President Claudia Sheinbaum’s new Infrastructure Law seeks to expedite public-private partnership projects with flexible investment schemes; however, a Banamex economic report concludes that these mechanisms risk introducing opacity into Mexico’s public finances.
Congress rushed to approve the legal framework that Sheinbaum and her finance team are relying on to materialize an investment of MXN$5.6 trillion during her presidential term as part of the Infrastructure Investment Plan for Development with Well-being 2026-2030.
But the creation of the Law for the Promotion of Investment in Strategic Infrastructure for Development with Well-being and the reform to the Federal Budget and Fiscal Responsibility Law (LFPRH) carry risks for the credibility of public finances by making investment mechanisms and the use of the budget for projects more flexible.
This is the conclusion of a Banamex report prepared by Arely Medina, a research economist in the Economic Studies Department, who notes that the proposal to make the fiscal framework more flexible comes at a time when public spending is under structural pressure.
“The law seeks to redefine the role of the State in promoting strategic projects; however, it does so in a context where fiscal leeway is limited, and the relaxation of fiscal metrics, along with off-budget schemes, introduces risks of opacity.”
The new investment scheme—which replaces the Public-Private Partnerships (PPPs) Law—proposes greater flexibility, more active State participation in financing and risk management, less standardized contractual structures, and the use of off-balance-sheet financial vehicles.
Four possible types of mixed investments are proposed: predominantly public investment, predominantly private investment, a co-investment scheme, and a scheme using specialized financial vehicles that will utilize trusts or investment instruments to channel resources and defer the fiscal impact.
“The increasing use of extra-budgetary instruments and off-balance-sheet financing schemes increases opacity in measuring fiscal effort, while potentially increasing the accumulation of contingent liabilities.”
The report notes that the “rigidity” of Public-Private Partnerships (PPPs) stemmed from their design as instruments of fiscal discipline and governance to prevent cost overruns, limit the accumulation of contingent debt, and reduce discretionary power and potential corruption.
But now, with the new law, greater “flexibility” could translate in practice into an “excessive relaxation” of these controls, facilitating the execution of projects in the short term, but possibly at the cost of reduced visibility and control over long-term fiscal commitments.
The reform to the Federal Law on Budget and Fiscal Responsibility (LFPRH) added a new article, Article 35 Bis, on regulated flexibility, which authorizes, as an exception and with the approval of the Ministry of Finance, the initiation of contracting procedures before final budgetary sufficiency is available.
During the congressional debate, this new article was challenged by the opposition.
Raymundo Bolaños, a senator from the opposition National Action Party (PAN), warned that initiating contracting projects without sufficient budgetary resources violates the principle of fiscal responsibility. “We are facing a debt mechanism.”
Senator Claudia Anaya of the Institutional Revolutionary Party (PRI) asked the Senate to suspend discussion of the Infrastructure Law, arguing that the new Infrastructure Law opens the door to “uncontrolled growth” in current spending, which creates risks to fiscal consolidation, and that investment schemes “circumvent” debt accounting records.
Medina noted in the report that, traditionally, the fiscal framework stipulates that commitments should not be made without approved resources. However, the addition of this article to the Law implies that, even if it is not formally immediate debt, de facto obligations will be generated.
“These modifications to the legal framework carry risks. They could lead to a decoupling of fiscal expectations by weakening some fiscal metrics and expanding discretion in the classification of spending.”
Source: bloomberglinea
