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Construction maps out recovery plan

MARKET REPORT: MEXICO - With the prospect of a construction bonanza before it, Mexico's recession weary construction industry is facing up to some difficult and uncomfortable changes.

The last seven years have been hungry ones for Mexico's construction industry. Work loads plummeted following the 1994 economic collapse and though relatively few firms have folded - Mexico's business culture dictates that companies will scrape by long after companies in the UK would have ceased trading - construction has lost a vast amount of labour and experience.

Construction firms have kept going thanks to work for private Mexican, US, European and Japanese clients in the industrial, manufacturing and commercial sectors, and because of a booming private housing market. Activity has been growing at between 5% and 7% a year and is currently stable at £1.25bn/year, reports Alberto Avila Mendoza, executive secretary of one of Mexico's two largest construction industry associations, the Federacion Interamericana de la Industria de la Construccion (FIIC).

Public sector projects account for only 20% of industry turnover. Avila, like others in the construction industry, sees increased public procurement as the only solution for a real revival in fortunes.

Infrastructure projects to be announced by President Vicente Fox Queseda in the next few months are expected to require a 15-fold increase in construction activity, says Avila. Sales of construction equipment are at a ten-year high in anticipation, construction industry body the Camara Mexicana de la Industria de la Construccion (CMIC) found in its most recent survey. 'We should see improvement in the construction market next year - we are banking on government projects, ' says director general of Monterrey-based civils contractor Maiz Mier, Jose Maiz Garcia. The firm is reliant on the private sector for 95% of its work at present.

However, large question marks hang over the industry's ability to source the necessary labour. Despite the ravages of recession, unemployment stands officially at just 2.3%.

Maiz Mier, operating in the north of Mexico is already having to recruit workers from the south.

Avila believes that rising construction industry wages will lure workers from other areas of the economy and does not see recruitment as a problem. Nearly half of Mexico's population is aged under 30, he points out.

Technical education in Mexico is good and there will be enough graduates to fill technical and managerial posts as the anticipated construction boom kicks in over the next five years.

Maiz agrees that finding the required number of workers is not an insurmountable challenge. But workers with industry experience will be in extremely short supply, he adds.

Until government-initiated, privately financed projects lead to an upturn in the construction economy, Maiz Mier, like many other Mexican contractors, is having to look for work outside its traditional geographic area.

Other than a handful of major contractors which operate nationally, construction firms have historically been local concerns, working in just one or two of Mexico's expansive states. Logistically and legally, Maiz Mier's ever wider search for work is throwing up problems.

Under Mexican employment law it is difficult to fire staff once they have been hired. Staff therefore have to be relocated to far-flung projects from Maiz Mier's home state Nuevo Leone.

Worse still, some states have been using underhand tactics to protect indigenous firms, refusing to sell tender forms to bidders from other regions, Maiz reports.

The make-up of Mexico's construction industry is unusual. According to CMIC director general Gabriela Lopez Rodriguez, Mexico's largest companies are specialists in, for example, roads, oil, power or housing. 'Medium sized and smaller companies tend to cover more than one sector.

They are far more flexible, ' he says.

Mexico has relatively few independent consulting engineers. Large and medium sized construction firms normally have an in-house design team to tackle private sector projects. Municipal engineering departments undertake most design themselves and contract out construction.

Organisation and behaviour of the construction industry is starting to change, though. 'Big construction companies are not in good shape. They are having to sell assets to recover capital lost over the last few years and clear debts, ' says Maiz. These include plant, land and property and in some cases design offices. The more innovative and market-focused municipal design offices are moving to provide consultancy services, and more are expected to follow. Others are starting to outsource design.

Mexico's recession years have seen a major shift in the way construction is procured.

Turnkey projects are increasingly favoured by private sector clients and contractors without working capital are struggling to do business. 'Most US clients don't provide any advance payment for the purchase of materials, ' Maiz notes.

Turnkey procurement is catching on with Mexican clients and, though many still provide cash up front, he anticipates contractors will increasingly be called on to finance construction themselves.

With this in mind, many of Mexico's major contractors, including construction giants Ica, Bufete Industrial, CCC, Protexa and Gutsa are looking to enter, or have already entered, joint ventures with foreign firms that can inject cash. Firms cannot afford to take out loans with Mexican banks to finance projects, Maiz says. 'Interest rates are very high' - they peaked at 160% and are still above 16%.

Meanwhile, 'as the construction market grows, labour rates are rising with demand and materials costs are rising with inflation'. Turnkey projects are generally let at a fixed price and so contractors are having to factor in escalations in project costs.

The risks are huge. 'It is like gambling, ' says Maiz. 'Margins used to be 8%. We are now doing well to get 3%-4%.'

Contractors are having to build higher margins into their bids to account for inflation, but few non-Mexican clients are sympathetic, bemoans Maiz.

'People from the US and Europe are asking us: 'Why are you building in such large margins - do you really want this job?'.'

Doubts also exist over the stability of Mexico's currency, the peso, and most contractors favour payment in US dollars.

Construction firms are increasingly focusing on labour and plant productivity - it is normal for firms to own all necessary equipment, although some of the largest are moving towards long-term leasing and hiring. They are also looking to achieve economies through design and construction.

Project management skills are sought after, as are new construction technologies and methods.

'We are increasingly using exotic construction methods to cut back on labour costs.

Precast, pre-tensioned concrete is becoming popular right across Mexico, for example, because it requires less labour than casting in-situ, ' Maiz reports. He adds that contractors are shopping outside Mexico for specialist materials and innovative design.

According to Lopez, health, safety and environmental management skills are also in demand.

But the quest to control costs is also eroding quality. 'Around 80% of clients are concerned only with price, ' estimates Maiz. Government contracts regularly attract up to 20 bidders. Despite the rise of turnkey projects in the private sector, traditional lump sum contracting still holds sway.

Undercutting on price is standard since winners are typically those making the lowest bid.

'A lot of contracts are coming to a halt as a result of lowest price selection. The problem is widespread, ' says CMIC president Fernando Garza Martinez. 'Government is proposing that companies that don't perform will be barred from future tenders.'

Lopez believes that new codes for tendering being negotiated between the government and the CMIC will redress the situation.

The CMIC is pushing for closer adherence to the two-envelope bidding system with emphasis on technical compliance. It also wants to see financial incentives introduced to encourage companies to meet and beat cost and time targets. She says there is growing interest in independent project supervision and checking.

Fox's government is cracking down on illicit dealing. Mexico City's director general of public works, Ramon Santoyo Lugo, says that in the last six months his 'most significant challenge' has become the district auditor.

He lives in dread of being taken to task over innocent bookkeeping errors. In the past it was common practice for ministers to buy land assigned for a construction project while details of the scheme were being agreed in parliament. After the project was publicly announced the land was sold on at increased value to the client, who was more often than not a central government department or municipal authority.

State contracts have also been stopped by the client under false pretexts to benefit the contractor, claims the director of one major construction firm. Generous compensation is paid to the contractor for delays before work resumes.

The government is keen to attract foreign firms to Mexico for their financial and project management expertise, technical and technological knowledge, and capital.

Public-private partnership, joint venture working and privatisation are popular topics of conversation. But Mexican firms are wary of overseas influence.

'I am willing to work in joint venture but don't want a marriage, ' comments Maiz.

He and Avila say any Mexican firm entering a joint venture will demand a 51% or greater majority stake, giving it overall control. CMIC's position is tougher still:

'The Chamber is opposed to foreign participation unless there are reciprocal opportunities for Mexican firms. If foreign firms work in Mexico, CMIC wants Mexican firms to work abroad, ' says Garza.

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