Deep Impact

In 2013, the IFC tripled its average annual investments in Mexico. What factors prompted this increase in project funding?

Before 2013, our average of new investments was between $250 million and $300 million a year. To some extent, the year ending in June 2013 was an outlier and was the result of a business plan that we put in place in 2010. It was a strategy of repositioning in the market, aiming for higher impact, and gaining higher relevance in the business community of Mexico. Our approach was two-pronged: on the one side, we wanted to increase the percentage of our portfolio in Mexico, because Mexico is a large country, with developmental needs, a positive outlook in terms of growth, and is open to external investment, particularly with the reforms lining up. We also wanted to rebalance our investment portfolio, because it was relatively skewed to financial intermediaries, and we wanted to have more investments in the real sector. We started repositioning IFC in the marketplace, looking primarily to sectors of Mexico’s greatest competitiveness, and in sectors where there is more content in terms of innovation and employment potential.

Which sectors are you focusing on?

We came across a study that was done at the end of 2009 by BCG and adapted the results of the study to understand what our best options were for positioning ourselves with respect to what IFC does. We looked at the sectors with comparative competitive advantage and developmental impact. We measured the results in one case vis-í -vis domestic demand, and in the other case via the relationship of the competitiveness of these sectors globally compared to Mexico. For instance, financial services provides a combination of domestic demand and developmental impact that we are looking for as in Mexico private credit penetration is 26% of the GDP, one of the lowest in Latin America. Besides financial services we defined housing, food and beverage, health services, and education as competitive sectors where IFC can play a role. Key sectors that are driven by external markets where Mexico competes globally and have a high developmental impact on the economy include some sectors that we don’t yet play a role in, such as steel. Tourism, for example, is important but it is on the boundary. Other sectors we included were health services, business services, information technology, electronic and electrical equipment, industries requiring heavy machinery, and innovative manufacturing. These are the sectors that we are seeing, and in some we were able to increase our presence, while in some other cases it is a work in progress.

Why is Mexico important to the IFC investment strategy in Latin America?

Mexico is now one of the 10 highest portfolio contributors in the IFC portfolio. However, it was not like that until quite recently, because it was perceived inside the IFC that Mexico did not need the support of the IFC anymore. However, Mexico’s income inequality and the economic crisis of 2008 and 2009 hit Mexico severely and increased the levels of poverty, showing that the IFC still had a role in Mexico. Following the crisis, the World Bank very quickly put in place a financial support program, and our reactivation was a little slower because, unlike the World Bank, we are market driven, meaning we go where the market tells us. There are areas where we have played an important role, especially in renewable energy. We have invested a great deal in wind power in Oaxaca. We have European investors as well, and we invested in a solar-electric power plant in Baja California. It is a 30-MW plant and the first merchant solar-power plant, meaning it is an important project.

What is the importance of your investment plan in the petrochemical park that Braskem Idesa is building in Veracruz for the petrochemical industry in Mexico, and what are your expectations regarding its impact for the economy of the region?

We started working to develop the relationship with Idesa, the Mexican partner of this project, in 2009. After a year and a half of talks, they called us with an offer for a major, challenging project. We realized the project’s importance, and agreed to offer support. It has been awarded international recognition and the financial arrangers and backers have been arranged. We believed that the project was important because it was the largest petrochemical project in the country for 25 years. We had committed a relatively large amount of money to it as well, roughly $630 million, or more or less half of our own balance sheet, with the other half coming from external banks. The project is only a kilometer away from the city of Veracruz. The impact on development fields has resulted in manufacturing jobs, plastic production, and various groups have been enticed by the success to move employment back to the area.

What other projects do you expect to influence the economy in different areas of the country?

The World Bank has different outreach programs based on where you are located in the world. In reality, we are in a higher-middle income country. Normally, the role of the World Bank as a lender to the government decreases over time while the IFC’s role increases. It needs to be filtered through some elements of our mission. For example, we do not displace private investors or private banks. If there is a project such as this one, in theory, it can be financed with maturities of 15-17 years. Without multilateral interventions, we do not impose or look for our presence. If there were a role for a catalyst or an absorber of residual risk, then would we play that role. We were interested in Veracruz because the income distribution in Mexico is uneven. There are some islands of wealth that could be a part of developed nations, but there are other areas that are extremely poor. These areas are frontier regions. We try to focus on these frontier regions, but they are resistant to industrial development.

Given the IFC’s international expertise, in which ways do its investments contribute to the sustainable development of the Mexican economy?

We measure our impact in terms of the productivity that we inject into a sector by supporting a project, either through employment generation, supply chain creation, indirect employment, and sustainability that is driven by projects with high standards of environmental, social, and community impact. We have serious measurements in terms of developmental objectives that we monitor yearly so we can justify the impact that we had anticipated when we justified our commitment of investment.

What do you do to support SMEs, and what is your role in terms of job creation in Mexico?

In Mexico, we believe that we have made a number of important investments, but we could do more. We were with Compartamos and other microfinance organizations. We always need a financial intermediary, because SMEs are not always able to bridge the gap. These financial intermediaries can be commercial banks, which we support by lending operations to specific sectors. We have also supported equity investments in local banks. That is the way we channel our funding into SMEs.

How do you feel about the impact of the energy reform on the country?

There are some who estimate that the greatest transformative event that could spur the growth of the Mexican economy is the impact of the Energy Reform Plan combined with the National Infrastructure Plan. Energy reform can free up around $25 billion of investment for the private sector in the energy sector alone. The total envelope is around $60 billion. Around half comes from PEMEX and the Federal Electricity Commission (CFE). The other half, to double the market, is going to be from private investments. The first estimates of the impact as far as energy reform for employment between 2015 and 2018 will be 500,000 new jobs. Public-private partnerships (PPPs) should add about $8 billion to $10 billion per year. If they only achieve half of what they plan, we are talking about $15 billion to $20 billion in investments, which can easily increase the GDP by 3.5%. In theory, energy reform can spur the economy by as much as 5%.

© The Business Year – February 2014