Bus Financing in Urban Transport Projects in Mexico: Challenges and Opportunities

Abstract

There is great potential for improving the financial sustainability of urban transport projects by rethinking how to structure projects in Mexico. In recent years, several Mexican cities have experienced a notable improvement in their urban transport services. However, as old structures are replaced by new schemes, new challenges arise. One of these challenges is discussed: how to improve bus financing in urban transport projects in Mexico. These projects are experiencing financial problems because the cost of formalization and the large investments required for service provision are placing pressure on tariff levels. Solutions range from local tax exemptions to direct government interventions (equity for the acquisition of buses) with a cost to local and state financing. However, these solutions do not take into account project structuring in terms of risk allocation. In Mexico, service providers are responsible for the acquisition of buses even if they have insufficient access to financing, and project structures do not enable off-balance-sheet financing. Therefore, private agents with weak creditworthiness have to bear high financial costs and risk both their own financial sustainability and that of the project. This situation is mainly the result of commercial, political, and regulatory risks. The public authority is in a better position to manage some of these risks. Reallocating these risks would boost market interest and competition and enable a more efficient investment of public resources. In this way, project structures would get closer to a project finance scheme that would lower financing costs by better aligning incentives and reallocating risks among stakeholders.