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Mexico set for a wave of change

MARKET REPORT: MEXICO - International trade and a booming industrial sector are driving demand for new infrastructure.

Though Mexico has some way to go before it mirrors the open market economies of the US or Europe, the world's sixth largest economic power has been liberalising for longer than any other Latin American nation. President Vicente Fox Queseda is pushing to maintain momentum.

Mexico is the signatory of 28 bilateral free trade agreements - more than any other nation.

Most significantly, it joined the Organisation for Economic Cooperation and Development (OECD) and entered the North American Free Trade Agreement (NAFTA) in 1994. In July last year, Mexico signed a free trade agreement with the European Union.

Its portfolio of agreements positions Mexico as a route through which European firms can enter the US market taxfree, and vice-versa. As a trading, assembly and manufacturing base, it is hugely attractive. A well educated and technically competent workforce linked with low wages - typically £90-£150 a week for a skilled worker - further increases Mexico's appeal to multi-nationals.

The country is dependent on international trade for the bulk of its gross domestic product, and 82% of that trade is with the US. Mexico desperately wants to reduce its dependency on the US to protect itself from a potential slump in the dollar economy. President Fox aims to achieve a 60/40 balance in trade with the US and Europe.

Growth in trade and shifts in the balance of trade are already placing a burden on Mexico's major ports, airports, roads and communications networks.

Exports were up from £11.25bn in 1994 to £103bn last year. At the same time, expansion of Mexico's manufacturing and industrial base, fuelled by European, Japanese and US firms setting up shop, mainly in the northern states, is stretching power and water supplies to breaking point.

(German car giant VW manufactures the new Beetle in Mexico only and 45% of all components in US cars are made there. ) Companies operating to justin-time manufacturing and delivery schedules are demanding improvements in highways.

Mexico is also keen to develop its already burgeoning and resource-hungry tourist industry. This is the country's third largest source of foreign currency, worth £4.7bn in 1997 and growing at 20%.

Fox recognises that Mexico's economic growth will be stifled if major infrastructure development cannot be swiftly realised.

Regarded at home and by the international community as a reformist who really can make things happen, Fox is setting a new political agenda. His party, the Partido Accion Nacional (PAN), was voted to power last year ending an unbroken seven decades of single party governance by the Partido Revolucionario Institucional (PRI) and is expected to deliver tangible change.

He has pledged to decentralise political power, awarding greater autonomy to local governments in Mexico's 31 states. Analysis of Mexico's political landscape by UK market research group, the Economist Intelligence Unit, suggests decentralisation will contribute to greater national stability - the federal (national) government has been trying to contain a guerrilla war waged by separatists in the southeastern state of Chiapas.

To increase stability, Fox is committed to boosting the economies of Mexico's southern states - a plan that will require still more ambitious infrastructure projects. His government aspires to providing citizens with a standard of living comparable with that of the US.

And Fox is garnering support among neighbouring Latin American states for a trade 'spine' linking southern Mexican city Puebla with Panama.

Construction experts estimate delivery of Mexico's infrastructure wish list will cost between £20bn and £30bn a year for the next five years. Fox is scheduled to announce priority projects later this summer.

But there is universal agreement that, whatever the scale of work to be undertaken, the Mexican government will not be able to fund it alone:

Mexico's economy was crippled in 1994 by recession from which the country is only just recovering. The severity of the seven-year slump is illustrated by the fact that, despite year-onyear growth in GDP of between 3.8% and 6.9%, economic activity is only expected to reach pre-1994 levels this year - GDP in 2000 was £352bn and is forecast to grow by 3.5% in 2001. Funds in the federal reserve were whittled down to almost nothing; now, thanks to tight budgetary and fiscal controls, the reserve is being built up but is still around only £20bn. Private sector capital will be essential if major new projects are to be realised.

Despite its liberal trade policy, Mexico retains a strong public sector. Nationalised ownership and control is still normal and widespread. Over the last ten years though, it has moved with degrees of success towards the private sector.

Road concessions let in the early 1990s failed dismally due to chronic over-estimation of traffic volume. Struggling concessionaires had finally to be bought out following the economic crash in 1994 and roads were re-nationalised.

But rail lines are now privately run, the last of Mexico's airports has just been handed over to private consortia and maritime ports have been placed under the management of a state owned 'concession' company as a prelude to privatisation.

The Fox administration is talking animatedly about public-private partnerships and the private finance initiative, though exactly how they would work is not yet clear. Mexico and the UK signed a bilateral PFI/PPP agreement last month that paves the way for information sharing, reports Mexico unit manager at government agency Trade Partners UK, Sarah Croft.

But legislation is needed to smooth the way for private lenders and provider-operators.

Fox will have to negotiate moves towards privatisation carefully through parliament, notes Putter. 'Fox doesn't have a majority so can't do anything too dramatic.'

According to Croft, PFI-type involvement of the private sector looks more likely than outright privatisation. Much that is owned by the public sector has 'sacred cow' status 'equivalent to the UK's national health service', she explains. It is important politically that the state retains ultimate control.

Even so, reform of laws governing private participation in the power sector, described by Croft as one of Mexico's most jealously cherished and guarded national industries, is expected in September. Fox has convened a treasury taskforce to assess further options.

Introducing efficiencies into the procurement and operation of national assets is one of the government's stated priorities.

Vitally, action is also needed to tackle the corruption which is rife through all levels of the public sector. It is impossible to calculate how many billions of pesos have disappeared from government accounts.

Fox has already launched a crackdown, with several prominent ministers from the previous government standing trial for embezzlement of state funds. And new laws on financial transparency are promised for the banking sector, a move that will be essential if Fox's government is to attract the international investment it so desperately needs.

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