Master Thesis Jose Andres Peña IMRE 2005 PDF

FREIBERG UNIVERSITY OF MINING AND TECHNOLOGY
International Management of Resources and Environment
Master Thesis
The Introduction and Future of Transportation Public-Private-Partnerships
in Mexico: Developments, Problems, Hindrances and Solutions
Prepared by:
Jose Andres Pea Gonzalez
Code: 47935
Freiberg, 2008
The Introduction and Future of Transportation Public-Private-Partnerships in Mexico: Developments, Problems, Hindrances and Solutions
Jose Andres Pea Gonzalez, IMRE 2005
_______________________________________________________________________________________________________
Table of Contents
Table of Contents .2
List of Figures 5
List of Tables .6
List of Annexes .6
Acknowledgements ..7
1.
Introduction ..8
1.1 Purpose and Objective ...9
1.2 Scope and Methodology ..10
2.
Public-Private Partnerships in Transportation Projects .....12

2.1 Background ..12
2.2 Definition and Types of Public-Private Partnerships ...14
2.2.1 Private Contract Fee Services ...14
2.2.2 Alternative Project Delivery Approaches ..15
2.2.3 Multimodal Partnerships .15
2.2.4 Joint Development ...15
2.2.5 Long-Term Lease or Concession Agreements ...15
2.3 Public-Private Partnerships Arrangements ..16
2.3.1 Private Contract Fee Services, including Contract Maintenance ....16
2.3.2 Alternative Project Delivery Approaches ..17
2.3.3 Full Delivery or Program Management .20
2.3.4 Transit Related Development Approaches ..20
2.3.5 Multimodal Partnerships .26
2.4 Benefits of PPPs ...27
2.4.1 Stronger Working Relations ...27
2.4.2 Reduction of Financial Constraints ...28
2.4.3 Faster Delivery .28
2.4.4 Innovation and Expertise ....28
2.4.5 Greater Cost Efficiency and Productivity .29
2.4.6 Integration .29
2.4.7 Greater Choices ...29
2.4.8 Increased Competition 29
2.4.9 Risk Management 30
2.5 Risks of PPPs 30
2.5.1 Transaction Costs 31
2.5.2 Potential Higher Life-Cycle Costs .....33
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2.5.3 Taxation Constraints 33

2.5.4 Moral Hazard ....33
2.5.4 Loss of Control over Assets 33
2.6 Critical Success Factors ..34
2.6.1 Stakeholder Consultation and Support .34
2.6.2 Public Sector Involvement ..34
2.6.3 Political Leadership ..34
2.6.4 Secure Public Control ..35
2.6.5 Limited Complexity and Appropriate Risk Sharing and Rewards ....35
2.6.6 Effective Working Relationships among Partners During/After
Contract Negotiations ....35
2.6.7 Legal Authority ..36
2.6.8 Other Key Success Factors for Transportation Project PPPs ..36
3.
Transportation PPP Activity in Mexico ..38

3.1 Major Toll Road Developments ..38
3.1.1 Early Toll Road Strategies ..38
3.1.2 President Salinas Private Toll Road Plan ...39
3.1.3 Early Problems and Continued Expansion ..40
3.1.4 Restructuring Before and After 1994 42
3.2 Major Toll Road Issues and Implications for Best Practices ..44
3.2.1 Need for Adequate Program Preparations and Planning ..44
3.2.2 Cost Estimates and Construction Issues .45
3.2.3 Traffic and Revenue Forecasts, Tariff Rates,
and Operations Issues ..45
3.2.4 Financial and Economic Issues .46
3.2.5 Importance of Well-Designed Legal, Regulatory, and Institutional
Frameworks ....47
3.3 Current Situation of Roads in Mexico ....48
3.3.1 Highway Concession ...49
3.3.2 Service Provision Contracts ...53
3.3.3 Asset Utilization 57
4.
Mexico Transportation PPP Case Studies ..60

4.1 Background 60
4.2 Transportation Project Case Studies in Mexico ...61
4.2.1 Matehuala Bypass Toll Road .62
4.2.1.1 Funding and Finance .....63
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4.2.2 Morelia-Salamanca Toll Road 64

4.2.2.1 Funding and Finance .....67
4.2.3 Northern Bypass of Mexico City Toll Road .....67
4.2.3.1 Economic Benefits ..69
4.2.4 Asset Utilization ....70
4.2.4.1 Maravato-Zapotlanejo and
Guadalajara-Aguascalientes-Len Toll Roads 71
4.2.4.2 Reynosa-Matamoros and
Reynosa-Pharr International Bridge .73
4.2.5 Irapuato-La Piedad Toll-Free Road ..74
4.2.6 Tepic-Villa Union Toll Road ....77
4.2.7 Monterrey-Saltillo and Saltillo Bypass Toll Roads ..80
4.2.7.1 Impediments ....81
4.2.8 Anzalduas International Bridge ..82
4.2.8.1 Impediments ....84
5.
Results and Conclusions ....85

5.1 Issues and Strategies to Address Them ...85
5.2 Lessons from Mexico Transportation PPP Case Studies ..85
5.3 Conclusions ...86
6.
References ...98
7.
Annexes ..102
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List of Figures
Figure 2.1 Mayor Types of Transportation PPPs .....16
Figure 3.1 Mexico Highway Network ..48
Figure 3.2 Mexico Main Highway Corridors ...49
Figure 3.3 New Highway Concession Model Construction Stage ..51
Figure 3.4 Comparison of PPP and Concession Models ....53
Figure 3.5 Main Risks in PPS Projects ...55
Figure 3.6 Legal and Document Structure in Mexican PPP Project ..55
Figure 3.7 Utilization of Highway Assets ....58
Figure 4.1 Matehuala Bypass Project Site Map 62
Figure 4.2 Ribbon Cutting for the Matehuala Bypass ..63
Figure 4.3 Morelia-Salamanca Toll Road Project Site .65
Figure 4.4 Morelia-Salamanca Toll Road Crossing Lake Cuitzeo .66
Figure 4.5 Arco Norte Bypass of Mexico City Project Site Map ...68
Figure 4.6 Jilotepec-Tula: First part of the Northern Bypass of Mexico City 70
Figure 4.7 Maravatio-Zapotlanejo and Guadalajara-Aguascalientes-Leon Toll Roads (the
project) in west-central Mexico ..72
Figure 4.8 Site Map of the Reynosa-Matamoros Toll Road and Reynosa-Pharr International
Bridge (exixting) and the Reynosa Bypass and the Rio Bravo Donna International Bridge
(to build) ...74
Figure 4.9 PPS La Piedad-Irapuato Toll Free Road Site Map ....75
Figure 4.10 La Piedad-Irapuato under construction .76
Figure 4.11 La Piedad-Irapuato Modernization Completed in July 2007 ..76
Figure 4.12 Tepic-Villa Union Toll Road Project Site ...78
Figure 4.13 San Pedro Bridge on the Tepic-Villa Union Highway ..79
Figure 4.14 Monterrey-Saltillo and Saltillo Bypass Toll Road Site Map 80
Figure 4.15 Monterrey-Saltillo Toll Road under construction ..82
Figure 4.16 Anzalduas Bridge Connector Site Map .83
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List of Tables
Table 2.1 Public and Private Sector Benefits and Risk of Transit-Oriented Development .22
Table 2.2 Types of Risks Associated with Transportation Infrastructure Project PPPs .....30
Table 2.3 Consequences and Mitigation Strategies for Mayor Types of PPP Project Risks .....32
Table 2.4 Legal Issues Associated with Transportation Infrastructure Project PPPs .....36
Table 3.1 Average Daily Traffic as % of Guaranteed Traffic ...42
Table 3.2 Highway Concession Program (2007) ..52
Table 3.3 Public-Private Partnership Model (2007) ..56
Table 4.1 Summary of Bid Tender in Maravatio-Zapotlanejo and
Guadalajara-Aguascalientes-Leon Toll Roads ..73
Table 4.2 Tepic-Villa Union Toll Road Concession Summary ....79
Table 4.3 Key Dates in the Construction of Monterrey-Saltillo Toll Road .81
Table 4.4 Summary of Investment of the Anzalduas International Bridge ....84
Table 5.1 Legal and Technological Issues and Strategies Used to Address Them for
Mexico Transportation PPP Projects ..89
Table 5.2 Funding/Financial Issues and Strategies Used to Address Them for
Table 5.3 Environmental Issues and Strategies Used to Address Them for
Table 5.4 Administrative Issues and Strategies Used to Address Them for
Mexico Transportation PPP Projects..95
Table 5.5 Key Lessons from Mexico Transportation PPP Projects ...96
Table 5.6 Critical Success Factors for PPP Transportation Projects ....97
List of Annexes
Annex A Glossary of Terms ...102
Annex B List of Acronyms ..105
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Acknowledgements
The thesis has been an inspiring, very challenging, but always interesting and exciting
experience. I am very grateful to my advisers, Dr. Christoph Winter and Dr. Jan C. Bongaerts, for
the patience and encouragement.
Many thanks and heartfelt appreciation to my friends in Germany and in Mexico, for the constant
prodding to finish my MBA, for helping me hold my ground, and for believing I could soar high.
Finally, I wish to thank my family for their continuous love and encouragement, for always
believing in me, and for never failing to provide all the support.
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1. Introduction
Since the late 1980s, public-private partnerships (PPP) have come to the fore in various countries
around the world in the provision of infrastructure. PPPs provide an opportunity for governments
to provide social capital infrastructure in the form of schools, hospitals and roads while benefiting
from greater cost-efficiency that may be achieved from private sector involvement. It is argued
that alignment of incentives drives the efficiencies that are derived from PPP arrangements.
Private sector participation in asset and service provision can maximize value for money for
government by expediting financing, facilitating innovation, providing better risk management, and
integrating life-cycle management (Miller, 2000).
Internationally PPPs have become increasingly attractive for governments seeking fiscal
discipline. PPPs provide public agencies opportunities to deliver transportation facilities using
private sector resources without necessarily committing public debt or equity. In the face of
increasing gaps between infrastructure financing requirements and revenues, public agencies
often view PPPs as a way to expedite critical infrastructure that may otherwise not be built.
In Mexico, the trend towards PPPs in the provision and maintenance of highway infrastructure
has been gradual due to the strength of the funding (Mexican peso crisis in 1994) and institutional
arrangements (Mexicos political crisis in the 1990s) that supported the nations traditional
roadway development program. This included a dedicated transportation trust fund supported by
oil revenues, federal transportation agencies to provide administrative oversight of the program,
and state transportation agencies which delivered the program through project planning,
financing, development, and maintenance activities. However, as Mexico highway system
matured, the needs for repairing and expanding the Nations network of roads, bridges, and
tunnels have escalated beyond the fiscal capabilities of traditional funding sources to pay for
them at both the federal and state levels of government (World Bank, 2003). This has resulted
from a number of causes, including:
The rapid pace of facility deterioration and functional as well as structural obsolescence
due to the advanced age of many of these facilities and in some cases deferred
maintenance of facilities by states which lacked the resources to perform normalized
maintenance to better preserve these infrastructure assets.
The growth in the nations economy and its position in the global economy (North
American Free Trade Agreement) which has led to increasing movement of freight over
the nations highway system.
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Escalating growth in personal travel that is congesting the highway system which has
grown little over the past 20 years.
Rapidly rising costs of building and maintaining highway infrastructure as the price of
construction materials has increased substantially in recent years due to greater
competition from countries experiencing accelerated growth, particularly China, India,
and Eastern Europe.
The general unwillingness of elected officials at both federal and state levels to raise the
motor fuel tax or institute an alternative funding strategy that will sustain the condition and
capability of the nations highway system to support economic growth, interstate and
international commerce and public mobility.
The culmination of these interrelated conditions has led to an increasing willingness by

transportation infrastructure agencies at both the federal and state levels to consider and in some
cases apply alternative funding, financing, contract delivery, and life-cycle preservation methods
to leverage the scarce public resources. The Federal government through the Secretariat of
Communications and Transportation (SCT) has promoted greater innovation in the ways
highways are planned, financed, procured, and administered through workshops and sponsored
research, which are aimed at promoting innovative ways that encourage the use of PPPs in the
national highway development and preservation program (World Bank, 2003).
1.1 Purpose and Objectives
The purpose of this thesis is to promote greater understanding of the role institutional factors
(including statutory, regulatory, financial, organizational, procedural, and cultural) play in
facilitating or impeding the formation and successfully implementation of public-private
partnerships and to identify effective strategies for overcoming institutional impediments and
facilitating successful PPP development and implementation, based on the experience of a
number of successful domestic transportation PPPs. To accomplish this purpose, the study
performed the following activities:
Conduct a literature review to characterize the types and implications of various

institutional factors that significantly impact the potential for successful implementation of
transportation PPPs;
Develop and execute a study plan to collect secondary and direct information on the
major
institutional
issues
that
confronted
successfully
implemented
PPPs
for
transportation projects in Mexico;
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Develop a series of case studies of domestic PPPs that characterize transportation

project PPPs by facility type and contract type, describe their institutional challenges and
how these issues and their implications compare and contrast between projects, and
identify strategies to effectively overcome these impediments to successful PPP
implementation; and
Synthesize and document the study findings in a guidebook to help prospective sponsors
and participants in PPPs understand the institutional context for transportation projects,
the institutional issues that can undermine formation or implementation of these PPPs,
and ways to deal with or overcome these impediments based on best practices cited from
PPPs successfully implemented in Mexico and elsewhere.
1.2 Scope and Methodology
The study reviewed and summarized the available literature on the application and management
of PPPs for transportation infrastructure in Mexico and overseas. This provided a summary of
benefits, risks and critical success factors arising from PPP arrangements in Mexico and
elsewhere. The study then assembled a list of candidate transportation PPPs in Mexico, from
which a group would be selected for developing the individual case studies. From this group of
projects, a finite set was chosen for investigation using project documentation available from the
literature, including that provided by relevant project websites, annual reports and local
knowledge. While general information is available about many PPP transportation projects
around the world, there are relatively few such projects in Mexico to choose from.
It should be noted that given the commercial and political nature of PPP arrangements,
information required to provide a comprehensive evaluation of PPP projects is often incomplete,
not available, or restricted. Furthermore, personnel from the private sector concession teams
generally disperse at various junctures of the concession. For example financial and legal
personnel involved in PPP projects disperse at financial closure of each project. Design and
construction personnel often disperse after the project is opened to traffic. This further inhibited
information that could be derived at either the consultation or development stages.
As a consequence of this, the study found that project partners whom attempted to contact were
often either not available or reluctant to respond, particularly those in the private sector. When the
author was able to make contact, many were reluctant to answer questions regarding issues that
arose during the project and the strategies used to overcome them. The public sector sources
were more forthcoming and candid in their discussion of the rationale for using a particular PPP
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arrangement to develop needed projects, as well as the key issues confronting their PPP projects
and how they were addressed. As such, information presented in this thesis is based on the best
available public information on each PPP project. This information is reflected in the domestic
case studies.
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2. Public-Private Partnerships in Transportation Projects
This chapter provides an overview of public-private partnership (PPP) approaches to delivering

surface transportation infrastructure projects and services. This includes presenting background
information on the evolution of PPPs, defining transportation PPPs and the various types of
approaches to involving the private sector in public-sponsored transportation projects, the
benefits and risks associated with PPPs, and critical factors for successful development and
implementation of a PPP project. The benefits, risks, and critical success factors are relevant to
PPP projects worldwide.
2.1 Background
Private sector involvement in the provision of transportation infrastructure and services has been
evolving for the last twenty-five years by nations overseas which realized early on that the lack of
a dedicated transportation funding source required different approaches to financing and
delivering transportation infrastructure, both highway and passenger rail. Hence there were early
attempts at PPP arrangements in the late 1970s with highway concessions in France and the
mid-to-late 1980s in places like Spain and England. The strongest impetus for transportation
PPPs overseas occurred in England, where economic reforms encouraged a number of efforts to
privatize major elements of the nations transportation systems. These early efforts focused
primarily on the most developed transportation systems, including railroads, public transportation,
and aviation. These initiatives included to efforts to more significantly involve private sector
resources to help finance and deliver projects in various sectors of the economy, including health
care, accommodations, defense, and transportation.
The major impetus for using PPPs in infrastructure projects occurred in England in 1992 when
legislative and regulatory reforms were put in place under the name of Private Finance Initiative
(PFI). PFI are a subset of PPPs typically referred to as concessions or franchises, whereby the
private sector assumes responsibility for the public asset through a long-term contract. Since that
time, other countries in the British Commonwealth of nations have instituted their own PPP
initiatives, including Australia, New Zealand, Scotland, and Canada.
With the creation of the European Union, its expansion after the collapse of the Soviet Union, and
the revitalization of the European economy in the last decade, the interest and application of PPP
approaches to transportation infrastructure delivery has spread across the world, with countries in
Central and Eastern Europe, Asia, and Latin America seeking private partners to expedite the
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financing and delivery of major transportation projects aimed at addressing the opportunities
presented by global changes in trade, mobility, and standards of living (Miller, 2000).
Since the mid 1980s, both public and private sectors in countries around the world have gained
significant experience and confidence in using PPPs to get particularly large and complex
infrastructure projects built. In addition, local urban governments are outsourcing maintenance of
their road networks to lower costs and improve performance. Growing from a cottage industry to
just under $0.5 trillion dollar mega-industry investing in all kinds of infrastructure worldwide,
including roads, railroads, airports, seaports, water/wastewater, and building, with almost $0.8
trillion dollars in PPP financing for planned project yet to be completed.
The predominant types of infrastructure financed or delivered through some form of PPP
arrangement varies by global region based on the level of development and relative modal share
of travel in each region. The largest proportion of funding is generally for road projects, with rail
passenger projects the second largest user of PPP-based financing or project delivery. This is
true for each region of the world, except for Africa and the Middle East, where water projects
dominate. Countries in this region are generally less developed economically and in greater need
of basic water delivery and treatment resources. However, even in Africa and the Middle East,
road projects are the second largest proportion of PPP-financed or delivered infrastructure
projects.
The use of PPPs for road infrastructure projects support continued economic growth in the more
developed parts of the world while fostering economic development in the less developed parts of
the world. In the latter case, various international funding organizations like the World Bank, the
Asian Development Bank, or the Inter-American Development Bank, stimulate the use of various
financial and asset management tools and techniques to promote the development of needed
infrastructure projects around the world, particularly road and rail projects.
Over the last 20 years, Europe has had the largest PPP infrastructure program in terms of road
and rail project costs. Asia has had the second largest road and rail programs, although in recent
years Asian countries have added significantly to their highway PPP projects. North America
(Canada, Mexico, and the United States) have been third in terms of the cost of road and rail
projects financed or delivered through some form of PPP arrangement. This may change as more
project sponsors seek to leverage and expedite their capital improvement programs through the
use of PPPs, innovative financing, and innovative project delivery (Spiering et al, 2007).
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2.2 Definition and Types of Public-Private Partnerships
Public-private partnerships are defined by the US DOT as follows:

A public-private partnership is a contractual agreement formed between public and private
sector partners, which allows more private sector participation than is traditional. The
agreements usually involve a government agency contracting with a private company to
renovate, construct, operate, maintain, and/or manage a facility or system. While the public
sector usually retains ownership in the facility or system, the private party will be given
additional decision rights in determining how the project or task will be completed 1
This definition emphasizes that with a PPP the public and private sectors share responsibility for
the delivery of the project and/or its services. By expanding the private sector role, the public
sector is better able to avail itself of the technological, managerial, and financial resources to
leverage scarce public funds and expedite the delivery of a project and/or services in a more
cost-effective manner and with reduced risk to the public agency sponsor. As noted above, the
public sector bore most project delivery, financial, and operational risks. By sharing responsibility
and resources for the delivery of a PPP project, both public and private sectors share in the
potential risks and rewards from the delivery of the facility or service relative to what they retain
responsibility for. 2
PPPs come in a wide variety of arrangements, representing a broad spectrum of private and
public sector involvement in the various phases of project development, finance, implementation,
operations, maintenance, and preservation. The five major types of PPP arrangements are listed
below.
2.2.1 Private Contract Fee Services
For both highway and transit modes, private contract services represent the most common form
of private sector involvement in surface transportation project and service delivery. For the
highway mode this includes contract planning and environmental studies, facility and right-of way
maintenance, and operations, including the operation of transportation management centers and
various ITS services. Transit agencies have long contracted for the operation of some or all of its
modal services with the private sector, especially paratransit services for senior and persons with
1
US DOT. Report to Congress on Public-Private Partnerships, December 2004, p.10. Retrieved Nov 24, 2007, from US
DOT: http://www.fhwa.dot.gov/reports/pppdec2004/
2
National Council for Public-Private Partnerships. Public Private Partnerships Defined. . Retrieved Nov 24, 2007, from
NCPPP:
http://www.ncppp.org/howpart/index.shtml#define
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disabilities. In addition, many transit agencies contract for maintenance services on some or all of
their vehicles, facilities, and infrastructure (Spiering et al, 2007).
2.2.2 Alternative Project Delivery Approaches
In recent years surface transportation agencies have increasingly turned to PPP project delivery
approaches (such as design-build or DB) in order to procure new or expanded facilities. Agencies
use PPP delivery approaches in an attempt to obtain time savings, cost savings, new technology,
and more innovative, higher quality projects with reduced risks (Spiering et al, 2007).
2.2.3 Multimodal Partnerships
Multimodal partnerships include transportation projects that involve more than one mode, such as
park and ride lots, High Occupancy/Toll (HOT) Lanes with Bus Rapid Transit (BRT) services,
airport transit extensions, or truck/rail transfer facilities. Multimodal partnerships may or may not
be PPPs, depending on whether the private sector is involved in the design, construction,
operation, maintenance, finance, and/or management of the multimodal project (Spiering et al,
2007).
2.2.4 Joint Development
Surface transportation agencies are partnering with private developers to capture a portion of the
increased value resulting from enhanced accessibility provided by proposed or recent
transportation projects, often referred to as joint development or transit-oriented development (in
the case of transit). Economic development-based partnerships provide access to additional
capital and operating revenues for surface transportation agencies through the receipt of tax
increment financing, special assessment or business improvement district fees, access fees, and
increased toll or fare revenues, as well direct private sector funding of capital facilities that
promote access between transportation facilities and private development (Spiering et al, 2007).
2.2.5 Long-Term Lease or Concession Agreements
Concession agreements typically involve the long-term lease of publicly financed transportation
facilities (such as toll roads or parking garages or air rights over transit stations or highways) to a
private sector concessionaire for a specified time period in return for the right to collect the
revenues generated by the facility. During the concession period, the concessionaire may be
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responsible for financing, developing, and delivering the project, as well as facility operation,
maintenance, and preservation.
These five categories of transportation PPP arrangements in the U.S., their components, and the
benefits of each are described in more detail below. Figure 2.1 illustrates the hierarchy of major
types of PPPs discussed in this chapter, starting at the bottom with PPPs that have the least
private sector role and ending on the top with PPPs with the greatest private sector role.
Figure 2.1 Major Types of Transportation PPPs
High
Asset Sale
Multimodal Agreement (Public-Private Partnership)

Joint Development Agreement (JDA pre-development)
Transit-Oriented Development (TOD post-development)
Build-Own-Operate (BOO)
Build-Transfer-Operate (BTO)
Build-Operate-Transfer (BOT)
Design-Build-Finance-Operate (DBFO)
Design-Build-Operate-Maintain (DBOM)
Project
Delivery
Approaches
Design-Build with Warranty (DB-W)

Design-Build (DB)
Construction Manager at Risk (CM@Risk)
Contract Maintenance
Fee-Based Contract Services
Source: Spiering et al. (2006, p.66)
Degree of Private Sector Responsibility and Risk
Full Service Long-Term Concession or Lease
Low
2.3 Public-Private Partnerships Arrangements
The following pages describe each of the five major types of PPP arrangements for delivering
surface transportation projects, including variations where developed and applied.
2.3.1 Private Contract Fee Services, including Contract Maintenance
Private contract fee services are contracts between public agencies and the private sector for
services that are typically performed in-house, such as planning and environmental studies,
program and financial management, and/or operations and maintenance. These contracts
generally are awarded on a competitive bid process to the contractor offering the best price and
qualifications. The potential benefits of private contract fee services include:
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Reduced work load for agency staff;
Potential for reduced costs; and
Opportunities to apply innovative technologies, efficiencies, and private sector expertise.
2.3.2 Alternative Project Delivery Approaches
Different project delivery approaches can be developed by combining various phases together
that the private sector takes responsibility for. The primary combinations are discussed below.
Design-Bid-Build. Design-bid-build (DBB) is the traditional form of project delivery where

the design and construction of the facility are awarded separately to private sector
engineering and contracting firms. As a result, the DBB process is divided into a two-step
delivery process involving separate phases for design and construction. In the design
phase, the project sponsor either performs the work in-house or contracts with an
engineering and design firm to prepare the preliminary engineering plans and
environmental clearance, which results in a project plan at the 30 percent completion
stage, and the final drawings and specifications for the project. Once the design phase is
complete, the project sponsor separately contracts with a private construction firm
through a competitive bidding process. Under a DBB contract, the project sponsor, not
the construction contractor, is solely responsible for the financing, operation, and
maintenance of the facility and assumes the risk that the drawings and specifications are
complete and free from error. The DBB selection process is based on negotiated terms
with the most qualified firm for the design phase; while, the award of the construction
contract typically is based on the lowest responsible bid price.
Design-Build. Unlike DBB where the design and construction of projects is procured in
two separate contracts with little or no overlap in the respective project work phases, the
DB delivery approach combines the design and construction phases into one, fixed-fee
contract. Under a DB contract, the design-builder, not the project sponsor, assumes the
risk that the drawings and specifications are free from error. While the design and
construction phases are performed under one contract, it is important to note that the
design-builder may be one company or a team of companies working together. The DB
selection process may be based on a negotiation with one or more contractors or a
competitive process based on some combination of price, duration, and qualifications.
Increasingly DB contracts are being awarded on the basis of best value, considering each
of these factors. DB is a successful, well-established process for delivering major capital
projects by both the public and private sectors in many countries overseas. DB offers
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cost-effective project delivery in terms of schedule, cost, and quality. The primary benefits
that have been associated with DB delivery approaches compared to traditional DBB
delivery include the following. 3
o
Time savings - The potential for time savings results from early contractor
involvement in the design phase, which increases the constructability of the
design plans; the ability to work concurrently on the design and construction
phases for portions of the project; and the elimination of the bidding process
between the design and construction phases that is required of traditional DBB
project delivery.
Cost savings - The potential for cost savings results from continued
communication between design, engineering, and construction team members
throughout the delivery; reduced inspection requirements by the project sponsor
since the design-builder is responsibility for these activities, reduced change
orders due to early contractor involvement in the design phase; and shortened
project timeline.
Shared risks - Since the potential project risks are shared among the public and
private sectors, the risks may be assigned to the party best able to handle them.
For example, the private sector may be better equipped to handle the risks
associated with design quality, construction costs, and delivery schedule
adherence since they are responsible for both the design and construction of the
facility; while, the public sector may be better able to manage the public risks of
environmental clearance, permitting, and right-of-way acquisition.
Improved quality - The potential for improved quality results from the
involvement of the design team through the project development and
opportunities to incorporate project innovations and new technology that may
arise based on project needs and contractor capabilities.
DB project delivery may include a variety of structures and combinations that result in
private participation only in the design and construction phases or may extend into
operations, maintenance, and project financing. These variations of the DB delivery
approach are discussed in greater detail below.
Design-Build with a Warranty. Under the DB with a warranty approach, the designbuilder guarantees to meet material, workmanship, and/or performance measures for
Pakkala, Pekka Innovative Project Delivery Methods for Infrastructure: An International Perspective, Finnish Road
Enterprise,
2002. Retrieved November 29, 2007, from http://alk.tiehallinto.fi/julkaisut/pdf/pakkalae5.pdf
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a specified period after the project has been delivered. The warranties may last five
to 20 years. The potential benefits of the DB with a warranty approach include the
assigning of additional risk to the design-builder and reducing the project sponsors
need for inspections and testing during project delivery.
Design-Build-Operate-Maintain. Under a design-build-operate-maintain (DBOM)

delivery approach, the selected contractor is responsible for the design, construction,
operation, and maintenance of the facility for a specified time. The contractor must
meet all agreed upon performance standards relating to physical condition, capacity,
congestion, and/or ride quality. The potential benefits of the DBOM approach are the
increased incentives for the delivery of a higher quality plan and project because the
design-builder is responsible for the performance of the facility for a specified period
of time after construction is completed.
Design-Build-Finance-Operate. The design-build-finance-operate (DBFO) delivery

approach is a variation of the DBOM approach. The major difference is that in
addition to the design, construction, and operation of the project, the contractor is
also responsible for all or a major part of the projects financing. The potential
benefits for the DBFO approach are the same as those under the DBOM approach
and also include the transfer of the financial risks to the design-builder during the
contract period. While the project sponsor retains ownership of the facility, the DBFO
approach attracts private financing for the project that can be repaid with revenues
generated during the facilitys operation.
Build-Operate-Transfer. Build-operate-transfer (BOT) is similar to the DBFO

approach whereby the contract team is responsible for the design, construction, and
operation of the facility for a specified time, after which the ownership and operation
of the project is returned to the project sponsor. Under a BOT approach, the project
sponsor retains ownership of the facility as well as the operating revenue risk and any
surplus operating revenues. The potential benefits of using a BOT approach are
similar to the benefits associated with using a DBOM contract: increased incentives
for the delivery of a higher quality plan and project because the contractor is
responsible for the operation of the facility for a specified time period after
construction.
Build-Own-Operate. Under a build-own-operate (BOO) delivery approach, the

design, construction, operation, and maintenance of a facility is the responsibility of
the contractor. The major difference between BOO and DBOM, DBFO, or BOT
approaches is that ownership of the facility remains with the private contractor. As a
result, the potential benefits associated with a BOO approach are that the contractor
19
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is assigned all operating revenue risk and any surplus revenues for the life of the
facility.
2.3.3 Full Delivery or Program Management
With a full delivery approach, the construction contractor provides a wide variety of services
beyond construction to the project sponsor. These services generally begin during the design
phase and may continue through the operation and maintenance of the facility. The potential
benefit of the Full Delivery approach is that it allows the project sponsor to leverage its resources
throughout the design, construction, and operation of the facility. A primary form of full-service
delivery is the Long-Term Concession or Lease Agreement.
Long term lease agreements involve the lease of publicly financed facilities to a private sector
concessionaire for a specified time period. Under the lease, the private sector concessionaire
agrees to pay an upfront fee to the public agency in order to obtain the rights to collect the
revenue generated by the facility for a defined period of time (usually from 25 to 99 years). In
addition to the concession fee, the concessionaire agrees to operate and maintain the facility,
which may include capital improvements in some instances. Long term lease agreements are
awarded based on a competitive process to a qualified bidder with the best bid price. Recent long
term lease agreements in Mexico include the Northern Bypass of Mexico City, Monterrey-Saltillo
and Saltillo Bypass and the Reynosa-McAllen Anzalduas International Bridge.
The potential benefits of long term lease agreements include: 4
Transferring responsibility for increases in user fees to the private sector;
Generating large up-front revenues for the public agency;
Transferring operations, maintenance, and capital improvement responsibilities to the

private sector;
Transferring most project, financial, operational and other risks to the private
concessionaire; and
Taking advantage private sector efficiencies in operations and maintenance activities.
2.3.4 Transit Related Development Approaches
The U.S. Federal Highway Administration PPP website presents an overview on his web page about the potential
benefits of long term leases. Retrieved November 29 , 2007, from http://www.fhwa.dot.gov/ppp/ltla.htm
20
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Transit related development is viewed differently by different agencies and regions depending on
the status of the transit facility when the development is committed. However, the common thread
between all of these definitions is that transit related development involves pedestrian-friendly,
higher-density development near transit facilities. Within the transit industry, transit related
development is generally defined as a pattern of dense, diverse, pedestrian-friendly land uses
near transit nodes that, under the right conditions, translates into higher patronage. 5 Transit
related development typically includes higher density residential, commercial, and/or retail
developments within a - to -mile radius (0.4 km to 0.8 km) of transit stations and stops. Mixed
use development is a common element of transit related development (Miller, 2000).
Transit related development can provide financial support for transportation infrastructure through
four formalized development opportunities:
Transit-Oriented Development;
Joint Development;
Business Improvement Districts; and
Tax Increment Financing.
These opportunities are discussed in greater detail below.
Transit-Oriented Development. Transit-oriented development (TOD) is commercial and

residential development that is a consequence of proximity to an existing or recently
opened transit station or terminal. TODs may involve the partnership of private
developers with local governments, development agencies, and transit agencies in order
to enhance the land use surrounding a transit facility. Transit agencies or local
governments frequently own land located near existing or future transit facilities that is
not being used, or could be put to a higher use. Developers are continuously looking for
new development opportunities, and the location of available land with good access to
transit is attractive for new development or re-development. With TOD, the private
developer is solely responsible for the financing and risks associated with constructing
the development on publicly owned land. Local governments may also play a role beyond
that of land owner; they can provide incentives to developers in the form of density
bonuses,
rezoning,
relaxing
parking requirements,
and
streamlining
regulatory
requirements. It takes the commitment, communication, and coordination of all these

public and private groups to make TOD successful.
Cervero, Robert (Principal Investigator). TCRP Report 102: Transit-Oriented Development in the United States:
Experiences,
Challenges, and Prospects. Transportation Research Board, 2004, p.7. Retrieved November 29 , 2007, from
http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf
21
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The benefits of TOD are quite varied and extend well beyond transit usage. Table 2.1
summarizes the primary and secondary benefits from the perspective of the public and
private sectors.
Joint Development. Joint development is a type of TOD involving transit agencies

working with private developers in planning and executing a project. Joint development is
project specific, dealing with the development on, above, or adjacent to land owned by a
transit agency.
Table 2.1 Public and Private Sector Benefits and Risks of Transit-Oriented Development
Public Sector - Primary Benefits/Risks
Private Sector - Primary Benefits/Risks
Increased ridership and fare revenues
Higher land values
Joint sharing of costs for mixed-use stations
Higher rental/lease rates and sales prices
Potential for dedicated property/sales tax revenue
More affordable housing opportunities
Potential for lease payments or other developmentrelated revenues
Risk of development market decline negating value

of developer investment in transit project
Risk that private development revenues fail to accrue

due to delays in development activity
Risk of commercial development delays caused by

transit project delays
Public Sector - Secondary Benefits/Risks
Private Sector - Secondary Benefits/Risks
Revitalized neighborhoods and commercial zones
Higher retail sales from greater customer exposure
Reduced traffic congestion and suburban sprawl
Increased access to labor
Reduced need for roads and other infrastructure
Reduced parking costs in suburban locations
Reduced crime and increased safety resulting from

rejuvenated urban landscape
Risk that transit service levels do not match needs of

development lessees, patrons, or residents
Risk of development requirements requiring costly

changes to transit facility designs and operations
Risk of mismatch between transit patrons and retail

or residential customers of related development
Source: Robert Cervero, TCRP Report 102: Transit-Oriented Development in the United States, TRB, 2004,
pp.120-131. Retrieved November 29 , 2007, from
http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf
Adapted by the author
With joint development, the transit agency provides developers with the right to design
and construct a residential, commercial, retail, or mixed use building on or above transit
property in return for a negotiated payment. Developer payments to transit agencies vary
significantly and may include an annual lease payment for a specified period of time as
well as the construction of transit facilities, such as portals to transit facilities, parking
facilities, and station facility improvements. The form of joint developer payments are
22
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project specific and depend on the benefits and needs of the developer and transit
agency. The primary forms of joint development payment arrangements include: 6
Ground Lease. A ground lease involves an annual rent payment to the transit
agency for the right to develop property owned by the transit agency. The length
of the lease agreement must be long enough for the developer to receive an
acceptable return on investment from the rents it charges to the occupants of the
development. When the lease expires, ownership returns to the transit agency.
Air-rights Lease. An air-rights lease is similar to a ground lease in that it

involves an annual rent payment to the transit agency for an agreed upon period
of time; however, the lease is for the right to build the development above the
transit station. The length of the lease agreement must be long enough for the
developer to receive an acceptable return on investment from the rents it charges
to the occupants of the development. When the lease expires, ownership returns
to the transit agency.
Operations Cost Sharing. Operations cost sharing involves the sharing of

certain operations costs between the transit agency and the development.
Common examples include ventilation systems, parking, and utilities.
Construction Cost Sharing. Construction cost sharing involves the developer

paying for portions of the transit agencies construction costs, such as parking
facilities, building foundations, access portals, transit centers, and bus shelters.
Construction cost sharing is one type of joint development that is easily applied
to bus service as well as rail.
Station Connection Fee. A fee (may be one-time or annual) charged by transit

agencies to a developer for the right to connect its development directly to the
transit station. The connection allows riders direct access to properties without
having to go outside the transit station.
Negotiated Private Contribution. Transit agencies negotiate directly with

developers to receive private contributions to transit facility improvements. The
value of the contributions is based on the benefits received by the private
developer from the transit investment. These contributions are generally a
onetime fee or payment.
Benefit Assessment District. A geographic benefit district is established around

a transit station. Property owners within the benefit district are then assessed a
Cervero, Robert (Principal Investigator). TCRP Report 102: Transit-Oriented Development in the United States:
Experiences, Challenges, and Prospects. Transportation Research Board, 2004, pp.25-32. Retrieved November 29 ,
2007, from http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearchProg.pdf
23
_______________________________________________________________________________________________________
fee based on the benefits they receive from the transit facility or improvement to
help finance its construction. Residential properties are frequently exempted from
the assessment.
o
Equity Partnership. Equity partnerships involve the exchange of certain assets

between the transit agency and the developer, such as a land sale.
Incentive Agreement. Incentive agreements involve the developer contributing

or sharing the costs of transit investments, such as station connections or
improvements, in return for density bonuses that allow the developer to add
additional floors or space to their development, rezoning of property, or relaxing
parking requirements.
The primary benefit of joint development for transit agencies is increasing agency revenues
through increases in ridership, the generation of lease payments, capital or operating
contributions, or one-time fees, as described below.
o
The mixed use development at transit stations attracts additional riders to the
transit system, thereby increasing fare revenues.
JDAs 7 may generate private sector capital and operating contributions as well as
annual lease payments for transit agencies. These additional annual revenues
and capital and operating contributions diversify transit agency funding and help
offset some of the agencys on-going capital and operating expenses.
In US, for instance, the Washington Metropolitan Area Transportation Authority (WMATA) has
been using joint development projects successfully for over 30 years to subsidize its capital and
operating expenses. Some of WMATAs joint development activities include air-rights leases at
two stations (Ballston and Bethesda), ground leases as 22 stations (including Silver Spring and
Friendship Heights), operating cost sharing at eight stations (including Farragut West and
Bethesda), capital cost sharing at 10 stations (including Bethesda), and station connector fees at
seven stations (including Friendship Heights and Clarendon).
In addition to the revenue benefits, joint development offers other secondary benefits or societal
improvements, including:
Increased economic activity and vitality of station areas;
A safer environment around transit stations; and
A more aesthetically pleasing place to live, work, and visit near transit stations and
terminals.
JDA: Joint Development Agreement
24
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These benefits may be secondary for transit agencies, but they are the primary benefits for
private developers. Without these economic, safety, and attractiveness benefits, the private
developers would not be interested in participating in joint development activities because the
developer would not be able to attract the residential, commercial, and retail tenants necessary to
make their investment profitable.
Business Improvement Districts. Business Improvement Districts (BIDs) assess

properties located within a defined geographic area to finance a variety of enhanced
services in the area including security, maintenance, marketing, economic development,
parking, transportation, and special events. BIDs usually are managed by a quasi-public
agency or a nonprofit organization under the direction of a board composed of
representatives from the various business and property interests within the district.
Historically, BID transportation projects have focused on pedestrian facilities and
movement within the district; however, as accessibility and congestion levels increase
and impact economic development, BIDs have started to take on a greater role in
transportation planning and initiatives. In some areas, BIDs have contributed to the
financing of new or expanded transportation services in order to enhance the economic
activity and growth in the district, such as a free trolley or circulator services in Tampa
and Washington D.C. In addition, some BIDs have sponsored transportation
enhancements or improvements to take advantage of the Federal and state
transportation grants available to fund the majority of the project costs.
If the businesses and property owners within BIDs understand the benefits of
transportation programs on economic activity and property values in the district, BIDs are
more likely to contribute funding to transportation projects. In new developments,
transportation initiatives offer the ability to provide better access to the district, generating
more traffic and economic activity. Additionally, as congestion levels increase in existing
districts, transportation improvement initiatives can move more people more efficiently
through the district and increase economic activity. From the public transportation agency
perspective, the potential benefits of including BIDs in transportation infrastructure
projects include access to property tax assessment revenues; revenue diversification;
creating partnerships with the businesses and property owners within the district; and
coordination of transportation services with other services provided by the BID.
Tax Increment Financing. Tax Increment Financing (TIF) is a tool used by municipalities
to help finance the redevelopment of areas within a community through increased
25
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property taxes from the enhanced value of property (both developed and undeveloped)
resulting from the implementation of infrastructure and service improvements. Localities
may establish TIFs with the approval of property owners in the district. A TIF district is
usually administered by local government officials or a quasi-public agency with the
direction of a board or commission that makes the decisions on how and where the
revenues will be applied. Tax increment financing uses the future increases in property
tax revenues to finance current infrastructure investments (including transit and other
transportation facilities). The idea behind the TIF is that the infrastructure investments will
increase the value of existing property within the district as well as encourage new
development that expands the tax base. As a result, private investors are willing to
provide upfront capital for these investments because the debt service will be repaid
through the increase in future property tax revenues. As an example, in Portland (US)
has used TIF revenues to support extension to its Metropolitan Area Express (MAX) light
rail transit system, including the Airport Extension (Spiering et al., 2007).
A TIF does not increase the property tax rate in the district; rather, it dedicates a portion
of future growth in the districts property tax revenues due to an expanded tax base for a
specified time period (usually 20 to 25 years) to meet the debt service payments for the
infrastructure investment. The primary benefits associated with using TIF to fund
transportation investments include:
- Providing access to capital financing markets with a dedicated
revenue
stream for debt repayment; and

- Providing access to new revenues without increasing taxes.
2.3.5 Multimodal Partnerships
Multimodal partnerships provide opportunities to combine the development, financing, and/or

operation of facilities that serve more than one transportation mode, including transit, passenger
rail, highway, and airports. With the passage scarcity of public funding, there has been increasing
interest in multimodal development and the coordination of projects across modes.
As transportation needs and connectivity requirements continue to increase in the places like the
European Union, China, and South America, successful multimodal partnerships will be essential
components in improving transportation efficiency, market competitiveness, service quality,
responsiveness to public needs, aesthetic appeal, and financial feasibility.
26
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Multimodal partnership projects do not have to be PPPs. Some may be PPPs involving several
public and quasi-public agencies. However, the opportunities for private sector involvement in
multimodal partnerships are an area of potential growth for transit-related PPPs, particularly when
toll roads and airports are involved due to the ability to leverage toll and airport revenues for
transportation investments (Perrot et al., 2000).
The primary results of multimodal partnerships include the ability to combine the strengths of
each partner. By involving other public transportation agencies as well as private sector partners,
multimodal projects have improved access to:
More diverse revenues and financial markets to fund transportation investments;
Increased economic development opportunities;
Increased ridership;
Commuter time savings; and
Efficiencies in the operation of all involved modes.
2.4 Benefits of PPPs
PPPs have the potential to offer benefits that may not otherwise be achievable through traditional
public procurement procedures or through privatization. PPPs offer an opportunity for the public
sector to reap the benefits of private sector involvement in infrastructure procurement while
meeting community obligations and retaining control over potentially important public assets.
These and other potential benefits of PPPs are described below.
2.4.1 Stronger Working Relations
In comparison to shorter-term procurements methods, PPPs provide the opportunity for public
sector agencies and private sector providers to develop long-term, high trust relationships. With
the need to concentrate on long-term objectives, there is greater incentive for public sponsors
and private providers to understand goals and share information to develop better long-term
solutions. Further, the opportunity to develop strong long-term relationships provides a better
forum in which to resolve problems and issues.
With transportation assets typically having long effective lives, a need exists for the public sector
to develop a long term relationship with a provider to assist the development of transportation
infrastructure, guide capital expenditure decisions and ensure that assets are maintained, safe
and are of high quality upon transfer (Guasch, 2004).
27
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However, the development of a long-term relationship will need to account for the possibility that
there may be a reduced desire on a providers part to seek the best solution due to the security of
the relationship. Public sponsors will also need to be mindful of the partnership proposing and
selecting options that minimize damage to the relationship, but may not maximize community
benefits (Lawther, 2000).
2.4.2 Reduction of Financial Constraints
Many projects proposed by public entities are postponed or do not proceed due to limited
financial resources, and in particular, the provision of upfront capital. PPPs provide an advantage
with respect to financing by allowing the private sector to finance projects using private funds, in
effect providing a form of off-balance sheet financing for public agencies. In turn, financing
commitments from the private sector often bring forward the development of projects that may
otherwise not proceed due to a lack of capital (Guasch, 2004).
2.4.3 Faster Delivery
PPPs can expedite the financing and delivery of transportation projects through the involvement
of the private sector in these phases of a project, that lower project costs by avoiding inflationary
cost increases, applying best practices and new technology, and transferring more technical and
other risks to the private sector which is often better able to manage these risks. The private
sector has an incentive to minimize construction delays in order to minimize costs and bring
forward their revenue stream. Contract conditions including early completion bonus payments
and the inclusion of the construction period within the concession period can provide further
incentives to bring forward delivery (Guasch, 2004).
2.4.4 Innovation and Expertise
Private sector involvement encourages the development of new and creative approaches to
financing, economies of scale, development, implementation and operation/maintenance. The
private sector can also offer expertise in project, operational and risk management. In particular,
financial markets have become savvy in the methods that they use to structure finance to suit
infrastructure projects through the use of stepped margin and indexed bonds (Guasch, 2004).
28
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2.4.5 Greater Cost Efficiency and Productivity
The private sector has an incentive to ensure its operations are as cost efficient as possible. In
particular, the private sector is often better at managing third-party usage of facilities, thus
reducing the net cost of a facility to transportation agencies. A private operator would also be
motivated to increase the productivity and return from assets, with greater interest in
implementing practices such as yield management and demand management when limited
capacity exists and is expensive to create (Guasch, 2004).
2.4.6 Integration
The potential integration of design, construction, maintenance, and operation provides incentives
for the private sector to optimize expenditure and maximize innovation to achieve the greatest
level of cost efficiency over the life of the asset through a life-cycle approach to asset delivery
rather than minimizing the cost of a specific part of the asset lifecycle e.g. construction costs
(Guasch, 2004).
2.4.7 Greater Choices
Project sponsors can match specific types of PPPs to individual projects based on their
characteristics and the capabilities and needs of public sector sponsors and private sector
providers. This model was successfully used in Hong Kong before being incorporated into China
when a number of transportation infrastructure projects were developed, each using a different
project delivery approach (DB, DBOM, DFOM, BTO, etc.), based on the nature of each project
and the interests and risk tolerance of the participating members of the partnerships (Guasch,
2004).
2.4.8 Increased Competition
PPPs also can enhance competition in how highway facilities and services are provided from a
functional, organizational, technological, and process perspective by engaging the private sector
through properly transparent contracting procedures that can leverage public sector capabilities
(Guasch, 2004).
29
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2.4.9 Risk Management
PPPs allow public sponsors to share the risk of a project with the private sector. In the risk
sharing process, public sponsors have the opportunity to pass risks that may be more effectively
managed by the private sector while retaining risks where it is in a better position to manage them
or deal with their consequences. For instance, the private sector may be more effective in
managing the variance in construction, operating, and maintenance costs while public agencies
may be more effective in managing public liability, environmental clearance, and permitting risks
(Guasch, 2004).
2.5 Risks of PPPs
While providing a variety of advantages, there are also risks to consider when using public-private
partnerships for transportation projects. The various categories of project risks associated with
the use of PPPs in transportation infrastructure development are listed below in Table 2.2.
Table 2.2 Types of Risks Associated with Transportation Infrastructure Project PPPs
Dem and/volum e
Com pensation and term ination clauses
Revenue
Changes of law
Environm ental/archeological
Econom ical shifts
Regulatory/contractual
Currency/foreign exchange
Paym ent structure/m echanism
Taxation constraints
Transaction cost
M oral hazard
Construction cost
Loss of control of assets
M aintenance cost
Political stability
Life-cycle cost
Protectionism
Liability/latent defects
Public acceptance
Source: Perrot et al. (2000, p.56-67)
At the end of the next page, Table 2.3 indicates potential consequences of a number of these key
risk factors for members of a PPP and suggests ways to mitigate these results. Several of the
major risk categories are discussed in more detail below.
30
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2.5.1 Transaction Costs
Significant transaction costs can be incurred by public entities procuring a PPP, with PPP
arrangements tending to be highly complex. Transaction costs are incurred by both public
sponsors and potential private sector providers at the procuring stage while preparing and
negotiating a PPP. When a PPP is awarded, additional costs maybe incurred to monitor
performance to ensure that a PPP agreement is being adhered to.
The impact of transaction costs can be reduced by providing the private sector opportunities to
participate in projects that have scale, in terms of time and expenditure. For example, recent
transportation funding legislation in the U.S. (SAFETEA-LU) reduced the project size thresholds
for certain innovative financing and project delivery mechanisms to promote the use of PPPs for
highway projects. For example, SAFETEA-LU lowered the threshold for using the credit support
and low-cost loan features of the Transportation Infrastructure Finance and Innovation Act (TIFIA)
from $100 million to $50 million per project. In contrast, public agencies in Australia have a variety
of opinions on the appropriate minimum project value required before a PPP becomes worth
pursuing (Seltzer, 2000). The Victorian Treasury recommends a project value of at least A$10
million while New South Wales Treasury recommends a project value of at least A$20 million. On
the other hand, the Queensland Government considers A$250 million as a minimum (Miller,
2000).
The impact of transaction costs can be mitigated through a variety of methods: decreasing
administration complexity, standardizing PPP procurement procedures, combining a series of
smaller scale projects, and increasing the lease period of a contract.
31
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Table 2.3 Consequences and Mitigation Strategies for Major Types of PPP Project Risks
Risk Category
Site Conditions
Design, Construction
and
Implementation
Risk
Financial
Operating
Market
Legislative
Asset Ownership
Description
Consequence
Mitigation
Existing structures
may be inadequate.
Contamination of site.
Necessary approvals
may not be obtained.
Additional construction
costs and time delays.
Clean up costs.
Commission studies to
investigate suitability of site
and structures
Private sector to
incorporate risk through
refurbishment during
construction phase
Facility incapable of
delivering at the
anticipated costs.
Physical or
operational
implementation tests
cannot be completed
Increase in recurrent
costs, delays
Delayed/lost revenue.
Seek reputable
constructors with strong
financial credentials.
Private party may pass risk
to builder/architects while
maintaining primary liability
Link payments to progress
interest rate risk.

Financing unavailable
Contingent funding
requirements
Increased project cost

Non-completion of
construction.
Interest rate hedging.

Financial due diligence
Bank/capital guarantees
from companies and
directors.
Inputs, maintenance
may yield higher costs.
Changes to
government
requirements with
respect to facility
operations.
Increase in operating
costs.
Adverse effects on
quality and service
delivery.
Long-term supply contracts

where quality/quantity can be
assured.
Upfront specification by
public sponsoring agency.
Fluctuations in
economic activity on
demand
Competition,
demographic change
and inflation.
Lower revenues.
Diminution in real
returns to private party
Private operator to seek an

availability payment element
to minimize impact on risk
premium.
Review likely competition
for service and barriers to
entry
Additional approvals
required during the
course of the project
cannot be obtained.
Changes in laws and
regulation
Further development
or change in business
operation may be
prevented
Increase in operating
costs with regards to
complying with new laws
Private sector to anticipate

requirements
Public sponsor may
mitigate such change by
monitoring and limiting
changes which may yield
adverse consequences.
Loss of the facility

upon premature
termination of lease or
other project contracts
upon breach and
adequate payment.
Different residual
value to that originally
calculated
Loss of investment of
private party
Possible service
disruption as additional
capital costs incurred to
upgrade the asset to the
agreed value and useful
life.
Private party will be given

cure rights to remedy
defaults.
Public sponsor may make
payment for value in the
projects on a cost to
complete basis if termination
occurs pre-completion.
Impose on the private party
maintenance and
refurbishment obligations.
Secure services of a
reputable maintenance
contractor, with strong
financial credentials.
32
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2.5.2 Potential Higher Life-Cycle Costs
The private sector provider may require a higher rate of return than the public sector sponsor to
cover the uncertainty of longer-term life-cycle cost risks, particularly when it is unable to diversify
its risk across a portfolio of projects. The premise of lower overall costs, which is a key benefit of
PPPs, is highly dependent on the innovation, scale, and expertise of the private sector, with cost
savings outweighing the risk premium required by the private sector.
2.5.3 Taxation Constraints
In the U.S., local governments generally exempt concessions from property taxes due to the
public service nature of the asset. However, the federal government has strict criteria for granting
private concession leaseholders the ability to take accelerated depreciation credits against
income on a 15-year straight-line basis, amortization of early concession payments and capital
expenditures to upgrade facilities under concession lease, and annual deduction of revenue
sharing payments (Guasch, 2004). These conditions include:
A lease term sufficiently long (at least 50 years) to indicate operational ownership of the
infrastructure asset, even if the public sponsoring agency retains title to the asset; and
The concession uses only taxable debt and equity and no tax-exempt debt financing.
2.5.4 Moral Hazard
Governments have an incentive to minimize political fallout from a PPP that is failing by covering
some of the losses of the private partner in order to ensure that the project is delivered. Private
sector proponents awareness of this propensity of governments to avoid political fallout may
result in them under costing risks with the knowledge that the public sector may provide financial
support (Guasch, 2004).
2.5.5 Loss of Control over Assets
PPPs potentially transfer control of assets to the private sector, limiting the ability of the public
sector to provide community service obligations for the duration of the PPP arrangement.
Government entities will need to ensure community service obligations are explicitly noted in PPP
contract arrangements to ensure that community service obligations are met. The loss of control
over assets to the provider is a considerable concern if the sponsoring agency wishes to develop
33
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competing infrastructure in the future. The example of the toll road concessions in Mexico in the
1990s in which the public sponsor bought out the interest of the private concessionaire.
2.6 Critical Success Factors
A PPP will need to improve service quality as well as promote social and economic development
if it is to have the best chance of succeeding. The following indicates what is considered to be the
critical success factors of PPPs.
2.6.1 Stakeholder Consultation and Support
Stakeholder consultation increases in importance if the potential impacts affect employees and
the community. Experience with respect to PPPs has shown that there are misconceptions of
PPPs, in particular, the perception that PPPs seek to privatize public assets. Stakeholder
consultation should be used to understand opinions and address misconceptions about the
proposed PPP and its value to the public. There may be a need to commit to ongoing stakeholder
consultation, particularly if the duration of the PPP proposed is long. This includes on-going public
outreach and communication (Spiering et al., 2007).
2.6.2 Public Sector Involvement
Once a partnership has been established, the public agency sponsoring the project must remain
actively involved in the project. Ongoing monitoring of the performance of the partnership is
important in assuring its success, particularly with respect to safety and maintenance. The nature
and frequency of monitoring should be stipulated in the contract (Spiering et al., 2007).
2.6.3 Political Leadership
A successful partnership requires strong political leadership. Senior public officials must be willing
to be actively involved in supporting the concept of PPPs. Officials need to be well-informed with
respect to potential benefits. A political leader can play a critical role in minimizing misperceptions
about the value to the public of a PPP and serving as a highly visible champion for the project.
Lack of senior political support can doom a PPP project even if otherwise justified (Spiering et al.,
2007).
34
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2.6.4 Secure Public Control
In a situation where contracts are not complete, Government should ensure that it has some
recourse rights to maximize the opportunity to resolve and take control if the private partner
defaults on its obligations to ensure the continued delivery of services to the community.
Recourse rights are particularly important where contract arrangements are incomplete (Spiering
et al., 2007).
2.6.5 Limited Complexity and Appropriate Risk Sharing and Rewards
PPP arrangements should be kept as simple as possible. Complexity of a PPP may result in
higher transaction and monitoring costs and fewer bidders. Furthermore, as noted above, one
major attribute of PPPs is the opportunity to share risks between the public and private sectors.
However, it is imperative that the risks are shared appropriately with associated rewards. There is
a need to identify the types of risks, the party best addressed to mitigate the risk and the premium
required to compensate for the risk. An inappropriate transfer of risks potentially will result in a
significant increase in the premium demanded by the private sector and the probability of provider
default, as noted earlier in Table 2.2.
Over the course of a PPP, the various kinds of risks will need to be considered by all parties to
the PPP with a clear understanding of the extent to which partnership members are responsible
for particular risk factors. Flexibility or risk-sharing in the PPP contract can have a significant
impact on the bid prices provided by private sector teams, with both approaches likely to result in
a lowering of the bid prices received (Spiering et al., 2007).
2.6.6 Effective Working Relationships among Partners During/After Contract Negotiations
New business relationships are required when PPP approaches are used to deliver projects,
often with larger national or international firms that can handle the increased risk and
responsibility of a PPP contract. This, in turn generates competition and fairness concerns, both
for the government (which must worry about attracting a sufficient number of bids for the contract)
and for smaller contractors (who may feel unable to compete in the new environment). In
addition, the scope and complexity of negotiations between the government and its contractors
can increase significantly, as the allocation of risk, the acceptable rate of return, and the contract
incentives must be carefully defined (Spiering et al., 2007).
35
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2.6.7 Legal Authority
A number of legal issues must be considered when deciding whether and how to proceed with a
transportation infrastructure PPP. The legal authority to use PPPs to expedite delivery of a
needed transportation project is based on statutes and regulations established by the responsible
legislative bodies and regulatory agencies.
Table 2.4 lists some of the many legal issues that can be resolved through flexible legislative and
regulatory actions, giving the sponsoring agency and private provider the legal authority to
advance the project in a timely manner, free of significant legal challenge.
Table 2.4 Legal Issues Associated with Transportation Infrastructure Project PPPs
Legal capacity of parties and legal requirement of the
sponsor to provide services
Competition and anti-trust regulations
Ability of the private sector to be involved in

infrastructure development, particularly foreign
companies.
Currency and profit repatriation rules
Ability of the private sector to acquire and own publicuse infrastructure, especially foreign firms
Public sector borrowing restrictions
Tax and accounting liabilities
Ability to provide performance guarantees
Adequacy of procurement and selection procedures
Property issues of land acquisition condemnation,

use, and disposal
Contracts provisions
Existence and legal basis of cost recovery and tolling
Administrative coordination
Property and intelligent property laws regarding

proprietary technologies and transfer of know-how
Dispute resolution and liability provisions
Adequacy of oversight and monitoring procedures
Special provisions associated with the use of public

funds.
Authority of other public entities over infrastructure

assets and access to them
Authority to regulate services
Ability and restrictions over transfer of private sector

contract responsibilities to other parties
Source: Guasch (2004, p.32-38)
2.6.8 Other Key Success Factors for Transportation Project PPPs
In addition to the factors cited above, other critical factors include the following:
Demonstrated transportation need (congestion relief, safety improvement, accessibility,

travel time reliability, etc.);
Willing public and private sector partners with mutually complementary interests; and
36
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Adequate funding or revenues dedicated to the project to make it financially viable

relative to the criteria of rate of return on investment for the public partner(s) and a
reasonable sharing of scarce public funding if available.
Each of these features must be present for a transportation project PPP to be successfully
developed and implemented (Spiering et al., 2007).
37
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3. Transportation PPP Activity in Mexico 8
In this chapter, it resumes the history of the first type of transportation PPP in Mexico: Toll Road
Concession. Furthermore, identify the key areas were had been improving in credit finance,
review the actual activity in the road sector in Mexico and appraise the next step for develop one
of the biggest toll highways in America. As a final point, it describes new strategies to extend new
forms of PPP to spread out the highways in Mexico.
3.1 Major Toll Road Developments
After several decades of limited results building state-run tolled and free highways, Mexico
embarked upon the worlds most extensive program of private concessioned toll roads between
1989 and 1995. The ambitious concession program resulted in the awarding of 52 concessions
for 5,500 km of road, of which 44 concessions and 5,120 km were open to traffic by 1995. More
than US$13 billion had been raised to build these roads, over 80 percent by the concessionaires
and domestic commercial banks. However, financial instability due to unexpectedly high
construction costs and low traffic, coupled with the December 1994 devaluation of the peso,
brought the concession program to a standstill in 1995. A comprehensive restructuring of the
entire program in 1997 ended up costing the Mexican Government an estimated US$8 billion.
The progress of toll road development in Mexico is described in more detail in the following
sections.
3.1.1 Early Toll Road Strategies
About 1,000 km of publicly owned toll roads were built by the Mexican Government between 1950
and 1970. Most of these roads were operated by the federal toll road authority, Caminos y
Puentes Federales de Ingreso y Servicios Conexos (CAPUFE) and were concentrated in highvolume traffic corridors near Mexico City. Another 3,000 km of untolled four-lane divided
highways were subsequently added by propublic sector governments of the 1970s and early
1980s. However, the oil glut of the 1980s put an end to the robust Mexican economic growth of
the 1970s, and the Government began searching for ways to reduce the size of the public sector.
Roads became a low priority since the recession had cut traffic growth. But as the economy
began to pick up by the end of the decade, the newly elected President Carlos Salinas de Gotari
(1988-94) identified high-quality infrastructure as critical to the Mexicos long-term growth. He
A complete list of the sources for this paper is presented in Chapter 6. However, this Chapter 3 draws most
extensively from two excellent sources: (i) Ruster (1997) ; and (ii) World Bank (2003)
38
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proposed a massive new program to build 4,000 km of private sector toll roads and seven new
international bridge crossings, funded largely (if not entirely) by private capital. The plan would
also provide an immediate stimulus to the countrys moribund construction industry, while helping
to reinvigorate the economy overall.
3.1.2 President Salinas Private Toll Road Plan
President Salinas charged the Secretariat of Communications and Transportation (SCT) with
administering the new private toll road plan. The toll roads were to be developed under the
following conditions:
SCT would select the routes to be offered for concession.
A parallel free route must be available as an alternate for all concessioned routes.
SCT would specify the allowable range for tolls, subject to twice-yearly adjustments
reflecting the consumer price index.
SCT would supply the bidders with preliminary designs, cost estimates, and traffic
projections.
The concession would be awarded to the bidder that offered the shortest concession
period (as originally planned, not to exceed 15 years).
The concessionaires were to be consortia of construction companies and banks, wherein the
banks would finance 70 to 75 percent of project costs, and the construction companies were to
contribute the remaining 25 to 30 percent by discounting their construction costs (sweat equity).
An independent trustee would be appointed to review bills, disburse bank financing, and distribute
toll proceeds to the investors.
Direct government assistance under the original plan was to have come only in the form of rightof-way assemblage (to be leased to the concessionaire for a nominal fee), and extensions of the
concession period (of a duration suitable for recovering the relevant costs).
Concession extensions were to be authorized in the case of:
Traffic levels falling below the SCT forecast;
Cost overruns resulting from government-imposed delays or design modifications; and
Cost overruns in excess of 15 percent of the original project budget.
Both the single bidding criterion (shortest proposed concession duration) and an open
prequalification process were utilized by the Government in order to promote a fair and
39
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competitive tendering process that was highly transparent to all bidders. The single bidding
criterion also both assuaged populist legislators who were eager to see the roads return to public
control and satisfied domestic financiers who had no access to long-term debt facilities in that
inflation-prone era.
3.1.3 Early Problems and Continued Expansion
In 1992, just three years after the programs inception, 3,600 km worth of concessions had been
awarded (90 percent of the original plan), and 1,500 km of toll roads had been opened to traffic
(38 percent). In spite of the impressive pace, four basic problems had already become apparent:
(i)
The program included many highways that were not financially viable by themselves.
Once the most profitable highway segments were built, the Government was called
upon to participate in the financing of roads with less traffic or more difficult
construction, but not to exceed 25 percent of costs.
(ii)
The shortest-length concession criterion encouraged the concessionaires to charge

the maximum allowable toll with the goal of reducing the payback time. The high tolls
and free parallel routes discouraged travel on the toll roads.
(iii)
The designs, cost estimates, and traffic forecasts provided by SCT were often of very
poor quality and highly inaccurate. The scale and pace of the project completely
overwhelmed the staff resources of SCT, and the effect of high tolls was not known to
the planners in any event.
(iv)
Some highway contractors were thought to be taking advantage of the program by

both underbidding and exaggerating the sweat equity that they were providing. The
bill auditors were not adept at catching such actions, while the concession rules
described earlier allowed for contract extensions in the case of cost overruns.
Nonetheless, the Mexican Government decided to expand the scope of the program by another
2,000 km during this period. The new roads were to fill in the gaps of five priority corridors
three from Mexico City north to the United States border, one from the Atlantic to the Pacific coast
via the capital city, and a final one from Mexico City southeast through Veracruz and on to the
Guatemalan border. The expansion plans were bolstered by a growing domestic economy and by
political pressure from regions not yet served by the new toll highways.
40
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By 1995, a total of 58 concessions had been awarded for 5,486 km of roads. Twenty three of the
concession contracts were won by Mexicos three largest construction companies, while the
remainder went to smaller construction companies and a few to state governments. A total of
US$13 billion had been raised by December 1994, of which 29 percent was concessionaire
equity, 52 percent was domestic bank loans, and the remaining 19 percent represented federal or
state government equity investments 9 . Nevertheless, cost and traffic issues continued to dog
most of the toll facilities. The average construction cost overrun was percent of the original SCT
estimate, while the average traffic level was only 68 percent of the original SCT guarantee.
These difficulties notwithstanding, the Mexican financial sector was at first quick to try to adapt to
the financing opportunities presented by the toll road programparticularly with respect to the
highways that were financially successful. The process that gained popularity before 1995 might
be idealized as follows:
(i)
Initial toll road financing would be provided by short-term construction or commercial

loans (from general bank savings, guaranteed by the issuing bank).
(ii)
The toll road would be refinanced subsequently through the issuance of medium-term
infrastructure bonds (sold on the domestic bond market, but guaranteed by the
issuing bank because of the toll road revenue uncertainties).
(iii)
Once a toll road had been operating for a few years, construction costs and traffic/toll
revenues would be predictable, and the more highly traveled routes would be in a
position to attract foreign capitalfreeing up domestic resources for other
investments.
In fact, between 1992 and 1994 four Mexican toll roads had sufficient revenue streams to be able
to successfully complete all three of the steps above and ultimately secure debt and equity
refinancing on the international markets. A similar refinancing of a fourth road fell through at the
last minute as a result of the Mexican currency crisis in December 1994.
Federal funding also included contributions by Petroleos Mexicanos (Pemex) and by Caminos y Puente Federales de
Ingreso y Servicio Conexo (CAPUFE), the federal highways and bridge operator, for more than 1,100 km of public toll
roads.
41
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3.1.4 Restructuring Before and After 1994
In the early stages of the Mexican toll road initiative, a small team of analysts was charged with
responsibility for making adjustments to contracts and overall policies with respect to the highway
development program. A part of SCT, this team initially consulted directly with senior officials of
the finance ministry. By 1994, however, the team had grown and was formally established as the
Toll Road Office (Unidad de Autopistas de Cuota), reporting to the Sub-secretary. As of 1997 the
staff of this office numbered 65, with the office responsible for all federal toll road and bridge
concessions. About 20 state-sponsored concessions faced problems similar to those of the
federal roads, but they were dealt with at the state level.
The toll road restructuring efforts of the Mexican Government may be divided into two rounds.
The first round included efforts undertaken to resolve problematic issues with toll road
concessions from the outset of the program in 1990 until the end of 1994, when the Mexican
currency was devalued, throwing the entire domestic economy into disarray. These initial efforts
allowed case-by-case relief from SCT for toll roads with traffic shortfalls or cost overruns so
severe that they could not be recovered even if the contract length was extended to the maximum
30 years. Table 3.1 illustrates traffic shortfalls with traffic expectation.
Table 3.1 Average daily traffic as %

of guaranteed traffic
Number of roads
Above 100
75 to 100
50 to 74
25 to 49
6 to 24
Source: Ruster, Jeff. A Retrospective on The Mexican Toll Road Program (1989-94), September 1997. World
Bank. Retrieved November 29 , 2007, from http://rru.worldbank.org/Documents/PublicPolicyJournal/125ruste.pdf
They involved tripartite support from the Government, the toll road builders, and the toll road
lenders, as follows:
The Government provided various direct contributions to the faltering concessions in the
form of loans from the national development bank, and/or the assignment of toll receipts
from an existing CAPUFE toll road.
42
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The toll road builders (equity owners) provided support in the form of limits on their return
on investment (7-10 percent maximum).
The toll road lenders provided support in the form of reduced interest rates on their loans.
In December 1994, the new administration of President Ernesto Zedillo devalued the Mexican
peso, precipitating an economic recession that dramatically worsened the financial standing of
the toll roads themselves, and compounded the fiscal woes of their owners and investors. This
environment brought about a second round of toll road restructuring efforts by the Mexican
Government. The initial response attempted to go beyond providing cash to the concessionaires,
by addressing the fundamental issue of excessively high tolls. Through a combination of a tax cut
on commercial toll road users (trucks and buses), and an agreement among concessionaires to
lower their toll rates below the maximum level permitted, an effective rate decrease of 28 percent
was achieved.
However, the slow pace of the subsequent economic recovery rendered these efforts insufficient
to increase revenues. It was estimated that the present value of toll revenues for the 38 federal
concessions that requested restructuring as of March 1997 amounted to only less than half of the
investments made. In April 1997 the Mexican Government announced that it would prepare a
new comprehensive toll road restructuring plan, which was finally unveiled in August of that year.
This plan proposed that SCT would take over 25 failing toll roads, and assume their bad debts.
Two-thirds of the debts relieved were from domestic banks (which were also being bailed out by
the Government at the same time), and one third came from the construction companies who
were equity investors in the concessions. The construction companies received long-term
government bonds in lieu of their toll road debt, while their shareholder equity was entirely
forfeited by the bailout. Twenty-three concessions were financially healthy enough to not need a
bailout, while four additional concessions that required a bailout involved foreign capital and were
dealt with individually.
The Government plan also called for reducing toll rates for all classes of vehicles by 17 to 39
percent. Future toll revenues were expected to pay back two-thirds of the Governments 60 billion
peso (approximately US$8 billion) bailout, and after a two-year adjustment period, it was planned
that the toll roads would be re-privatized based upon actual traffic and cost data. Critics charged
that the Zedillo administration should have made the construction companies and banks pay a
greater portion of their debts, but the Government prevailed, countering that it was acting to save
the countrys infrastructure, not to rescue a few private companies.
43
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3.2 Major Toll Road Issues and Implications for Best Practices
Despite its primary successthe completion of over 5,000 km of toll road in just five yearsthe
shortcomings of the Mexican private toll road program were many and varied. As such, the
Mexican toll road experience raises a number of issues with respect to concessioned toll road
development programs, many with important implications for best practices elsewhere. These
include:
The need for adequate program preparation and planning;
Issues related to cost estimates and construction;
Issues related to traffic and revenue forecasts, tariff rates, and toll road operations;
The importance of well-designed legal, regulatory, and institutional frameworks; and
Issues related to project finance and economics.
3.2.1 Need for Adequate Program Preparations and Planning
It was apparent from the ensuing problems faced by the concessionaires that the project
selection, prequalification, and award criteria were too vague. Mexico had no intermodal
transportation development strategy, and as such it was impossible to design the projects to fit in
with long-term regional development plans. This was particularly problematic with respect to the
Governments concurrent rail, port, and airport privatization plans. In terms of highway
development alone, planning was also highly inadequate. For instance, some key segments of
the five priority corridor roads were never concessioned, while other toll roads lacked important
links to other highways in the network. The tendering process lacked strict prequalification
procedures and did not require the bidders to submit detailed financing plans. Consequently,
many small to medium sized concessionaires relied upon commercial bank loans for their equity
commitments, which became problematic as soon as project revenues began to falter. Potential
concessionaires also faced challenges during the bid preparation process, as there was
insufficient time between the release of bidding documents and their due date. This precluded
independent consultants from being able to perform effective field survey work on behalf of the
project investors.
It was also apparent that in many cases both the public and private sector organizations involved
lacked sufficient technical, organizational, staff, and financial resources to plan for and implement
the proposed projects successfully. SCT was understaffed and had inadequate overall
institutional capabilities to take on the commitments demanded by the scale and nature of
44
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Mexicos private toll road program. Compounding this problem, a lack of proper discipline within
the financial institutions also contributed to the over-reliance on non-recourse financing. In the
early stage of the toll road program the project loans were often provided by government-owned
commercial banks, with little or no due diligence performed. Not only were the banks technically
incapable of performing such reviews at the time, but some also say that it was implicitly
understood that the ultimate recourse would in fact be to the Government.
3.2.2 Cost Estimates and Construction Issues
During the design and construction stages of project implementation, the private concessionaires
had their hands full with a wide range of problems. Inadequate plans, insufficient information,
right-of-way conflicts, ineffective turnkey construction arrangements, unanticipated design
changes, community resistance, and permitting problems all contributed to frequent cost overruns
and delays. Construction often started with only preliminary engineering and design work
completed, and very little right of way obtained. Compounding matters, poorly defined procedures
and bureaucratic delays with permits often brought construction to a standstill. Throughout the
implementation period, SCT supervision was poor, and the Secretariat became known for often
mandating universal change orders. Construction financing was also insecure, often based upon
poorly structured cost-plus contracts if any at all.
3.2.3 Traffic and Revenue Forecasts, Tariff Rates, and Operations Issues
For many concessionaires, cash flow has been significantly below expectations. Reasons for this
include:
insufficient
information
coupled
with
flawed
traffic
analysis
and
forecasting
methodologies; prohibitively high tolls; and the free parallel route requirement. In general, the
traffic studies did not consider travel variations by time, day, or season, nor by type of vehicle or
trip. In addition, demographic and economic conditions and trends influencing travel demand
were typically not identified. In several cases, traffic growth rate assumptions were unrealistic and
often data from SCT were inadequate or unavailable. These traffic study shortcomings have
generally been attributed to a lack of expertise on the part of the concessionaires, financiers, and
their consultants.
Significantly lower than expected truck traffic magnified revenue problems because of the higher
toll revenues that were expected from these vehicles, while counterfeit toll tickets made matters
45
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even worse. General road users also shied away from the toll highways due to the high tariffs 10 .
Most concessionaires also did little or no marketing to increase public awareness of their roads
and the travel benefits provided over the parallel free routes, and they have given minimal
attention to the development of auxiliary services such as gas stations, rest areas, restaurants,
and emergency towing. The tariff adjustment procedures have also been highly uncertain for the
concessionaires. Both toll increases and decreases typically required SCT approval, which
restricted most concessionaires abilities to responsively adjust pricing to optimize revenues once
the roads were open to traffic. In the end, the concession agreements required the Government
to specify toll rates and guaranteed traffic volumes by category of vehicleeffectively putting all
revenue risk on the Government.
3.2.4 Financial and Economic Issues
Longer-term concession periods are in general beneficial to the private sector concessionaires,
and support the financial and operational stability of the projects. Long term concessions allow
the project sponsors to spread their debts over a longer period, and reduce the annual cash flow
(revenue) needs to levels that may be met with more reasonable toll rates. The Mexican
Government did eventually allow various financially troubled concessionaires to extend their
concession periods, but some were already so bad off that even this was insufficient to make
their finances sound.
There is a pronounced need for mature domestic financial markets, able to provide long-term
financing, in order to support successful private sector toll road development. In the case of
Mexico, underdeveloped local financial markets were incapable of providing long-term fixed rate
financing. A lack of liquidity in local financial markets, and local debt instruments that were limited
to short-term high-cost floating-rate notes (often 10 percent above the local market reference
rate) severely limited the conditions under which the toll roads could be operated profitably (or
even break even). Once toll road revenue (and debt service) problems became apparent, local
and international investor interest in most projects dried up. Consequently, the idealized scheme
of refinancing the toll roads under better terms once construction was complete became difficult if
not impossible for most concessionaires.
A stable macroeconomic environment, supportive of international investment, is also of

paramount importance for effective private sector participation in toll road development. The
10
Average cost of tolls: US$0.12-0.50 per km in Mexico (1995). It is in marked contrast with Brazil for example, a country
of comparable GDP per capita but where the tolls have been in the US$0.04 per km (1995). (World Bank, 2003)
46
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December 1994 peso crisis and subsequent recession, which reduced road usage, had a severe
impact on project revenues and cash flow for nearly all of the toll road projects eventually
requiring the US$8 billion government bailout of nearly half of the concessions in 1997.
International investors also faced significant currency devaluation and convertibility risks in
Mexican toll roads, and indeed only three of the most profitable projects were able to successfully
attract foreign investment before the financial crisis. Prior to the crisis, the Government also
provided dollar-based funding to certain lenders in order to help them lower their interest rates.
However as the value of the peso dropped, the cost of these obligations ended up increasing by
70 to 80 percent.
3.2.5 Importance of Well-Designed Legal, Regulatory, and Institutional Frameworks
A well-structured legal, regulatory, and institutional framework ought to be formulated well in

advance of the awarding of concessions. In the case of Mexico, it has been suggested that the
lack of legal and regulatory institutional arrangements discouraged lenders and builders from
respecting their agreements. There were no formal mechanisms for the Government to obtain
and address requests or inquiries from the private sector parties before, during, or after the
bidding process. This situation led to an often adversarial and less than transparent relationship
between the parties. The independent regulatory authority for supervising contractual
arrangements was insufficient, and contracts were subject to the local court system, which
represented a significant risk to international investors who were unfamiliar with the domestic
legal system. With projects that needed direct government support, SCTs dual role as
government regulator as well as concession partner sent somewhat conflicting signals to the
private concessionaires. In particular, the extent to which the Government would retain
managerial control over such projects was uncertain.
In order to keep private sector projects financially viable, and in the private sector, there is a need
to provide the private sector with incentives and room to maneuver in order to face their
associated commercial and financial risks. Successful arrangements also protect the Government
and taxpayers from ultimately being responsible for the financial condition of the private sector
entities. It has been concluded that while contractual arrangements alone may be sufficient for
encouraging the commencement of private sector participation in infrastructure development, a
broader regulatory and legal framework (for both the concessionaires and financiers) is perhaps
necessary to sustain private sector involvement in infrastructure operation and management.
47
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3.3 Current Situation of Roads in Mexico
Today, Mexicos road system consists of more than 342 thousand kilometers of highways which
have all kinds of needs, including modernization and expansion of the highway network (see
Figure 3.1). To satisfy those needs, Mexico requires about 5 billon US dollars per year for road
construction and maintenance. As stated above, the available public funds allow the federal
government to annually invest less than half the required amounts. To close this gap, the
Secretariat of Communications and Transportation (SCT) has designed and implemented two
public-private partnership (PPP) models that seek to attract private capitals to highway
investments.
Concessions and public private partnership projects (PPP) 11
Figure 3.1 Mexico Highway Network
Federal Road
State Road
Toll Highway
Project
Source: SCT, 2007

http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf
11
These new models were established in 2005 by the SCT and Banobras (National Bank of Public Works and Services),
during the Presidency of Vicente Fox.
48
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Through its public-private partnership models, SCT seeks to allow an earlier development of
Mexicos road system, increase the amount of highway investments with private participation, and
add value to services offered to users. Moreover, to better distribute and manage highway project
risks. SCT plan to link the highway corridors can be illustrated in the Figure 3.2.
Figure 3.2. Mexico Main Highway Corridors
Source: SCT. Public-Private Partnerships for Highways in Mexico, 2007.

http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf
3.3.1 Highway Concession
The new model of highway concession has been designed by the SCT and the National Bank of
Public Works and Services (Banobras) to allow private participation in road infrastructure
development through a combination of private equity, banks loans and public funds based on the
specific characteristics of each project. This combination seeks to offer reasonable returns on
equity to private participants and a more efficient use of public funds.
Under this new model, the concessions had several characteristics that are described as follows:
Concessions are granted through public bids
49
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SCT provides final designs and rights of way
SCT sets maximum average tolls and rule for updating them
The time of concession is the maximum allowed by Mexican law (thirty years)
The government provides an initial contributions with public funds paid through Finfra 12 , a
trust in Banobras
The government offers a minimum revenue guarantee (CAS) to facilitate involvement by

private banks
The concession is awarded to the bidder who requests the lowest amount of public funds,
measured as the sum of the initial contribution an the net present value of the minimum
revenue guarantee
The construction stage of the new concession is summarized in Figure 3.3. SCT implemented a
number of changes to the original version of the concession model. Some of those differences
include the following:
Additional construction works are paid with funds provided by the concession, up to a
certain amount. If exceed, SCT provides the additional funds required
The condition that requested the winning bidder to share responsibility with the
concessionaire was eliminated
The time available to acquire bidding documents has been extended
Cure periods for events related to non-compliance by the concessionaire with respect to
its obligations have been introduced
The condition to withhold the guaranty of the offer in second place until the
concessionaire complies with his obligations has been eliminated
The amount and the management of the letter of credit that guarantees the availability of
equity have been eased
The winning bidder may constitute the concessionaire company after the bid is awarded
The terms and conditions for delivery of the right of way to the concessionaire have been
clarified, as well as the management of related contingencies
Excess revenues will be shared in terms more favorable to the investor
Insurance provisions within the bidding documents have been improved
Acts of god and force majeure events are managed with insurance and a contingency
fund established in Finfra
In case of early termination due to causes related to the concessionaire, sanctions will be
applied and the amount of equity not yet recovered will be repaid
12
Fondo de Inversin en Infraestructura (FINFRA): Infrastructure Investment Fund
50
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Adaptation to the title of concession and the trust contract for cases when public funds
from Finfra are not requested
Improvement of terms of the letter of credit to reduce its cost
Figure 3.3 New Highway Concession Model Construction Stage
Source: SCT
http://uac.sct.gob.mx/fileadmin/ingles/presentations/newmodel.pdf
The Matehuala Bypass was the first concession to be awarded under the new concession
program. This 30-year concession was awarded to DECOMSA on May 9, 2003, for the
construction, maintenance, and operation of 14.2 km of highway (see case study). Until 2007,
the awarded new concessions have allowed investments of about 1.60 billion US dollars on
721.2 kilometers of roads. Highways currently in the New Concession Program are summarized
in Table 3.2.
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Table 3.2 Highway Concession Program (2007)

Type of Work
Project
Awarded concessions
Length (kms)
721.2
Matehuala Bypass
14.2
Mexicali Bypass
41.0
Amozoc-Perote
103.0
Tepic-Villa Union
152.0
Morelia-Salamanca
83.0
Northern Bypass of
Mexico City
222.0
Tecpan Bypass
4.0
Monterrey-Saltillo and
Saltillo Bypass
92.0
Reynosa-McAllen
Anzalduas International
Bridge
10.0
Bids in progress
183.4
Perote-Banderillas and
Xalapa Bypass
60.0
Arriaga-Ocozocoautla
93.0
Irapuato Bypass
30.0
San Luis Ro Colorado II

International Bridge
0.4
Bids in progress
183.4
La Piedad Bypass and
access to MexicoGuadalajara highway
50.0
Compostela-Puerto
Vallarta
104.0
Chihuahua Bypass
41.0
Source: General Directorate of Road Development (2007)
52
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3.3.2 Service Provision Contracts
In Mexico Service Provision Contracts (PPS, its Spanish acronym) are being applied mostly to
projects that improve the characteristics and level of service of toll-free roads. The first service
contract, to modernize the Irapuato- La Piedad fereral road (see case study), was successfully
awarded by SCT on August 26, 2005. PPS is different from the concession model. To better
understand the main differences between PPP and concession models, Figure 3.4 illustrates
those differences.
Figure 3.4 Comparison of PPP and Concession Models
Source: SCT. General Directorate of Road Development

http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf
SCT applies the following main criteria to select the road sections to be improved with this model:
Number of users who benefit
Regional and state relevance of the road
Availability of alternative sources of funds
Potential to support development in specific regions (for example, in southeastern

Mexico)
53
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The characteristics of this type of PPP (PPS model) for highways might be described as follows:
A concession is awarded through a public bidding process which at the same time gives
the concessionaire the exclusive right to sign the service provision contract
The contract establishes an association between SCT and a private firm to design,
finance, build, maintain and operate a highway
The duration of the service contract is fixed, from 15 to 30 years
The private firm provides services in exchange for periodic payments which are based on
the availability of the road and its traffic
Each bidder requests a periodic payment determined as a function of :

o
Construction, maintenance and operating costs
Rate of return on equity, including financial costs
Estimated annual traffic
Duration of contract
The Net Present Value of the stream of periodic payments is the decision criterion used
to award the concession provided that the winner complies with technical, legal and
financial requirements
After construction, the modernized road continues operation as a toll-free road
The PPP usually lead to a faster implementation of projects, since they often provide incentives
for the private sector to deliver capital projects within short construction timeframes. Because a
core principle of any PPP is the allocation of risk to the party that is best suited to manage risk at
the less cost, there is a better control of the complete range of project risks throughout the life of
the project. The Figure 3.5 shows the risk in PPP projects in the case of the Mexican legal
framework. In addition, Figure 3.6 explains the legal and document structure of PPS model.
54
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Figure 3.5 Main Risks in PPS Projects
Source: SCT. General Directorate of Road Development

http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf
Figure 3.6 Legal and Document Structure in Mexican PPP Project
Source: SCT. General Directorate of Road Developm ent

http://dc.sct.gob.m x/fileadm in/ingles/presentations/ppp.pdf
55
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Until 2006, PPS projects are generating investments of 2.4 billions US dollars to improve, operate
and maintain 410 kilometers of toll-free roads. The current status of this program is shown in
Table 3.3:
Table 3.3 Public-Private Partnership Model (2007)

Type of Work
Project
Awarded contracts
Length (kms)
410
Irapuato-La Piedad
75
Quertaro-Irapuato
93
Nuevo Necaxa-Tihuatln
85
Rioverde-Ciudad Valles
112
Tapachula-Talismn
with Branch to Hidalgo
City
45
Bids in progress
229
Nuevo Italia-Apatzingn
Upcoming bids
32
376
Mitla-Tehuantepec
163
Zacatecas-Saltillo
213
Under preparation
938
Acayucan-La Ventosa
170
Apizaco-Calpulapan
51
Macuspana-State limit
Campeche/Quintana Roo
434
Arriaga-La Ventosa
137
Salina Cruz-Huatulco
146
Source: General Directorate of Road Development (2007)
The experience of PPP deals in other countries constitutes evidence that, when properly
implemented, the PPP approach constitutes a viable method for developing infrastructure
projects. The interest of the Mexican Government in considering alternative methods for the
56
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development of infrastructure projects (such as the PPP scheme) will lead to new business
opportunities for the private sector in Mexico. While it will be necessary for the Mexican
Government to provide the legal framework for the implementation of said scheme, private
companies that may be interested in participating in such projects should become prepared to
take advantage of the learning experiences of the first pilot projects being currently implemented.
The experience of other countries and the participation of international sponsors with experience
in PPP deals will also be essential.
3.3.3 Asset Utilization

In this new scheme, the SCT terminates the concession of highway assets to FARAC 13 in
exchange for compensation. In this manner, SCT prepares concessions formed by existing
highways with more than 10 years of continuous operation, and new highways to be constructed.
In order to do that, the Secretariat grants the concessions to the private sector through public bids
and pays FARAC. The concessionaire is responsible to operate, maintain and exploit the existing
toll roads, as well as to build and later operate the new highways in the concession. Figure 3.7
describes the actual projects of this program.
13
Highway Concession Rescue Trust (Fideicomiso de Apoyo para el Rescate de Autopistas Concesionadas in Spanish) :
The network of FARAC constitutes all of the operating roads bailed out in 1997 plus those that were completed and began
operations in 1998.
57
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Figure 3.7 Utilizationof Highway Assets
Source: SCT.
http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pd
f
58
_______________________________________________________________________________________________________
Figure 3.7 Cont. Utilization of Highway Assets
Source: SCT.
http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pd
f
59
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4. Mexico Transportation PPP Case Studies
This chapter presents a series of briefer case studies of major highway projects undertaken or
still in progress that demonstrate the types of public-private partnerships being used to leverage
scarce public resources and expedite needed transportation projects in Mexico. Each case study
provides insights into the issues encountered and strategies used to advance the project, at times
in the face of determined opposition. Some of the case studies also provide lessons that can
assist agencies and their private sector partners beginning to consider and develop PPP
arrangements to avoid or address impediments to PPP contracts and facilitate their successful
implementation.
4.1 Background
The rationale for partnerships between government agencies and private firms for the delivery of
public services such as transportation (as well as water and sanitation) is strong. Especially in
recent times, public investment budgets have flattened or been reduced, while at the same time
the needs for both new investment and maintenance of older infrastructure have continued to
grow. Increased taxation is politically unpopular, yet the public also demands continued
improvements in the capacity, safety, and efficiency of its public services. Although they are not a
panacea, public-private partnerships (PPPs) offer one to approach to solving this dilemma. The
advantages of PPP project delivery methods include:
The Access to new private capital to supplement public funds.
More rapid development of infrastructure assets under a PPP project structure.
Higher quality and customer satisfaction due to focus on performance standards and
enhanced quality control.
Improved efficiency in construction, operation, and maintenance of the infrastructure

should arise from innovations in service delivery, incentives in the PPP contract, and
better institutional integration throughout the life of the project.
Public agencies focus on their strengths of long-term service planning and

management, having turned over financing and/or day-to-day operating responsibility
to their private partners.
Despite these apparent advantages, PPPs in surface transportation have been relatively slow to
develop in Mexico, especially when compared to other nations around the world, especially in
Europe, Asia, and some developed countries in South America. The notable feature of a PPP is a
genuine sharing of the risks and rewards that accompany the project. This sharing of risk and
60
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reward is foreign to most public agencies in this country which are more accustomed to a strict
delineation of public and private sector roles and responsibilities. In addition, numerous
impediments confronted the early adopters of PPPs, particularly overseas and more recently in
Mexico.
In most cases, enabling legislation has been required to allow state 14 transportation agencies to
enter into PPPs for surface transportation projects and use alternative project delivery
approaches to improve the viability of proposed PPPs for these projects.
4.2 Transportation Project Case Studies in Mexico
The following pages provide detailed information about several highway or multi-modal projects
that were or are being developed using some form of PPP. This includes seven case studies of
transportation PPP projects in Mexico as listed below.
Case Studies
Matehuala Bypass Toll Road
Morelia-Salamanca Toll Road
Northern Bypass of Mexico City Toll Road, central Mexico
Asset Utilization
Irapuato-La Piedad Rehabilitation Project, Center Mexico
Tepic-Villa Union Project
Monterrey-Saltillo and Saltillo Bypass Toll Roads, Northeast Mexico
Reynosa Anzaldas International Bridge, Tamaulipas and Texas
Together these eight PPP projects represent a cross-section of surface transportation projects
that involve a variety of infrastructure types, funding and financing arrangements, and delivery
approaches in various parts of the country. Each of these PPPs encountered a wide variety of
challenges and opportunities and together they demonstrate how public agencies and their
private sector partners either worked together to produce a successful project or reverted to
traditional approaches that produced less favorable results.
14
The State of Nuevo Leon (Mexico) has been a pioneer to implement PPP projects of their own without help of federal
agencies. In 2007 they announced the construction of a 180 meters State Office Tower in the center of their capital,
Monterrey. Retrieved December 21, 2007 from: http://www.nl.gob.mx/?P=plazacivica
61
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4.2.1 Matehuala Bypass Toll Road
Matehuala bypass is part of the San Luis Potos-Saltillo Highway, as shown in Figure 4.1. It is
located in the most important main corridors of the Mexican federal highway system, Mexico CityNuevo Laredo. The main objective of this bypass was to avoid heavy traffic vehicles thru
Matehuala city.
Figure 4.1 Matehuala Bypass Project Site Map
Federal Road
Toll Highway
Project
Source: SCT
http://adminsitios.sct.gob.mx:8090/uac/fileadmin/espanol/esquema_concesion
es/libroasociaciones/fichascap2.pdf
On March 31, 2003, the SCT, on behalf of the Federal government, granted a 30-year concession
title to Desarrolladora de Concesiones Omega S.A. de C.V. (DECOMSA) for the construction,
operation, exploitation, management, and maintenance of the Matehuala bypass. The concession
title included an upgrade and 8.4 km expansion of the Matehuala City Boulevard (free
alternative).
62
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4.2.1.1 Funding and Finance
In September of the same year, Omega signed a Simple Credit Opening Contract with
BANOBRAS to perform the bypass construction for up to Mexican pesos (MxP) 85 million (US$
7.91 Million) 15 , which was dedicated to partially cover the construction of the road, including,
among other concepts, the cost of works with its corresponding upgrades, right of way, studies,
permits, taxes, and controlling equipment (the Credito Banobras). In November 2004, the road
initiated its operations. Figure 4.2 shows the ribbon cutting for the Matehuala Bypass made by
former Mexican president, Vicente Fox.
Figure 4.2 Ribbon Cutting for the Matehuala Bypass
Source: Presidency of the Republic

http://fox.presidencia.gob.mx/actividades/?contenido=16533
A year later, the concessionaire issued notes for an amount equivalent to 151,549,600 UDIS 16 ,
that is, around US$51.21 million, which was used to settle the debt with BANOBRAS, and to pay
15
Mexico has had a floating exchange-rate regime since the December 1994 peso devaluation. Under this system, Banco
de Mxico makes no commitment to the level of the peso exchange rate, although it does employ an automatic
mechanism to accumulate foreign reserves. It also possesses tools aimed at smoothing out volatility. The Exchange Rate
Commission sets policy; it is made up of six members - three each from the Ministry of Finance and Public Credit
(Secretara de Hacienda y Crdito Publico-SHCP) and the central bank, with the SHCP holding the deciding vote.
Since 2003, it has been certain exchange-rate stability in Mexican Peso. This study uses last 5 years average data to fix
the Mx-US$ exchange rate ($10.74 Mexican Pesos per US$1 Dollar). Current exchange-rate is of $10.92 Mexican Pesos
per US$1 Dollar (December 2007).
Retrieved January 2, 2008 from: http://finance.yahoo.com/currency/convert?from=USD&to=MXN&amt=1&t=5y
16
UDIs: Inflation-linked units (Unidad de Inversin in Spanish), which protect loans from inflation volatility. The loans
denominated in UDIs have their monthly payment calculated as a multiple of the minimum wage ("salario mnimo," or SM)
63
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the expenditure generated by the issuance, the funding constitution that brings liquidity to the
trust and others in terms of the same trust.
In addition, the concessionaire reached an agreement with Operacion y Conservacion de

Autopistas Concesionadas S.A. de C.V. to operate and manage the bypass.
The financial structure considers as an alternative income source a debt service fund having 12
months of resources from the issuance, and will keep 7.65% of the outstanding debt or 12
months of payments of the debt service. Also, the notes have been granted by XL Capital
Assurance Inc. by means of the issue of the financial guarantee insurance policy, which
guarantees the principal and interest scheduled payments that, according to trust, the trustee
must pay to its bondholders according to the terms established in said policy.
On the other hand, the concessionaire will not receive any distribution after debt service, as it is
expected that any flow surplus would be designated to prepay the debt, as long as the debt
coverage rate is greater than 1.15x. The prepayment mechanism avoids debt concentration and
builds in growing payments in the last years.
4.2.2 Morelia-Salamanca Toll Road
Located in the states of Michoacan and Guanajuato and 83 km long, this highway belongs to the
project that will connect the Pacific and Atlantic Ocean thru several motorways, as shown in
Figure 4.3 below.
in Mexico City, and the Sociedad Hipotecaria Federal (SHF) covers any potential mismatch between a rise in the
minimum wage and the increase in the value of the UDI through an SM-UDI swap. Retrieved on 23 December, 2007 from:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1148442756124.html
64
_______________________________________________________________________________________________________
Figure 4.3 Morelia-Salamanca Toll Road Project Site
Federal Road
Toll Highway
Project
Source: SCT
The concession for the Morelia-Salamanca toll road includes two road tranches: Road Stretch 1
of 51.2 km that must be constructed by the concessionaire, and Road Stretch 2 of 31.8 km that
must be constructed by SCT, which would be handed the concession for its operation,
exploitation, and maintenance. Figure 4.4 provides a view of one of the bridges that cross Lake
Cuitzeo in Michoacan.
65
_______________________________________________________________________________________________________
Figure 4.4 Morelia-Salamanca Toll Road crossing lake Cuitzeo
Source: SCT
The concession estimates a term of 30 years and would be granted by public bid, which allows
the participation of individuals and companies, national and international. Originally, the bid
program was planned to last seven months (from June 2004 to January 2005), but during the
procurement process, several delays arrived, so the bid was not granted until June 3, 2005, five
months after the original term.
In the Bid General, it was established that the concession would be granted to the bidder that,
besides meeting technical, financial, economic, and legal requirements, needed the minimum
public subsidy, taking into account the sum of initial contribution and CAS net current value,
calculating an annual discount rate of 10%.
There were proposals from several companies and consortiums, such as: the consortium
integrated by Obrascon Huarte Lain S.A. 17 (OHL) and Compaa Contratista Nacional S.A. de
C.V., Grupo Mexicano de Desarrollo S.A., Promotora Inbursa S.A. de C.V., Omega Corp. S.A. de
C.V., and Consorcio de La Peninsular integrated by La Peninsular Compaia Constructora S.A.
de C.V., Consorcio de Obras y Dragados Maritimos S.A. de C.V., Operadora y Administracion
Tecnica S.A. de C.V., Pavimentos de la Laguna S.A. de C.V., and Grupo Profrezac S.A. de C.V.
17
Obrascon Huarte Lain : is a Spanish Construction Group, which principal activities are construction, infrastructure
concessions and services. The construction activity includes the construction of highways, bridges, tunnels, and
residential properties.
66
_______________________________________________________________________________________________________
A tie was determined, since OMEGA and Consorcio de La Peninsular didnt ask for Initial
Contribution or CAS. Therefore, according to the tie agreements the concession was granted to
the company that offered the lower cost of construction: Consorcio La Peninsular 18 .
The road is currently under construction, and, as of today, it has been entirely financed by risk
capital.
4.2.2.1 Funding and Finance
In addition to mentioned laws, once financing is involved, it will be regulated by Ley de

Instituciones de Crdito, Ley del Mercado de Valores y Ley de Ttulos y Operaciones de Crdito,
and its corresponding rules and dispositions.
Generally, the concessionaire will create a trust (Administration Trust) to conduct the construction
process. In Mexico, the figure of a Trust is legally considered bankruptcy remote, if properly set
up. Ideally, debt holders act as beneficiaries of such trusts and have controlled the regulatory
board, known as the technical committee. The concessionaire will be solely responsible of the
construction of the road; however, three additional supervisors will be designated for the
supervision of the works: one designated by the SCT, one by the Technical committee, and one
by the concessionaire.
The concessionaire will have the option to securitize the flows derived from the project, and have
the option of refinancing through future securitizations if the financial cost conditions improve and
if the SCT authorizes it. So far in Mexico, securitization of toll roads has been for postconstruction
projects. In most cases, the concessionaire has created a new trust (Issuance Trust) to
administrate the resources generated from the operation of the toll road. The debt issued by the
trust could be guaranteed to give additional protection to the bondholders. On termination of the
concession, the rights to operate the toll road and to collect revenues revert to the government.
4.2.3 Northern Bypass of Mexico City Toll Road
Northern bypass of Mexico City (Arco Norte, in Spanish) toll road starting in Atlacomulco, Mexico
State and ends in San Martin Texmelucan, Puebla State. It crosses the States of Mexico, Hidalgo
and Tlaxcala, and in way it pass through two toll highways: Mexico-Queretaro and Mexico18
Consorcio La Peninsular is part of La Nacional Group, a Mexican construction company with investments in different
assets in Mexico. The owner of this corporation is Carlos Hank Rhon, son of Carlos Hank Gonzlez, former distinguish
Mexican politician.
67
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Pachuca, as shown in Figure 4.5 below. The bypass is part of the Altiplano corridor which
provides a faster communication between east and west of Mexico and would avoid heavy traffic
thru Metropolitan Mexico City area.
Figure 4.5 Arco Norte Bypass of Mexico City Project Site Map
Source: SCT
The Arco Norte bypass transit would oscillate in an average of 6,400 vehicles (daily). Due to the
fact that almost a third part of that vehicular flow will be heavy traffic; each year, the bypass would
contribute to eliminate the circulation of almost a million of trucks thru Metropolitan Mexico City
area, with consequential benefits such as: improvement of Mexico city environment, traffic
security and savings in travel time.
On December 15, 2005, the SCT, on behalf of the Federal government, granted a 30-year
concession title to Promotora del Desarrollo de Amrica Latina 19 , S. A. de C. V. and Promotora
Inbursa, S. A. de C. V. for the construction, operation, exploitation, management, and
maintenance of the 223 kms length Northern Mexico City Bypass. The winning bid was selected
by the Secretariat (SCT) because the offer didnt solicit any public funds. Moreover, the amount of
19
Promotora del Desarrollo de Amrica Latina, S. A. de C. V. and Promotora Inbursa, S. A. de C. V. are part of Carso
Group, a conglomerate of companies owned by the Mexican tycoon Carlos Slim.
68
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the project construction was lower than the other offers. The total cost of the project is of $5,881.2
Millions Pesos, around US$543 Million.
There were proposals from several companies and consortiums integrated by :

1.
Promotora del Desarrollo de Amrica Latina, S. A. de C. V. and Promotora
Inbursa, S. A. de C. V.,
2.
Constructora Norberto Odebrecht 20 , S. A., Autoroutes du Sud de la France 21 and
Omega Corp, S. A. de C. V.
3.
Ingenieros Civiles Asociados, S. A. de C. V., Controladora de Operaciones de
Infraestructura, S. A. de C. V., Constructoras ICA 22 , S. A. de C. V. and Itinere

Infraestructuras 23 , S. A.
4.
Empresa Obrascn Huarte Lain, S. A.
4.2.3.1 Economic Benefits
The regions of this Project not only include Mexico City and the States of Mxico, Hidalgo,
Tlaxcala and Puebla, but also indirectly embrace all south of Mexico 24 . South of Mexico finally
would have a fast and reliable route to export to USA without passing through Metropolitan
Mexico City. Figure 4.6 shows the first part of the Arco Norte in the states of Mexico and
Hidalgo.
Furthermore, the States of Hidalgo and Mexico are betting everything on the Arco Norte. The
project will connect with four of the main highways and will be linked to the National System
of Multimodal Transport. With the project, the states of Tlaxcala and Puebla will also be
benefited, although as it was stated above, it is a well planned project that will positively affect
the entire country. Moreover, the Arco Norte is an important and good opportunity for real
estate investors. The challenge for the states is to create regional policies that are driven
through common legislation that is easy for real estate developers to understand. The
20
Constructora Norberto Odebrecht is part of Odebrecht Group, a Brazilian business conglomerate

ASF is France's leading motorway network in France
22
ICA is Mexicos largest engineering, procurement and construction company. Founded in 1947, initially it was focused
on the construction of public sector infrastructure. ICA is a wholly-owned subsidiary of Empresas ICA, S.A. de C.V., ICA
Groups holding company.
23
Itinere Infraestructuras, S.A. is the Infrastructure concessionaire within Sacyr Vallehermoso group (Spain). It is present
in six countries (Spain, Chile, Portugal, Brazil, Costa Rica and Bulgaria) through the operation of different motorways
which comprise a total of 3,640.21 Kilometers and 33 concessions.
24
Regional disparities and income inequality continue to be a problem in Mexico. While all constituent states of the
federation have a Human Development Index (HDI) superior to 0.70 (medium to high development), northern and central
states have higher levels of HDI than the southern states. Nuevo Len and the Federal District have HDI levels similar to
European countries, whereas that of Oaxaca and Chiapas is similar to that of Syria or Egypt. Programa de las Naciones
Unidas para el Desarrollo (2005). "Informe sobre desarrollo humano, Mxico, 2004" (PDF). United Nations. Retrieved on
23 December, 2007 from:
http://hdr.undp.org/en/reports/nationalreports/latinamericathecaribbean/mexico/mexico_2004_sp.pdf
21
69
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meaning of the Arco Norte in the sense of participation from the states must be oriented
towards a regional orientation in the design of public policy and legislative and economic
systems that make growth towards this area easy concluded the panel guests.
Figure 4.6 Jilotepec-Tula : First part of the Northern Bypass of Mexico City.
Opened in 2006
Source: Presidency of the Republic

http://fox.presidencia.gob.mx/actividades/crecimiento/?contenido=23762
4.2.4 Asset Utilization
The following section explains two examples of asset utilization that as it has been shown
above (in chapter 3) is the way the SCT is using existing highway assets to support new
project development in Mexico. The two projects clarified in this section are:
1. The package formed by four highways covering 558km in the states of Michoacn,
Jalisco, Guanajuato and Aguascalientes.
2. The package formed by the Reynosa-Matamoros highway and the Reynosa-Pharr
International Bridge
70
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4.2.4.1 Maravato-Zapotlanejo and Guadalajara-Aguascalientes-Len Toll Roads
This toll highway package represents the largest and most important highway network of the
Occidente-Bajo-Centro region in Mexico, as shown in Figure 4.7 below. The toll highways
connect major Mexican cities, such as Guadalajara, the second largest in Mexico, Morelia,
Zamora, Len, and Aguascalientes, among others. This is one of the most dynamic regions in the
country, representing 15.7% of Mexicos Gross Domestic Product. The regions GDP has grown
at an average annual rate of 2.3% from 2000 to 2005, which is 0.5% more than the national
average in the same period. In addition, this highway network serves to link important cities like
Colima, Puerto Vallarta, Tepic, Zacatecas, Irapuato, Toluca, and Mexico City.
The road sections are summarized as follows:
Maravato-Zapotlanejo: This highway started operations in October 1993. It is a four

lane, divided highway with a total length of 309.7 km of length; and provides an east-west
axis across the Occidente-Bajo-Centro region and connects important cities in the states
of Michoacn and Jalisco. It is part of the most direct route between Mxico City and
Guadalajara, the two largest cities in the country. This highway has four tollbooths.
Guadalajara-Zapotlanejo: This highway was constructed in the 60s as a two-lane toll

road, and two additional lanes were added in 1994. It has a total length of 26 km with
asphalt pavement. It is one of the most important access roads to the city of Guadalajara,
since it connects the toll roads of Maravatio-Zapotlanejo and Zapotlanejo-Lagos de
Moreno. This toll highway is the main access road that connects the Occidente-BajoCentro region to Guadalajara. It has one tollbooth.
Zapotlanejo-Lagos de Moreno: This toll highway started operations in May 1991 and
has a total length of 118.5 km. It is a four-lane divided highway with asphalt pavement,
and provides direct communication to the region known as Altos de Jalisco, with many
medium-sized towns, which have strong economic with Guadalajara. This toll highway is
very important for freight transportation between the industrial cities of Guanajuato,
Aguascalientes, San Luis Potosi, and Jalisco. It has two tollbooths.
Len-Lagos-Aguascalientes: This toll highway started operations in September 1992

and has a total length of 104 km. It is a four-lane divided road with asphalt pavement.
This toll highway connects the States of Guanajuato, north of Jalisco and Aguascalientes.
Guanajuato lies in the center of the Mexico and plays a key strategic role in freight and
passenger transportation across Mexico. The toll highway has two tollbooths located at
Len and Encarnacin de Daz.
71
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Figure 4.7 Maravato-Zapotlanejo and Guadalajara-Aguascalientes-Len toll roads

(the Project) in west-central Mexico.
Source: SCT
http://tti.tamu.edu/conferences/ftoa/program/presentations/athie.pdf
It is the first package of roads ICA and Goldman Sachs Infrastructure Partners won against five
other bids for the 30-year concession to operate the highways illustrated above. As is shown in
Figure 4.7, the concession also calls for the construction of connecting roads between the
highways, which link the cities of Guadalajara, Aguascalientes and Leon, and upgrades on
various stretches of the toll roads. The toll roads that ICA and Goldman Sachs will take over had
revenue from quotas last year of about US$185 million.
The SCT stated that 40% of the funds would go to paying down the debt of other governmentheld highways; just fewer than 40 percent will be used to finish a public works highway between
Durango and Mazatlan in northern Mexico 25 , with the rest spent on other road projects.
25
Durango-Mazatlan is a public funded highway. The project cost is estimated at US$950 Million. It will provide
landlocked Durango State with an exit through the Sierra Madre mountain range to the Pacific Ocean via Sinaloa port city
Mazatln. The 232km highway could benefit as many as 21 million people, and will have 56 tunnels and 62 bridges,
72
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Losing bids included ones made by IDEAL, Spanish toll road firm Abertis; a consortium of Spain's
FCC and private savings bank Caja Madrid; and Spanish building firm Obrascon Huarte Lain. The
table 4.1 shows the tender competitors for the package of highways and the amount offered.
Table 4.1 Summary of Bid Tender in Maravato-Zapotlanejo and GuadalajaraAguascalientes-Len toll roads (August, 2007)
Partnership
Amount Offered
(US$ Million)
Contructora ICA (Mexico) / Goldman Sachs

Infrastructure Partners (US)
4,100
Promotora del Desarrollo de America Latina

(Mexico) / Macquarie Mexico Holdings
(Australia)
4,043
Abertis Infraestructuras (Spain) / Banco

Invex (Mexico)
3,910
FCC Contruccion (Spain) / Caja de Madrid

(Spain) / Globalvia (Spain)
3,901
Obrascon Huarte Lain (Spain)
3,644
Compaia de Concessoes Rodoviarias

(Brazil) / Brisa International (Portugal) /
Grupo Hermes (Mexico)
2,706
Source: SCT
http://www.capufe.gob.mx:81/statics/web_internet/Sala%20de%20Prensa/Con
ferencias/conf-20070806/Licita_de_4_autopistas_6ago.pdf
4.2.4.2 Reynosa-Matamoros and Reynosa-Pharr International Bridge 26
Another example of asset utilization is the upcoming bid of the package formed by the ReynosaMatamoros highway and the Reynosa-Pharr International Bridge. With the amount gained with
the re-privatization of those highways, the Federal Government will have the public fund
necessary to build the Reynosa bypass and the Rio Bravo Donna International Bridge. The
identified highways and future projects are mapped in Figure 4.8 below.
including the 1,120m long, 500m high El Baluarte bridge, which would be Latin America's longest and highest. Once
accomplished (in 2010), it will be offer as a concession to the private sector.
Retrieved December, 27, 2007 from:
http://dc.sct.gob.mx/fileadmin/espanol/esquema_concesiones/libroasociaciones/cap4.pdf
26
The highway and future projects are located in Tamaulipas, a provincial state in the northeast of Mexico.
73
_______________________________________________________________________________________________________
Figure 4.8 Site Map of the Reynosa-Matamoros Toll Road and Reynosa-Pharr
International Bridge (existing) and the Reynosa bypass and the Rio Bravo Donna
International Bridge (to build).
Source: SCT.
http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pdf
4.2.5 Irapuato-La Piedad Toll-Free Road
The Irapuato-La Piedad road is the first project awarded to the private sector under PPS program.
The project is the first investment in the road sector where the PPS model of concessions is
tested. As such, the Project is expected to create a positive demonstration effect of the PPS
program for future concessions, both in the highway sector and other sectors.
The 74.3 kilometer IrapuatoLa Piedad highway will be a toll-free road under the PPS
mechanism, and consists of the expansion, upgrading, operation and maintenance of a 74.3 km
long road beginning in the junction of the Quertaro-Irapuato highway with the Irapuato-La
Piedad road, and ending at km. 77 of the junction with the future bypass of La Piedad de
Cabadas in the State of Guanajuato, in the Central part of Mexico, as shown in Figure 4.9 below.
74
_______________________________________________________________________________________________________
Figure 4.9 PPS Irapuato-La Piedad Toll Free Road Site Map
Source: SCT.
The project will be developed pursuant to a 20-year Concession and a 20-year Services Contract
entered into by and between the Mexican Secretariat of Communications and Transportation
(SCT) and Concesionaria Irapuato La Piedad, S.A. de C.V. (the Company) on September 12,
2005. The Company is a wholly-owned subsidiary of Ingenieros Civiles Asociados S.A. de C.V.
(ICA).
The total project costs are estimated US$72 million and the recovery of the investment will be
accomplished through an integrated quarterly payment made directly by the SCT. The payment is
made up by two parts:
1. Payment for highway availability, based on achieving minimum performance standards,

established in the concession and the services agreements; and
2.
Payment based on traffic volume pursuant to the concession agreement, which provides
that the SCT will pay a shadow tariff.
75
_______________________________________________________________________________________________________
The modernization of the highway was completed in July 2007, as it is shown in Figure 4.10 and
Figure 4.11.
Figure 4.10 La Piedad-Irapuato under Construction
Source: ICA
http://www.ica.com.mx
Figure 4.11 La Piedad-Irapuato Modernization

Completed in July 2007
Source: ICA
76
_______________________________________________________________________________________________________
ICA has established a special purpose company that will be the concessionaire and will contract
for the operation and construction of the highway. The SCT has divided the highway into 16
sections. It will pay the concessionaire the availability payment for completion of each section.
The second payment based on traffic volume will be charged to SCT by the concessionaire once
the entire highway is modernized and fully operational.
The project was financed principally by a project finance loan that has been approved by an
international financial institution with operations in Mexico. The balance was provided by ICA as
an equity contribution to the concessionaire using a portion of the proceeds from the equity
offering in August of 2005. The transfer of resources to the concessionaire was made in the form
of a capital contribution. The integrated quarterly payment from the SCT provides the resources
for both the return on the investment and the repayment of the financing.
It is important to mention that the road is part of the East-West corridor linking the Bajo Region
(State of Guanajuato) in the center part of the country, with the cities of Guadalajara (second
largest city in Mexico) in the West, and Quertaro and Mexico City in the East and Center-South,
respectively. The road is located in a zone of rich agricultural production, and is connected with
the important Bajo industrial corridor. As such, it is an important road for the transportation of
agricultural and industrial products to several major cities in the country and to the United States.
The expansion and upgrading of the road would contribute to promote the regional exchange of
products and regional economic growth. Also, the project will contribute to improve traffic
conditions along the road, reduce congestion and increase safety.
4.2.6 Tepic-Villa Union Toll Road
Located in the states of Nayarit and Sinaloa and 238 km long, this highway belongs to the Pacific
Highway Artery (Eje Carretero del Pacfico) which goes from Guadalajara to Nogales and Tijuana
on the northern border of the country, as shown in Figure 4.12 below.
77
_______________________________________________________________________________________________________
Figure 4.12 Tepic Villa Union Toll Road Project Site Map
Federal Road
Toll Highway
Project
Source: SCT
On April 2005, the SCT, on behalf of the Federal government, granted a 30-year concession title
to Concesionaria de Carreteras, Autopistas y Libramientos de la Republica Mexicana, S.A de C.V
(subsidiary of IDEAL 27 ) for the construction, operation, exploitation, management, and
maintenance of the Tepic-Villa Union highway.
There were proposals from several companies and consortiums from Mexico and Spain,
integrated by:
1.
Promotora Inbursa, S. A. de C. V.
2.
La Peninsular Ca. Constructora, S. A. de C. V., Pavimentos de la Laguna, S. A. de C. V.,
Grupo Profrezac, S. A. de C. V., Consorcio de Obras y Dragados Martimos, S.A. de C.V. y

Operadora y Administracin Tcnica, S. A. de C. V.
3.
Obrascon Huarte Lain, S. A
4.
Ingenieros Civiles Asociados, S.A. de C.V. e Itinere Infraestructura, S. A.
A summary of the Tepic-Villa Union Toll Road is illustrated in the Table 4.2 below.
27
In June of 2005, a split in Financial Group Inbursa of approximately $9 billion pesos was destined to found IDEAL and
an action of it was given to each shareholder of Inbursa Financial Group.
78
_______________________________________________________________________________________________________
Table 4.2 Tepic-Villa Union Toll Road Concession

Summary
Construction length
152Km
Investment
US$ 281.1 Million
Bidding Sponsors
Winning Bid Award
Feb 25, 2005
Concessionaire
INBURSA
Toll Road Objectives
Stimulate Western an
Northern regions economic
development
Improve infrastructure
competitiveness in the Western
logistics corridor
Provide a 30% reduction in
transit time (savings of 53
minutes)
Source: SCT
http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesi
on_3/S3_FO.pdf
It is important to realize that this freeway will not only increases security and rapidity of the routes
throughout the coast of the Pacific, but also detonates the agro-industrial and tourist potential.
Furthermore, facilitates the transit of one of the freeways of the Free Trade Agreement (NAFTA).
Figure 4.13 San Pedro Bridge on the Tepic-Villa Union Highway
Source: IDEAL
http://www.ideal.com.mx/pdf/IDEAL06-english.pdf
79
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4.2.7 Monterrey-Saltillo and Saltillo Bypass Toll Roads
The Monterrey-Saltillo and Saltillo toll road project is located in the states of Nuevo Leon and
Coahuila. The highway consists of 50km of toll road (35.2 km in Nuevo Leon and 14.8km in
Coahuila) and 42km of a bypass (located in Saltillo, Coahuila), as shown in Figure 4.14 below.
Figure 4.14 Monterrey-Saltillo and Saltillo Bypass Toll Roads Site Map
Monterrey-Saltillo Toll Road

Saltillo Bypass
Source: SCT.
http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_PC.pdf
On November 1, 2006, the SCT, on behalf of the Federal government, granted a 30-year
concession title to Coconal, S.A de C.V, Isolux Corroan Concesiones, S.A. and Elsamex, S.A. for
the construction, operation, exploitation, management, and maintenance of the 95 kms length
Saltillo-Monterrey toll motorway. The project also includes the construction of 3 toll plazas. The
Spanish Isolux Corsn 28 leads the consortium awarded the contract with a majority holding. It is
important to mention that this is the first time that a non-Mexican company has been awarded a
concession for Federal roads.
There were proposals from several companies and consortiums integrated by :
28
Grupo Isolux-Corsan S.A., along with its subsidiaries, operates as an engineering and construction company in Spain
and internationally.
80
_______________________________________________________________________________________________________
1.
Coconal, S.A de C.V, Isolux Corsan Concesiones, S.A. and Elsamex, S.A.,
2.
La Peninsular Compaa Contructora, S.A de C.V, Contructora Andrade
Gutierrez, S.A de C.V 29 , Operadora Administracin Tecnica, S.A de C.V and Compaa
de Concessoes Rodoviarias.
3.
Ingenieros Civiles Asociados, S. A. de C. V., Controladora de Operaciones de
Infraestructura, S. A. de C. V.
4.
Empresa Obrascn Huarte Lain, S. A.
5.
Pavimentos de la Laguna, S.A de C.V, Grupo Profrezac, S.A de C.V and
Operadora de
Autopistas
del
Altiplano, FCC Contruccion, S.A, Desarrollo
Contrucciones Urbanas, S.A de C.V and Impulsa Infraestructura, S.A de C.V
4.2.7.1 Impediments
The Monterrey-Saltillo is the project of the new model of highway concession that has been
more problematic. It is so far the most polemic of all the new concessions projects. The project
will be finished one year after the original dateline. The construction delay was induced by a
suspension of the Secretariat for Environment and Natural Resources (SEMARNAT). The
SEMARNAT detected that the SCT didnt have the Land Use Permit on May 11, 2007.
Subsequently, on October 4, 2007, five months later, the Mexican environmental office releases
the permit for reactivation of the construction. Table 4.3 below shows the key dates of this
highway project.
Table 4.3 Key Dates in the Construction of Monterrey-Saltillo Toll Road

Begin of
Construction
March 1, 2007
Construction
Delay
7 Months
Original Finishing
Date
September, 2008
New Finishing Date

September, 2009
Source: SCT
http://uac.sct.gob.mx/fileadmin/espanol/convocatorias/nueva_infra/fallos/saltill
o.pdf
It is important to notice that the SCT was fined US$23,277 by the Mexico's Attorney General for
Environmental Protection (PROFEPA) for authorized the concessionaire to start the construction
without the Land Use Permit. Figure 4.15 provides a view of the construction site.
29
The Andrade Gutierrez Group (AG group or the company) is one of Brazil's premier industrial conglomerates. AG
currently won a US$97.8 Million PPP project (PPS project type) to build, operate and maintain for 24 years a State
Government Tower in Monterrey (Nuevo Leon). The tower will be finished in June of 2009. Retrieved December 21, 2007
from: http://www.nl.gob.mx/?P=plazacivica
81
_______________________________________________________________________________________________________
Figure 4.15 Monterrey-Saltillo Toll Road under

Construction
Source: SCT
http://saltmont.net/
4.2.8 Anzalduas International Bridge
The Anzalduas International Bridge is an international bridge that will connect the city of Mission,
Texas with the western outskirts of Reynosa, Tamaulipas (Mexico). It will provide cross-border
commuters with two southbound and northbound lanes, as well as a pedestrian crossing. The
bridge project will cost a total of about US$157.8 million for both sides (US$99 million on the U.S.
side and US$58.8 million in Mexico). The U.S. side of the bridge will be paid for by the US federal
government, from the International Bridge Board (cities of Hidalgo, McAllen and Mission city of
McAllen,) and the Texas Department of Transportation. On the other hand, in Mexican side of the
bridge construction capital will come from a Public Private Finance initiative granted as a
concession. Figure 4.16 below illustrates the extent of the project within Reynosa.
82
_______________________________________________________________________________________________________
Figure 4.16 Anzalduas Bridge Connector Site Map

U.S.A
Anzalduas
International
Bridge
Mexican
Border
Customs
Bypass
Access to
MonterreyReynosa
Toll Road
Mexico
Source: SCT, adapted by the author.

http://uac.sct.gob.mx/fileadmin/espanol/seminariocct/resultados/sesion_3/S3_VS.pdf
It is important to point out that Anzalduas International Bridge open the westside of Reynosa for
direct access to the U.S. without having to cross town (Reynosa), but may also take some of
truck traffic away from Nuevo Laredo as it will connect directly with the highway to Monterrey and
the NAFTA Highway leading to Mexico City. Furthermore, the bridge will connect the South
McAllen (Texas) and Mission (Texas) international trade areas to the west end of Reynosa,
where many maquiladoras and other cross-border businesses are located. This will help to
facilitate just-in-time delivery, allowing companies to keep inventory costs down, progress trade
with Monterrey (Nuevo Leon), (because it is a quicker and safer route), and it will be the most
efficient way for business traffic from northern Mexico to reach the United States. According to
US and Mexican authorities, the bridge will be completed in June 2009. Table 4.4 below shows
the summary of investments in Mexican side.
83
_______________________________________________________________________________________________________
Table 4.4 Summary of Investments of the Anzalduas International Bridge

Concept
Right-of-way
Bypass
Border Customs
Viaduct
(international
bridge)
Cost
(US Million)
$7.44
Tamaulipas State
$9.31
Mexican Federal Government
$11.35
Private Sector (Concession)
$30.72
Private Sector (Concession)
$58.82
Total
Investment
Sources of Capital
$16.75
Total of Public
Investment
$42.08
Total of Private
Investment
Source: SCT
http://uac.sct.gob.mx/fileadmin/espanol/convocatorias/nueva_infra/fallos/saltill
o.pdf
4.2.8.1 Impediments
On June 2007, the SCT, on behalf of the Federal government, granted a 30-year concession title
to Group Marhnos 30 for the construction, operation, exploitation, management, and maintenance
of the 2.55km (Mexican side) Anzalduas International Bridge and the construction of the Mexican
border customs. This company came under criticism, for construction delays and problems when
it built the Mexican side of the Pharr-Reynosa International Bridge in the mid-1990s. But Alfredo
Gonzlez Fernndez, Tamaulipas secretary of economic and employment development, said
Marhnos and the Mexican government (thru SCT) have developed a master plan that will better
coordinate the development of the Anzalduas bridge project to eliminate quality problems. The
governor is asking that all new projects have a master plan to avoid those types of problems, he
said. Tamaulipas State and Federal Governments affirmed that they are optimistic the plan will
eliminate any construction problems with the Mexican side and that U.S. and Mexican engineers
have met weekly throughout the project to ensure both sides stay on the same page as building
progresses. However, Mexican builders ran into a snag when the government realized it had not
acquired enough property for the project. Government officials acquired an additional 12.19
meters of property for the bridge, which likely set the project back about three weeks.
Nevertheless, the SCT and State officials affirm that with more than a year left before the bridge
is set to open; workers have plenty of time to catch up.
30
Founded in 1954, Marhnos is a 51 year old Mexican private firm.
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_______________________________________________________________________________________________________
5.
Results and Conclusions
This chapter summarizes the key insights provided by Mexico transportation PPP project case
studies presented in Chapter 4 of this thesis and the information shown in Chapter 3. This
includes issues that often confront agency sponsors and private providers of PPP projects and
strategies used to address and overcome these potential impediments. The chapter also contains
summaries of the lessons learned from the PPP case studies and the transportation PPP activity
in Mexico. It concludes with remarks regarding the use of this thesis.
5.1 Issues and Strategies to Address Them
Based on the PPP transportation projects documented as case studies in Chapter 4 and the
transportation PPP activity in Mexico of Chapter 3, Table 5.1 through 5.4 provide summaries of
the major issues and impediments faced by these projects and the strategies used to address
them by Mexico sponsoring agencies and their respective private sector partners. The summary
information is organized into four categories:
Legal and Technological
Funding and Finance
Environmental
Administrative
These issues and strategies illustrate how certain members of the PPP project teams (including
both public and private partners) dealt with problems that arose during project development,
financing, and implementation. In few cases were the partners unable to fully overcome the
impediments they faced in applying the PPP approach to surface transportation project delivery.
Even in these cases, the strategies suggest courses of action for resolving these issues in the
future. These summaries are not intended to suggest the full spectrum of possible impediments
that transportation PPPs might encounter or all possible ways to address them. However, they
provide a sampling of what sponsoring agencies and provider teams might encounter in pursuing
transportation project delivery as a PPP.
5.2 Lessons from Mexico Transportation PPP Case Studies
The key lessons from Mexico transportation PPP projects described in this thesis are
summarized in Table 5.5. The lessons noted in the exhibit are instructive for any sponsor or
provider actively involved in or considering participation in a transportation PPP project. Table 5.6
85
_______________________________________________________________________________________________________
summarizes the critical success factors for transportation PPPs based on the case studies
presented in Chapter 4 and the transportation PPP activity in Mexico of Chapter 3.
5.3 Conclusions
Public-Private Partnerships (PPPs) represent a wide variety of project financing and delivery
approaches whose common element is that the public sector sponsor of infrastructure projects
engages the private sector to varying degrees in the performance of certain functions previously
handled by the public sector. This can range from contracted services like maintenance to full
financing, development, operations, and preservation over a long term. The variety of PPP
approaches continues to evolve and offer increasing choices to state and local transportation
agencies to fulfill their missions. Though not appropriate for all projects, PPPs are likely to benefit
a number of projects, particularly large-scale projects, which would not otherwise be to move
forward for many yeas or even decades under traditional financing and delivery approaches
(ADB, 2000).
The public sectors interest in PPPs has been stimulated by the widening gap between the needs
for improving and expanding Mexicos aging transportation systems and the available public
funding to address these needs. Facing increasing congestion, declining accessibility, unreliable
freight delivery, and obsolete facilities, the Mexican public sector has begun to realize it cannot
address these needs by relying solely on traditional financing, delivery, and operating practices.
PPPs enable public sponsors of transportation projects the potential to expedite their
transportation infrastructure programs and leverage their scarce public resources by accessing
private sector best practices, new technology, and capital markets more quickly to deliver and
operate transportation facilities in a more timely and cost-effective manner. With the Secretariat of
Communications and Transportation (SCT) and its surface transportation administrations
encouraging state and local transportation agencies to consider the selective use of PPP
approaches to expedite urgent transportation projects, there is significant opportunity for these
agencies to add PPP approaches to their means of accomplishing their missions.
Interest in the use of PPPs to expedite surface transportation is growing as state and local
jurisdictions face the combined challenges of rehabilitating their aging and often outdated surface
transportation infrastructure and adding necessary facilities and expanding services to support an
ever-growing economy and population whose requirements for mobility, reliable accessibility, and
safety continue to expand. Experience from other countries which have used PPPs for
86
_______________________________________________________________________________________________________
transportation infrastructure projects shows that the structure and delivery methods selected are
highly dependent on the following features:
Enabling statutes and regulations;
The capabilities of all members of the PPP to execute their roles and responsibilities;
Flexibility and a proactive approach to identifying and resolving issues that arise during
the project planning, development, and implementation phases;
Underlying taxation arrangements that may lower the cost of the project; and
The ability of capital markets to deliver financing structured to suit each PPP project.
The case studies and the information of transportation PPP activity in Mexico contained in this
thesis illustrate how these issues can vary and therefore should be addressed on a project-byproject basis. Particularly important are potential risks arising when state or local transportation
agencies attempt to implement PPPs for the first time where legal authority to use PPP
approaches are not clearly defined or there is strong political, local, or institutional opposition.
The many challenges facing state and local transportation officials and agencies, as noted above,
require a broader array of tools to improve the cost-effectiveness of project delivery and the
operational efficiency of transportation facilities. While not a panacea for the fiscal, staffing, and
technological shortages facing state and local transportation agencies, PPPs can provide
additional resources to the provision of transportation infrastructure and services. The number of
state and local agencies participating in project PPPs is rapidly growing, while the domestic
financial investment community has begun to realize the opportunities associated with this
emerging market for transportation infrastructure financing.
Because PPPs represent new ways of performing their traditional responsibilities, there is
considerable uncertainty about using alternative approaches that rely more heavily on the private
sector than in the past, when there was a clear distinction in responsibilities between the
sponsor/owner agency and the private firms that performed such services as highway final design
and construction. Therefore it is important to emphasize that PPPs involve a sharing of project
responsibilities, as well as risks and returns on investment associated with these responsibilities,
between public owners of transportation facilities and their private sector partners. Arriving at a
balanced and acceptable sharing of responsibilities, risks, and rewards with the private sector
through a contractual partnership poses the greatest challenge and opportunity for public
agencies seeking to rebuild and expedite their transportation programs. Effectively administering
PPPs can help state and local transportation agencies be assured that their expectations for
87
_______________________________________________________________________________________________________
project performance are being met, consistent with the terms of the PPP contract (Spiering et al.,
2007).
While PPPs represent change for officials and staff of many of these agencies, the uncertainty
associated with introducing PPP approaches can be reduced through the experience of other
agencies which have successfully developed and implemented PPP projects. The case studies
presented in this thesis highlight various PPP approaches and the strategies used to address
impediments that arose as the projects evolved. This information is intended to inform those
officials and agencies considering the use of PPP approaches or interested in learning more
about what peer agencies (SCT, SCHP) in Mexico are doing to develop and implement
successful PPP projects. Armed with this information, it is the intent of this study to encourage
broader application of PPP approaches to leverage scarce public resources and expedite
financing and delivery of essential transportation projects in Mexico.
88
_______________________________________________________________________________________________________
Table 5.1 Legal and Technological Issues and Strategies Used to Address Them for
Mexico Transportation PPP Projects
Issues
Strategies
Lack of state or local statutory

authority to enter into PPPs or
DB project delivery for surface
transportation projects
Created special legislation for a single project

to allow the application of innovative financing
and project delivery approaches as part of a
PPP.
Established as a matter of public policy state
statutes that provide legal authority to
transportation agencies to enter into PPPs to
deliver projects and services. The legislation
provided wide flexibility to apply innovative
project financing and delivery approaches for
surface transportation projects as PPPs.
Legal challenges to projects as

eligible PPPs under existing
PPP statutes
Sponsoring agency and private partners sought

legal opinion from transportation agency (SCT)
chief financial officer and state attorney general
(Spanish: Procuradura General del Estado) to
confirm statutory basis and legal authority to
proceed with project as a PPP.
Risks of introducing and

applying new technologies in
the PPP project
Build into implementation schedule of project

scheduled
service
downtime
to
permit
conversion and de-bugging of the new systems
for PPP projects that are built under continuing
transportation service.
Used Design-Build-Operator (DBO) approach
to PPP project for a specified period after the
construction phase is completed (2 years
minimum for operating systems) to ensure the
operating service and control systems work
properly without jeopardizing public safety.
Source: Spiering et al. (2007, p.176-187) and SHCP (2007)

89
_______________________________________________________________________________________________________
Table 5.2 Funding/Financial Issues and Strategies Used to

Address Them for Mexico Transportation PPP Projects
Issues
Uncertainty regarding
adequacy of available
funding
Public or political
opposition to tolls or
rising toll rates
Strategies
Combined federal, state, local, and toll revenues to

provide adequate project funding.
Used innovative funding and project delivery
approaches, including PPPs and Design-Build, authorized
by state statutes.
Used PPP project delivery, tolling, innovative financing
approaches involving private sector access to private
capital markets, and tolling to expedite project delivery.
Leveraged available federal transportation funding with
state and local matching funds augmented with a 20
percent contribution from economic development group
whose project would benefit from the accessibility
provided by a new bridge overpass.
Used tax increment financing (TIF) to pay for the debt
service costs associated with low cost municipal bonds
sold to finance two bridges and access ramps to provide
access to two proposed economic developments,
backstopped by special assessment district fees and
transportation impact fees if the developments did not
materialize in a timely manner to generate expected
increases in local property taxes, thereby placing the
financial risk of the projects on the private developers.
Contract agreement stipulated criteria to allow for annual
toll rate adjustments.
Source: Spiering et al. (2007, p.176-187)

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Continued
Issues
High cost of obtaining

additional right-of-way
High cost of site

remediation and other
project elements
Escalating
costs
project
Funding jeopardized
by early project delays
caused by external
economic forces
Political tampering by
efforts to cancel or
change contract terms
of agreement
Strategies
Project sponsor retains land acquisition responsibility

using cost-effective and timely eminent domain authority.
Project sponsor separately funds right-of-way
acquisition costs to eliminate cost risk for land acquisition
to provider team, thereby reducing uncertainty in costing
fixed-price design-build project.
Value engineering to lower soil remediation costs by
focusing on exposed areas
Public sponsors incorporated contingency funds into
contract to cover possible escalation in right of way and
utility relocation costs; while private providers accepted
financial risks of material costs, which increased
significantly in recent years.
Obtained long-term commitment of financial backing for
project from major investment partner with patient capital.
Lease agreement provides ample remedies to private
concession team if project sponsor seeks to terminate the
contract agreement prematurely and without merit, or
interfere with ability of project to generate revenues from
facility under terms of contract agreement.

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Continued
Issues
Strategies
Potential threat to
project revenues due
to competition from
nearby
Recognition of very high cost of adding capacity to

nearby congested facilities mitigates against traffic
diversion and revenue loss.
Captive market with no reasonable alternative highway
facility.
High growth of region served by facility provides more
than enough latent demand to compensate for potential
traffic diversion.
Slowdown
in
population growth in
primary market served
by facility
Long-term concession agreement mitigates against

traffic and revenue risks due to continued economic and
demographic growth.
Improvements to patron service through interoperable
electronic toll collection systems along connected
facilities, including open road tolling.
Reduced project scope by 40 percent to match lower
expected cash flow from local Transportation
Improvement District fees full project scope restored
later when actual development growth increased to levels
needed to fully fund the project.
Maximizing
net
present values of
long-term concession
contracts
Apply innovative funding, financing, and asset

management techniques and incorporate future revenues
and costs.
Use private-sector financing approaches that include
short-term taxable bank loan and taxable equity
convertible to institutional debt instruments with patient
capital and modest rates of return.
Traffic and revenue

risks
Incorporate a prescribed toll rate schedule that allows

increases on a defined timetable based on agreed to
indices or minimum percentages as part of the PPP
contract agreement.
Use toll rates to manage traffic and provide free-flow
conditions to optimize throughput volume.
Unusual site condition

risks
Public sponsor agency agrees to share costs of

unusual site risks, such as hazardous materials
discovered on project site during construction.

92
_______________________________________________________________________________________________________
Table 5.3 Environmental Issues and Strategies Used to Address Them

for Mexico Transportation PPP Projects
Issues
High
costs
of
environmental
challenges
and
environmental
clearance process
Site location risks that

may
cause
environmental delays
and costly mitigation
requirements, such as
hazardous materials,
buried
ordinance,
brownfield sites, and
non-attainment area
restrictions
Strategies
Have public agency partners retain responsibility for

obtaining environmental clearance, permits, and right-ofway early in the project development process (MonterreySaltillo Toll Road Study Case).
Have public agency partners conduct the environmental
clearance process using a transparent and phased
approach to ensure environmental issues are recognized
and addressed in a timely manner in the early phases of
the PPP process.
Establish a flexible DB delivery approach and contract
performance criteria.
Incorporate on the PPP team several technical
specialty subcontractors to address certain types of
special conditions relating to the environment.
Restrictions
on
developing
transportation facilities
in non-attainment area
Obtain exemptions to restrictions from federal and state

environmental protection agencies (SEMARNAT) by
demonstrating environmental advantages of the project
versus the status quo by classifying the facility as a Traffic
Control Measure where regional environmental benefits
outweighed the impacts of the new transportation facility.
Foster strong political and local community champions
for the project, at the federal, state, and local levels.
Lack of state or local

authority to use PPPs
or DB to deliver
transportation projects
Created special legislation for a single project to allow

the application of innovative financing and project delivery
approaches as part of a PPP.
Established state statutes that provide legal authority to
transportation agencies to enter into PPPs to deliver
projects. The legislation provided flexibility to apply
innovative project financing and delivery approaches for
transportation projects as PPPs.

93
_______________________________________________________________________________________________________
Table 5.3 Environmental Issues and Strategies Used to Address Them

Issues
Legal challenges to
projects as eligible
PPPs under existing
PPP statutes
Willingness of multiple
jurisdictions to
cooperate in helping
local economic
development groups
establish PPP
involving innovative
financing approaches,
including Tax
Increment Financing
(TIF)
Risks of introducing
new technologies in a
PPP project
Strategies
Sponsoring agency and private partners sought legal

opinion from transportation agency chief financial officer
and state attorney general to confirm statutory basis and
legal authority to proceed with project as a PPP.
Developer partners asked city to annex sites from the
municipality to allow TIF-based PPPs, backed by
transportation
impact
fees
and
transportation
improvement district fees. This minimized the financial
risk to the city and placed it primarily on the developers to
expedite site development once annexed. The
municipality agreed since it retained its property tax rights
to the sites and could also benefit from the enhanced
property and sales tax proceeds resulting from the
resulting development made accessible by the PPP
bridge projects.
Build into implementation schedule of project scheduled
service downtime to permit conversion and de-bugging of
the new systems for PPP projects that are built under
continuing transportation service.
Use Design-Build-Operator (DBO) approach to PPP
project for a specified period after the construction phase
is completed (2 years minimum for operating systems) to
ensure the operating service and control systems work
properly without jeopardizing public safety.

94
_______________________________________________________________________________________________________
Table 5.4 Administrative Issues and Strategies Used to Address Them

Issues
Risk of using new

project delivery and
financing approaches
that
result
in
differences
in
understanding
and
expectations between
Strategies
Promote on a pro-active basis public outreach and

communication with the public early in the PPP project
concept planning to obtain inputs regarding project issues
and ways to address these issues and continue the
process throughout the project development process.
Promote two-way communication with project
stakeholders throughout project development process to
expose and resolve issues before they become
impediments to the project that slow progress and
threaten successful completion within budget and
schedule terms of the PPP contract agreement.
Employ experts on the alternative project delivery and
financing approaches and what makes for a successful
PPP relationship throughout the project t assist public
sector agency managers and staff involved in the PPP
project understand their roles and responsibilities and how
to handle the partnering process.
Bring in a noted specialist in partnering early in the
project development process to conduct workshops that
familiarize the partners to the PPP project of how the
partnership arrangement should work and methods of
communication, coordination, and dispute resolution
without resorting to claims and counter-claims.
Assign experienced staff to the PPP project that are
familiar with the project delivery and financing approaches
and are experienced in managing PPP-type contracts.
Apply partnering techniques that facilitate the PPP
project development process and build a productive and
trustful working relationship between the public and
private partners. These include: (1) use facilitated
services on partnering techniques; (2) hold periodic
executive partnering meetings from the beginning of the
PPP project that include senior members of the PPP
project management team; (3) hold weekly project status
meetings among internal staff assigned to the PPP
project; (4) hold bi-weekly meetings among project
supervisors from public sponsor agency and private
provider team to obtain briefings on project status, issues,
and solution strategies; and (5) encourage field-based
decision-making by public sponsor agency supervisors.
Source: SHCP (2007)

95
_______________________________________________________________________________________________________
Table 5.5 Key Lessons from Mexico Transportation PPP Projects
Unique situations often require unique solutions. Differences in projects and their
institutional environments make each project unique in certain ways and this needs to be
taken into consideration when structuring a PPP contract agreement.
Allow a flexible project development approach for projects that have demanding design
requirements to enable the private partner team to introduce innovative design and
construction techniques that control the cost and timing of the project. This suggests the
public agency partner not over design the project before bringing the PPP team on board but
instead take the preliminary design process to the point where the basic requirements of the
project are defined so the PPP design team can take it from there. It also suggests that the
PPP partners should work collaboratively and constructively in confronting obstacles that
invariably arise during project development with creative solutions, instead of playing the
"blame game". This requires trust among the members of the PPP.
Having champions for a PPP project among top elected and appointed officials is essential
to moving PPP projects forward in a timely and cost-effective manner, especially in the early
stages of environmental clearance, permitting, and financing
Members of the PPP team should maintain a spirit of openness (transparency) and
cooperation throughout the project development and implementation processes, soliciting
inputs from and communicating with each other and key stakeholders, including the general
public. This will help keep the project moving as the parties work out issues in a collaborative
manner.
PPPs can benefit by combining multiple objectives that benefit numerous stakeholders,
beyond just the PPP members, such as economic development, remediation of brownfield
sites, congestion relief, and safety that provide a "win-win" solution set that enhances the
chances of the project proceeding.
PPPs can bring together various stakeholders in a project, some of which might ordinarily
serve as an adversary to a project but by being a party to the PPP or the PPP development
process from an early stage, might become advocates of the project or at least have their
opposition neutralized by having their concerns addressed for the full term of the PPP
agreement.
Transportation PPPs are more likely to survive the stresses of development and
implementation if the partners share a common vision of the project that provides continuity
and mutual commitment throughout these phases of project delivery.
Successful PPPs begin with a clear understanding of the respective roles, responsibilities,
risks, and returns each partner will assume during the terms of the project contract
agreements with each party held accountable for delivering according to the terms of the
contract.
Risk management can be optimized by retaining a private sector project delivery team with
extensive experience and capabilities in delivering PPP projects that meet the full terms of the
contract.
Source: ADB (2000, p.118-132) and Spiering et al. (2007,
p.176-182)
96
_______________________________________________________________________________________________________
Table 5.6 Critical Success Factors for PPP Transportation Projects
Stakeholder consultation through regular meetings at both the managerial and technical
levels
Active public involvement through public outreach and on-going communication between
project partners and stakeholders
Political leadership that supports the project and serves as a champion for its successful
implementation
Secure public control of the infrastructure assets through continued public ownership and
PPP team accountable for project results consistent with the contract terms
Limited complexity of the PPP arrangement and contract agreement to ensure stakeholder
understanding and compliance
Well defined legal authority for the public sector to enter into PPP arrangements and apply
alternative methods of funding, financing, and delivering transportation infrastructure
Financial viability under a wide range of risk factors
Clear delineation and balance of project roles, responsibilities, and risks among the PPP
partners commensurate with their potential returns
Demonstrated transportation need (congestion relief, safety improvement, better

accessibility, and travel time reliability) and public support among numerous stakeholder
groups
Capable public and private sector partners with mutually complementary interests in the
project and a willingness to accommodate changing conditions and opportunities consistent
with the desired project outcomes and performance requirements
Adequate dedicated funding sources for the full term of the PPP contract
Environmental constructability to ensure the project can be cost-effectively constructed

without serious damage to the environment through environmental and context-sensitive
design and value engineering
Ample number of capable private sector firms and teams to ensure a competitive
procurement and selection process
Source: ADB (2000, p.118-132) and Spiering et al. (2007,
p.176-182)
97
_______________________________________________________________________________________________________
6.
References
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ADB (2000). Developing Best Practices for Promoting Private Sector Investment in Infrastructure.
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Cervero (2004)
Cervero, Robert (2004). TCRP Report 102: Transit-Oriented Development in the United States:
Experiences, Challenges, and Prospects. Retrieved Nov 29 , 2007, from Metropolitan Area
Planning Council:
http://www.mapc.org/transportation/trans_alternatives/transit_PDFs/3b_TOD_TransCoopResearc
hProg.pdf
FHAa (2007)
FHAa (2007). Long Term Lease Agreements. Retrieved Nov 29, 2007, from Federal Highway
Administration: http://www.fhwa.dot.gov/ppp/ltla.htm
FHAb (1999)
FHAb (1999). Shadow Tolls Chapter 1. Retrieved Nov 29, 2007, from Federal Highway
Administration: http://www.fhwa.dot.gov/innovativefinance/stchap1.htm
GAO (1999)
GAO (1999). Public-Private Partnerships: Terms Related to Building and Facility Partnerships.
Retrieved Dec 27, 2007, from U.S. General Accounting Office:
http://www.gao.gov/archive/1999/gg99071.pdf
General Directorate of Road Development (2007)
General Directorate of Road Development (2007). Private Service Contracts in Highways.
Retrieved Nov 22, 2007, from SCT: http://dc.sct.gob.mx/fileadmin/ingles/presentations/ppp.pdf
Gobierno de Nuevo Leon (2007)
Gobierno de Nuevo Leon (2007). Centro de Gobierno Plaza Cvica. Retrieved Dec 21, 2007 from
Gobierno de Nuevo Leon: http://www.nl.gob.mx/?P=plazacivica
Guasch (2004)
Guasch, J.Luis (2004). Granting and Negotiating Infrastructure Concessions. USA: World Bank
Institute.
ICA (2007)
ICA (2007). PPS (Prestacin de Servicios). Retrieved Dec 11, 2007, from ICA:
IDEAL (2006)
IDEAL (2006). Annual Report 2006. Retrieved Nov 15, 2007, from IDEAL:
http://www.ideal.com.mx/pdf/IDEAL06-english.pdf
Lawther (2000)
Lawther, Wendell C. (2000). Privatizing toll roads: a public-private partnership. USA: Greenwood
Publishing Group
Miller (2000)
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Miller, John B. (2000). Principles of Public and Private Infrastructure Delivery. Cambridge, USA:
Massachusetts Institute of Technology.
NCPPP (2007)
NCPPP (2007). National Council for Public-Private Partnerships. Public Private Partnerships
Defined. Retrieved Nov 24, 2007, from NCPPP:
http://www.ncppp.org/howpart/index.shtml#define
Perrot et al. (2000)
Perrot, Jean-Yves / Chatelus, Gautier. (2000): Financing of major infrastructure and public
service
projects: Public Private Partnership, Lessons from French experience throughout the
world., France: Presses Ecole Nationale Ponts Chaussees.
Presidency of the Republic (2005)
Presidency of the Republic (2005). Inauguracin del Libramiento y Boulevard Matehuala en San
Luis Potos. Retrieved Dec 22, 2007, from Presidency of the Republic:
http://fox.presidencia.gob.mx/actividades/?contenido=16533
Presidency of the Republic (2006)
Presidency of the Republic (2006). Inauguracin del Arco Norte, Tramo Jilotepec-Tula e
inauguracin del Tramo Jorobas-Tula. Retrieved Nov 15, 2007, from Presidency of the Republic:
http://fox.presidencia.gob.mx/actividades/crecimiento/?contenido=23762
Pakkala (2002)
Pakkala, Pekka (2002). Innovative Project Delivery Methods for Infrastructure: An International
Perspective. Retrieved Nov 29, 2007, from Finnish Road Enterprise:
http://alk.tiehallinto.fi/julkaisut/pdf/pakkalae5.pdf
Ruster (1997)
Ruster, Jeff (1997). A Retrospective on The Mexican Toll Road Program (1989-94). Retrieved
Nov 29 , 2007, from World Bank:
http://rru.worldbank.org/Documents/PublicPolicyJournal/125ruste.pdf
Seltzer (2000)
Seltzer, David (2000). Recent Developments in Federal Project Finance. Retrieved Nov 29 ,
2007, from FHA: http://www.tfhrc.gov/pubrds/jan00/finance.htm
SCTa (2008)
SCTa (2008). New Concession Model for Toll Road Development in Mexico. Retrieved Jan 28,
2008, from SCT: http://uac.sct.gob.mx/fileadmin/ingles/presentations/newmodel.pdf
SCTb (2008)
SCTb (2008). Public-Private Partnerships for Highways in Mexico. Retrieved Jan 8, 2008, from
SCT: http://uac.sct.gob.mx/fileadmin/ingles/presentations/public.pdf
SCTc (2008)
SCTc (2008). Public-Private Partnerships for Highways in Mexico. Retrieved Jan 11, 2008, from
SCT: http://adminsitios.sct.gob.mx:8090/uac/fileadmin/ingles/presentations/public.pdf
SCTd (2007)
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SCTd (2007). Public-Private Partnerships for Highways in Mexico: Federal Perspectives.

Retrieved Nov 18, 2007, from SCT:
SCTe (2007)
SCTe (2007). Primera Licitacin de Autopistas del FARAC. Retrieved Dec 11, 2007, from SCT:
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SCTf (2006)
SCTf (2006). Nuevo Esquema de Concesiones de Autopista de Cuota. Retrieved Dec 5, 2007,
from SCT:
http://adminsitios.sct.gob.mx:8090/uac/fileadmin/espanol/esquema_concesiones/libroasociacione
s/fichascap2.pdf
SCTg (2006)
SCTg (2006). Esquemas especiales aplicados al desarrollo de dos proyectos estratgicos para la
red carretera. Retrieved Dec, 27, 2007 from SCT:
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SCTh (2006)
SCTh (2006). Autopista Saltillo-Monterrey y Libramiento Norponiente de Saltillo. Retrieved Nov
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Autopista Saltillo-Monterrey. Retrieved Nov 29 , 2007, from SCT:
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SCTj(2005). Tepic-Villa Union Toll Road Project. Retrieved Dec 5, 2007, from SCT:
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SCTk (2005)
SCTk (2005). Puente Internacional Reynosa Anzalduas. Retrieved Nov 24, 2007, from SCT:
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SHCP (2007)
SHCP (2007). Presentacin sobre Proyectos para Prestacin de Servicios (PPS). Retrieved Jan
10, 2008, from SHCP: http://www.pps.sse.gob.mx/docs/pps_febrero_2007.pdf
Spiering et al. (2007)
Spiering, Mirjam Bult / Dewulf, Geert. (2007). Strategic Issues in Public-Private Partnerships: An
International Perspective. Oxford, UK: Wiley-Blackwell.
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Standard & Poor's (2007): Will The U.S. Subprime Downturn Spread To Mexican RMBS?.
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http://hdr.undp.org/en/reports/nationalreports/latinamericathecaribbean/mexico/mexico_2004_sp.
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US DOT (2004)
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http://www.fhwa.dot.gov/reports/pppdec2004/
World Bank (2003)
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101
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7.
Annexes
Annex A Glossary of Terms
Build-Own-Operate: a private contractor constructs and operates a facility while

retaining ownership. The private sector is under no obligation to the government to
purchase the facility or take title (GAO, 1999).
Concession Benefits: rights to receive revenues and other benefits (often from tolling)
for a fixed period of time.
Construction Manager at Risk: hired construction manager (CM) begins work on the
project during the design phase to provide constructability, pricing, and sequencing
analysis of the design. The CM becomes the design-build contractor when a guaranteed
maximum price is agreed upon by the project sponsor and CM.
Design-Bid-Build: the traditional project delivery method where design and construction
are sequential steps in the project development process.
Design-Build: an agreement that provides for design and construction of improvements

by a contractor or private developer. The term encompasses design-build-maintain,
design-build-operate, design-build-finance and other contracts that include services in
addition to design and construction. Franchise and concession agreements are included
in the term if they provide for the franchisee or concessionaire to develop the project
which is the subject of the agreement.
Developer Financing: a type of financing where a private party finances the construction
or expansion of a public facility in exchange for the right to build residential housing,
commercial stores, and/or industrial facilities on the site. This type of financing often
takes the form of capacity credits, impact fees, or exactions (GAO, 1999).
Electronic Toll Collection: the use of electronic devices such as transponders,

cameras, and photo-recognition technology to identify, classify, and toll vehicles entering
and/or leaving a toll highway, bridge, or tunnel without the need for direct human
involvement in the process or the handling of cash.
Innovative Contracting: innovative contracting practices meant to improve the efficiency

and quality of roadway construction, maintenance, or operation. Examples of innovative
contracting include: A+B contracting, lane rental, the use of warranties, design-build,
design-build-operate, design-build-finance-operate-maintain.
Innovative Finance: innovative methods of financing construction, maintenance, or

operation of transportation facilities. The term innovative finance covers a broad variety of
non-traditional financing, including the use of private funds or the use of public funds in a
new way, e.g., GARVEE bonds or special tax districts.
102
_______________________________________________________________________________________________________
Life-Cycle Costs: the costs of a project over its entire life: from project inception to the
end of a transportation facility's design life.
Public-Private Partnership: a contractual agreement formed between public and private

sector partners, which allows more private sector participation than is traditional. The
agreements usually involve a government agency contracting with a private company to
renovate, construct, operate, maintain, and/or manage a facility or system. While the
public sector usually retains ownership in the facility or system, the private party will be
given additional decision rights in determining how the project or task will be completed.
The term public-private partnership defines an expansive set of relationships from
relatively simple contracts (e.g., A+B contracting), to development agreements that can
be very complicated and technical (e.g., design-build-finance-operate-maintain). In the
context of this report, the term public-private-partnership is used for any scenario under
which the private sector would be more of a partner than they are under the traditional
method of procurement. Further, the broad definition used for public-private partnerships
includes many elements that are applied fairly regularly on appropriate projects (GAO,
1999).
Revenue Bonds: instruments of indebtedness issued by the public sector to finance the
construction or maintenance of a transportation facility. Revenue bonds, unlike general
obligation bonds, are not backed by the full faith and credit of the government, but are
instead dependent on revenues from the roadway they finance (GAO, 1999).
Shadow Tolling: Shadow tolls are per vehicle amounts paid to a facility operator by a
third party such as a sponsoring governmental entity. Shadow tolls are not paid by facility
users. Shadow toll amounts paid to a facility operator vary by contract and are typically
based upon the type of vehicle and distance traveled (FHA, 1999).
Toll Credits: toll credits are earned when a State, a toll authority, or a private entity funds
a capital highway investment with toll revenues from existing facilities. States may
increase the use of available eligible Federal funding on a project, up to the normal
State/local matching amount, and debit the sum of the toll credits that have been earned
by that same amount.
Tolling: the process of collecting revenue whereby road users are charged a fee per
roadway use. Tolls may be collected on a flat-fee basis, time basis, or distance basis and
may vary by type of vehicle.
Warranty: when used in public-private partnerships for the construction of roads,

warranty clauses guarantee that the roadway will meet a certain level of quality or else
repairs will be made at the private contractors expense. There are currently two types of
warranties used in highway construction: (1) materials and workmanship warranties and
103
_______________________________________________________________________________________________________
(2) performance warranties. Under the first type, the contractor is responsible only for
defects caused by poor materials and workmanship. Under the latter, the contractor is
responsible for the product meeting certain agreed upon performance thresholds,
regardless
of
whether
materials
and
workmanship
met
State
standards.
104
_______________________________________________________________________________________________________
Annex B List of Acronyms
ADB
Asian Development Bank
BANOBRAS
Banco Nacional de Obras y Servicios
BLT
Build Lease Transfer
BOO
Build-Own-Operate
BOT
Build Operate Transfer
CAPUFE
Caminos y Puentes Federales
DB
Design-Build
DBB
Design-Bid-Build
DBF
Design-Build-Finance
DBOM
Design-Build-Operate-Maintain
DBOM-F
Design-Build-Operate-Maintain-Finance
DGCF
Directorate General of Federal Roads
DGCC
Directorate General of Road Maintenance
EIS
Environmental Impact Statement
ETC
Electronic Toll Collection
FARAC
Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas
FHA
Federal Highway Administration
FINFRA
Fondo de Inversin en Infraestructura
GAO
General Accounting Office
HOV
High Occupancy Vehicle
ICA
Ingenieros Civiles Asociados
IDEAL
Impulsora del Desarrollo Econmico de Amrica Latina
IFB
Invitation for Bid
JDA
Joint Development Agreement
NCPPP
National Council for Public-Private Partnerships
PDC
Project Development Contractor
PPP
Public-Private Partnership
PPS
Proyectos para Prestacin de Servicios
SCT
Secretara de Comunicaciones y Transportes
SHCP
Secretara de Hacienda y Crdito Pblico
SEMARNAT
Secretara del Medio Ambiente y Recursos Naturales
UDIs
Unidad de Inversin
USDOT
United States Department of Transportation
105
_______________________________________________________________________________________________________
Affidavit
I hereby verify that the work written in these pages is solely that of own and that use of any
dishonest, deceitful and unscrupulous methods have been in no means, mode or manner used in
the creation of this Masters Thesis. The ideas herein, other than my own, have been referred to
and quoted to according to recognized citation standards.
Jose Andres Pea Gonzalez
Freiberg, 18.02.2008
106

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FREIBERG UNIVERSITY OF MINING AND TECHNOLOGY

International Management of Resources and Environment

Public-Private Partnerships in Transportation Projects .....12

2.5.3 Taxation Constraints 33

Transportation PPP Activity in Mexico ..38

Mexico Transportation PPP Case Studies ..60

4.2.2 Morelia-Salamanca Toll Road 64

Results and Conclusions ....85

The culmination of these interrelated conditions has led to an increasing willingness by

1.1 Purpose and Objectives

Conduct a literature review to characterize the types and implications of various

transportation projects in Mexico;

Develop a series of case studies of domestic PPPs that characterize transportation

1.2 Scope and Methodology

2. Public-Private Partnerships in Transportation Projects

This chapter provides an overview of public-private partnership (PPP) approaches to delivering

2.2 Definition and Types of Public-Private Partnerships

Public-private partnerships are defined by the US DOT as follows:

2.2.1 Private Contract Fee Services

2.2.2 Alternative Project Delivery Approaches

2.2.3 Multimodal Partnerships

2.2.4 Joint Development

2.2.5 Long-Term Lease or Concession Agreements

Figure 2.1 Major Types of Transportation PPPs

Multimodal Agreement (Public-Private Partnership)

Design-Build with Warranty (DB-W)

Degree of Private Sector Responsibility and Risk

Full Service Long-Term Concession or Lease

2.3 Public-Private Partnerships Arrangements

2.3.1 Private Contract Fee Services, including Contract Maintenance

Reduced work load for agency staff;

Potential for reduced costs; and

Opportunities to apply innovative technologies, efficiencies, and private sector expertise.

2.3.2 Alternative Project Delivery Approaches

Design-Bid-Build. Design-bid-build (DBB) is the traditional form of project delivery where

Design-Build-Operate-Maintain. Under a design-build-operate-maintain (DBOM)

Design-Build-Finance-Operate. The design-build-finance-operate (DBFO) delivery

Build-Operate-Transfer. Build-operate-transfer (BOT) is similar to the DBFO

Build-Own-Operate. Under a build-own-operate (BOO) delivery approach, the

2.3.3 Full Delivery or Program Management

Transferring responsibility for increases in user fees to the private sector;

Generating large up-front revenues for the public agency;

Transferring operations, maintenance, and capital improvement responsibilities to the

Taking advantage private sector efficiencies in operations and maintenance activities.

2.3.4 Transit Related Development Approaches

Business Improvement Districts; and

Tax Increment Financing.

These opportunities are discussed in greater detail below.

Transit-Oriented Development. Transit-oriented development (TOD) is commercial and

requirements. It takes the commitment, communication, and coordination of all these

Joint Development. Joint development is a type of TOD involving transit agencies

Private Sector - Primary Benefits/Risks

Increased ridership and fare revenues

Higher land values

Joint sharing of costs for mixed-use stations

Higher rental/lease rates and sales prices

Potential for dedicated property/sales tax revenue

More affordable housing opportunities

Potential for lease payments or other developmentrelated revenues

Risk of development market decline negating value

Risk that private development revenues fail to accrue

Risk of commercial development delays caused by

Public Sector - Secondary Benefits/Risks