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.
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