Business Elite, Banks Panic after Presidential Front-Runner Threatens to Scupper Mexico’s Largest Infrastructure Project

A project of “mind-watering” magnitude in money and corruption.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The Mexican peso suffered its biggest rout in four months on Thursday, likely due to the realization dawning on market participants that the veteran populist Andres Manuel Lopez Obrador (or AMLO) may  win the presidential elections on July 1. AMLO has led all the polls in Mexico for well over a year and is still 15 points ahead of his closest rival. And now he’s threatening to put an end to the country’s most expensive public infrastructure project, Mexico City’s new airport, which has been plagued by corruption, scandals, and cost overruns since its inception four years ago.

AMLO’s latest pledge has aroused fits of apoplexy among Mexico’s business elite, many of whom stand to rake in large sums of money from the project — no one more so than Mexico’s richest man, Carlos Slim, who told journalists in Mexico City this week that suspending the project “would mean suspending the country’s growth.’’ Slim urged AMLO to reconsider his opposition.

Slim’s concern is not wholly altruistic. Grupo Carso, one of his many construction companies, is deeply involved in the building project. Three big contracts allegedly worth 94 billion pesos ($5 billion) are in the hands of consortia led by Grupo Carso or other firms owned by Slim and his family.

The first tender that Slim’s family won was for the airport’s architectural design, which was awarded to a firm run by Fernando Romero, a Mexican architect who is married to one of Carlos Slim’s daughters. British architect Nigel Foster led the design project, for which Fernando Romero Enterprises was reportedly able to bill Mexico’s government a cool $1 billion.

Other large Mexican companies involved in the project include ICA, which almost went under two and a half years ago after overdosing on dollar-denominated debt, Prodemex, GIA, and Grupo Hermes, which is owned by Carlos Hank, a billionaire banker with cozy ties to the current government. Two other major participants are the Spanish infrastructure giants Acciona and FCC, the latter of which is also majority-owned by Carlos Slim.

One of the biggest potential money earners for some of these companies will be the airport’s absurdly high maintenance costs once it’s built. Until recently, the site on which it’s being developed was home to a very large lake, which was drained before work began. But the ground still has extremely high water content and low resistance to stress. As the Mexican newspaper Proceso reported last year, this will inevitably result in very juicy contracts just to keep the land upon which the airport is built fit for purpose.

When the project to build the airport was first launched in 2014, it was broadly welcomed by the general public. Mexico City is one of the world’s biggest metropolises and its airport is Latin America’s busiest hub, yet it has no room for further growth since it is located slap bang in the middle of a built-up residential area. By contrast, the new airport, located 15 kilometers (over 9 miles) from the city center, would eventually have six runways built and 94 boarding gates on a site almost 5,000 hectares (12,355 acres) large. It would have a capacity of close to 120 million passengers per year, four times the current airport’s capacity, making it “one of the 3 biggest hubs in the world.”

But as soon as the project began, so, too, did the accusations of corruption. And in Mexico right now corruption is a hot-button topic, occupying top spot in many of the surveys of top voting issues, ahead of even drug-related violence.

The airport project is currently 50 billion pesos ($2.7 billion) over budget and it’s not even close to completion. Considering that at least 40% of the funding is expected to be delivered through Public-Private Partnerships, which tend to include exorbitant long-term repayment costs, the eventual bill is likely to be far in excess of the original projected costs of 169 billion pesos ($9 billion).

Cost overruns are a particular cause of concern when there’s scant oversight of how the funds are being spent. According to the head of the congressional committee set up to oversee the project, Rafael Hernandez Soriano, there is so little transparency that it’s very hard to tell where exactly the money is going.

A mind-watering 70% of the contracts, some of which have a duration of 50 years (with the option of extending them to 100 years), were awarded without tender, in direct contravention of the Mexican government’s own anti-corruption laws. The deep opacity also extends to the government’s financing arrangements with international banks and the issuance of green bonds, Hernandez Soriano says.

Given how much money the project could generate in years to come for some of Mexico’s biggest companies and international banks, as well as how much has already been ploughed into it, Mexico’s business elite and their political minders will fight tooth-and-nail to ensure that AMLO does nothing to upset the apple cart. It’s still far from certain that AMLO will actually win the elections or indeed that he intends to go ahead with this plan; it could just be an electoral ploy to galvanise his base. But if he does win the elections and he does go ahead with the plan, every effort will be made to change his mind, including the threat of litigation and broader economic fallout.

The ratings agency Moody’s has cautioned that cancelling the airport project would have negative credit repercussions, not only for Mexico City’s current airport but the entire national sector. Marco Oviedo, Barclay’s chief economist for Latin America, went a step further, warning that cancelling the project would hurt the entire economy due to investors’ loss of confidence. For an open, liberalized economy like Mexico that depends so heavily on foreign direct investment, this is a big threat.

But until July, at the very earliest, the future of Mexico’s biggest public infrastructure plan is — if you’ll excuse the pun — up in the air. And that is the last place Mexico’s business elite, along with bankers and investors, domestic and foreign, want it. By Don Quijones.

Pemex lost $18 billion in Q4 2017, suffers from revenue shrinkage, falling oil and gas production, and $102 billion in debt. And now its world is changing. Read… How Much Longer Can Pemex Hang On?

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  43 comments for “Business Elite, Banks Panic after Presidential Front-Runner Threatens to Scupper Mexico’s Largest Infrastructure Project

  1. Armando Rubio says:

    I hate to say as someone of Mexican descent but Mexico in many ways appears to be a failed state that hasn’t collapsed because of remittances and the ability to unload troubled people on its northern neighbor. Apparently, rising interests here in the US also might weaken the Peso further. Only time will tell what populist movements around the world will lead to.

  2. Wait, let me get this straight: they’re building an airport on top of a lake??

    • Wolf Richter says:

      Well yeah, in an earthquake zone. But where else are they going to build it?

      In San Francisco, they built the Millennium Tower — which I renamed the “Leaning Tower of San Francisco” two years ago — on Bay mud without taking the piles down to the bedrock, which is way deep down and would have added to the costs. This has turned into a fiasco of mega proportions with lawsuits now getting everyone tangled up. A fix is still not within reach. And that thing is leaning faster. “Should have known” is one of the phrases that keeps coming up.

      • Wolf Richter says:

        You’d think that there would be enough smart people around here to avoid this sort of thing. But no. Money matters.

        • JungleJim says:

          Allegedly, a job seeker was once recommended to Boss Tweed with the words, “he is an expert in mathematics. He understands subtraction, division, and silence”.

        • d says:

          The Money that mattered. Probably went into the pockets, of those granting the construction consents.

      • Frederick says:

        It’s not necessary to drive the piles to bedrock just to strata of material of adequate loadbearing capacity to support the building which could be compact gravel If they built it on “mud” it would fail very quickly
        My ex boss invented a precast pile tip that he got approved for lots of high rises in Miami where the substrate was dense sand As far as I know all the buildings that used his piling system are still vertical

        • Wolf Richter says:

          Agreed. The method of using a platform floating on sand/mud stabilized by piles going deeply into the mud has been used many times successfully in SF. But those are steel buildings. The Millennium Tower is a concrete building, and much heavier. So it’s sinking much faster than anticipated and it’s sinking more on one side than the other. To my understanding it was the first big concrete tower with that type of foundation in SF. And probably the last.

          They’re building a four-story condo building down the street from me. The garage floor and ceiling are concrete. The living floors are wood-frame with some big I-beams. So a fairly light construction. I watched them do the foundation. This building sits on former sand dunes near where the Bay’s wetlands used to be (we’re up the hill on rock). They put many pipes down the sand and filled them with rebar and concrete. Those piles are just stabilizers. They don’t go anywhere near bedrock which is hundreds of feet down. Then they poured a thick odd-shaped concrete pad with a huge amount of thick rebar in it. There seems to be no issue at all with this type of foundation when the building is of this size and weight.

      • Rates says:

        Way worse than that when it comes to SF.

        And the National Geography has a map that basically says that your life has a very high probability of being forfeit if you happen to be in Embarcadero, FiDi, and North Beach when a big one hits.

        It’s not just mud, those area are built on top of sunken ships.

      • d says:

        Long Term. There is only 1 thing to do with that POS project.

        Demolish it. As it will not sink evenly.

        Otherwise one day that building will impersonate 1 of the many chinese High-Rises, that have simply fallen over. leaving the apartment/unit owners, to try and find somebody, to cover the removal cost, and compensate them.

    • raxadian says:

      Argentina tried to do it first! There was an artificial island project that never went anywhere due to rising costs and economic crisis. And the river were they wanted to put said island being one of the most polutef ever.

      Mexico doesn’t even have original scams, this is a recicled one.

  3. bev says:

    As for earthquakes and weakened foundations due to water log. ….

  4. MCH says:

    No corruption here, nothing to see….

    Move along…

    Why are you still here? Do you really want me to sic the cartels on you?

    You know the things the cartel did in the movie Scicarrio? That’s literally nothing compared to what we do IRL.

  5. Hendrik1730 says:

    Sounds familiar. WorldWIDE.

  6. Rates says:

    LOL. AMLO is just asking for a BIGGER cut. And Senor Slim will give it to him.

  7. worldblee says:

    In my opinion, AMLO is the best hope for the Mexican state to recover some semblance of stability after years of austerity and corruption. The state needs to invest in the people, rather than stealing from them, and AMLO is the only candidate remotely close to fulfilling that need. The corrupt Mexican system, which has worked in the past to keep AMLO from winning and will doubtless work hard again to attempt to do so, is the oligarchs’ best chance of keeping the system running just as it does now. And of course, there’s always the chance of paying off AMLO to ensure he doesn’t rock the boat once elected.

    • Lion says:

      “The state needs to invest in the people, rather than stealing from them”

      A nice thought but I always considered Democracy as a system created by the Elite to pass power from the people to themselves so they could steal from the people

      • Rates says:

        Amen. The difference between Democracy and a non Democracy is that in the former, the people willingly sign their own death sentence.

  8. Nick Kelly says:

    A billion to DESIGN it?

    Given my choice I think I’d rather invest in the design company than the physical end.
    That way you avoid the risk of inflation in material costs and having to deal with tough concrete guys.

    Just thought of something!
    Maybe you could outsource some of the design to India or….

  9. James Levy says:

    I’m reminded of a story related by a character in a work by Isaac Asimov. The man in the story compares the people of his time to a man walking in a forest who runs under a tree in a rainstorm who thinks that when the leaves soak through, he can simply run under another tree.

    Where do the elites think they are going to run after they have looted, polluted, and degraded every nation on earth? How do they think they are going to avoid the ravages of climate change, ocean acidification and deoxygenation, and soil exhaustion and poisoning? Everywhere you look, you see the same depraved indifference to the future functioning of societies. And please, don’t tell me they really think they are headed on one of Elon Musk’s fake rocket adventures to Mars. Something else has got to be going on here on a planetary scale.

    • Jos Oskam says:

      “…Where do the elites think they are going to run after they have looted, polluted, and degraded every nation on earth?…”

      They don’t. Nobody lives forever, and they are content just keeping the house of cards from falling in during their lifetime. They don’t care at all about the long term. The French have a nice saying for this:

      “Apres nous le deluge”.

  10. A populist who fights corruption? How does that work?

  11. Paulo says:

    If this was Zero Hedge someone would have written, “I sense an accident with a nail gun is imminent”. Since it isn’t, I hope the reform candidate has a good security detail.

  12. Realist says:

    Sounds a little like AMLO runs on a platform similar to what Trump did north of the border ?

    If so, there might be some interesting fireworks in the waiting.

  13. DK says:

    I’m shocked

  14. Bruce T. says:

    “What work needs to be done?” instead of “where are the jobs?” It would seem that we peasants are still too enamoured of the “needs” of the wealthy to ever look at our own needs and giving them priority.

  15. Fernando says:

    Mexico is not a functional country and it needs a good benevolent dictator to eradicate corruption and the elites that run it. Carlos Slim like many other elites in Mexico only care about themselves and their corrupt followers/enablers. The Mexican average person is good and hard worker, they sure deserve better…

    • James Levy says:

      Yes, because Caesarism in Latin America has such a great track record.

      How about the people mobilizing in their own defense?

      • Fernando says:

        I didn’t say Cesarism, I said Benevolent Dictator. Since when is Chavez the only example of one?

    • govinda says:

      Maybe Duterte from the Phillipines could be hired on as a consultant.

      • d says:

        DU 30 is even more corrupt that the rest of them.

        His entire election campaign and benefits to him, were all funded by BEIJING.

        DU 30 sold out his country, and you recommend him as an aid to Mexico.

        A benevolent military dictatorship would be the answer for at least 2 generations. However finding enough non corrupt officers to run it would be impossible.

        Mexico has serious instances of the catholic diseases, nepotism and corruption.

        Step 1 in the cure, has to be complete and totally devastating financial collapse. A Violent revolution will simply, as every other time, replace the current baddies, with worse baddies.

  16. Javert Chip says:

    $5 billion dollar Mexican “project”; 70% no-bid; 50-100 year contracts.

    What could possibly go wrong?

    • Lee says:

      All you Yanks want to hear about a couple of projects in Melbourne and Victoria? Then ask yourselves, is this for real?

      Years back the powers that be wanted a new ticketing system for the rail, tram, and bus network. Rather than buy an off the shelf system that was already working in other cities or countries, for example, Japan, they went had had one built from scratch.

      It cost well over A$1 BILLION, yep, A$1 BILLION and still didn’t work well. So the next incoming government spent another couple hundred million to sort of fix it. It works better now, but still has problems. Please don’t ask any questions about who got the contracts for that though……

      Then there was the East-West Link (a road) which was approved and contracted by the Liberal (Conservative Government), but promptly scrapped and the contracts torn up by the incoming left wing Labor government when they won the election.

      How much do you think the Labor government paid for that action (The current head of the Labor government here stated that the contracts were not worth the paper they were written on and that he wouldn’t pay a cent to the contract holders during the election..)

      They ended up paying well over A$1 BILLION again to NOT build a road. Yep, they wrote checks for that amount to NOT build a road.

      Then there are the other fiascos such as Southern Cross Station, Federation Square, the North-South Pipeline, the various high speed rails that are slower than a camel, and the other big white elephant, the Desalination Plant.

      That plant was paying manual labor workers over A$180,000 a year and the project cost IIRC around A$5 BILLION. When they tried to start it up to deliver water for the first time (when the damns were over 70% full!!) the plant wouldn’t work. We have a take or pay contract that runs forever and we pay for it in our water bills every quarter. By the way the price of water has gone up over 250% in the past ten years.

      And now the same state labor government is throwing around $A7 BILLION or more to build Melbourne Metro tunnel. No doubt it will go way over budget, take years more to complete, and have problems as well.

      Big projects – labor government – big unions………………well you get the point.

      And people here still vote that party into government.

    • polecat says:

      What a grand relic to behold, in 100 .. or even 50 years ! I can see it now, er, then .. future tourists, if any then still exist .. will regale over the already decrepit “Floating Tarmacs of Mexico City” ….

  17. Nick Kelly says:

    So same old same old, but why is Moody’s weighing in as favoring the project due to ‘reputational risk’ or something?

    You might think that Mexico’s reputation and credit rating would be improved by more scrutiny.

    The design contract going to a family member of the main contractor looks dubious, as does the billion dollar tag. What percentage of the whole price is that?

  18. Too close to the Swamp says:

    I had the privilege of completing a summer study-abroad during high school in Mexico to study Spanish, in 2006. I was actually in Mexico the day of the election. I remember seeing the concession speech inside a domino’s. I don’t think the kitchen was open anymore, but there I was watching the TV in the corner with the Mexicans.

    I was personally relieved. AMLO was clearly a populist, more along the Bernie Sanders spectrum and I respect Bernie, but would not give him the keys to the white house. AMLO is much worse, apples to oranges though. I presume even more fiery now. I remember in the middle of no where somewhere else I stayed for a week, someone spelled out “AMLO” on their land. As if it were to be viewable from above like a helicopter. Anyway,

    FYI, having worked with a few latin american countries. The corruption will NEVER stop in most of them. They have titanic democrat versus republican forces in their system, with much $$$ in the mix. This one looks juicey and whoever gets the contracts will make off with a killing. The maintenance contracts (Which will be overstated, ie $500 toilet seats) will be pocketed and the subcontractors will get off.

    Oh, MEXICO CITY was built on a lake. Very interesting story btw.

  19. Sneaky Pete says:

    Chavez’ Venezuela is a good recent model to help us understand how Mexio will “prosper” under AmLo. At least we know to invest in Mexico’s stock market and to short the Peso. That’s the Venezuelan way to riches.

    My preferred model is Chile. And how exactly did Chile escape the typical Central and Latin American fate?

    • Fernando says:

      I visited Chile under Pinochet, the place is a good example of a dictator dedicated to his country, not so much his people as Chavez. People feared him, he was no saint, but it worked…I dated a Chilean lady, people were mostly happy there…Mexico needs it’s own Pinochet.

  20. Winston says:

    AM LO and NAFTA – BIG Multinational Corporate Push To Support Mexican NAFTA Position During Critical Weekend…


    “The Mexican national election is July 1st and the soft-Marxist Andres Manuel Lopez Obrador (AM LO) has increased his lead. AM LO is now 22 points ahead of his next closest competitor. Lopez Obrador, a self-described Hugo Chavez ideologue, is guaranteed to win – and Mexico will become Venezuela 2.0 within five years.”

  21. mean chicken says:

    Mexico has a swamp too? I bet it doesn’t compare to the US MIC that’s kicking into overdrive just about now.

Comments are closed.