The Mexican Airport Conflict That’s AMLO’s First Test

(Bloomberg) -- Mexico’s incoming president, Andres Manuel Lopez Obrador, known as AMLO, called for a public referendum to decide whether to continue building a $13.3 billion international airport that he has called a waste of taxpayer money mired in corruption. He’s said he’ll base his decision on the public “consultation,” which takes place Oct. 25-28. Investors are watching closely for the first strong clue about how Lopez Obrador will govern after he’s sworn in on Dec. 1. Will he lean toward pragmatism or double down on his populist pledges?

1. Why such a fuss over an airport?

Construction of the new Mexico City International Airport was a central issue in Lopez Obrador’s campaign. The airport, the biggest infrastructure project of the current president, Enrique Pena Nieto, is two years behind schedule and has faced numerous problems because it’s being built on a former lake bed in an earthquake-prone region. During his campaign, Lopez Obrador called for stopping construction as part of pledge to cut back wasteful government costs; he wanted a more modest replacement instead. After the election, he backed away from the harsh language, and said that the people should decide the fate of such a big project.

2. How is the public being consulted?

Over 1,000 voting stations will be placed in 583 municipalities across the country. Since the electoral regulators aren’t in charge of the process, it’s unclear how people will be kept from voting more than once. Lopez Obrador’s party, Morena, is financing the consultation and a little-known non-governmental organization is in charge of counting the votes. There will also be door-to-door polls, though details on that process are scarce. The current administration hasn’t said much about the consultation process, just that the airport construction should go on. The ballot language asks whether the government should upgrade the existing international airport in Mexico City and another nearby in Toluca, and expand the Santa Lucia military base for commercial flights with two new runways, or whether construction of the new international airport in Texcoco should continue.

3. What happens if the new airport isn’t built?

The current one, Benito Juarez, is overwhelmed and has no space to grow. Last year, it moved nearly 45 million passengers, well over its capacity of 35 million passengers, causing delays and reducing airlines’ capacity to increase flights. The new airport is set to handle as many as 68 million passengers by 2022. Lopez Obrador has said his alternative plan would cost 70 billion pesos (about $3.6 billion) and that there could be “other” costs from canceling the current construction. Analysts at BBVA Bancomer bank say those other costs could reach $10.5 billion on cancellation fees and bond payments. Lopez Obrador has said current contracts for the Texcoco airport will still be valid for the alternative project, although it’s unclear how that would work.

4. What about the new airport funds?

No one is completely sure what would happen to them if the project was halted. Construction was funded in part by $6 billion in bonds, which include a provision that requires immediate repayment of principal and interest if the government interferes with the passenger tariffs that are pledged to back the bonds. Another $1.6 billion in funding came from an initial public offering of Fibra E shares — a hybrid between a master-limited partnership and a real estate investment trust. The Fibra E shares were bought mostly by billionaire Carlos Slim’s Operadora Inbursa through its pension fund. This hybrid model is relatively new in Mexico and winding it down would be unprecedented. The state-owned airport trust in charge of the construction also took out a credit line of about $1 billion. About 30 percent of the estimated cost has yet to be funded.

5. What are businesses saying?

One of Mexico’s business chambers, CCE, says the public consultation process is not legally valid and has been created with a marked bias toward canceling it. Consulting group Eurasia agrees, saying Lopez Obrador’s increasingly antagonistic tone hints in favor of the Santa Lucia option. Also, polling stations will be set up in areas where Lopez Obrador’s influence is large, Eurasia says. Because Lopez Obrador isn’t in power yet and official referendums have to comply with certain requirements, the consultation isn’t legally binding.

6. How has the market reacted?

Fears that the project will be halted have already helped pull the peso’s value to the lowest levels since September, during the general emerging-market sell-off. Yields on the airport bond maturing in 2047 have surged to the highest ever. If the new airport is canceled, it may be harder to convince investors that Lopez Obrador’s administration will maintain prior commitments. It could, for example, cause foreign oil companies to question the safety of further investments in Mexico, since Lopez Obrador has said he doesn’t like the 2014 reform that freed the oil industry from state control.

7. How would the Santa Lucia expansion be bankrolled?

Lopez Obrador has not provided details, and it’s unlikely there would be much investor appetite for funding this option. That’s mainly because aviation experts have said it’s not a viable alternative. While the military base currently operates simultaneously with the current Mexico City airport, it handles very few flights a day. Turning it into an international airport alongside the existing one would represent significant flight risks because Mexico’s mountainous landscape only allows one flight pattern into the area, creating logistical nightmares for airlines.

8. Are any other alternatives being considered?

Lopez Obrador has said at times that the construction and operation of the new airport could be handed over to a private company. Slim, who’s heavily involved in the project through the Fibra E shares and several construction contracts, agrees. But the public consultation doesn’t take this option into account. Mexico is familiar with the private model, since all the other commercial airports in the country are licensed to three main operators — Gap, Asur and Oma. Before handing the 30 percent-finished Texcoco airport over to a private company, it’s likely there would be plenty of negotiations with creditors to establish new terms. It’s unclear what the public reaction would be of Lopez Obrador picked this third option, but the consultation itself makes life easier for AMLO. “The political responsibility of the decision will no longer rest on the president-elect,” political analyst Lorena Becerra said in an interview. “I suppose that was always the idea.”

The Reference Shelf

• Bloomberg News on how construction of the new airport was bogged down and problems facing Lopez Obrador’s Santa Lucia option.
• Bloomberg Businessweek on the tensions between Lopez Obrador and Pena Nieto.
• Mexico’s richest man defends the airport project he’s heavily invested in.
• MexicoDecide’s website and Facebook page.

To contact the reporter on this story: Andrea Navarro in Mexico City at anavarro30@bloomberg.net

To contact the editors responsible for this story: Carlos Manuel Rodriguez at carlosmr@bloomberg.net, Anne Cronin

©2018 Bloomberg L.P.