ALL CANDIDATES LOOKING TO SPEND ON INFRASTRUCTURE

UNCLAS SECTION 01 OF 02 MEXICO 001277

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC
STATE PASS USAID FOR LAC:MARK CARRATO
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV PINR MX

SUBJECT: ALL CANDIDATES LOOKING TO SPEND ON INFRASTRUCTURE

REF: MEXICO 1124
MEXICO 953
MEXICO 806
MEXICO 680
MEXICO 503
MEXICO 351

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SUMMARY
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1. (SBU) Andres Manuel Lopez Obrador (AMLO),Felipe Calderon
and Roberto Madrazo have at least one shared plan: increase
investment in infrastructure as the catalyst to spur
economic growth, generate employment, improve
competitiveness, and promote regional development. Funding
their plans will be costly. Calderon foresees tapping
pension funds for financing, AMLO proposes providing
incentives (the details of which are unclear) to investors
interested in highways, ports, and airports. Madrazo will
promote infrastructure projects through synergies among the
public and private sectors. To free public funds for
infrastructure and other plans, the candidates will need to
reign in growing pension liabilities. To do so, each will
have to take on the unions. Only Calderon has publicly said
as much. End summary.

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PENSION FUNDS TO FINANCE INFRASTRUCTURE
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2. (SBU) This cable is part of our continuing series
(reftels) on the three main presidential candidates'
economic proposals as presented on the campaign trail. The
candidates' economic proposals all include investment in
infrastructure as a key ingredient for improved economic
growth. The candidates are beginning to provide more
details on how the plan to fund this investment. National
Action Party (PAN) candidate Felipe Calderon proposes
financing infrastructure spending through the issuance of
long-term bonds that he hopes to sell to pension funds.
Given swelling pension fund balances, this proposal is seen
as feasible. However, some critics suggest the government
seek private partners in order to share risks. In addition
to greater borrowing, Calderon has proposed broad fiscal
reform to rasie government revenues to pay for increases in
infrastructure investments. Another Calderon proposal sees
amending the NadBank (North American Development Bank)
agreement between the U.S. and Mexico to allow for financing
of projects outside the border area.

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PAY FOR INFRASTRUCTURE BY CUTTING BUREAUCRACY
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3. (SBU) Andres Manuel Lopez Obrador (AMLO),of the Party of
the Democratic Revolution (PRD),plans to spur economic
growth and employment growth through infrastructure and
housing projects. He plans to pay for these projects
largely by reducing the costs and structure of the federal
bureaucracy, and by providing unspecified incentives for
private investments. As head of the Mexico City government,
AMLO provided a variety of tax incentives for private
investments. If he provides similar incentives at the
federal level, he would have to find offsetting means of
raising government revenues. One of AMLO's promises is to
fight tax evasion and improve tax collection to increase
government income.

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AMLO'S ENERGY INFRASTRUCTURE PROJECTS
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4. (SBU) Among AMLO's grand infrastructure projects are two
major refineries to be built to replace imported gasoline
with domestic production. Given that AMLO doesn't favor
private investment in the energy sector, AMLO has three
options to finance these projects. He could either reduce
spending on other government programs (security, education,
health, etc.); he could divert Pemex resources away from
exploration and production, or he could borrow more money.
Thus far, AMLO has suggested these projects could be
financed using the savings from cutting government
bureaucracy.

MEXICO 00001277 002 OF 002




5. (SBU) Any future president will also face billions of
dollars in needed infrastructure in the electricity sector.
If AMLO forbids private investment in the sector, the
government will have to bear those costs, which, in
electricity generation at least, have largely been borne by
the private sector in the last decade.

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MADRAZO PROPOSES "SYNERGIES"
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6. (SBU) Institutional Revolutionary Party (PRI) candidate
Roberto Madrazo proposes amending regulations to allow for
better coordination between federal, state, and municipal
government efforts in infrastructure planning and financing.
Madrazo's vague proposal includes a strategy to link
economic and industrial policies with urban development
policies. Madrazo believes these efforts would yield
"synergies" between the public and private sectors. For
less developed states, Madrazo proposes using public
resources, and for states with higher income per capita, as
Calderon, he proposes the continuation of Fox's service
provision schemes (PPS),which combine public and private
resources. The government's main role in infrastructure
projects would be as a regulator and its participation will
be restricted to larger, high-impact projects. For
infrastructure in the energy sector, Madrazo will continue
using the current borrowing mechanisms, which many believe
have reached their limits.

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UNIONS AND GROWING PENSION COSTS
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7. (SBU) Analysts agree that all the candidates' proposals
are feasible, some more so than others. One funding
constraint all candidates will face is the growing burden of
unfunded pension liabilities, which each year squeeze public
sector budgets more and more. To prevent public sector
budgets from being overwhelmed by pension costs, any future
president will have to confront the unions, which have and
will continue to bitterly oppose any pension reform. AMLO's
chief economic advisor, Rogelio Ramirez de la O, has made it
clear that AMLO is aware of the need to confront the unions.
Calderon himself has promised to diminish the power of
unions. Madrazo, on the other hand, has not addressed the
union problem as they are largely PRI creations and long-
time PRI supporters.

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COMMENT
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8. (SBU) Campaign promises around the world always meet
budgetary realities once candidates reach office. The
candidates should be applauded for at least beginning to
address the funding needs of their grand infrastructure
proposals, which are key to their economic plans. They will
not be able to escape the need to reign in pension costs if
they want to move forward on their spending plans. But even
if pension cost pressures moderate, the sheer costs of
massive transportation and energy infrastructure costs
cannot simply be met by either more borrowing or by cutting
government waste. An encouraging fact is that the private
sector will have to play a role. End Comment.
GARZA