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Progress Depends on Private Strength in Mexico
June 04, 2015
Mexico ended 2014 with a strong economy and a positive outlook. Just as the New Year’s celebrations subsided, the government responded to a sharp decline in oil prices by announcing budget cuts across the board. The new Mexico City Airport will continue on schedule, but hundreds of other infrastructure projects have been put on hold, and government subsidiaries shut down.
The past two years in Mexico have witnessed progressive legislation on a historic scale, as lawmakers have busted monopolies and paved the way for public-private partnerships (PPP) and foreign direct investment (FDI), attracting a record USD 35.2 billion FDI in 2013.
However, the state wants to retain ownership of key infrastructure assets. This means that, despite PPP reform, the government is still responsible for funding the construction of new infrastructure. Private partners are only allowed operational concessions for specified timeframes, after which, ownership reverts to the state. So, even after constitutional reforms in finance, tax, anti-trust, energy, and telecommunications, new infrastructure depends on the government budget.
Despite this setback, GDP growth is forecast at 3.2%, a strong outlook in comparison to many other countries in the region. In the absence of infrastructure expansion, private companies will be redirecting capital into private projects, keeping the economy in good shape for 2016, when GDP growth is expected to rise again to 3.7%.
As private firms shoulder the burden of growth, they will be looking to maximize capital leverage and secure bottom lines. Risk engineers and insurers can provide specialized solutions for cargo and construction risk. These will help optimize assets in two ways: by mitigating risk, and by transferring it through insurance coverage.
Transport vulnerability is probably the single, most underestimated risk. Transporting equipment and components is part of every project, and damaged cargo can significantly impact profit margins.
If cargo is damaged or delayed en route to the construction site, ultimately it can delay the operational startup date. In addition to replacement costs, this can cause financing problems, when repayment schedules are dependent on facilities becoming operational and producing revenue by specified dates.
The long established practice of under-declaring cargo values also presents hidden risks. In a trouble-free delivery, this might appear to save transport costs. But if cargo fails to arrive at its destination, intact and fully operational, losses can be severe. Unfortunately, under-declaring value also provides a low-risk theft incentive to shady drivers and their cohorts. If only 50% of value is declared for transport, even if only 60 boxes out of 100 arrive, a company will have trouble prosecuting insider theft or claiming a loss.
Mexico is one of the three peacetime countries at most severe risk for cargo theft, especially hijacking. In 2012, 83% of the 6,000 reported transport thefts in Mexico were hijackings. Countless thefts go unreported. Industry activity is accelerating faster than security and police forces can keep up, and opportunistic thieves are pouncing.
Cities are rife with cargo theft. Traditional targets have been pharmaceuticals and electronics. GPS tracking in recent years has helped police catch up with criminal activity in urban areas. However, as energy and infrastructure investment picks up, expensive equipment is passing through remote areas all over the country. This presents a couple of challenges.
First, hijackers can act with greater impunity, since police will be seldom there to stop them. Some stretches of road are practically invisible to satellites, so GPS tracking is rendered useless.
Secondly, accidents are common on these remote roads. Unsteady loads of 150-meter wind turbines or swaths of solar panels traverse arid, desert hills, on bumpy, outdated roads and rails. If a tank of natural gas topples over, add environmental clean-up to replacement, repair, injury, and construction-delay costs.
Strong Helping Hands
Businesses are stretching to accomplish this phase of development, and every dollar has to count. Most investors now demand evidence of meticulous risk engineering and insurance coverage. So, competitive bids are expected to include the full palette of insurance coverage for transport, construction, and liability.
Because of the many recent regulatory changes that have been implemented, prepackaged insurance policies are likely to leave dangerous risk exposure. To be effective, coverage must be based on detailed risk analyses, with careful liability assignment, and tailored capacity and pricing.
XL Catlin’s risk engineering arm specializes in risk assessment and loss-prevention services. Our risk engineers offer expert, in-depth analysis of every aspect of construction, cargo, and liability for corporate clients. They assess each phase of construction, from design to completion, to categorize and quantify risks. Advising on logistics consolidation and efficiency, they advocate a “policy of truth” with clear and accurate value declaration. This ensures that security warranties are cost-efficient, and also cover the true value of cargo. They also recommend the most secure travel routes, with strong satellite connections for GPS tracking. All this helps XL Catlin’s underwriters create highly customized policies with appropriate wordings, including options to cover Delay in Startup (DSU) and Advanced Loss of Profits (ALOP). So, capacity is tailored to match exposure precisely, at the best rate.
As Mexican companies look to manage the cost of risk, our risk engineers can take the extra time to help them develop their own rigorous, internal, risk-management cultures. This is a long-term effort that pays big dividends to companies throughout projects.
Finally, insurance has to be innovative to match the innovation companies are pushing forward. Award-winning risk-engineering and claims tools, local connections, transparency, service and custom coverage put XL Catlin at the vanguard of global insurers. Our risk engineers and underwriters stick to a project from beginning to end. That is why XL Catlin leads more than 70% of the 2,700 global programs we participate in.
We have built a strong, diverse team in Mexico. We are ready now to empower companies to achieve maximum profitability and progress during this crucial period of national development.
Want to know more? You can reach Ruben on: firstname.lastname@example.org
- About The Author
- Rubén Chanona
- Underwriting Manager para Marine en México y Latinoamérica en AXA XL