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Foreign Affairs, Defence and Trade References Committee
29/10/2015
Australia's relationship with Mexico

GAMAS, Dr Edmundo, Executive Director, Mexican Institute of Infrastructure Development

[10:54]

Evidence was taken via video conference—

CHAIR: I now welcome representatives of the Mexican Institute of Infrastructure Development by videoconference. Before we begin I advise you that as you are providing evidence from a foreign jurisdiction your evidence cannot be protected by parliamentary privilege. However, as you are giving evidence voluntarily you may at any time make a request to be heard in camera if you have concerns that your evidence may cause you any harm. Would you like to make a brief opening statement before we go to questions?

Dr Gamas : Yes, I would.

CHAIR: Please proceed.

Dr Gamas : I would like to thank the Senate for this opportunity to submit proposals and information to the inquiry on Australia's relationship with Mexico. We are very honoured to have submitted what we believe are relevant proposals. We are a non-profit organisation dedicated to the development of Mexico's infrastructure. We have a unique origin, which was out of the finance and infrastructure group of the Australia, New Zealand & Mexico Business Council here in Mexico City, where Australian companies contributed to the ideas that created our institute.

Over the course of the past two years we have had the opportunity to work on two major initiatives. The first, with funding from USAID, is an initiative to advise the Mexican Senate on the reform of Mexico's public works legislation and the preparation of a tool kit to be used by authorities in the infrastructure field when they are faced with new public infrastructure projects. The other major initiative, with funding from the United Kingdom's Prosperity Fund, has been to develop a network and a masterplan for a network of state offices or centres linked to our central organisation in Mexico City, with the objective of providing Mexican states and municipalities with planning and advisory services for their infrastructure projects.

We presented four initiatives to the Australian Senate. All of them went through the evaluation process of how the world would be different every 12 months thanks to each initiative and making sure that everything that would be done within these initiatives would be measurable. I will not go into detail about them; I will just state them. The first is future editions of the Australia-Mexico Second Track Dialogue, of which at least one has already taken place—and which I had the privilege of attending in Canberra. The second is participation in the Australia-Mexico Infrastructure Finance Forum, which will be held in February or March next year, that will bring superannuation funds to Mexico to see how Mexico can benefit from their investment and expertise and, along with that, how Mexico can also become a market for the infrastructure ecosystem in Australia pooled into Mexico via the superannuation funds. The third is the idea of linking Australia and Mexico in their participation within the Global Infrastructure Hub, which has recently been set up in Sydney under the auspices of the G20. The final idea is the establishment of an Australia-Mexico centre for the management of natural resource industries, which could provide a real landing pad in Mexico for Australian government businesses and universities that want to provide products and services into the Mexican infrastructure ecosystem, including expertise in managing community relations and environmental protection. Thank you very much.

CHAIR: Thank you for that opening statement. If I can ask a couple of questions before we go to Senator Back: you mentioned infrastructure investment and, in particular, attracting investment from Australia's superannuation industry.

Dr Gamas : Yes.

CHAIR: This is a very contentious issue in Australia. How visible is the evaluation of infrastructure projects in terms of the dollar invested and the return in productivity and the dollar invested and the return on investment? Is that an independent, contested, published strategy, or is it done on a case-by-case basis?

Dr Gamas : I think it is case by case in the Mexican infrastructure ecosystem. One of the things that Mexico lacks is an orderly process to develop its infrastructure. Unfortunately, most infrastructure projects are one-offs that come from the government determining that certain projects are important. But, because the government has to request support from private finance and the rest of the private sector for building and operation, in all cases the government has to bear the returns in mind as it structures projects. But there is no central strategy for the returns that projects must generate or should generate.

CHAIR: That is probably a contested issue in Australia at the moment. We have Infrastructure Australia, which is charged with setting the infrastructure priorities of the nation and testing those against the increased productivity that that investment will bring. As politicians on this side of the table, we understand how those priorities sometimes change. I know that there is a lot of international infrastructure happening—for example, Australian super funds have invested in the United Kingdom in water and in all sorts of areas—so there are probably models there. But is Mexico attracting any infrastructure investment from the global funds?

Dr Gamas : Definitely. To give you an example: speaking about Australia specifically, Macquarie has been very active in Mexico. They have investments in renewable energy, transportation—meaning toll roads—a university campus and telecommunications towers. IFM, another big fund, has recently purchased 25 per cent of a major toll road, and Whitehall Capital has invested in the natural gas industry. So there is already a precedent for Australian financial institutions operating in Mexico. I would say this is about five years old. In addition to that, recently, CDPQ, a Canadian venture fund, established a commitment to at least US$2 billion of infrastructure funding in Mexico over the next five years. They have established links with the Mexican pension funds.

CHAIR: I see. Your trade is 80 per cent exports to the United States and 50 per cent back from the United States. You are sitting next to California, and CalPERS' income per month would be as big as some Australian super funds. Why don't you get your capital from there?

Dr Gamas : Mexico has pursued for at least 20 years a strategy of diversification and open markets. I do not think that the Mexican government thinks it is wise or desirable to defend as much of the United States as we do. I believe there is a clear—let's say—goodwill to receive pension funds and other institutional investors from other parts of the globe. I think the recent signing of the TPP, although not aimed directly at infrastructure, does address issues of services, intellectual property and other soft issues, which I believe will also make commerce easier for all of the infrastructure ecosystem. So I think there is an open-arms policy here in Mexico and I want to stress that we are not only asking for money but for knowledge and know-how that comes with structuring or operating projects—public-private partnership models, community relations and environmental issues, where Australia is a leader.

Senator BACK: In January with the generous assistance of His Excellency Armando Alvarez Reina—who is in the room and listening to you and so please do not tell is anything that you do not want the ambassador to hear—and with the Australian ambassador in Mexico City, Mr Tim George, I addressed an ANZ Mexico forum in the oil and gas sector in January—we were looking at the impact of $40 a barrel. I also had the opportunity to look at the hard-rock mining sector and met several participants in the energy sector. Can you give the committee some understanding about the liberalisation in your energy sector and, indeed, in your hard-rock mining sector as a result of government initiatives? What do you believe can happen? And where do you think Australian companies may participate in that process?

Dr Gamas : Absolutely. With respect to the energy sector and perhaps with the mining sector as well, I think that the recent reforms have opened up at least three broad avenues for investment. One avenue is directly related to the projects themselves—the exploration, production or drilling projects. One avenue is related to all of the ancillary activities, such as transportation of the minerals or the oil or the gas, the storage and industrial processing. The third avenue would be the development and support of the communities that are hosting, so to speak, these projects in their vicinity. I think that in all three types of infrastructure, Mexico would benefit greatly both from the money that Australian institutional investors could provide and from the expertise—technical, community, environmental, financial and legal—that Australia's infrastructure ecosystem could provide.

Senator BACK: As an extension of that, could you comment on where you believe the infrastructure priorities and needs are in Mexico that will allow for the productivity and profitability for those two sectors? Is it in ports or pipelines? Is it in road networks? Is it in communications? Where do you see the gaps at the moment?

Dr Gamas : To some extent, all of the above; but I think that the most critical bottlenecks at this point will be the transportation of the oil, gas and minerals and the management of storage facilities et cetera. There are definitely going to be requirements for many new roads. The ports definitely need investment and know-how to increase productivity, and communications are also very important. But I would say that at this point the major initiative that the government has for 2016—and partly this is because the low oil price has impacted PEMEX in its finances—is to allow PEMEX financial mechanisms to transfer the money that it has invested in fixed infrastructure, especially non-exploration and production infrastructure, but transport infrastructure, storage infrastructure and industrial infrastructure, and put those into financial vehicles that can be sold to international investors so that PEMEX can use those funds to invest in exploration and production, where it makes its highest returns. So I would say that that specific move to the market of all of these assets from PEMEX and from the federal electricity commission in the same manner—for transmission and other types of infrastructure related to distribution and even generation—is the big opportunity for 2016. The Mexican government recently set up two new types of financial instruments in the Mexican stock exchange so that this can take place. It is in the first stages of structuring the first deals, where, in my opinion, Australian expertise would be very welcome.

Senator BACK: It is my understanding from reading the submissions that the Mexican stock exchange has expanded to include other Latin American stock exchanges. Has that happened? If so, what impact—positively or negatively—is that having on infrastructure investment?

Dr Gamas : I would say that that to date is a small-scale experiment. What has happened is that the exchanges of Mexico, Columbia, Peru and Chile, which are the signatories of the Pacific Alliance, have become linked so that you can trade instruments from any of them on any of them. But I would say that, to date, its impact is small and even smaller in infrastructure. That does not mean that there is not a future there.

Senator BACK: In Australia the tax system is such that the federal government centrally collects most of the taxes and passes them through to the states and then, effectively under our constitution, local governments are a functionality of the state governments. I recall hearing in January that, under some of the reforms initiated by the President of Mexico, there would be a driving down of funding and, therefore, responsibility for decision making more to state levels and indeed to local government levels, including satisfying communities on environmental grounds et cetera for infrastructure and related developments projects, mining projects et cetera. First of all, am I correct in what I believe to be my assumption? Secondly, has there yet been any evidence of it happening? Thirdly, positively or negatively, what impact do you think that that is likely to have on infrastructure projects getting up and, in fact, being successfully completed?

Dr Gamas : Well, broadly speaking, you are correct. In a way similar to Australia, in Mexico the central government collects the majority of the taxes. But, through agreements with states and municipalities, a lot of those taxes are earmarked; some are earmarked for specific uses by states and municipalities, and some are earmarked for them to use as they see fit. So we have that structure. With respect to what is going on at this time—in addition to those fund flows, which will in the future be more restricted because of the oil price, once again, which is a big revenue source for the governments—there are also two funds that might be of great interest to Australia. One is the petroleum fund for municipalities and one is the mining fund for municipalities. These funds will receive their revenues from specially collected taxes, which are already in the reforms, from the companies operating. These funds can—and should only—be used to develop municipal infrastructure, meaning social infrastructure. So I think that the world is speaking. A lot of the funding is there. However, in Mexico our biggest problem is that the states and the municipalities often have no capabilities or very slim capabilities to plan their projects, so a lot of the money is wasted on projects that do not necessarily focus on the real needs. So there is definitely a really important need for planning.

Senator BACK: Yes, we understand that. Thank you very much, Dr Gamas, your evidence has been very interesting.

Dr Gamas : Thank you very much.

CHAIR: Thank you, Dr Gamas, for that excellent submission and for answering our questions.