 86,980.1 88,044.7 89,096.5 90,125.8

Constructionindustryemployees as% of totallabour force 5.3 5.5 5.8 6.0 6.3 6.6

InfrastructureIndustry ValueAs % of TotalConstruction 51.0 51.3 51.5 51.7 51.9 52.0

InfrastructureIndustry Value,MXNbn 666.4 722.1 781.3 846.6 917.0 994.4

InfrastructureIndustry Value,US$bn 56.0 61.5 68.2 74.9 82.6 88.8

InfrastructureIndustry ValueReal Growth(%) 4.6 4.5 4.3 4.4 4.4 4.4

InfrastructureIndustry Valueas % of GDP 3.0 3.0 3.0 3.1 3.1 3.1


Residential andNon-residentialBuilding 641.0 686.3 736.0 791.2 851.2 918.2




2017f 2018f 2019f 2020f 2021f 2022fIndustry Value,MXNbn


Residential andNon-residentialBuildingIndustry ValueReal Growth(%) 3.4 3.3 3.3 3.5 3.7 3.9


Cementproduction(includingimportedclinker), tonnes 52,994,742.6 56,661,095.0 60,440,261.5 64,488,437.7 68,828,116.9 73,483,192.4

Cementproduction(includingimportedclinker), tonnes,% y-o-y 6.6 6.9 6.7 6.7 6.7 6.8

Cementconsumption,tonnes 55,304,848.0 59,071,475.9 62,955,166.6 67,115,093.2 71,575,744.5 76,362,162.1

Cementconsumption,tonnes, % y-o-y 6.5 6.8 6.6 6.6 6.6 6.7

Cement netexports, tonnes -2,310,105.3 -2,410,380.9 -2,514,905.0 -2,626,655.5 -2,747,627.7 -2,878,969.7

Cement netexports, tonnes,% y-o-y 4.0 4.3 4.3 4.4 4.6 4.8

e/f=estimate/forecast, Source: INEGI, CMIC, Banco de Mexico, USGS, BMI

BMI View: We are maintaining our expectation that Mexico's construction industry will experience a

rebound in 2014 and this recovery is driven by non-residential building and infrastructure activity.

However, in line with our increasingly bearish view for Mexico's construction sector over the latter half of



2013, we have substantially downgraded our 2013 growth estimate for Mexico's construction net output

real growth to -2.7%.

Mexico's infrastructure sector has the potential to enter a new period of growth, following stagnant to weak

growth over recent years. However, despite having the ingredients for growth - including a comprehensive

plan for projects, well regulated market for private companies, a wealth of expertise and strong demand -

the pieces have failed to come together.

Broadly speaking, the combination of poor weather and uncertainties surrounding Mexico's fiscal and

energy reforms have weighed on progress in the construction sector. Contract opportunities surrounding the

National Infrastructure Plan have yet to make progress, whilst weakness in the mining and manufacturing

sectors is weighing on industrial construction. In October 2013, we wrote (see, 'Infrastructure Revival View

Still In Place, But Timing Delayed', 29 October 2013):

'Although our 2013 estimate is already pricing in a slump in the industry - 1.7% real growth for the year as

compared to 3.3% growth in 2012 - a rebound in Q413 is looking less likely. As such, the risks to our 2013

estimate for construction growth remain to the downside.'

Based on poor Q313 construction data (declining 6.9% year on year [y-o-y]) and weak September 2013

construction industrial production (declining 8.3% y-o-y), we have now priced in this downside risk, and

are expecting a recession in the industry. Indeed, construction spending on buildings is down 5.6% y-o-y in

the first nine months of 2013. We now anticipate a 2.7% contraction for the year. Growth has averaged

-4.5% y-o-y in the first nine months of the year, however, we anticipate an easing in this trend in Q4 2013.



Rebound Anticipated

Mexico Construction Industry Value And Growth Forecasts

Construction industry value, MXNbn (LHS)Construction Industry Value, Real Growth % y-o-y (RHS)

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

2018

f

0

500

1,000

1,500

-5

0

5

f=BMI forecast, Source: Banco de Mexico, BMI

Infrastructure Revival On The Cards

Despite the downgrade to our estimate for 2013, our positive outlook for the Mexican construction sector

remains solidly in place. We anticipate construction sector growth of 4.4% and 4.3% in 2014 and 2015

respectively, over the next five years, we anticipate that infrastructure sector growth in particular will trend

higher. In recent years, Mexico's infrastructure sector has stagnated, with major greenfield projects

struggling to move forward. Between 2007 and 2011, growth of just 0.5% was reported in the infrastructure

sector. Despite a comprehensive plan for investment under previous president Felipe Calderon (the first

National Infrastructure Plan), little investment took place. Of the 76 projects worth a combined MXN152bn

to be carried out by Mexico's national infrastructure fund Fonadin, just 25, worth MXN13.5bn, were

completed.

We expect much better results from the new National Infrastructure Plan (NIP), which will be carried out

against a backdrop of a new public private partnership (PPP) law, a pro-private sector President who has a

proven track record on infrastructure investments, and major fiscal and potentially energy reforms. This



confluence of events should help to shift the trajectory of Mexican infrastructure investment a notch higher.

Between 2013 and 2017, we anticipate growth of 5.6% for the subsector, with further upside once we see

projects moving through the tendering process.

At present, details are still limited on the projects under the NIP, but we expect transport and

communications to account for MXN1.3trn, including a range of rail, road, port and airport projects, with

the rest divided between national oil company Pemex, national water agency Conagua, and power company

CFE. The private sector through PPPs is expected to play a major role, and we expect the beneficiaries to

be both domestic companies including Empresas ICA (for which we hold a positive view in our macro-

industry strategy) and IDEAL. Of the international players expected to benefit we highlight regional players

from Argentina, Colombia and Brazil, as well as Spanish companies who already hold a presence in the

market, such as OHL Mexico.

Housing To Remain Weak

Mexico Construction Real Growth, y-o-y, Residential And Non-Residential Construction

Source: INEGI



Housing To Remain A Drag

Whilst a revival in the infrastructure sector is on the cards, the housing sector is likely to experience

difficulties for the short term at least. The housing market has been the major drag on the construction

sector over 2013, with homebuilders forced to restructure debt in the first half of 2013. Homebuilders'

struggle with cashflow shortages has prevented new launches and with many entering bankruptcy in the

second half of 2013, the capacity to expanding housing construction will be constrained. The government

has announced plans to provide financial support for the homebuilders in order to support new housing

construction, such as credit lines and guarantees for bond issuances. This should help to stabilise the market

and support our outlook for a better 2014, however, with cash flow severely constrained, this will be a slow

recovery unless further consolidation or government measures are put in place.

Transport Infrastructure - Outlook And Overview

Table: Mexico Transport Infrastructure Industry Data, 2011-2016

2011 2012e 2013f 2014f 2015f 2016f

TransportInfrastructureIndustry ValueAs % Of TotalInfrastructure 60.7 59.2 57.2 55.9 54.7 53.7

TransportInfrastructureIndustry Value,MXNbn 229.9 248.5 264.3 289.2 310.6 330.8

TransportInfrastructureIndustry Value,US$bn 18.5 18.9 20.6 22.9 24.8 27.3

TransportInfrastructureIndustry ValueReal Growth(%) 5.6 4.0 2.7 5.7 3.8 3.2

TransportInfrastructureIndustry ValueAs Percent OfTotalConstruction(%) 24.6 24.7 27.3 27.6 27.5 27.2

Roads andBridgesInfrastructureIndustry Value,MXNbn 201.0 217.2 229.7 250.0 266.9 282.5



Mexico Transport Infrastructure Industry Data, 2011-2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

Roads andBridgesInfrastructureIndustry Value,US$bn 16.2 16.5 17.9 19.8 21.4 23.3

Roads andBridgesInfrastructureIndustry ValueReal Growth(%) 7.6 3.9 2.1 5.1 3.2 2.5

Roads andBridgesInfrastructureIndustry As %of TotalInfrastructure 53.1 51.7 49.7 48.4 47.0 45.9

Roads andBridgesInfrastructureIndustry As %of TotalConstruction 21.5 21.6 23.7 23.9 23.6 23.2

RailwaysInfrastructureIndustry ValueAs % ofTransportInfrastructure 8.9 9.0 9.5 10.1 10.7 11.4

RailwaysInfrastructureIndustry Value,MXNbn 20.5 22.4 25.2 29.1 33.3 37.6

RailwaysInfrastructureIndustry Value,US$bn 1.7 1.7 2.0 2.3 2.7 3.1

RailwaysInfrastructureIndustry ValueReal Growth(%) -7.4 4.8 8.8 12.0 10.7 9.5

RailwaysInfrastructureIndustry As %of TotalInfrastructure 5.4 5.3 5.4 5.6 5.9 6.1

RailwaysInfrastructureIndustry As %of TotalConstruction 2.2 2.2 2.6 2.8 2.9 3.1




2011 2012e 2013f 2014f 2015f 2016f

AirportsInfrastructureIndustry ValueAs % ofTransportInfrastructure 0.6 0.5 0.5 0.5 0.5 0.5

AirportsInfrastructureIndustry Value,MXNbn 1.3 1.3 1.4 1.5 1.6 1.6

AirportsInfrastructureIndustry Value,US$bn 0.1 0.1 0.1 0.1 0.1 0.1

AirportsInfrastructureIndustry ValueReal Growth(%) -0.9 -1.8 1.6 3.4 1.9 -0.9

AirportsInfrastructureIndustry As %of TotalInfrastructure 0.3 0.3 0.3 0.3 0.3 0.3

AirportsInfrastructureIndustry As %of TotalConstruction 0.1 0.1 0.1 0.1 0.1 0.1

Ports Harboursand WaterwaysInfrastructureIndustry ValueAs % ofTransportInfrastructure 3.0 3.1 3.0 3.0 2.8 2.8

Ports Harboursand WaterwaysInfrastructureIndustry Value,MXNbn 7.0 7.6 8.1 8.5 8.8 9.1

Ports Harboursand WaterwaysInfrastructureIndustry Value,US$bn 0.6 0.6 0.6 0.7 0.7 0.8

Ports Harboursand WaterwaysInfrastructureIndustry ValueReal Growth(%) -4.7 4.4 2.4 2.3 -0.5 -0.1

Ports Harboursand WaterwaysInfrastructure 1.8 1.8 1.7 1.7 1.6 1.5




2011 2012e 2013f 2014f 2015f 2016fIndustry As %of TotalInfrastructure

Ports Harboursand WaterwaysInfrastructureIndustry As %of TotalConstruction 0.7 0.8 0.8 0.8 0.8 0.7

e/f = BMI estimate/forecast. Source: BMI, INEGI, Banco de Mexico, CMIC

Table: Mexico Transport Infrastructure Long-Term Forecasts, 2017-2022

2017f 2018f 2019f 2020f 2021f 2022f

TransportInfrastructureIndustry ValueAs % Of TotalInfrastructure 52.4 50.9 49.4 48.0 46.7 45.4

TransportInfrastructureIndustry Value,MXNbn 349.4 367.2 385.8 406.0 427.8 451.6

TransportInfrastructureIndustry Value,US$bn 29.4 31.2 33.7 35.9 38.5 40.3

TransportInfrastructureIndustry ValueReal Growth(%) 2.0 1.3 1.2 1.2 1.5 1.6

TransportInfrastructureIndustry ValueAs Percent OfTotalConstruction(%) 26.7 26.1 25.4 24.8 24.2 23.6

Roads andBridgesInfrastructureIndustry Value,MXNbn 297.5 311.3 325.7 341.1 357.8 375.9

Roads andBridgesInfrastructureIndustry Value,US$bn 25.0 26.5 28.4 30.2 32.2 33.6



Mexico Transport Infrastructure Long-Term Forecasts, 2017-2022 - Continued

2017f 2018f 2019f 2020f 2021f 2022f

Roads andBridgesInfrastructureIndustry ValueReal Growth(%) 1.7 0.8 0.7 0.7 1.0 1.1

Roads andBridgesInfrastructureIndustry As %of TotalInfrastructure 44.6 43.1 41.7 40.3 39.0 37.8

Roads andBridgesInfrastructureIndustry As %of TotalConstruction 22.8 22.1 21.5 20.8 20.2 19.7

RailwaysInfrastructureIndustry ValueAs % ofTransportInfrastructure 11.7 12.1 12.5 13.0 13.4 13.8

RailwaysInfrastructureIndustry Value,MXNbn 40.8 44.4 48.3 52.6 57.3 62.4

RailwaysInfrastructureIndustry Value,US$bn 3.4 3.8 4.2 4.7 5.2 5.6

RailwaysInfrastructureIndustry ValueReal Growth(%) 5.1 5.0 4.8 4.9 4.9 5.0

RailwaysInfrastructureIndustry As %of TotalInfrastructure 6.1 6.2 6.2 6.2 6.2 6.3

RailwaysInfrastructureIndustry As %of TotalConstruction 3.1 3.2 3.2 3.2 3.2 3.3

AirportsInfrastructureIndustry ValueAs % ofTransportInfrastructure 0.5 0.5 0.5 0.4 0.4 0.4




2017f 2018f 2019f 2020f 2021f 2022f

AirportsInfrastructureIndustry Value,MXNbn 1.7 1.7 1.8 1.8 1.9 1.9

AirportsInfrastructureIndustry Value,US$bn 0.1 0.1 0.2 0.2 0.2 0.2

AirportsInfrastructureIndustry ValueReal Growth(%) -1.1 -1.1 -1.1 -0.9 -0.7 -0.6

AirportsInfrastructureIndustry As %of TotalInfrastructure 0.2 0.2 0.2 0.2 0.2 0.2

AirportsInfrastructureIndustry As %of TotalConstruction 0.1 0.1 0.1 0.1 0.1 0.1

Ports Harboursand WaterwaysInfrastructureIndustry ValueAs % ofTransportInfrastructure 2.7 2.6 2.6 2.6 2.5 2.5

Ports Harboursand WaterwaysInfrastructureIndustry Value,MXNbn 9.4 9.7 10.1 10.5 10.9 11.3

Ports Harboursand WaterwaysInfrastructureIndustry Value,US$bn 0.8 0.8 0.9 0.9 1.0 1.0

Ports Harboursand WaterwaysInfrastructureIndustry ValueReal Growth(%) -0.3 -0.3 -0.3 -0.2 0.0 0.2

Ports Harboursand WaterwaysInfrastructureIndustry As %of TotalInfrastructure 1.4 1.3 1.3 1.2 1.2 1.1

Ports Harboursand WaterwaysInfrastructure 0.7 0.7 0.7 0.6 0.6 0.6




2017f 2018f 2019f 2020f 2021f 2022fIndustry As %of TotalConstruction

f = BMI forecast. Source: BMI, INEGI, Banco de Mexico, CMIC

The 2013 budget has created a mixed outlook for the transport sector. Overall the transport and

communications ministry will see an increase of 3% on 2012 levels, to MXN275.6bn, but some areas are

expected to benefit more than others.

The main priority will be the roads and rail sub-sectors. This supports our view that airports and ports will

be the underperforming sub-sectors. Annual real growth in the airport and port infrastructure industry is

anticipated to oscillate between growth and contraction over the forecast period between 2013 and 2017,

with average growth of just 1.3% and 0.5% respectively.

One promising element of the proposal is the potential improvement in project selection, which addresses

one of our key concerns under the previous government. Project quality has been one of the biggest causes

of delay in Mexico's transport sector and therefore the reassessment of projects on the table is an

encouraging sign. A number of projects failed to attract investor interest and thus ground to a halt, but were

still kept in the pipeline. We have long avoided incorporating these projects into our forecast, and it is

encouraging that they have been taken off the table for the time being; this includes the Rivera Maya

Airport and the Punta Colonet port.

Private investment should pick up in 2013, taking up some of the slack created by the slowdown in public

investment seen in 2012. Until we see tenders being announced, however, we are holding off from factoring

in substantial private investment growth. As a result, annual average real growth in transport infrastructure

of 3% between 2013 and 2017 is anticipated. There is upside to this figure if we see an improvement in the

government's ability to procure transport infrastructure projects, and much will depend on the new policies

enacted by President Nieto and further detail of projects included in the new National Infrastructure Plan, of

which transport and communications will account for MXN1.3trn, including a range of rail, road, port and

airport projects.

Based on a successful history of concessions for highways during his time as governor for the State of

Mexico, we believe that Nieto will pursue increased private operation of infrastructure, especially transport



assets, and the public-private partnership (PPP) law approved in will allow further expansion of the model

to take place.

Investment To Expand Transport Networks

Transport Infrastructure Industry Value, By Sector, MNXbn

Airports Ports RailwaysRoads & Bridges

2009

2010

2011

2012

e

2013

f

2014

f

2015

f

2016

f

2017

f

0

200

400

e/f = BMI estimate/forecast. Source: BMI, Banco de Mexico, CMIC

Ports

Mexico's transport and communications ministry, SCT, plans to direct MXN5.5bn (US$454mn) towards the

Altamira, Tampico and Matamoros ports in the Mexican state of Tamaulipas. Of the total amount,

MXN1.5bn (US$123.8mn) will be used to upgrade the Matamoros Port. Additionally, the investment will

be directed towards the dredging and construction of an underpass, new access roads and a new railway line

for the Altamira Port. The ministry will make the investment during a three-year period, with MXN1bn (US

$82.5mn) likely to be invested during 2013, according to SCT Ports Minister Guillermo Ruiz de Teresa.

We see potential upside to our forecasts from the launch of the tender for the Guaymas port project in H113.

The first US$568mn phase includes dredging and construction of 10 new terminals, which take capacity to

30mn tonnes/year, from a current 7mn. A number of international companies have shown interest in the

tender. Construction is due to start in 2013 and be completed in 2015.



Given the uncertainty surround the bigger port projects, and the reduction in government spending planned

for 2013, we have a more muted outlook for the sector. Growth should be sustained through to 2015, though

beyond the completion of the Lazaro Cardenas terminal growth will stagnate until we see progress on other

projects.

Roads Will Dominate

2013 Planned Public Investments In Transport Infrastructure, MXNmn

Source: CMIC



Roads Remain Dominant

The Mexican transport and communications ministry, SCT, intends to tender 1,000 road projects by

end-2013 and also launch a crackdown on corruption, according to the deputy director of infrastructure for

the SCT, Raúl Murrieta. The tenders would include various studies and sub-division of highway packages.

The SCT is planning to publish the national infrastructure plan in mid-2013 and as yet has not released

details pertaining to the required project investments. Highway modernisation work will help in achieving

the target of increasing cargo transport across the country.

The regulatory changes brought in to support public-private partnerships (PPP) have come at a good time,

as news that OHL had its US$225mn concession for the Libramiento Norte (northern bypass) in Puebla

cancelled. The contract was awarded back in 2008 (thus not covered by the PPP law); however, no

construction has started, in part due to the lack of land ownership rights, due to owners refusing to sell. This

in itself raises some concerns over the potential for PPPs in Mexico. Land clearance has been a major

barrier to greenfield infrastructure development in many emerging markets and has the potential to cause

considerable and expensive problems for developers.

Spanish infrastructure company OHL is one of the largest players in Mexico's highway sector, participating

in concessions for a combined 359km of road, with investment to date totalling US$6.73bn. It is also one of

the few non-local players in the market (with local firms Ideal and Empresas ICA being the two other

heavyweights). The company is expected to play a big role in future concessions awarded under the PPP

law. While this is expected to provide much greater protection from events such as these, the company may

be deterred from future participation if they are unable to agree a resolution.

Rail Boom On The Horizon

President Enrique Peña Nieto has pledged to oversee the restoration of passenger rail service to Mexico

through a multi-billion investment plan. Railways have long been a neglected transport mode, with net

output as a percentage of total transport in long-term decline. However, these projects present significant

upside potential to our currently muted outlook for rail infrastructure industry value growth over the

medium term.

The flagship project in Nieto's railway plans is a high-speed rail linking Mexico City with the

manufacturing hub of Queretaro. The train would travel at speeds of up to 180kmph, slightly below the



European standard of at least 200kmph, making the 200km trip in around 90 minutes. Eventually there are

plans to extend the line to Guadalajara.

The project is only in the very early stages, though there are strong signs it will move forward. It was

included in Nieto's budget proposal, which allocated MXN2bn for rail projects in FY2013. Pre-investment

studies are currently underway assessing the environmental, financial, technical and legal feasibility of the

project. There is an ambitious timeframe for the project, with work hoped to start within the year and be

completed in 2016. Whilst we believe this is too ambitious considering the current status and the lack of any

details on financing, we are positive that the project will progress.

The project's ability to meet the ambitious timeframe depends on which of a number of options are pursued

in developing the railway. The first, and quickest option, would be using the existing railway, which is

currently dedicated to freight transport. The second is to modernise the existing railway to include an

additional right of way. The final option, and the most expensive, would be to build an entirely new railway.

Using the current rail lines would be difficult given that they are privately operated and already congested.

Using the same railway for passenger and freight use is possible; however, it puts limitations on the times

when freight trains can run. Given the growing level of US-Mexico trade, freight rail lines are currently

congested and therefore rail companies are unlikely to approve any limitations of their use. Consequently, a

brand new railway seems to be the most likely outcome.

The biggest risk, as always, will be financing. Nieto's previous success with infrastructure projects has been

through inviting the private sector to invest, and this is certainly possible in this case. Indeed, there is a

dearth of new-high speed rail projects globally, and companies active in this sector are keen for new

opportunities.

In addition to the high-speed railway, other projects included in the budget are the Yucatan Trans-Peninsula

Rail and Mexico City-Toluca Rail. Nieto has also floated plans for a third subway line in Monterrey.

The potential for a boom in rail construction has led us to upgrade our forecasts for railways infrastructure

industry value, as the commitment to the sector has been demonstrated by recent agreements. Between 2013

and 2017, we are now anticipating 9.4% annual average real growth. There is further upside potential once

construction commences.



Table: Major Projects - Transport

Project Name Sector Value (US$mn)Capacity/Length Companies Timeframe Status

New terminal atMexico Cityinternationalairport, MexicoCity Airports 792

32 mnpassengers/yr AMA 2007-2009 Completed

Riviera MayaAirportConcession Airports

3 mnpassengers/yr Suspended

Upgrades AtAltamira,Tampico andMatamorosports Airports 454

Mexicotransport andcommunications ministry (SCT) 2013-2016 Announced

ManzanilloContainerFacility Ports 400 37000 TEU 2009-2011 Completed

LazaroCardenas portexpansion Ports 225 400000 TEU

Maersk Line,ICAConstruction 2011-2012 Cancelled

Construction ofPacific coastport at PuntaColonet Ports 3820 1000000 TEU 2009-2020 Delayed

Port of Veracruzexpansion Ports 3040 Acciona Announced

Secondcontainerterminal at theport of LazaroCardenas Ports 900

ICAConstruction,APM Terminals

At planningstage

Guaymas portterminalsexpansion Ports 568

30000 '000tonnes 2013-

In tender/Tenderlaunched

Railinfrastructureupgrades Rail 380

Kansas CitySouthern deMexico (KCSM) 2009-

At planningstage

Mexico CitySuburbanRailway Rail 706 27 km

FerrocarrilesSuburbanos 2005-2008 Completed

Mexico Citydowntown tramline Rail 478 10 km Alstom SA Cancelled

Morelia railsystem Rail 236 80 km 2011-

At planningstage

Mexico Valleyurban rail Rail 1200

At planningstage

Mexico ValleySuburban RailSystem - Line 3 Rail 23.4 km

At planningstage



Major Projects - Transport - Continued


Mexico CityMetro Line 12(Gold Line),Mixcoac -Tlahuac Rail 1900 25 km

Carso, ICAConstruction,Alstom SA 2008-2012 Completed

MonterreyMetro Line 3Project Rail 448 7.5 km -2015

At planningstage

Mexico City-Queretaro HighSpeed RailProject Rail 200 km

Ministry ofCommunications andTransportationof Mexico 2014-2016

At planningstage

Trans-PeninsulaRail Project,Yucatan-Quintana Roo Rail 863 277 km 2015-

Feasibilitystudies/EIAunderway

Mexico City-Toluca Rail PPPProject Rail 2900 75.6 km

The SecretaryofTransportationandCommunications of Mexico

At planningstage

Mexico City-Pachucahighway

Roads &Bridges 81 Empresas ICA 2008-2011

ContractAwarded

MichoacanHighway PPP

Roads &Bridges 602.83 362 km

Promotora yOperadora deInfraestructuraSAB de CV,Grupo deEmpresas AzviSL,InfraestructuraInstitucional,Empresas ICA 2009-2012

ContractAwarded

NoresteHighwayPackage

Roads &Bridges 167 46.2 km

MexicoTransport andCommunications Ministry (SCT)

At planningstage

Sinaloahighway/FARACII

Roads &Bridges 307 305 km

Impulsora delDesarrollo y elEmpleo enAmerica LatinaSAB de CV(IDEAL)


Estacion Don-Nogaleshighway


MexicoTransport andCommunications Ministry (SCT),Sonora stategovernment 2009-2011

Project financeclosure

PerifericoBeltwayConcessions

Roads &Bridges 571.12 9 km OHL 2010-

Project financeclosure





(northernstretch)

Perifericobeltwayconcession(southernstretch)


Impulsora delDesarrollo y elEmpleo enAmerica LatinaSAB de CV(IDEAL), ICAConstruction 2011-2014

Underconstruction

Libramiento deCelaya toll roadconcession

Roads &Bridges 127 29 km VISE, Rubau 2010-2012

Underconstruction

Bicentenariohighway

Roads &Bridges 526 25 km OHL -2010 Completed

Salamanca -Leon highwayPPP


MexicoConstructoraIndustrial,Operadora deAutopistas,Coconal 2011-2013

ContractAwarded

Acapulco -Zihuatanejohighway


At planningstage

Guadalajara -Colima HighwayExpansion


Banobras, InecoGroup 2011-2014

Underconstruction

Farac III BOTPPP

Roads &Bridges 660 219 km 2010-


Federalhighwaysmaintenance -SoutheasternVeracruz


MexicoTransport andCommunications Ministry (SCT) 2011-2018


Development ofhighwayinfrastructure inTamaulipasstate


At planningstage

Santa Fe -Perifericosuperhighway(SuperviaPoniente)


CarmanahTechnologiesCorp.,ObrasconHuarte Lain(OHL), Copra

ContractAwarded

Pacifico Surhighwayconcessionpackage


Impulsora delDesarrollo y elEmpleo enAmerica LatinaSAB de CV(IDEAL) 2012-2014

ContractAwarded

Barranca Larga-Ventanilla tollroad PPP


ICAConstruction 2012-2014

Underconstruction





Sonora statehighwaymaintenance

Roads &Bridges 219 797.4 km Empresas ICA 2012-2019

ContractAwarded

PueblaLibramientoNorte HighwayPPP Project

Roads &Bridges 56

ObrasconHuarte Lain(OHL)

ContractAwarded

Guanajuato-SanMiguel deAllendeHighway PPPProject

Roads &Bridges 70.6 km


Autopista Riode losRemedios -Venta de Carpio

Roads &Bridges Mota-Engil

ContractAwarded

Siglo XXIhighway inMorelos

Roads &Bridges

Promotora yOperadora deInfraestuctura,Grupo BursatilMexicano andAldesa Mexico

Source: BMI Key Projects Database



Energy And Utilities - Outlook And Overview

Table: Energy And Utilities Infrastructure Industry Value Forecasts, 2011-2016

2011 2012e 2013f 2014f 2015f 2016f

Energy andUtilitiesInfrastructureIndustry ValueAs % Of TotalInfrastructure 39.3 40.8 42.8 44.1 45.3 46.3

Energy AndUtilitiesInfrastructureIndustry Value,MXNbn 149.1 171.3 197.5 227.7 256.8 285.3

Energy andUtilitiesInfrastructureIndustry Value,US$bn 12.0 13.0 15.4 18.0 20.5 23.6

Energy andUtilitiesInfrastructureIndustry ValueReal Growth(%) 3.0 10.8 11.6 11.6 9.2 7.8

Energy andUtilitiesInfrastructureIndustry ValueAs Percent OfTotalConstruction(%) 15.9 17.0 20.4 21.7 22.7 23.5

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 56.0 55.9 54.8 54.0 53.1 52.4

Power PlantsandTransmissionGridsInfrastructureIndustry Value,MXNbn 83.5 95.7 108.3 122.9 136.5 149.6

Power PlantsandTransmissionGridsInfrastructureIndustryValue,US$bn 6.7 7.3 8.4 9.7 10.9 12.4



Energy And Utilities Infrastructure Industry Value Forecasts, 2011-2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

Power PlantsandTransmissionGridsInfrastructureIndustry ValueReal Growth(%) 2.9 10.6 9.4 9.7 7.4 6.3

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % of TotalInfrastructure 22.0 22.8 23.5 23.8 24.1 24.3

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % of TotalConstruction 8.9 9.5 11.2 11.7 12.1 12.3

Oil and GasPipelinesInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 14.0 13.0 13.3 13.2 12.8 12.3

Oil and GasPipelinesInfrastructureIndustry Value,MXNbn 20.9 22.3 26.2 30.1 32.9 35.1

Oil and GasPipelinesInfrastructureIndustry Value,US$bn 1.7 1.7 2.0 2.4 2.6 2.9

Oil and GasPipelinesInfrastructureIndustry ValueReal Growth(%) -4.4 2.8 13.5 11.4 5.6 3.3

Oil and GasPipelinesInfrastructureIndustry As %of TotalInfrastructure 5.5 5.3 5.7 5.8 5.8 5.7

Oil and GasPipelinesInfrastructureIndustry As % 2.2 2.2 2.7 2.9 2.9 2.9




2011 2012e 2013f 2014f 2015f 2016fof TotalConstruction

WaterInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 30.0 31.1 31.9 32.8 34.1 35.3

WaterInfrastructureIndustry Value,MXNbn 44.7 53.3 63.0 74.7 87.5 100.6

WaterInfrastructureIndustry Value,US$bn 3.6 4.0 4.9 5.9 7.0 8.3

WaterInfrastructureIndustry ValueReal Growth(%) 7.0 15.0 14.6 14.8 13.5 11.7

WaterInfrastructureIndustry As %of TotalInfrastructure 11.8 12.7 13.6 14.4 15.4 16.3

WaterInfrastructureIndustry As %of TotalConstruction 4.8 5.3 6.5 7.1 7.7 8.3

e/f=BMI estimate/forecast. Sources: Banco de Mexico/BMI

Table: Energy And Utilities Infrastructure Industry Value Forecasts, 2017-2022

2017f 2018f 2019f 2020f 2021f 2022f

Energy andUtilitiesInfrastructureIndustry ValueAs % Of TotalInfrastructure 47.6 49.1 50.6 52.0 53.3 54.6

Energy AndUtilitiesInfrastructureIndustry Value,MXNbn 317.1 354.9 395.5 440.6 489.2 542.8

Energy andUtilities 26.6 30.2 34.5 39.0 44.1 48.5




2017f 2018f 2019f 2020f 2021f 2022fInfrastructureIndustry Value,US$bn

Energy andUtilitiesInfrastructureIndustry ValueReal Growth(%) 7.5 8.1 7.5 7.4 7.1 7.0

Energy andUtilitiesInfrastructureIndustry ValueAs Percent OfTotalConstruction(%) 24.2 25.2 26.1 26.9 27.7 28.4

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 52.0 52.0 52.0 52.0 52.0 52.0

Power PlantsandTransmissionGridsInfrastructureIndustry Value,MXNbn 164.9 184.5 205.6 229.0 254.3 282.4

Power PlantsandTransmissionGridsInfrastructureIndustryValue,US$bn 13.9 15.7 18.0 20.3 22.9 25.2

Power PlantsandTransmissionGridsInfrastructureIndustry ValueReal Growth(%) 6.6 8.1 7.6 7.4 7.2 7.0

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % of TotalInfrastructure 24.7 25.5 26.3 27.1 27.7 28.4




2017f 2018f 2019f 2020f 2021f 2022f

Power PlantsandTransmissionGridsInfrastructureIndustry ValueAs % of TotalConstruction 12.6 13.1 13.6 14.0 14.4 14.8

Oil and GasPipelinesInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 11.8 11.3 10.8 10.4 10.0 9.6

Oil and GasPipelinesInfrastructureIndustry Value,MXNbn 37.3 40.0 42.5 45.6 48.7 52.0

Oil and GasPipelinesInfrastructureIndustry Value,US$bn 3.1 3.4 3.7 4.0 4.4 4.6

Oil and GasPipelinesInfrastructureIndustry ValueReal Growth(%) 2.9 3.2 2.6 3.3 2.9 2.7

Oil and GasPipelinesInfrastructureIndustry As %of TotalInfrastructure 5.6 5.5 5.4 5.4 5.3 5.2

Oil and GasPipelinesInfrastructureIndustry As %of TotalConstruction 2.9 2.8 2.8 2.8 2.8 2.7

WaterInfrastructureIndustry ValueAs % Of TotalEnergy andUtilities 36.2 36.8 37.2 37.7 38.0 38.4

WaterInfrastructureIndustry Value,MXNbn 114.9 130.5 147.3 166.0 186.1 208.4




2017f 2018f 2019f 2020f 2021f 2022f

WaterInfrastructureIndustry Value,US$bn 9.7 11.1 12.9 14.7 16.8 18.6

WaterInfrastructureIndustry ValueReal Growth(%) 10.6 9.8 9.0 8.7 8.2 8.0

WaterInfrastructureIndustry As %of TotalInfrastructure 17.2 18.1 18.9 19.6 20.3 21.0

WaterInfrastructureIndustry As %of TotalConstruction 8.8 9.3 9.7 10.1 10.5 10.9

f=BMI forecasts. Sources: Banco de Mexico/BMI

The Energy and Utilities sector is expected to dominate growth in Mexican infrastructure sector as a

number of significant investments are implemented over the coming years. The biggest issue for the sector

remains uncertainty over government direction and reliance on cheap US natural gas. Energy and utilities

infrastructure is forecast to account for 42.8% of Mexico's total infrastructure in 2013, rising to 53% by

2022, with significant government and private investment in the water, electricity and oil & gas pipeline

sectors.

Power Plants & Transmission Grids

Major investments are planned for the power generation sector. Power plants and grid infrastructure

industry value will account for the majority of energy and utilities infrastructure industry value as a result of

large-scale investments planned and under way. Projects such as the Manzanillo power station upgrade (US

$981mn), the Tabsco power plant contract awarded to Abengoa (US$633mn) and the La Parota

hydroelectric dam will create significant value for the overall infrastructure sector.



Investments Sustain Value Growth

Energy & Utilities Industry Value, By Sector, MXNbn And Real Growth

Power plants and transmission grids (LHS)Oil and gas pipelines (LHS) Water (LHS)Energy and utilties industry real growth, % y-o-y (RHS)

2011

2012

e

2013

f

2014

f

2015

f

2016

f

2017

f

0

100

200

300

400

5

10

0

15

e/f=estimate/forecast, Source: CMIC, Banco de Mexico, BMI

Alternative Energy

Mexico's adoption of the General Law on Climate Change in June 2012 was certainly ambitious, setting a

target of boosting the renewable industry so that 35% of energy generated comes from alternative sources

(including hydropower) by 2024. Considering that thermal sources contributed nearly 80% to the country's

total electricity generation mix in 2012, this is a tall order.

That said, Mexico is making considerable progress with its renewables expansion, with high-profile

international companies channelling investment into the sector including General Electric, Vestas, Enel,

EDF, Gamesa and Mitsui.

Spanish companies in particular have been making headway in Mexico's renewable energy market and

helping Mexico meet its ambitious goals.



In March 2012, the largest wind power complex in Latin America was inaugurated. Three wind energy

parks - the Oaxaca II, III and IV were inaugurated with a combined 306MW of installed capacity. The

projects were developed by Acciona, which invested US$670mn into the wind farms.

Acciona is the biggest owner of installed wind power in Mexico, with 556MW from four wind farms, equal

to 65% of the country wind capacity, as of March 2012, when the Oaxaca wind complex was inaugurated.

Abengoa will build the country's first solar-thermal power plant in Sonora as part of government attempts to

reduce Mexico's reliance on non-renewable energy sources. In early 2013, Spanish renewable energy

company Iberdrola announced that it had acquired the 70MW Dos Arbolitos wind farm. It is scheduled to

commence commercial operations in 2014. The wind farm will provide electricity for 150,000 homes in the

region, as well as reducing carbon dioxide emissions by 560,000 tonnes on an annual basis. In July 2013,

Spanish company Comsa Emte announced it will join with Spanish utility Iberdrola to provide the electrical

work on the 234 megawatt (MW) wind power plant in Juchitan de Zaragoza, which is using turbines from

Spain's Gamesa.

Mexico's geothermal potential is also sizeable, with sites along the San Andreas Fault potentially holding

8.6GW of additional power capacity. At present, installed geothermal capacity is just over 1GW, from four

fields; Cerro Prieto, Los Azufres, Los Humeros (I and II) and Las Tres Vírgenes. Mexico is also home to

one of the world's largest geothermal complexes, the 720MW Cerro Prieto site, which was first developed

in 1973. The country has considerable experience of implementing large geothermal projects, and the

relatively developed status of the domestic industry (over 30 years' old) is conducive to growth.

Yet, only two projects are in the pipeline: the Los Azufres III project, which is scheduled to go online in

2014, with a net additional capacity of 30MW; and the Los Humeros III project, scheduled for 2015 and

with a net additional capacity of 25MW.

Overall, we believe that Mexico's non-hydro renewables industry will continue to expand, with capacity

growth to average 18.7% per year between 2013 and 2017.

Despite our expectations for growth, we have adopted a more conservative outlook for the industry to what

the Mexican government is proposing, as we have factored in a number of risks that we believe are likely to

hinder the development of the industry.

We believe the most pertinent issue is the lack of regulatory framework to support renewable energy

developers. The government will have to make renewable energy projects more cost-competitive and will



therefore need to consider offering some sort of financial subsidy to developers, for example a Feed-

in Tariff (FiT) programme.

Gas Gains Ground

Mexico Electricity Generation, By Source, TWh

Non-Hydropower Renewables Coal OilHydropower Natural Gas

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

200

400

e/f=estimate/forecast, Source: EIA, BMI

US Gas Changing The Landscape

The rapid expansion in Mexican imports of US natural gas is unlikely to slow substantially over the medium

term as new infrastructure is put in place to support insatiable demand. Supported by low prices and

plentiful supply from the US, Mexico's natural gas consumption for power generation as well as industrial

and residential use has been growing rapidly over the medium term and we believe this trend will continue

as new pipelines are built to bring US gas to consuming regions in Mexico. The Los Ramones pipeline will

provide the greatest capacity increase. The first stage of the pipeline is under construction, while the

tendering for the second is due to begin by the end of May 2013.

Industrial and residential users are one source of demand growth, but we are also seeing a shift in the

electricity sector, which is switching over to gas-fired generation from oil, where possible, to take



advantage of relatively cheaper input costs. Gas-fired electricity generation is estimated to have increased

by 10% per annum between 2010 and 2012, with further growth expected. We envisage gas as the fuel of

choice for the power sector going forward and have seen plans for other sources, such as nuclear, taken off

the table.

Natural gas imports from the US have thus been rising rapidly, up 50% y-o-y in 2011, 24% in 2012 and

17.5% in the first six months of 2013, compared to the same period in 2012 (according to EIA data).

However, the situation is still getting critical for Mexico. Not only is the country unable to import enough to

meet growing demand, but it also cannot justify or attract increased investment into domestic shale gas,

despite significant reserves, due to low prices as Mexico uses the US price bench mark Henry Hub which

remains below historic average and below a level which is financially feasible for new shale gas exploration

in Mexico. Pemex was forced to contact clients 15 times in 2012 to recommend cutting consumption of

natural gas or face incomplete deliveries, according to Reuters. It has also been forced to increase imports of

LNG, purchasing additional cargoes on the spot market to meet growing demand for natural gas.

Oil & Gas Pipelines

There are currently 13 natural gas pipeline interconnections between the US and Mexico, and several new

are being planned that should help to increase Mexico's import capacity. These include:

■ Los Ramones: Pemex is planning to construct a new pipeline, which when completed will run 750 milesfrom the Agua Dulce gas hub near Corpus Christi deep into the industrial heartland of Mexico. The firstphase of the pipeline, from the US-Mexico border to the Mexican town of Los Ramones (75 miles east ofMonterrey), is expected to come online as of end-2014. Moreover, as of May 2013, Pemex announcedthat it was accepting bids on the second phase.

■ Sierrita Lateral Project/ Northwest Pipeline: When completed, this pipeline will run from Tucson,Arizona (US) to Mazatlan, Sinaloa (Mexico). On the US side, Kinder Morgan will start construction in2014 on a segment extending a pipeline from Tucson to the border town of Sasabe and carrying 21.8mncubic meters per day (Mcm/d) of natural gas annually. Meanwhile, Sempra energy has won two contractsto build on the Mexican side. A 310 mile pipeline from Sásabe to Guaymas, carrying 21.8Mcm/d ofnatural gas is expected to come into operation by late 2014. Shortly thereafter, in 2016, a second segment,running 200 miles from Guaymas to El Oro and capable of conveying 14.44Mcm/d will begin operations.

■ Chihuahua Expansion Project/ Samalayuca Lateral Project And Encino-Jimenez Project: This projectincludes two main parts:

■ First, there is a planned pipeline running from Hueco (US) to El Encino, Chihuahua (Mexico). Thiswill involve building a connection from El Paso's Samalayuca Lateral pipeline in the US under the RioGrande and through to El Encino. Tarahumara Pipeline, a subsidiary of Fermaca, put forward thewinning bid to build the connection from the US border to El Encino, carrying 24.07Mcm/d, and ElPaso is set to extend the pipeline on the US side.

■ Second, within Mexico, TransCanada has been awarded a contract to connect El Encino toTopolobampo, Sinaloa, via an 18.97Mcm/d pipeline, expected in service by Q316.



■ Tamazunchale Pipeline Extension: This 146-mile project will extend TransCanada's TamazunchalePipeline from the state of San Luis Potosi through to the national pipeline system in Queretaro. Awardedin 2012 to TransCanada's Mexican subsidiary, it is expected to come online in Q114 and have a capacityof 17.84Mcm/d.

■ These projects will therefore ensure strong growth in the oil & gas pipeline infrastructure industry valueover the short term. Indeed we have revised up our outlook following the award of contracts and are nowforecasting growth of 11.4% in 2014.

■ Nuclear Back On The Table?

■ Despite cancelling plans for 10 new nuclear reactors in late 2011 in favour of gas power plants, nuclearcould be back on the table. The new National Energy Council of Mexico presented its first NationalEnergy Strategy in March 2013, outlining the direction of energy policy over the 2013-2027 period. Thestrategy highlighted the growing reliance on imported US gas, and noted that this was a threat to energyindependence. With Mexican domestic gas production unlikely to fill the gap, renewables unable toprovide the volume of electricity needed and other thermal sources in conflict with the law on climatechange, nuclear has surfaced as the best option. However, we do not believe much progress will be made.The high sunk costs and the availability of cheap gas make nuclear an economically unfeasible optionover the near term.

■ Water Infrastructure

■ A plethora of new water infrastructure contracts for pipelines, water treatment plants and desalinationplants will drive growth in the sub-sector - this is the main factor supporting our bullish outlook for theindustry, with 13% annual average growth anticipated between 2013 and 2017.

■ The largest project under construction is the Atotonilco water treatment plant. The first phase of the plant- pre-treatment - was completed in October 2012. The plant will have the capacity to treat 1.99mn cubicmetres per day. It is the largest plant of its kind in Mexico and one of the largest in the world, with the US$740mn investment being a force for growth in industry value. Another large project underway is the ElZapotillo aqueduct and pipeline, which is being built by Abengoa and Abeinsa. The US$566mn projectwill provide drinking water to 1.5mn people in León and the municipalities of Los Altos de Jalisco. Theproject was modelled as a PPP, with the joint venture (JV) operating the concession for 22 yearsfollowing a three-year construction period.

■ Combined with other investments in smaller plants, such as the Agua Prieta plant, ongoing investments inMexico's water infrastructure sub-sector have prompted a very bullish outlook for real industry valuegrowth.

Table: Major Projects - Energy & Utilities

Project Name Value (US$mn) Capacity/Length Companies Timeframe Status

Oil & GasPipelines

Guadalajara-Tamazunchalenatural gaspipeline 360 310 km

TransCanadaCorporation 2009-2011

Completed (June2011)

Guaymas - El OroNatural GasPipeline Project

321.9 km (5.1bcm/year) Sempra Energy -2016

Contract Awarded(October 2012;Part of US$ 1billion



Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/Length Companies Timeframe StatusNorthwestern GasPipeline Project )

Los Ramones Sur TAG Pipelines,GDF Suez

TamazuchalePipeline ExtensionProject (San LuisPotosi - Hidalgo-Queretaro) 500 235 km

Comision Federalde Electricidad,TransCanadaCorporation -2014

Announced(February 2012)

ChihuahuaCorridor GasPipeline Project 500

385 km (0.85 bcm/year)

TarahumaraPipeline -2013

Under construction(July 2013)

Sasabe (Arizona)to Guaymas (Northeast Mexico)Natural GasPipeline Project

500 km (7.7 bcm/year) Sempra Energy -2014

Contract Awarded(October 2012;Part of US$ 1billionNorthwestern GasPipeline Project )

Los RamonesNorte

TAG Pipelines,IEnova, PGPB

Cima de Togo-Venta de CarpioPipeline 57

108 km (70000 b/d) Pemex -2011

In tender/Tenderlaunched (January2009)

Power Plants &transmission grids

Los Azufres IIIgeothermal powerstation 50 MW

Mitsubishi ElectricCorporation,Mitsubishi HeavyIndustries,Comision Federalde Electricidad 2014-

Contract Awarded(September 2012)

Tecate PV Solarpower plant 450 MW SolFocus -2016 Announced

Cozumel windpower plant 60 MW

Mexico PowerGroup Announced

Zacatecas windpower plant 180 MW

Mexico PowerGroup Announced

Aeolus wind powerprojects (I and II) 112 MW Eoliatec At planning stage

Durango PV solarpower plant (phaseII) 60 180 MW Risen Energy

Contract Awarded(November 2011)

MarenaRenovables windfarm 1200 396 MW

MacquarieMexicanInfrastructureFund, PGGM,MitsubishiCorporation 2011-2013

Contract Awarded(March 2012 -Contract to supplyturbines won byVestas)

Canatlan PV solarpower plant 300 100 MW

At planning stage(December 2012 -Siliken abandonedproject; Stategovernment




Project Name Value (US$mn) Capacity/Length Companies Timeframe Statuslooking for projectfinance)

Bordo PonienteBiogas PowerPlant 55 MW

At planning stage(Contract to beawarded)

Oaxaca IV windpower plant

Acciona EnergiaMexico -2012

Under construction(Scheduled to startoperation onMarch 2012)

Oaxaca III windpower plant 102 MW


Completed(January 2012)

Oaxaca II windpower plant 102 MW


Completed(February 2012)

Piedra Larga windfarm, UnionHidalgo, Oaxaca 200 190 MW

Demex (Renovalia),Grupo Bimbo 2012-

Completed(October 2012)

Piedra Larga(Phase II) windpower plant,Oaxaca 138 MW

Gamesa,Renovalia Energy 2013-2014

Contract Awarded(August 2013 -Supply contractawarded)

Soto La MarinaNatural GasCompressionStation,Tamaulipas 90

Fermaca (50%),Engasa (50%)

Contract Awarded(August 2013-Enagas winscontract )

Aura Solar Iproject, BajaCalifornia Sur 30 MW

Martifer Group,Gauss Energia,Suntech PowerHoldings -2013 Under construction

Dos Arbolitos windfarm 70 MW Iberdrola

Contract Awarded(May 2013)

Ventika windpower plant 126.4 MW Cemex 2012-2014

In tender/Tenderlaunched (January2013 - Cemexseeking bidders)

Los Molinos Windfarm 102 MW Energeo -2014

At planning stage(January 2013)

Sureste windpower plant (PhaseI) 203 MW

Comision Federalde Electricidad,Enel 2014-

In tender/Tenderlaunched (February2013 - Tenderresultannouncementpostponed untilDecember 2013)

Yucatan Solar PVProject 360 150 MW isofoton SA 2014-2016

Approved (August2013 - MoU signedwith the Yucatanstate government )

El Porvenir windfarm 130 54 MW

Gemex, GrupoEcos, Soriana 2013- Under construction





Bordo PonienteBiomass andwaste plant 58 MW

BMLMX PowerCompany

Contract Awarded(January 2013)

Capo El PabellonSolar PV plant 149 29.8 MW 2011-2013

At planning stage(January2012 -Seeking projectfinance)

Bii Nee Stipa windproject (IV and V) 144 MW 2012-

Project financeclosure (January2012 - FinancingSecured)

Sureste I windfarm (phase II) 130 102 MW

CFE, ImpulsoraNacional deElectriciad, ENEL 2013-2014

Contract Awarded(November 2012 )

Durango PV solarpower plant (PhaseI) 84.5 20 MW -2012

Contract Awarded(November 2011)

Bii Nee Stipa IIwind farm PPP,Oaxaca 160 70 MW Gamesa, Enel -2012

Under construction(July 2012)

La Venta III WindFarm IPP, Oaxaca 202 MW

Gamesa, Iberdrola,CFE 2009-2012

Completed(January 2012)

Monterey landfill toelectricity projectexpansion 12 MW 2009- Completed

Rumosa I windfarm 10 MW

TurbopowerServices,D'QuadrantStrategies Completed

BaluarteHydropowerProject, Nayarit 480 MW CFE 2009-

Feasibility studies/EIA underway(June2009 -Environmentalimpact studyunderway )

La Angosturahydropower plant 7 MW Comexhidro 2011-

At planning stage(Constructionpendingenvironmentalimpact study)

Enel energyinvestments 400 MW Enel 2009-2012 At planning stage

Construction of LaYesca dam 750 750 MW ICA Construction 2009-2012

Completed (NOV2012 - dam wasofficiallyinaugurated)

Tabasco powerplant, IPP 633 300 MW

Abener Energia,Abengoa, GE 2009-2012

Completed(October 2012)

Nitrogen plant inBaja California 190 600 MW Sempra Energy 2009-2010 Completed





Oaxaca I windfarm 177 101 MW

CFE, EnergiasAmbientales deOaxaca 2009-2012

Completed (Q12012)

Extend &modernise powerlines in Veracruzand Chiapas 160

Electricas deMedellin(EDEMCO),Iberdrola, Elecnor 2009-

Contract Awarded(June 2009)

Los Humeros IIGeothermal PowerPlant, Puebla 61 1175 MW CFE, Alstom SA 2009-2012

Completed (April2012)

Transmission linesin Chihuahua 11.5 230 kV Abengoa 2009- Completed

Eurus wind farmexpansion,Juchitan deZaragoza, Oaxaca 550 250 MW Acciona, Cemex 2010-2011 Completed

Nuevo Pemexcogenerationpower plant,Mexico 640 300 MW

HSBC, ExportDevelopmentCanada, CreditAgricole CIB,Banco EspiritoSanto, La Caixa,Banobras, GEEnergy FinancialServices, AbenerEnergia, Abengoa,Santander,Scotiabank 2010-2012

Completed(October 2012 )

Jaliscotransmission lines 70 230 kV Iberdrola 2011-2013

Under construction(March 2011)

Norte II GasCombined Cyclepower plant IPP,Mexico 420 433 MW

Techint, SamsungConstruction &Trading (SamsungC&T), KoreaElectric PowerCorporation(KEPCO), GE -2013

Under construction(August 2011)

Mexicali PV solarpower plant 10 MW Baja Sun Energy

Announced(September 2011)

La Caridad IIcombined cyclepower plant 300 250 MW

Minera Mexico,Siemens -2014

Under construction(July 2013 )

Water

El Zapotilloreservoir 185

Fomento deConstrucciones yContratas SA(FCC) 2011-


Water supplysystem from ElRealito dam to thecentral state ofSan Luis Potosi 179 ICA Construction 2009-

Contract Awarded(May 2009)





El Novillo -Hermosillo waterpipeline, Phase I 180 km

ExploracionesMineras delDesierto 2011-2012

Under construction(Due to becompleted in June2012)

Agua Prietawastewatertreatment plant 171 Conoisa 2009-2013

Under construction(August 2013;Capacity- 8,500l/s )

Monterrey VI watertransfer systemconcession( Monterrey VI project)PPP 1100 365 km

NationalInfrastructure Fund(financer) 2012-2015

In tender/Tenderlaunched (PPPtender in 2012;Banobras tofinance 49% of theproject1.3 cubicmeters/day)

Atotonilco watertreatment plantPPP 740

Impulsora delDesarrollo y elEmpleo enAmerica LatinaSAB de CV(IDEAL), Acciona,Empresas ICA,Mitsui 2010-2013

Under construction(Oct 2012 - Firstphase (pre-treatment)completed;Capacity - 1.99mncubic metres)

Paso Ancho damand pipeline 220 100 km Conagua

At planning stage(Tender dueOctober 2013)

Independenciawater pipeline,(part of El Realito -San Luis Potosiline) 301 45 km 2011-

In tender/Tenderlaunched(Constructiontender due in April2011)

El Zapotilloaqueduct PPP(potable watersystem + ElZapotillo - Leonpipeline) 566 139 km Abengoa, Abeinsa 2011-2014

Contract Awarded(September 2011 -25 Yearconcessionawarded)

El Salitraldesalination plantPPP 33 2011-2013

In tender/Tenderlaunched (Open forbids until 22ndJuly 2011;Capacity - 21600cubic meters )

El Zapotillo damproject 655 -2011

Under construction(June 2011)

Mexico citydrainage project(Tunel EmisorOriente) 62 km

ConstructoraMexicana deInfraestructuraSubterranea 2009-

Under construction(June 2013 - First10 Km section putinto operation )

Mexico valleywastewatertreatment project(new AtotonilcoWastewaterTreatment Plant) 3760

Aguas Tratadasdel Valle deMexico (ATVM),Conagua 2010-2015

Under construction(June 2013- 74%Complete;Capacity - 3.6mtons of water perday )





Program for theSustainability ofWater Supply andSanitation Servicesin RuralCommunities III,(PROSSAPyS III) 500

Government ofMexico

Project financeclosure (US$250mn IDB loanobtained)

El Caracolwastewatertreatment 205 2012-2015

Contract Awarded(September 2012.Capacity of 4m3/s.)

Falcon-Matamorospotable waterpipeline project 524 264 km

Project financeclosure(September 2013-contract will bepartly financed )

Desalination plantin Baja California 40

OHL MedioAmbiente Inima





Residential/Non-Residential Building - Outlook And Overview

Table: Mexico Residential & Non-Residential Building Industry Data, 2011-2016

2011 2012e 2013f 2014f 2015f 2016f


Residential andNon-residentialBuildingIndustry Value,MXNbn 555.8 585.2 506.9 530.8 562.9 599.2


Residential andNon-residentialBuildingIndustry ValueReal Growth(%) 5.0 1.2 -17.1 1.0 2.5 3.2





Table: Mexico - Residential & Non-Residential Building Industry Data, 2017-2022

2017f 2018f 2019f 2020f 2021f 2022f

Residential and Non-residential Building Industry Value As% of Total Construction 49.0 48.7 48.5 48.3 48.1 48.0

Residential and Non-residential Building Industry Value,MXNbn 641.0 686.3 736.0 791.2 851.2 918.2

Residential and Non-residential Building Industry Value, US$bn 53.9 58.4 64.3 70.0 76.7 82.0

Residential and Non-residential Building Industry Value RealGrowth (%) 3.4 3.3 3.3 3.5 3.7 3.9

Residential and Non-residential Building Industry Value as %of GDP 2.9 2.9 2.9 2.9 2.8 2.8


Residential Construction Woes Weigh On Construction

The sharp drop in construction activity in Mexico over the course of 2013 can be largely attributed to the

crash in the housing market. Over the first three quarters of 2013, fixed investment into residential

construction has contracted by an average of 5% y-o-y in real terms, with this trend accelerating in Q3 to

-6.5% for the period. This trend should begin to stabilise in Q4 and in 2014 as the industry finds a bottom.

However, the prospects for recovery are uncertain, as a number of companies face bankruptcy and

government support for the transition to the new housing plan remains insufficient.

Indeed, whilst we see the broader residential and non-residential construction sector experiencing stabilising

in 2014, from an estimated -17% contraction in 2013, growth will reach just 1% for the year, indicating a

rebound is not on the cards, rather a slow recovery.



Residential Construction Pulls Down The Sector

Mexico Construction Fixed Investment, Real Growth, y-o-y, Residential And Non-ResidentialConstruction

Source: INEGI

Existing pressures on Mexican homebuilders resulting from over-supply and misplaced and poorly

implemented government housing policies to encourage the development of rural communities were

exacerbated over 2013. In early 2013, President Enrique Pena Nieto introduced a new housing policy which

would shift the focus of home construction back to the areas of demand. However, the measures led to

write-downs of land value and high cost outlays. Uncertainty over government support during the transition

weighted heavily on investor perception and subsequent fears over cash flow and the cost of capital created

a vicious cycle, with homebuilder equities tanking and bond yields spiking.

Indeed, of the four largest homebuilders, Urbi, Geo and Homex all defaulted on their debt. In line with our

view that Urbi and Geo would be hardest hit due to their high debt load and reliance on government

subsidies, the two companies were suspended from trading on the Mexican stock exchange in mid-2013.

Homex was temporarily suspended in late 2013 for delaying the release of its Q3 2013 results, in which it

eventually reported a MXN3.5bn (US$267mn) loss.



Ara is now the largest homebuilder in Mexico by market cap, and its share price has been the least

impacted by the homebuilder crisis. The company is both the least indebted of its peers, but was also the

least dependent on government subsidies, which helped to spark the initial crisis. The company is also

diversified outside of housing, and has valuable assets in commercial construction. We believe Ara is best

placed to emerge from the homebuilder crisis, and will be able to gain a substantial market share.

Strongest Left Standing

Mexican Homebuilder Equities, MXN

Source: Bloomberg. Geo suspended 29/07/2013, Urbi suspended 25/07/2013, Homex temporarily suspended

29/10/2013 - 08/11/2013.

In order to shore up the market, the government announced plans to provide financial support for the

homebuilders in order to support new housing construction, such as credit lines and guarantees for bond

issuances. However, whilst this should help to stabilise the market and support our outlook for a better

2014, it was too little too late for the market as a whole, and with most homebuilders in a financial black

hole, this will be a slow recovery unless further consolidation or government measures are put in place.



Housing Policy develops, But Cashflow Remains Problematic

President Enrique Peña Nieto's National Housing Policy (PNV) is now under way but cashflow concerns

still raise issues for Mexican homebuilders. There are three main goals that will be pursued in order to

improve the planning process and increase the provision of new housing.

■ Reduction of the housing gap: The plan aims to reduce Mexico's housing gap (the difference betweenthe housing stock and expected demand). It is estimated that there is a gap of around 9mn homes.According to a study by the IADB, 34% of Mexican families are homeless or live in poor quality homes.One method will be addressing access to capital through increasing private sector lending for mortgages.

■ Better coordination of government institutions: Part of the plan is to improve the planning processbehind the housing sector; to achieve this Nieto has proposed better coordination across the three levelsof government. This should help streamline the planning, regulatory and financing of new homes.

Better urban planning: Also addressing the planning process is an effort to reduce urban sprawl. This is a

continuation of a policy which has been mooted for a number of years, but has failed to take off thus far. In

order to address this issue, the government is pushing for more inner city and 'vertical housing', i.e.

apartment style buildings. Consequently, qualifications for housing subsidies will factor in location from

2014.



Slow Recovery For Residential Building

Mexico Infrastructure And Residential & Non-Residential Real Growth

Infrastructure Industry Value, Real Growth, % y-o-yRes/Non-Res Building Industry Value, Real Growth, % y-o-y

2010

2011

2012

e

2013

f

2014

f

2015

f

2016

f

2017

f

-20

0

20

e/f = BMI estimate/forecast. Source: BMI, INEGI, CMIC

The housing policy will address a major issue in the market, however, as seen, it is a painful transition for

the homebuilding sector.

Demand has shifted toward inner-city housing and away from government sponsored housing projects

located a considerable distance from the cities. Data from Infonavit show that lending has increased for

purchases of used homes versus new homes, showing the fundamentals for homebuilders are deteriorating.

Consequently, Mexican homebuilders have seen inventory increasing. The trend is likely to be linked to

location, with demand for used inner-city housing more favourable than new housing built outside of cities.

The government's broader plan to improve urban planning should support longer-term demand for new

housing in Mexico.

However, the PNV's focus on 'vertical' and inner-city housing will be a painful transition for homebuilders

for two reasons: firstly, apartment complexes are much more capital intensive than single homes; secondly,

these companies have a substantial stock of land located on the periphery of cities. Mexican homebuilders

have an undisclosed existing landbank, which is now not suitable for future projects under the government's



PNV. This land will likely need to be divested and could result in write-downs, considering the land is now

much less valuable, thus creating further investor caution.

Overall, these measures should prevent positive long-term support for housing sector improvements. Better

planning and coordination should help to alleviate some of the delays in the government's housing

programme and have been damaging to the companies active in the homebuilding sector. However, the

impact will generate short-term pain for some of those homebuilders that are most reliant on government

subsidies. Nieto outlined a two-year transition period to help these companies adjust; however, the details of

this assistance are yet to be announced.

Stronger Fundamentals

Long-term however, we are more optimistic toward the sector. The PNV is looking to address some of the

biggest challenges that have prevented growth in the sector, primarily targeting government inefficiencies

and better matching housing demand with supply to create a more sustainable long term housing market.

Further focus will be needed on increasing access to finance. The penetration of loans in Mexico is one of

the lowest in the region, with assets as a percentage of GDP at around 40%. Client loans per capita are US

$1,900 - the lowest in the region. Hence, increasing access to, and provision of, capital is crucial. We are

seeing an improvement in this, with a shift towards consumer lending by the major banks. We are

forecasting loans per capita to reach US$3,800 by 2017. Lending for the housing sector has been growing

substantially over the last few years, and we expect growth to support the expansion in total loans. Credit

for housing reached MXN437bn in December 2012, compared with just MXN265bn in December 2007.



Longer-Term Financial Support

Mexico Client Loan Forecasts

Client loans, MXNmn (LHS)Client loans, % of GDP (RHS)

2008

2009

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

5,000,000

2,500,000

7,500,000

15

20

25

10

30

e/f = BMI estimate/forecast. Source: BMI, CNBV

Table: Major Projects - Construction And Social Infrastructure


Construction - Commercial

Dragon Mart,retail complex,Cancun 1540

283600 squaremetres Dragon Mart 2013-

Contract Awarded(Delayed due toseries ofcontentious legaldisputes )

Four HamptonInn hotels 48 Hilton Worldwide -2013

Social Infrastructure - Healthcare

Tlalnepantlahospital PPP,Mexico 60 120 beds

Aldesa EnergiaRenovables,Marhnos, SocialSecurity Instituteof the State ofMexico Under construction




Industry Risk/Reward Ratings

Mexico - Industry Risk/Reward Ratings

Mexico remains in second place in this quarter's Infrastructure Risk/Reward ratings (RRRs) with a score of

58.9 out of 100. The country has seen steady improvements in the business environment over the past 18

months, capped off with the election of pro-business and pro-private sector (at least for infrastructure)

Enrique Peña Nieto. The large industry size and robust growth outlook combined with a relatively safe

operating environment mean Mexico is a good all-rounder, propelling it into the upper levels of the table.

Mexico scores 56.6 for Rewards and 64.0 for Risks.

Rewards

Industry Rewards

Mexico's construction industry is the second largest in the region and is part of the reason the country

achieves a favourable overall score. The sizeable scale of the market indicates significant opportunities for

potential investors that are able to break into a market currently dominated by a few large players. However,

compared to some frontier markets in the region Mexico's growth is less impressive, which shaves off

points from the industry rewards score, indeed 2013 has seen the industry enter a recession as a result of

institutional delays and the crashing of the housing market. However, the country's future growth trajectory

is more positive and stable. We expect growth to follow along a higher growth path from 2014 once projects

under the US$314bn National Infrastructure Plan begin to move forward, allowing it to achieve an above

average score of 52.5 out of 100.

Country Rewards

Mexico's infrastructure sector scores well in this category, with 64.3. The power infrastructure in the

country is reasonably good and, with a large number of planned power generation projects in the pipeline, it

is expected to further improve. Financial infrastructure is relatively strong, the equity and bond markets are

both very liquid, though the banking sector is relatively under-developed in terms of loan penetration.



Risks

Industry Risks

Mexico's construction sector benefits from a well-established local industry; however, a number of larger

international players also have operations in the country, especially the Spanish companies that have made a

name for themselves in the energy and utilities sector. Mexico scores well for Industry Risks, with 70.0,

with the introduction of a PPP law improving the operating environment for concessions. The law will add

greater security for companies operating in the sector and could see a proliferation of this type of project.

Country Risks

Policy continuity is strong and we forecast only an improvement in the government's attitude towards

private investors in the sector. However, on a regulatory note, legal infrastructure in the country is highly

unimpressive and institutions are unsophisticated. In addition, corruption is a common problem and weighs

on the Country Risk score. However, President Nieto is looking to address the convoluted planning and

institutional processes and has embarked on an impressive reform agenda. Mexico scores 60.0 for this

indicator.



Latin America - Infrastructure Risk/Reward Ratings

BMI View: Substantial opportunities for private investors are prompting international companies to

increasingly eye up the Latin America region. However, high risks, stemming from weak institutions,

populist policies, poor regulations and security and financial risks will prevent the region as a whole from

realizing its full potential. As such, we believe the region will offer average Risk and Rewards scores.

Against this backdrop, Chile and Mexico have emerged as outperformers, closely followed by Colombia

and Peru, with the former showing clear signs of progress.

The key themes and trends we have identified in our Latin America Risk/Reward Ratings (RRRs) are:

■ The scores for the Latin America are low on average, with only one country scoring above 60 (Chile).

■ Chile maintains the top spot ahead of Mexico. The country has long been highlighted as our favouritemarket in terms of risk, with its rewards indicator now catching up. Brazil remains at an unimpressivefifth position.

■ Colombia and Peru have held their third and fourth positions respectively. Further upside to IndustryRewards scores is becoming more realistic as we are finally seeing movement on long delayed projecttenders; however we remain concern on a Risks front due to persistent country and industry risks.

■ Argentina, Venezuela and Ecuador remain the riskiest markets in South America and have seen theiralready low rewards stagnate this quarter as election spending booms in 2012 are no longer factored intoour ratings.

■ Central America continues to underperform South America, owing to poor Industry Rewards scores,which have been a result of limited scale.

■ Costa Rica and Panama stand considerably above the other Central American markets in sixth andseventh place respectively, whilst Nicaragua has seen a strong improvement in its Industry Rewardsscore over recent quarters.

■ Growing divergence in Central America, with the weakest markets seeing further downgrades.



Latin America Underperforms Globally

Latin America Risk/Reward Ratings

Scores out of 100, Source: BMI

Top Two Out On Their Own

Chile and Mexico are the clear outperformers in the Latin America region. Both countries offer stable

political and regulatory environments as well as attractive, if not spectacular rewards.

Chile has long been our favourite market in terms of risk, and rightfully occupies the top ranking in our

Latin America ratings table. The evidence of this is not only in the amount of international investment

pledged for the country's infrastructure sector, but also the type of investor in the sector. Chile has

received significant investment from pension funds and private equity players; these investors typically

have a low risk mandate, making their entry a ringing endorsement of Chile's attractive Risk/Reward

balance, where developed market risk meets something approaching emerging market yield. Even with

presidential elections due to take place in December 2013, we see little potential for an abrupt change in

policy that would threaten infrastructure investment. We have seen rising tension amongst ongoing student

protests; however we believe it is likely that former President Michelle Bachelet will win the election with

little controversy. New concessions are expected to come to market in 2013, and we believe they will act as



a litmus test for investor perception. With existing assets being sold at high prices, we expect significant

interest to be registered.

In terms of new construction projects, we do highlight rising concerns over permitting procedures, with a

number of new power plant projects getting waylaid at the permit stage. This is primarily due to strict

environmental policies which are being challenged by the need for expanded infrastructure. Chile will need

to balance these two pressures in order to instill investor confidence in the permitting procedure and ensure

delays at this phase are kept to a minimum. Improvements here could bolster scores for both Industry

Rewards and Risks.

Mexico is also well placed in second position. The country has seen steady improvements in the business

environment over the past 18 months, capped off with the election of pro-business and pro-private sector (at

least for infrastructure) Enrique Pena Nieto in late 2012. Following a transition period, which has led to

weaker growth over 2013 - contributing to Mexico's current Risk/Reward rating falling below 60 - we hold

a stronger outlook for the medium term, and anticipate a recovery in the country's score over the next six

months. In August, Nieto announced a US$315bn National Infrastructure Plan which outlines plans for

expanded private sector investment into the country. These opportunities should be matched with expanded

investor interest, following the passing of a new public private partnership law in 2012. In addition to stable

business environment improvements, Mexico's construction sector is the second largest in the region (after

Brazil), offering scale to potential investors able to break into the market. Most successful in this effort have

been Spanish companies (such as OHL and Acciona), who have leveraged off cultural ties to establish

subsidiaries in Mexico which are successfully competing with the domestic majors (including Empresas

ICA). .



Rewards Plateau, Risks Decide The Leaders

Latin America - Top Four Risks & Rewards Markets


Best Of The Rest: Colombia And Peru

After the top two, we see a plateau of average scores, where a combination of high rewards and equally high

risks leave the investment opportunities in these countries less appealing. Even though recent quarter has

seen Colombia and Peru leap frog regional powerhouse Brazil to settle in third and fourth positions

respectively in our regional ratings table, we remain cautious toward these markets. Strong rewards are

undoubtedly on offer, but there are persistent risks. The presence of the FARC in Colombia and the Shining

Path in Peru remains concerning for the sector. Both groups have shown an inclination for targeting the

infrastructure and energy sphere by attacking both personnel and assets, placing high costs on developers

for insurance premiums.

On the industry specific front, we also remain concerned about the realisation of rewards. Colombia and

Peru have ambitious concession programmes in the pipeline; however, a poor precedent in executing these

programmes (owing to corruption and regulatory incapacity), and a lack of progress in recent years, has left

us cautious. We do highlight that Colombia seems to be making greater progress in moving forward its



concessions than Peru. Indeed, recent progress on highway tenders leads us to hold greater optimism for

Colombia over the near term. The country has registered significant interest in its first tenders under the 4G

concessions package, and the government recently approved the bidding process for nine concessions,

representing a total investment of US$7.4bn. This sets a strong precedent which could see the country

improve its Industry Rewards scores over the coming quarters.

Brazil's Faded Glory

Brazil has settled into fifth position in the rankings following several quarters of consecutive downgrades,

falling from third place with a score of 58 in January 2012, to fifth place with a score of 54.1 currently. The

country undoubtedly offers an attractive combination of large-scale (it has the biggest industry value in the

region) and strong growth potential. This is mainly due to its substantial resource base - the country is

currently implementing PAC II, its US$600bn growth acceleration programme (2010-2014) - and the

hosting of two international sporting events, which is adding a sense of urgency to investments. However, a

combination of institutional shortcomings, lack of transparency at the tendering stage, weak regulations and

increasing government intervention in the sector, have resulted in the country failing to meet its growth

potential and us questioning the potential to realise these rewards.

Over the long term, new regulations, new tendering rules and promises of increased return on investment

are being put forward by the government; however, given the precedent set by Brazil's institutional capacity

thus far, we have limited confidence that these new measures will entice international private investors back

to the market and therefore have only factored in partial realisation of these investment plans. Indeed, the

first few test cases for the government's BRL480bn (US$235bn) concessions programme were far from a

ringing endorsement of the country's appeal to private investors. Of the two highway concessions released

to investor, one had received no bids; whilst underwhelming interest was seen in the first pre-salt licensing

round. Airport and rail concessions have encountered multiple structural alterations and as expected, have

been delayed.



Downward Spiral

Evolution Of Brazil's Infrastructure Risk Reward Ratings, 2010-2013


Populist Policies Perturb Investors

Populist Policies Perturb Investors

For Argentina, we believe its Risk/Reward scores fully price in the unattractive operating environment

caused by import restrictions, capital and FX controls, excessive government intervention and high

inflation.

Argentina is now classified with Venezuela and Ecuador, as presenting the highest level of investor risk in

Latin America. All three countries have unattractive and unpredictable business environments, which deter

investors with even the strongest risk appetite. The impact of election spending in all three countries had

artificially inflated industry growth in 2012, but our expectation of an abrupt slowdown in growth in 2013

has materialised and a normalisation in growth in line with broader macro-economic trends has seen

Industry Rewards across all three countries downgraded.



No Good Angle

Venezuela, Argentina, Ecuador - Risks & Rewards Scores


Scale Just One Problem For Central America

The Central America region is a mixed bag; whilst opportunities are on offer across the region, the risks in

some countries are prohibitive. High levels of violence and exposure to international instability makes the

region a risky bet, particularly considering the small scale of industries. Across the region, we have seen

opportunities in the power sector - especially renewables, which are being pursued on an ad hoc basis.

Freight transport projects, including, and in response to, the Panama Canal are attracting investor

interest. Besides the expansion of a number of existing ports to capitalise on trans-shipment potential,

alternative canal projects have been floated across the region to compete with the Panama Canal. In

Nicaragua, a US$40bn canal project has been awarded to HKND under a 50-year concession, with the

company seeking international investors to help foot the bill. In Guatemala and Honduras dry canals are

also being proposed. These project present considerable upside potential to the region's Industry Rewards,

but we remain unconvinced that they will be realised given the considerable cost, and limited demand for

additional bi-oceanic crossings in the region.



Divergent Performances

Central America Construction Industry Real Growth

Panama Costa Rica NicaraguaEl Salvador Honduras Guatemala

2013 2014 2015 2016 20170

5

10

15

20

25

2013-2017=BMI forecast, Source: National Statistics, Central Banks, BMI

Indeed, despite some major projects in the pipeline, on average, Central American countries score below

South American ones in terms of Rewards. This is primarily due to their small populations and economies,

which have kept the scale of infrastructure development in most of Central America to a minimum. At the

same time, the dependency on official development assistance is substantial. This lack of scale has fed into

poor industry rewards for most countries in the region.

We see little upside potential in the short-term for countries further down the table such as El Salvador,

Honduras and Guatemala. While private procurement of infrastructure could be a way of addressing

infrastructure and budget deficits, the structural problems in the wider business environment - ranging from

high levels of political risk stemming from heavy government interference in business, to high levels of

crime and corruption, especially drug related violence - continues to keep investors at bay.

We have held a more positive short term outlook for Nicaragua off the back of a housing boom and growing

project pipeline. This positive outlook has translated to growth in Industry Rewards. The country's Industry

Rewards score has experienced an almost 20-point increase over recent quarters, pushing the country's



regional ranking up to eleventh position. A longer-term support to our growth outlook is possible as a

number of high value and large-scale construction projects have been announced for the country, which if

approved, would see billions of dollars of investment in the country (although not pricing in the ambitious

Nicaragua Canal). At the same time, we have seen gradual improvements in the business environment,

although it remains a risky market.

Panama and Costa Rica remain the region's outperformers, pulling in scores above the regional average

Risk/Reward Ratings. Both have optimistic growth outlooks, with Panama playing host to some of the

largest projects under way in the region - namely the Panama Canal expansion. We believe this robust

project pipeline will see Panama report the world's second highest construction sector growth in 2013. This

has already started to be reflected in both its Risk/Reward Rating and regional ranking, with Panama

registering record gains in its ratings scores and moving up to seventh position this quarter, right behind

Costa Rica in sixth place. For both countries, the growing precedent for successfully procured large-scale

infrastructure projects will only boost their profiles in the coming years. We do highlight two risks in these

regional outperformers; the first is labour issues in Panama which have seen the Canal expansion delayed.

In Costa Rica, the suspension of a highway concession awarded to Brazil's OAS could deter future investors

as political interference in the market sets a worrying precedent. Indeed, the OECD has recommended Costa

Rica improve regulations surrounding public-private partnerships in order to attract more investment into

the country's transport infrastructure sector.



Table: Latin America Infrastructure Risk/Reward Ratings

Rewards Risks

IndustryRewards

CountryRewards Rewards

IndustryRisks

CountryRisk Risks

InfrastructureRR Rating

RegionalRanking

Chile 50.0 69.9 57.0 80.0 70.5 74.3 62.2 1

Mexico 52.5 64.3 56.6 70.0 60.0 64.0 58.9 2

Colombia 47.5 69.9 55.3 57.5 57.3 57.4 55.9 3

Peru 50.0 63.1 54.6 45.0 62.6 55.6 54.9 4

Brazil 50.0 55.2 51.8 52.5 64.0 59.4 54.1 5

Costa Rica 52.5 58.5 54.6 40.0 60.6 52.3 53.9 6

Panama 52.5 41.3 48.6 57.5 53.0 54.8 50.4 7

Ecuador 62.5 42.3 55.4 25.0 41.1 41.1 49.2 8

Argentina 47.5 52.4 49.2 20.0 37.8 30.7 43.6 9

Belize 45.0 43.4 44.4 27.5 38.5 34.1 41.3 10

Nicaragua 40.0 27.9 35.8 25.0 38.8 33.3 35.0 11

Venezuela 35.0 37.7 36.0 20.0 36.0 20.0 34.1 12

Honduras 35.0 28.3 32.7 30.0 40.0 36.0 33.7 13

El Salvador 20.0 37.7 26.2 42.5 50.1 47.0 32.4 14

Guatemala 15.0 29.8 20.2 30.0 52.6 30.0 27.2 15

RegionalAverage 43.7 48.1 45.2 41.5 50.9 46.0 45.8 -

*Scores out of 100. Source: BMI



Market Overview

Competitive Landscape

Table: Key Company Financial Data

Name Sector

LatestFYEarnings

MarketCap (US$)

Revenue(US$)

Netincome(US$)

Total Debt/Ebitda

InterestCoverageRatio

PERatio

CEMEX materials 12/2012 12,967.2 14990.4 -903.9 6.34 0.94 NA

OHL MEXICO construction 12/2012 4,441.9 1527.9 392.4 2.94 3.52 9.69

EMPRESAS ICA construction 12/2012 1,204.7 3642.3 89.8 11.37 1.40 NA

DESARROLLADORAHOMEX homebuilder 12/2012 65.1 2187.2 121.4 5.42 6.00 NA

CONSORCIO ARA homebuilder 12/2012 511.4 495.5 42.5 3.77 17.38 14.25

PROMOTORA YOPERADORA DE INF construction 12/2012 4,501.9 349.5 138.2 3.00 3.56 27.15

CORP MOCTEZUMA-SER materials 12/2012 2,670.2 692.3 157.1 0.01 737.55 20.66

IMPULSORA DELDESARROLLO Y E construction 12/2012 6,819.9 1102.9 21.2 8.58 2.06 68.92

GRUPO MEXICO SABDE CV-SER B mining 12/2012 24,108.6 10182.9 2364.0 1.18 14.94 11.81

GRUPOAEROMEXICO SABDE CV airport 12/2012 984.9 3010.4 100.6 1.63 1.68 9.65

GRUPO AEROPORTDEL SURESTE-B airport 12/2012 3,904.1 389.5 157.9 0.11 113.13 21.99

GRUPO AEROPORTDEL PACIFIC-B airport 12/2012 2,965.6 376.2 134.8 0.68 20.69 20.46

ABENGOA SA power/water 12/2012 2,220.0 10008.3 161.3 9.41 1.30 10.37

TRANSCANADACORP pipeline 12/2012 30,857.2 8012.7 1355.0 5.62 2.02 21.67

IBERDROLA SA power 12/2012 38,046.7 43978.5 3652.8 4.58 2.57 10.19

ACCIONA SA power/water 12/2012 3,064.5 9021.7 243.5 6.13 1.31 14.18

INFRAESTRUCTURAENERGETICA NOVA energy 12/2012 4,852.3 607.6 194.0 1.58 20.03 25.01

*exchange rates accurate as of 12/12/2013. Source: Bloomberg

Mexico's infrastructure and construction sectors present a mixed trend in terms of local and international

dynamics. While the transport and residential building sectors are dominated by domestic companies, the

power and water sectors have seen considerable market share taken by international companies, mainly



from Spain. However, across all sectors, there is an abundance of companies with an established presence,

making it difficult for new entrants to gain a foothold. The greatest potential lies in the energy and utilities

sector, with private investment welcome in electricity and water, and the potential for oil liberalisation to

open up a sector to new entrants.

The infrastructure sector in Mexico is dominated by domestic companies, namely Empresas ICA, IDEAL,

and Spain's OHL's Mexican subsidiary - OHL Mexico - although companies such as CICSA and PINFRA

also have some share of the market. These companies dominate contracts for EPC and have a stronghold in

the transport concessions sector. OHL Mexico has six toll road concessions and is the largest operator of

urban highways in Mexico. IDEAL also operates six toll roads. ICA operates 11 highways and 13 airports

through subsidiary Grupo Aeroportuario Centro Norte (OMA). The company is one of the largest players

in the construction of highways.

As well as OMA, which operates 13 airports, the largest airport operators in the country are all domestic,

including Grupo Aeroportuario del Sureste (ASUR), which operates nine airports and Grupo

Aeroportuario del Pacífico (GAP), which operates 12 airports.

Another sector under the construction infrastructure banner that is dominated by domestic companies is the

residential construction industry, which has four main players that account for the majority of the market:

Ara, Urbi, Homex and Geo. However, the crash in the housing market in 2013 has left the competitive

landscape in the industry in a state of flux. Urbi and Geo have both had their shares suspended from the

Mexican stock exchange (and have thus been removed from our table above). Ara is now the largest

Mexican homebuilder by market cap, whilst Homex has lost 90% of its value in the year to date (to

December 12 2013).

Mexican homebuilders were substantially over-extended under former housing policies which focused on

construction of housing estates in rural areas and provided substantial subsidised funds for house purchases.

However, a substantial shift in demand to urban areas, which precipitated the government's new housing

plan, which undermined the value of land assets held by housing companies, placed pressure on cash flow

and concerns over debt servicing - with many forced to restructure debt.

The area where international companies have seen the most success is the utilities sector. The electricity

sector is dominated by the state-owned Federal Electricity Commission (CFE), which generates, transmits

and distributes electricity; however, the company has been investing in generation and transmission

expansion, providing EPC contract opportunities for international companies. At the same time, CFE has



been using the Independent Power Producers (IPP) model to expand capacity, especially in the renewables

sphere. According to CFE, 22.67% (equal to around 12GW from 22 plants) of its generating capacity is

from power plants, which were built using private sector capital through the Productores Independientes de

Energía (IPP) model. Spanish energy major Iberdrola is one of the largest players in the market in this

sense. However, Acciona has taken a sizeable chunk through wind power projects. Acciona is the biggest

owner of installed wind power in Mexico, with 556MW of installed power and 65% of the wind turbine

market as of March 2012, when its Oaxaca wind complex was inaugurated.

The Spanish companies have been the most active international investors, drawing on cultural ties to

establish a strong presence in Mexico. Following a number of contract awards in 2011, Abengoa reported

that as of September 2011 its Mexican order book stood at EUR1.1bn (US1.3bn) - equal to 15% of the

company's total E&C order book. Water has been another area of strong project awards for Abengoa and

Acciona. The country has used PPPs to some success in the water sub-sector, and this has provided an entry

point for Spanish companies. Both electricity and water hold the most significant potential for future growth

and this bodes well for continued contract opportunities for international investors.

While the electricity sector has welcomed private capital, the energy sector is mostly closed off to

international companies, with NOC Pemex controlling the sector. However, the potential for energy

liberalisation following elections in 2012 could open up the oil industry to international investors. If this

were to happen it would not be overnight, although with President Enrique Pena Nieto announcing his first

proposal for energy liberalisation in August 2013, we see greater potential for some opening up of the sector

to take place. If reforms are wide-reaching enough, there is huge potential for companies to access Mexico's

oil sector, which has suffered from a lack of investment and technological expertise.

Private sector activity in the energy sector thus far has been constrained to services and transport. In the

services sector, ICA through its joint venture with Fluor is the biggest beneficiary of engineering contracts

from Pemex. In the pipeline sector, Canadian pipeline operator Transcanada is a major player, operating

the 305km Guadalajara pipeline and the 130km Tamazunchale gas pipeline. In February 2012, the company

was awarded a US$500mn contract to build own and operate the 235km extension of the Tamazunchale

pipeline. The project is supported by a 25-year transport contract with Mexico's state-owned power

company CFE. The company is looking to expand its presence in Mexico. US company Sempra Energy is

another major player in the midstream segment in Mexico and launched an IPO of its Mexican unit in

March 2013, called Infraestructura Energetica Nova.



Company ProfileCemex

SWOT Analysis

Strengths ■ Huge global presence - geographic diversification reduces country risk.

■ One of the three majors in the global cement industry.

■ Cement supply contract for Panama Canal expansion.

■ Strong asset portfolio.

Weaknesses ■ Cement and construction are highly cyclical, a weakness during global economic

downturns.

■ Lack of sector diversification.

■ Exposure to European market has been a persistent source of weakness.

Opportunities ■ US construction sector is expected to continue its recovery, with Cemex benefitting

through its substantial US assets.

■ Fuel prices are expected to remain high globally, filtering through the increased

electricity costs - a key input for cement production.

■ We are forecasting an expansion in construction activity in Mexico over the medium

term.

■ Asset swap deal with Holcim in Europe should improve synergies in operations and

reduce the drag from Europe.

Threats ■ UK and Spain - two key markets - are expected to experience sustained weakness in

the construction sector.

■ Increased competition in the Mexican market.

■ Mexican housing sector will remain weak over the near term.



Company Overview Cemex is the leading cement manufacturer in Mexico and the world's third largest.

About 75% of Cemex's sales come from cement. It also makes ready-mix concrete,

aggregates and clinker (an intermediate product used to make Portland cement).

In 2000, Cemex became North America's largest cement company, with the acquisition

of the US-based Southdown. That year, it also received an upgrade to investment grade

from rating agency Standard & Poor's (S&P).

The company is truly global, with operations not just in the US, but also in Central and

South America, South East Asia, Australia and the UK/Europe. In Mexico, Cemex

operates 15 cement plants, 220 ready-mix facilities, 67 land distribution centres and

eight marine terminals. Facilities are located on the Atlantic and Pacific coasts, enabling

Cemex to benefit from low-cost maritime transportation to the Asian, Caribbean and US

markets.

Cemex has been the best performing of the major cement companies following a debt

restructuring precipitated by the financial crisis. The company remains one of the best

placed to take advantage of inconsistent global construction growth; however, its

European operations have been the major concern for investors and drag on profits.

News that the company is entering into a number of transactions with Holcim to

optimise existing asset portfolios in Europe should provide support to the European

operations and presents opportunities for further share price gains over the coming

months.

Cemex has outperformed other cement majors in terms of share price gains since it

restructured its debt in 2011, falling to a low point of MXN3.44 on October 3rd 2011.

Following a number of measures to tackle debt including raising cash and offloading

assets, in addition to our expectations of recovery in some of Cemex's core markets (in

particular the US), we outlined potential for share price gains to continue (see, Cemex

Refinancing Deal Provides Further Relief, 14 September 2012). In the year to date, the

Cemex's share price is up 20% (to reach MXN14.89 as of December 11th), compared

to peers Holcim (down 5.2%) and Lafarge (up 6.7%).

Much of the company's strength has come from its US operations, which had been a

cause of much stress during the US homebuilding crisis. With a recovery now underway

in the housing market and the US construction sector back in the black following seven

years in the red, Cemex has seen sales growth from the region, its second largest

accounting for 22% of revenues.

Europe however has remained a persistent weakness, and a drag on overall

performance. Operations in Northern Europe and the Mediterranean account for 36% of

revenues (during the first six months of 2013), however both regions saw revenues fall,

a trend which has broadly been in place for a number of years. Indeed, whilst we

believe that the worst of the construction slump across Europe is over, the general



outlook remains weak. Bright spots such as the UK and Germany will be offset by

continued weakness in Spain and Central and Eastern Europe.

Against this backdrop, the strategic agreement on asset optimisation between Cemex

and Holcim should help to shield both from the weaker markets and better align assets

which will help reduce costs and improve margins to help reduce the drag on profits.

Through the agreement, Cemex will acquire Holcim's assets in the Czech Republic,

whilst Cemex will divest its western German assets to Holcim (although retaining its

assets in the rest of Germany). The deal also includes an agreement to work together in

Spain, a market which has experienced a considerable contraction in cement demand.

Cemex will hold a 75% controlling interest in the Spanish venture, which will have an

estimated market share of around 22%. As part of the deal Holcim will pay Cemex

EUR70mn.

The transactions, which are hoped to allow the companies to optimise existing assets,

is expected to lead to a recurring EBITDA improvement for both Holcim and Cemex of

between EUR20mn and EUR30mn as of 2014 according to company press releases.

The move should help to reduce one of the biggest drags on Cemex's overall

performance, which should in turn unlock further share price gains.

Cemex generates 38% of its revenues domestically and Mexico has been a major drag

on performance over 2013. Following the leadership transition which saw President

Enrique Pena Nieto elected, a lull in infrastructure spending, combined with a crisis in

the homebuilder market following the new housing plan, has seen demand for cement

and aggregates struggle to reach the heights seen in previous years. Cemex reported a

6% y-o-y decline in sales in the nine month period, with an 11% y-o-y decline noted in

Q3 2013 alone. We anticipate Q4 2014 to be equally as difficult, but expect a recovery

in 2014, when the government's US$315bn National Infrastructure Plan moves forward

and energy sector reform will hopefully drive expanded demand from hydrocarbons

exploration and production.

Indeed, over the next 12 months, as we anticipate a recovery to take hold in Mexico's

construction sector, we should see an improvement in Cemex's financial results relative

to its peers. Indeed, with the European construction sector poised for recovery, Mexico

is the last piece of the puzzle for a company which has staged an impressive comeback

from the verge of bankruptcy.



Table: Cemex - 9M13 Financial Data

Sales Operating EBITDA Net income

2012 2013 % Change 2012 2013 % Change 2012 2013 % Change

Cemex,US$mn 11,274 11,353 0.7 2,008 2,001 -0.3 -411 -512 24.6

Source: Cemex



ICA

SWOT Analysis

Strengths ■ Mexico's biggest construction company in revenue terms.

■ Maintained profitability throughout the recession in Mexico's construction and

infrastructure sector.

■ Move into the public-private partnership (PPP) sector has produced major

concessions for the company.

■ Strategic partnership with Pemex.

■ Partnership with MECO in Costa Rica allows it strong prospects in Central America.

Weaknesses ■ Debt levels are high (increasing, net debt stands at MXN40bn as of March 31 2012,

with net debt at nine times EBITDA).

Opportunities ■ Expansion into new markets in the region, including Peru, Colombia, Panama and

Costa Rica.

■ Expansion into mining infrastructure in Peru through strategic acquisition.

■ The company is a significant beneficiary of the government's NIP, which is due to

enter its second round in 2013.

■ Mexico's construction sector is expected to rebound in 2014.

■ Government has passed a new PPP law which will improve investor protection and

regulations surrounding projects.

■ US$315bn National Infrastructure Plan will create contract opportunities.

■ Energy sector reform should benefit ICA through its ICA Fluor partnership which is a

major contractor for Pemex.

Threats ■ Government struggles to successfully procure projects, many poorly structured.

■ Depreciation of Mexican peso would make dollar denominated debt repayment more

expensive.



SWOT Analysis - Continued

■ Entrance of new players into the energy sector if energy reform is passed could be

detrimental for current dominant market position.

■ Potential for recession in the construction sector to persist in 2014.

Company Overview Empresas ICA is Mexico's largest engineering and construction company. ICA is

involved in the construction of infrastructure works; urban and industrial construction;

and the operation and maintenance of roads, bridges, ports and tunnels. Furthermore,

ICA participates in contracts to construct buildings and manage water distribution and

waste disposal plants. ICA's subsidiary, Viveica, manages the company's real estate

products, namely residential developments, shopping centres and office buildings.

ICA has four main businesses: civil construction, industrial construction, operation of

infrastructure and housing.

Strategy Our expectation that Mexican infrastructure company Empresas ICA would see a

rebound in its share price following a sharp sell-off over recent months is playing out.

Signs that Mexico's construction sector is recovering from a period of stagnation as a

result of political transition are being seen with the announcement of the US$315bn

National Infrastructure Plan. This plan could unlock Mexico's long-term growth

potential, with ICA best placed to benefit. We have consequently re-initiated a bullish

macro-industry strategy for the sector, highlighting ICA as our preferred company.

Since late 2011, we have been highlighting Empresas ICA as the company in the best

position to realise the rewards in Mexico's infrastructure sector (see 'Strong

Fundamentals Support Our Optimism For ICA Over IDEAL', 14 October 2011, '

Empresas ICA Outperformance View Playing Out', 16 March 2012 and 'Positive On

ICA's Strategic Direction', 30 May 2012 ). However, the fundamentals for the sector

have looked uncertain. Political transition and poor project selection under the previous

government had created a bottleneck in the project pipeline during the current

administration's first few months in office. This led to a period of weak infrastructure

activity. These issues are currently being addressed, with the first sign of progress

being the announcement of the eagerly awaited new National Infrastructure Plan

(2013-2018). The plan, announced by President Enrique Peña Nieto, outlines US$315bn

in infrastructure projects and will be heavily focused on new concession projects and

public-private partnerships (PPPs), with 60 road projects, seven airports, seven ports

and three railways all included in the plan.

Over the short term, there remain risks to the company's full year 2013 results. The

Q313 results posted by Mexican construction and engineering company Empresas ICA



support our view that whilst things are improving, obstacles for this recovery remain

and will be unlikely to fully take hold until 2014. The company's results have

disappointed throughout the year, and ICA has now downgraded its full year revenue

outlook to flat growth from previous target of 9-12% growth (as of the Q1 2013 results

presentation). The company did however maintain its EBITDA target at 13-16% growth.

Despite this, we continue to highlight the more encouraging aspects of the company's

results. EBITDA and operating margins have improved substantially over the course of

the year, with operating income up 70% year-on-year (y-o-y) in Q3 2013 (versus Q3

2012), and 50% y-o-y in January-September period. Operating margin stands at 15.8%

y-o-y for the nine month period, compared to 8.3% y-o-y for the same period in 2012.

Much of this gain has been driven by the positive performance in the company's

highway concessions and airports unit.

The construction unit has been, and remains ICA's weak spot, with revenues down 31%

y-o-y for the first nine months of the year compared to the same period in 2012.

However, revenues have been increasing on a quarter on quarter basis, and

construction backlog remains stable.

One risk we had previously highlighted is the deterioration of Mexico's mining sector.

This risk appears to be playing out more aggressively with contract opportunities in the

sector declining, as illustrated by a 20% decline in ICA's mining services backlog.

Mining services now accounts for less than 20% of total backlog, versus 25% as of

December 2012.

An area which is helping to offset a weakness in mining and construction performance

is opportunities presented through the company's joint ventures. We have long

highlighted the potential for ICA's strategic partnerships to cushion the blow of the

current slump in its core areas of operations. This is playing out, with revenues from

joint ventures up 38% y-o-y in Q3 2013 to MXN119mn. We expect this to continue, with

ICA Fluor winning US$410mn in new contracts in September and October 2013 alone.

ICA Fluor in particular will be a major beneficiary from energy sector reform, as the

major contractor for Pemex currently.

Over the longer term we remain positive towards Mexico's infrastructure sector, with a

recovery still expected. Whilst the residential construction sector will continue to act as

a drag on overall construction, we believe the infrastructure sector will achieve stronger

growth from 2014, with a key inflection point for this increase in growth being the

awarding of the first contracts under the government's National Infrastructure Plan.

Clarity on fiscal and energy reform will also help to cement a sustained recovery in the

industry by providing greater investor certainty. Consequently, much of the recovery will

hinge on the public sector expediting its agenda and providing attractive opportunities

for investors. ICA's performance with its concessions unit illustrates that demand for

infrastructure, and thus potential return on investment in assets remains appealing.

Given that we expect the NIP to potentially boost activity in Mexico's infrastructure

sector in 2014; we have re-initiated a bullish Macro-Industry view on Mexican



infrastructure. As highlighted above, we believe that Empresas ICA is one of the best

placed companies to benefit from a boom in the Mexican infrastructure sector and this

presents upside pressure to its stock price.

We believe sentiment towards Mexican assets is rapidly improving as President Enrique

Peña Nieto's reforms move forward, with a bill that will liberalise the energy sector

expected to be approved by December 15, which will benefit ICA due to its exposure to

energy sector-related infrastructure operations. In addition, we continue to expect the

infrastructure sector to experience a gradual recovery next year, which will further

strengthen ICA's company specific fundamentals. Furthermore, ICA's valuations remain

below average, with the P/E ratio at 28.6x compared its 10-year average of 35.0x.

Finally, the technical picture has turned attractive once more, with the share price

breaking above the MXN25.00 level, which previously posed significant resistance. We

are targeting a move to MXN30.00 from the current level of MXN26.00, with a stop-loss

at trendline support around MXN23.00.



Table: Empresas ICA Financial Data, MXNmn Unless Otherwise Stated

Q3 2012 Q3 2013 % Change 9M 2012 9M 2013 % Change

Revenues 9,317 8,363 -10 28,246 23,416 -17

OperatingIncome 702 1,197 70 2,340 3711 59

Consolidatednet Income(Loss) 510 447 -12 1,691 384 -77

OperatingMargin, % 7.5 14.3 - 8.3 15.8 -

Concessions

Highway Traffic,ADTV* 18,940 34,877 84 18,369 31707 73

Airports,Passengers,'000s 3,446 3,619 5 9,380 9,857 5

Dec-12 Sep-13 % Change

ConstructionBacklog 32,734 33,592 3 - - -

ContractedMining Services 8,166 6,536 -20 - - -

*Average Daily Traffic Volumes. Source: Empresas ICA



Global Infrastructure Overview

Global Industry Overview

Competition for private capital is increasing across the infrastructure space. This is because an ever-growing

number of countries are turning to the public-private partnership (PPP) model to develop new infrastructure

to revive and support economies as well as take the financial burden off the public sector. PPPs, long

confined to low risk developed markets, are increasingly gaining traction in emerging markets; however,

higher risks are making them harder to promote. Using our Project Finance Ratings and our analysis of

projects and financing trends, we highlight that Asia stands to be the major winner in the competition for

private sector capital, while Latin America and Africa will continue to see mixed performances, with

regulatory and financing improvements necessary for greater success.

On Track For An Average Year

PPPs Reaching Financial Close

*H1 2013. Source: Infrastructure Investor Research & Analytics

Over the past 12 months there have been a growing number of PPP opportunities coming to market in

emerging markets. Some have been in the pipeline for a number of years, and are finally making progress,



while others are in new countries that are taking their first steps into the PPP market. The end result is that

the infrastructure space is flooded with PPP project opportunities in emerging markets.

However, this does not mean that PPPs in emerging markets are universally embraced by the private sector.

Many sponsors and developers are still calculating the risks associated with these projects, while financiers

for high risk emerging market assets are still rare. At a time when project financing is constrained globally,

this is creating high competition for capital amongst emerging market projects, with those offering the best

returns in the most stable environment most likely to be successful.

Developed Markets Still Appeal More

Average Project Finance Rating, By Region

Scores out of 100, with 100 the best. Source: BMI

According to BMI's infrastructure Project Finance Ratings, which assess the risk to raising and repaying

financing over the life-cycle of a project, Western European and North American countries remain the most

conducive destinations for PPPs. This is due to greater access to financing, the well established regulatory

environment and the limited political and structural risks in these markets. However, of the emerging

market regions, Asia is the outperformer. Whilst Asia includes a number of developed market players, such

as Singapore and Australia (two of the strongest PPP markets globally), which provides some artificial



elevation, all but three countries in the region (of 15) score above the global average, including Vietnam,

the Philippines, Malaysia and Thailand.

Asia: Institutional Delays Slowly Improving

Despite Asia posing perhaps the lowest risk among the various emerging market regions, institutional

weaknesses are still thwarting ambitious PPP plans from some of the region's major economies. In

Indonesia, the slow issuance of a construction permit from the sub-sovereign government has caused delays

in other pre-construction activities for the Central Java coal-fired power plant project, the largest PPP

project awarded by Indonesia so far. In the Philippines, delays to its PPP programme have been caused by

the lack of sufficient institutional capacity to carry out pre-construction activities (eg documentation, spatial

planning, feasibility studies, public consultation, permit issuance, land acquisition) to a level of detail

desired by all project stakeholders, namely local residents, project developers and financers. These delays

are reflected in our break down for the Asia region, where the construction phase is the area where the

highest risk is noted, with permits, timeliness and cost overrun concerns all heightened.

However, progress is being seen. In the Philippines, two of the five packages (under phase two of the PPP

schools project) have been awarded, while in Vietnam, significant interest was registered for the Dau Giay-

Phan Thiet expressway project in Q3 2013. These developments should ensure at least partial realisation of

PPP programmes and are supporting our view that investor interest is high for the region.



Construction Blockers

Asia Project Finance Ratings

Scores of out 100, with 100 the best. Source: BMI

Latin America: Flooding The Market

Latin America has some of the most ambitious PPP plans, with a number of countries looking to use the

model for the first time. However, in general, risks across the region are some of the highest globally, and

this will only be exacerbated by the nascent nature of PPP regulations in many countries.

Against this backdrop, we hold varying degrees of optimism for the region's PPP plans, and highlight that

already, those offering less appealing terms for investors have struggled to attract interest, while the newer

markets are experiencing delays in bringing projects to market.

Brazil, despite promising one of the largest concession programmes globally, will continue to face

difficulties. Investor interest has been weak, with domestic companies dominating the bidding for the

projects on offer. In addition, delays and additional regulatory changes continue to emerge, which may

further deter investor interest in upcoming concessions. Elsewhere, we believe Central American countries

will struggle to attract significant investor interest owing to uncertain returns and immature regulations.



We have a more positive view for Peru and Colombia. Despite deep run delays in bringing projects to

market, recent progress has seen encouraging international investor interest. In 2013 Colombia launched

tenders under its COP44bn 4G concessions programme, with a considerable number of expressions of

interest (EOI) submitted for highway and airport projects. The concession for Baranquilla Ernesto Cortissoz

Airport received 21 EOIs in September 2013, while five highway projects moved into the final tendering

phases in October 2013, with a further three projects launched in late September 2013. In Peru success has

been less impressive, but progress is still notable. While delays have plagued transport projects under the

US$10bn concessions portfolio, energy and utilities concessions such as natural gas distribution and

electricity transmission lines have been awarded, with Spanish companies winning the majority of these

projects.

Table: Latin America PPP Round-Up

Country PPP updates

Brazil US$235bn concession portfolio, including US$121bn in transport concessions.

Peru US$10.4bn portfolio of transport and power projects

Colombia US$20bn in highway concessions.

Mexico US$315bn NIP (2013-2018) will focus on PPPs for infrastructure

Chile Transport concessions

ParaguayNew PPP bill currently being debated, hoping to attract US$30bn in investment over 10years

Honduras

Public-private promotion agency Coalianza released the tender for construction andoperation of the Palmerola Airport, with a contract hoped to be awarded in September2013

GuatemalaEstablished a PPP agency in November 2011 is hoping to launch its first concession forLine 1 of the Guatemala City passenger railway in 2014

El Salvador A PPP will be used to develop the Cuscatlán International Airport and a wind farm

Trinidad & Tobago 12 social infrastructure projects selected for PPP model in August 2013

Source: BMI

Sub-Saharan Africa: High Risk Prompts Different Approach

Sub-Saharan Africa (SSA) is also increasingly looking to attract private capital through the PPP model.

Over the past year Tanzania, Kenya, Rwanda, Ghana, Cameroon and Namibia, among others, have

registered an interest in pursuing PPPs. The most successful countries thus far have been Côte d'Ivoire,

Cameroon, Ghana and Namibia. Côte d'Ivoire in particular is seeking out alternative and creative financing

methods in order to open up financing to enable private sector players to take up projects.



While opportunities remain attractive, and rewards could be substantial, risks remain the highest globally

(with Sub-Saharan Africa posting the lowest average Project Finance Rating). Given the long -term nature

of PPPs, this is a major deterrent for investors. Risks, both regulatory and political, are one of several

hurdles, but the biggest and most immediate obstacle is financing. Therefore, it has been unsurprising that

we have seen a number of initiatives to increase access to private sector capital in Africa. In addition to loan

guarantees provided by multilateral agencies, such as the World Bank's Multilateral Investment Guarantee

Agency (MIGA), a new vehicle titled Africa50 is aiming to open up project finance for the region. The

fund, launched in September 2013, is hoping to raise US$500mn to provide bridge financing, direct loans

and loan guarantees across the region.

Central And Eastern Europe And Sub-Saharan Africa Fall Behind

Number Of Project Reaching Financial Close, By Region, 2000-2012

Source: World Bank



Central And Eastern Europe: Still Waiting For The Revival

Prior to the financial crisis, Central and Eastern Europe was the next big region for PPPs. However, the

market has never recovered this promise. Despite a desperate need for private capital for infrastructure,

brought on by continued austerity drives, the weak economic climate means that returns on offer are

unappealing, and the region is unable to compete for the limited infrastructure financing available.

Turkey is one of the few exceptions, with one of the largest project finance closure in 2013 so far, namely

the third Bosphorus bridge in September 2013. However, in order to achieve this, the project had to be

funded exclusively by domestic banks. Turkey's ability to go to the international market was dented by

political risk and currency weakness, and we expect that for the remainder of the country's PPP projects,

domestic capital will play a crucial role.

Western Europe And North America: Still Leading The Pack

Western Europe, in addition to Canada and Australia, remains the favoured market for PPPs. However,

owing to a combination of diminished project pipelines and constrained project finance, only Canada has

really managed to return to pre-crisis levels of deal making. The volume of PPPs has declined significantly

in the regions as banks have been unable to play the role they previously held in providing debt financing.

Equity financing has also declined as corporates focus on debt reduction rather than asset expansion.

Conversely, deal flow in the secondary market has been strong, with the sale of existing PPPs and

concessions rapidly expanding, particularly by cash strapped infrastructure companies to cash rich

institutional investors. In Western Europe they are typically high value and well established stable assets,

such as airports and regulated utility assets.

With the region's economy still struggling to recover, the returns on offer are questionable for

PPPs especially in the periphery and this is deterring investors. In Australia, the numerous failures with

existing toll road PPP projects has deterred investors from financing such projects, propelling the

government to introduce alternative PPP models that reduces project risks to private investors.

Another prime example is Greece. Although the country had some success in the transport sector with the

PPP model, the funding of projects remains a challenge as private finance has all but dried up in light of the

severe economic instability. The issue is notable in our Project Finance Ratings, with the operation phase



receiving the lowest score for Western Europe & North America, owing to an extremely weak outlook for

revenues.

Indeed, financing in general is not the biggest obstacle, but rather the number attractive of opportunities on

offer. Despite limited PPPs coming to market, of those that do, most attract significant interest, and

therefore Western Europe still accounts for the majority of project finance deals over the past year. This is

supported by new financiers entering the market to take a stake in low risk, stable assets coming to market,

such as insurance companies AXA and Legal & General.

Revenue Weakness

North America And Western Europe Average Project Finance Rating

Scores out of 100, with 100 the best. Source: BMI

In the US, a market offering more promising rewards than Western Europe, progress in introducing PPPs to

the transport sector has seen only mixed success of late. Here, rather than financing or rewards, the

obstacles are political and popular opposition to private operation of infrastructure. A prime example is the

failure of the Midway Airport privatisation in September 2013. The project fell through due to unappealing

terms as the Mayor tried to appease taxpayers, and failed to appeal to private companies. Despite this, our

core view has been, and remains that we will see growing employment of the PPP model in the US,



especially in highway projects. Investor interest is high, and financing, through various government funding

programmes and a number of investment vehicles, is available. Indeed, in September 2013Cintra and

Meridiam Infrastructure closed financing on a concession to extend the North Tarrant Express in Texas.



Methodology

A number of principal criteria drive our forecasts for each construction and engineering variable.

Construction GDP And Infrastructure Spending

Figures for construction GDP and infrastructure spending are based, where possible, on national accounts as

published by relevant central banks, as well as primary government/ministry sources and official data.

Where these are unavailable, construction GDP forecasts are based on a range of variables including:

■ Stated infrastructure and development programmes;

■ Likely increases owing to related urban or industrial sector developments;

■ Political factors (such as an electorally motivated public works programmes).

Construction as a percentage of GDP is calculated using BMI's own macroeconomic and demographic

forecasts.

Data Methodology

BMI's Infrastructure data examines the industry from the top down and bottom up in order to calculate the

industry value of infrastructure and its sub-sectors.

For the bottom up country-specific approach, we have made full use of BMI's Infrastructure Major Projects

Databases for each country, in most cases dating back to 2005. This allows us to calculate historical ratios

between general infrastructure industry value and its sub-sectors, which we then use for forecasting. Our

Major Projects Tables are not exhaustive, but they are comprehensive enough to provide a solid starting

point for our calculations.

The top-down approach uses deduction to form the main hypothesis. We have separated the 39 countries

into three tiers. Each tier comprises a group of countries on a similar economic development trajectory and

with similar patterns in terms of infrastructure spending, levels of infrastructure development and sector

maturity. This enables us to confirm and overcome any deficiencies of infrastructure-specific data by

applying an average group ratio (calculated from the countries for which official data exists) to the countries

for which data is limited.

Tier I- Developed States. Common characteristics: mature infrastructure markets, investments typically

target maintenance of existing assets or highly advanced projects at the top of the value chain. Infrastructure

as percent of total construction averages around 30%.



Tier I countries: Canada, Germany, Greece, UK, US, France, Hong Kong, Taiwan, Singapore, Israel, Japan,

Australia.

Tier II - Core Emerging Markets. Common characteristics: the most rapidly growing emerging markets,

where infrastructure investments are a strategic government priority. Significant scope for new

infrastructure facilities from very basic levels (eg highways, heavy rail) to more high value projects

(renewables, urban transport). Infrastructure as percent of total construction averages around 45% and

above.

Tier II countries: Colombia, Malaysia, Mexico, South Korea, Peru, Philippines, Turkey, Vietnam, Poland,

Hungary, South Africa, Nigeria, Russia, China, India, Brazil, Indonesia.

Tier III- Emerging Europe. Common characteristics: regional socioeconomic trajectories, development

defined by recent or pending accession to European structures such as the EU. Infrastructure development

to a large degree dictated by EU development goals and financed through vehicles such as the PHARE and

ISPA programmes, and institutions such as the EBRD and EIB. Infrastructure as percent of total

construction averages between 30% and 40%.

Tier III countries: Czech Republic, Romania, Bulgaria, Slovakia, Slovenia, Estonia, Latvia, Lithuania,

Croatia, Ukraine.

This methodology has enabled us to calculate infrastructure industry values for states where this was not

previously possibly. Furthermore, it has enabled us to create comparable indicators.

The top down hypothesis-led approach has been used solely to calculate the infrastructure industry value as

a percentage of total construction. For all sub-sector calculations we apply the bottom-up approach, ie

calculating the ratios from our Major Projects Tables where data was not otherwise available.



Definitions

Construction Industry Value

Construction/infrastructure industry value measures the output of the construction/ infrastructure industry

over the reported 12-month period in nominal values (ie domestic currency terms).

As it is derived from GDP data, it is a measure of value added within the industry (ie the additional

contribution of the construction industry over other industries, such as cement production).

Put simply, gross value added (GVA) is the value of goods and services produced by an area, sector or

producer minus the cost of the raw materials and other inputs used to produce them. GVA is mainly

composed of the income made by employees (earnings) and the business (profits/surplus) as a result of

production.

GVA is often confused with gross domestic product (GDP). The difference is that GVA does not include

subsidies and taxes on the products and services produced, notably VAT. The reason GVA is preferred to

GDP for regional statistics is that it is not possible to allocate tax sub-nationally

To calculate industry value by infrastructure sub-sector, such as transport, we use BMI's Major Projects

Database (base year = 2005). This allows us to calculate historical ratios between general infrastructure

industry value and its sub-sectors, which we then use for forecasting.

Growth

Our data and forecasts for real construction measures the real increase in output (rather than nominal

growth, which would also incorporate inflationary increases). In short, it is an inflation adjusted value of the

output of the construction industry year-on-year. Consequently, real growth will, in virtually all instances,

be lower than the nominal growth of our 'construction value' indicator.

Construction Industry, % Of GDP/Construction Value (US$)

These are derived indicators. We use BMI's Country Risk team's GDP and exchange rate forecasts to

calculate these indicators.



Capital Investment, % Of GDP, Per Capita (US$)

These are derived indicators. We use our Country Risk team's population, GDP and exchange rate forecasts

to calculate them. As a rule of thumb, we believe an appropriate level of capital expenditure is 20% of GDP,

although in rapidly developing emerging markets it may, and arguably should, account for up to 30%.

Government Capital Expenditure

This is obtained from government budgetary data and covers all non-current spending (ie spending on

transfers, salaries to government employees etc). Due to the absence of global standards for reporting

budgetary expenditure, this measure is not as comparable as construction/capital investment.

Government Capital Expenditure, % Of Total Spending (US$bn)

These are derived indicators.

Total Construction Employment

This data is sourced from either the national statistics office or the International Labour Organization (ILO).

It includes all those employed in the sector.

Construction Employment, % Change Y-o-Y; % Of Total Labour Force

These are derived indicators.

Average Wage In Construction Sector

This data is sourced from either the national statistics office or the ILO.



Infrastructure Risk/Reward Ratings

BMI's approach in assessing the risk/reward balance for infrastructure industry investors globally is

fourfold. First, we identify factors (in terms of current industry/country trends and forecast industry/country

growth) that represent opportunities to would-be investors. Second, we identify country and industry-

specific traits that pose or could pose operational risks to would-be investors. Third, we attempt, where

possible, to identify objective indicators that may serve as proxies for issues/trends to avoid subjectivity.

Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that only the

aspects most relevant to the infrastructure industry are incorporated. Overall, the system offers an industry-

leading, comparative insight into the opportunities/risks for companies across the globe.

Ratings System

Conceptually, the ratings system divides into two distinct areas:

Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development.

Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall

risk/reward rating a weighted average of the total score. Importantly, as most of the countries and territories

evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This

ensures that the rating draws on the latest information and data across our broad range of sources, and the

expertise of our analysts.



Table: Infrastructure Business Environment Indicators

Indicator Rationale

Rewards

Industry rewards

Constructionexpenditure, US$bn Objective measure of size of sector. The larger the sector, the greater the opportunities available.

Sector growth, % y-o-y Objective measure of growth potential. Rapid growth results in increased opportunities.

Capital investment,% of GDP Proxy for the extent the economy is already oriented towards the sector.

Governmentspending, % of GDP Proxy for extent to which structure of economy is favourable to infrastructure/

Country rewards

Labour marketinfrastructure

From BMI's Country Risk Ratings (CRR). Denotes availability/cost of labour. High costs/low qualitywill hinder company operations.

Financialinfrastructure

From CRR. Denotes ease of obtaining investment finance. Poor availability of finance will hindercompany operations across the economy.

Access to electricity From CRR. Low electricity coverage is proxy for pre-existing limits to infrastructure coverage.

Risks

Industry risks

No. of companies Subjective evaluation against BMI-defined criteria. This indicator evaluates barriers to entry.

Transparency oftendering process

Subjective evaluation against BMI-defined criteria. This indicator evaluates predictability ofoperating environment.

Country risks

Structure ofeconomy

From CRR. Denotes health of underlying economic structure, including seven indicators such asvolatility of growth; reliance on commodity imports, reliance on single sector for exports.

External risk From CRR. Denotes vulnerability to external shock - principal cause of economic crises.

Policy continuity Subjective rating from CRR. Denote predictability of policy over successive governments.

Legal frameworkFrom CRR. Denotes strength of legal institutions in each state. Security of investment can be a keyrisk in some emerging markets.

CorruptionFrom CRR. Denotes risk of additional illegal costs/possibility of opacity in tendering/businessoperations affecting companies' ability to compete.

Source: BMI



mexico - pwc · mexico's infrastructure sector has been stagnating over recent ... regulatory...

Documents