Ontario Teachers Pension Plan logo.
A curving toll road is bringing two of Canada's largest pension funds to Mexico in an investment poised to tap into growth in the country's manufacturing sector.
The Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers' Pension Plan said Thursday that they would team up and contribute a combined $1.35-billion for nearly half of the Arco Norte toll road.
As its name suggests, the highway traces a 223-kilometre northern arc around Mexico City that connects several states, intersecting with trade corridors and attracting trucks and commercial traffic looking to bypass gridlock. Mexico City is one of the largest metropolitan regions in the world, and also one of the most congested.
"It connects two key industrial hearts of Mexico, and that means that we have a good link between economic activity and traffic volume," said Cressida Hogg, managing director and head of infrastructure at the CPPIB.
The road will be the CPPIB's first infrastructure investment in Mexico and comes after many months of building relationships in the country and assessing other toll road investment opportunities.
The Arco Norte is a young road – only about four years old – meaning it's not in need of repair and traffic and usage of the highway is still projected to increase over time, particularly given the growth prospects of the country's manufacturing sector and likely increase in drivers on the road.
The toll road has also expanded in that time, with two new sections planned to open this year, according to a report from the company that built it.
As the costs of doing business in Asia increase, Mexico has become a more attractive manufacturing hub. Goods can travel through the United States into Canada more quickly than being shipped across the seas.
"Mexico is becoming increasingly competitive as a nearshoring option," said Andrew Claerhout, head of the infrastructure and natural resources group at Teachers. "When you include the total delivered costs of items, including transportation, Mexico today is basically at parity with China."
The Canadian pension funds are buying 49 per cent of this road from publicly traded Impulsora del Desarrollo y el Empleo en America Latina SAB de CV or IDEAL, which is one of the largest infrastructure companies in Latin America. IDEAL won the initial contract to build, maintain and run the road, taking on the "greenfield" or undeveloped land risk.
The toll road, formally called the Autopista Arco Norte SA de CV, will be owned in a concession agreement with the government with a term lasting until 2065 – nearly 20 years longer than the 30 years that is becoming standard in these deals, which was an advantage for the pension funds that have longer holding periods for their investments.
Exposure to the growth of an emerging economy can come with added risk. Allegations of corruption and bribery have followed some firms and infrastructure projects in Mexico, where the bidding processes for infrastructure projects aren't always transparent to outsiders.
Ms. Hogg said the CPPIB considered the risks and takes corruption seriously. Along with that analysis, the CPPIB also spent a lot of time with IDEAL and looking at traffic flows to ensure projections for use of the road were reasonable and reflected the economic backdrop. According to IDEAL's public documents, traffic increased by more than 7 per cent in 2015 to an average of 18,890 standard vehicles using the toll road each day.
The pension funds were also under a little less pressure to conclude their due diligence, since the road wasn't sold through an auction process.
Now that the road is operational, with toll plazas, security systems and staff in place, IDEAL could be looking to fund its next big project. The Mexican government has ambitious plans to bolster the country's productivity and ability to compete on the world stage, and part of that will be replacing crumbling infrastructure in areas such as electricity distribution and building new projects from the ground up, such as transit lines.
IDEAL's plans could align with the global trend of "asset recycling" that has gathered steam in recent months as more investors seek to invest in hard assets such as infrastructure. Governments and other developers may look to sell more mature infrastructure assets and use the money to fund new development. It's a system that has been popular in Australia and an idea that Canadian Finance Minister Bill Morneau has been considering, and even mentioned in the federal budget.