What to Do with $13-Bn Airport Project Steeped in Corruption & Cost Overruns? Reality Check for Mexico’s President-Elect

A classic lose-lose scenario for taxpayers that’s making the world’s richest even richer.

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

Mexico’s President Elect Andres Manuel Lopez Obrador (AMLO) doesn’t take office until December, but he’s already got a multi-billion dollar dilemma on his hands: what to do with the country’s largest infrastructure project, already steeped in scandals and corruption, which, if completed, will become one of the world’s biggest (and most costly) airports? Last month AMLO announced that his government would either finish the hub or expand a military base north of the capital, depending on the results of a a review by engineering experts and a public consultation due in October.

On Wednesday, a top engineering association threw their support behind the completion of the $13 billion airport project. Ascension Medina Nieves, president of Mexico’s college of civil engineers (CICM), told a news conference that on the basis of the available information, the only “feasible, viable and reliable solution” was to continue with the new airport.

The CICM does not have the final word on the airport — that will seemingly belong to the people of Mexico, who will vote in a referendum on the matter next month — but its backing is a step in favor of the hub, now in its fourth year of construction. During the presidential campaign AMLO pledged to put an end to the scandal-plagued project, arousing 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.

Grupo Carso, one of Slim’s many construction companies, is deeply involved in the building project, which is allegedly around 30% finished and at least $4 billion over budget, with construction costs having soared from €9 billion to €13 billion. 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.

Other large Mexican companies participating in the project include ICA, Prodemex, GIA, and Grupo Hermes, which is owned by Carlos Hank, a billionaire banker with cozy ties to Mexico’s outgoing government. Two other major participants are the Spanish infrastructure giants Acciona and FCC, the latter of which is also majority-owned by Carlos Slim.

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 plowed 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. But one thing they’re not willing to do is actually put up their own money for the project.

Before making the decision to consult the Mexican public on whether to go ahead with the project, AMLO proposed privatizing it lock, stock and barrel. But none of the investors or companies involved were interested in taking it off the public’s hands, for one obvious reason: the project’s sky-high operational and maintenance costs.

A large part of the problem is that the new airport is being built on a site that was home to a very large lake, most of which was drained before work began. But the ground still has 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.

The government’s current total budget for project maintenance, on a 50-year timeline, is 569 billion Mexican pesos ($29 billion), according to the Mexican daily El Universal. That’s over double the current construction costs.

A mind-watering 70% of the contracts involved, 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, says Hernandez Soriano, head of the congressional committee set up to oversee the project.

As long as Mexican taxpayers are on the tab for those crippling maintenance costs, everything is just fine and dandy. Or at least was, until a new government was voted in that appears to be unwilling to write a blank check for a project whose total costs could reach the stratosphere and for which there’s virtually zero oversight of how the funds are being spent.

Vast sums of public money vanish everyday in Mexico. In the latest corruption scandal 2.76 billion pesos ($140 million) of funds donated by members of the public and businesses to the victims of last year’s earthquake disappeared into thin air. As such, the idea of leaving taxpayers on the tab for untold billions of dollars for a vanity project his predecessor launched under the worst possible terms and conditions (for the government) is not exactly an enticing prospect for Mexico’s incoming president.

But the alternative of cancelling the airport project also comes with huge risks attached. The government could end up having to pay out billions of dollars in damages to investors and contractors. Then there’s the long-term damage it could do to Mexico’s standing among global investors. The ratings agency Moody’s has already cautioned that cancelling the project would have negative credit repercussions, not only for Mexico City’s current airport but the entire national sector.

Plus, AMLO’s proposal to expand the Santa Lucia military base could cause serious air traffic problems, experts have warned. In other words, if AMLO follows through on his instincts and cancels the project, not only will Mexico be back to square one, with an inadequate inner-city airport serving its capital; it will be billions of dollars worse off and with nothing to show for it, apart from a huge building site on top of an empty lake. It’s a classic lose-lose scenario, with a multi-billion dollar price tag attached, which is probably why AMLO decided to let the people decide. By Don Quijones.

Motivated by inflation? Read…  Mexico’s Central Bank Just Broke with the War on Cash

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  35 comments for “What to Do with $13-Bn Airport Project Steeped in Corruption & Cost Overruns? Reality Check for Mexico’s President-Elect

  1. Fernando A. says:

    Mexico is not a functional country. It’s current state consists of regional local governments/mafia associations, with the central government kept in place untouched to give the illusion of control. The two pretty much work independently. Federal government projects and construction works are full of corruption obviously…place is a disaster. How it will ever change other than a revolution I have no clue…

    • Max Power says:

      See my comment below… you don’t need to be in a non functioning country for this to happen. The airport under construction in Berlin (scheduled to open in 2011, now 2021… maybe) is just as big a boondoggle.

      • Rates says:

        That’s not the point. There will always be corruption everywhere, but at least in some countries, things get done despite corruption, whereas in Mexico, it’s the same crap again and again.

        AMLO needs to echo Don Draper i.e. “change the conversation”. Instead of just saying go/no go on the airport, he needs to link it to higher taxes on the wealthy, etc.

        But then again, Mexico is what it is i.e. it will ALWAYS be a shitty country. Good for vacation and nothing else.

        • Frederick says:

          Not even so great for vacation anymore with the recent murders in Cancun and Cabo My sister used to go every year for two weeks but I think she’s reconsidering this year

        • DJT says:

          OMG, that’s racist, a total Trump thing to say. It’s ok to call them thieves, corrupt, oligarchs, those are acceptable terms, but we cannot call them a shitty country. That’s a step too far.

        • Lee Irvine says:

          Well said.

  2. Max Power says:

    You need not be in a developing country for this to happen to the capital city’s airport. See the fiasco known as “Berlin Brandenburg Airport”.

    • Drater says:

      This corruption is child’s play compared to the California bullet train to nowhere which is already at $77B and rising. I’m shocked Dianne Feinstein’s husband has a $1B contract with the “project”. If/when completed it will still be cheaper and faster to fly on Southwest within CA…heckuva job CA voters!!

      • Frederick says:

        Diane Feinsteins husband sure seems to have done well on the apron strings of that witch

  3. 2banana says:

    Maybe a “wise latina” can fix it…

  4. Msshell says:

    As an aside:
    It boggles the mind how someone who is so rich only wants more and more on the backs of his people. But I should know better.
    After the $2 an hour NAFTA article re the salaries the people in the auto industry make, the only way to make money seems to be the drug trade.
    I know two engineers in Mexico one graduated 1st in her class, who work as potters because they make more $$$. He is fairly well known and one pot sells for thousands. She helps and teaches poor children.
    Is there any wonder why we have an immigration problem? We are Mexico’s relief valve so they do not have a revolution. And who uses the drugs? The people in the US.
    Our policies seemed not to have worked so well for our neighbor.

    • JungleJim says:

      Our policies haven’t worked very well for us either. A very high percentage of our murder rate involves drug dealers fighting over turf. The only thing the drug laws have accomplished is to create a profit margin for the drug dealers.

      To answer your question about why the wealthy keep screwing the public, I think it is that in their lives no one says no to them. So, after a while they develop a sense of entitlement. They don’t steal from need, but rather because they enjoy getting away with it.

      • Suzie Alcatrez says:

        Big Pharma and the criminal system employs a lot of people who would at all drugs remain illegal.

  5. Mike Earussi says:

    I like China’s solution, just shoot everyone who’s corrupt–problem solved. Just wish it was legal in the U.S.

    • Max Power says:

      The only problem is that the person doing the shooting is probably more corrupt than the person being shot.

      • Paul says:

        I agree completely with both of you.
        It is a sort of “chicken-egg problem”.
        The cycle can be broken, however, if it can get a very strong voter mandate, or like China, Vietnam and a few other places, a Peoples’ Army takeover.
        Sadly, most of the world’s population is content to be victims.
        That is how I see the “justice system” in the USA.
        The next victim of crime has not been identified yet, and so is not a person with rights.
        Only the criminals have rights.
        I favor a “three strikes and your out” concept.
        Three independent felonies, and maybe the second one involving violence, and society would be better off without them than with, so off to a sand-pit and be done with them, just like China.

    • kf6vci says:

      Excuse me, WHO owns trillions in offshore accounts? Yes, families of the Communist Party etc. Greed unites the bad guys in this world…

      Guess if one could see the aura of these billionaires, one would shudder in disgust and feel revolted. Quick, how to consume 1,000 million Dollars.

      Building a good airport, using clever designs (to save energy etc.). Nope.

  6. Fernando A. says:

    We must stop allowing the corrupt rich from outside countries to steal their countrie’s wealth and come buy the best real estate in America they can buy and live here like royalty. It only creates incentives for them to steal even more!!!
    Honestly is any question this is happening? I used know/associate with some of the rich people in those countries so I know how they think. I decided years ago I could not bet in good faith friends with them anymore…
    We need to stop this insanity!!!
    Our country was not founded on this principles!!!

    • Fernando says:

      Sorry for the typos;)

    • Taxpayer says:

      “We must stop allowing the corrupt rich from outside countries to steal their countrie’s wealth and come buy the best real estate in America”
      Honest state and local governments, if any exist, could take advantage of this by raising the real estate tax on expensive properties.

  7. Waves4me says:

    I am looking at the decision regarding this project as a decider of the usd/mxn direction. AMLO is untested.

    Mexico has amazing beaches!! I love it when I am living there.

    • kf6vci says:

      Love the food as well. Many folks are tough and very sad.

      • Waves4me says:

        I somewhat disagree that the many Mexicans are very sad. They continually rank high in the happiness index and can laugh off and enjoy life, whatever it brings. Much of their happiness also comes from close social ties that other cultures don’t have.

        • Rates says:

          “Happy”? I think you meant they are on drugs all the time. You really must not be aware of the ghastly killings done in Mexico by the drug cartels. Think ISIS and it’s pretty much similar down there. Decapitation, torture, etc is super common. In some cities, you can see bodies hanging off bridges. It’s pretty obvious why American media would not report those.

          How can you be “happy” living in a country like that? If they really have close social ties, then they would “care” no? Strangely enough, it can be fixed real fast. How? The gringos should just stop buying drugs, and that’s it.

    • Frederick says:

      Waves4me Yup the beaches are to die for, literally

  8. Justme says:

    We don’t need any more stinking airports. Enough with all the vanity-flying all over the place. All that oil going to waste, all that CO2 being emitted. Just stay home and use videoconferencing.

    • kf6vci says:

      Just had another botched job interview, where a multinational corporation insisted on using “Skype for Business”. A living nightmare, this software has never worked for me.

      Then another interview with a Thai lady. My microphone failed. She had video and call my cell phone.

      Get the job done, or let all that red tape strangle your HR Dept.

      • Rates says:

        It’s pretty common nowadays. Here’s the trick with Skype: if you have a shitty computer, make sure it’s the only software running because Skype takes a LOT of resources. Video and sound quality will drop the more software you have open.

    • Maximus Minimus says:

      And you haven’t even touched on all relevant questions, like was a lake the only place left to build the airport, and the reason.

  9. George McDuffee says:

    If the largest companies and biggest banks in Mexico stand to make large profits from this airport when finished, it seems only reasonable to expect them to buy and hold airport revenue completion bonds with some reasonable rate of interest.

  10. Mike G says:

    On a related topic, what’s happening with Berlin’s clusterfck airport project?
    Corruption and incompetence in Mexico is not a surprise, but expectations are a little higher in the case of Germany.

  11. R Davis says:

    They should finish the airport – regardless.

    Years ago, Australia commissioned overseas architect Jorn Utzon to design the Sydney Opera House.
    Throughout the building of this iconic building there was trouble.
    The budget blew out.
    Jealousy raged.
    And the original design of this wonderous building was changed to a cheap & nasty imitation.
    Even today we lament the bullshit that took place & spoiled what was to be a magnificently acoustic delight.

    • R Davis says:

      2CELLOS – You Shook Me All Night Long [Live at Sydney Opera House] – Youtube

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