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Mexico, Cuba: Next Hot Spots for Energy?

Fortnightly Magazine - July 15 2000

 

Both look overseas for project developers, but some U.S. firms worry they'll miss out.

With its electric grid primed for privatization , Mexico stands ready to open the door to an estimated $25 billion in new investment in its energy infrastructure. Companies from the United States, Canada, France, and Spain, among others, all appear eager to enter the market.

Cuba, too, is attracting attention, especially among U.S. firms with global affiliates.

Yet U.S. investors worry they'll miss out on some opportunities. And not just in Cuba-for the obvious reasons-but in Mexico as well, since private capital may find itself at a disadvantage when bidding against public sector competitors to win contracts.

Part of the attraction of investing in Mexico's electric generation capacity is the generally strong economic state of the nation, expected to grow 5 percent this year in gross domestic product. But since the advent of the North American Free Trade Agreement in the early 1990s, Mexico's regulatory regime has become far more transparent to global commerce, making entry for U.S. companies particularly attractive. While there still are limits on the private sector participation in distribution and transmission, the needs for generation are profound.

Mexico's federal energy ministry, the Secretaria de Energia, late last year adjusted its prior 10-year forecast for electrical capacity needs by the year 2007, adding 8,554 megawatts to the previously estimated requirement of 13,189 MW of new power, for a revised total of 21,743 MW. The projected new capacity will add to the current generating capacity in Mexico of 35,603 MW.

"This may translate into about 10 projects more than the 10 already planned as of September 1999," says Arturo Dessommes, a trade specialist at the U.S. Embassy, in Mexico City. Some 75 percent of the new capacity planned for the next few years will be sited in the country's industrialized Northeast and Northwest regions, where the export assembly maquiladora factories are most heavily concentrated.

Plans already are in the works by the Mexican federal electric utility (CFE, or Comision Federal de Electricidad, which serves most of the country) to spend $9.3 billion this year to improve the nation's electric grid capability. Public coffers will chip in $2.1 billion to build new generating capacity, with $473 million going to upgrade transmission lines.

Yet the balance of the required new investment in generation-close to $4 billion a year through the end of the next presidential term, which will end in January 2007-will have to come primarily from private-sector companies. And while the demand is great for new generating capacity in Mexico, the terms of new concessions are not always attractive.

Bidding, Finance, and Other Investment Obstacles

In Mexico, the CFE tends to set the winning criteria for concessions on the lowest cost for delivered energy. Thus foreign government-subsidized entities like France's Electricitie de France-one-third owned by the French government-have a perceived advantage over purely private sector competitors in being willing to take a lower rate of return on a project in order to get a foot in the door.

"The last few concessions that have been awarded

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