Sector Overview

Mexico faces enormous environmental challenges and the market for environmental infrastructure and services is growing fast at 6% annually. The Mexican environmental market was worth US$2.2 billion in 2006. The Calderon Administration (2006-2012) has ambitious environmental programs and has specifically identified waste water treatment and solid waste management as priorities. In addition, the Mexican renewable energy and alternative fuels technologies could be worth $3 billion by 2015.

Since NAFTA took effect in 1994, Mexico has experienced important advances in the development and enforcement of its environmental legal and regulatory framework. According to the World Economic Forum’s (WEF) Infrastructure Competitiveness Index, Mexico ranks 64th among 125 countries measured, and 7th among Latin American countries, behind Barbados, Chile, Panama, Jamaica, El Salvador and Uruguay. Mexico’s average infrastructure investments (2000-2006) were 3.2% of GDP. Chile and China invested 5.8% and 7.3% respectively. 43% of Mexico’s infrastructure investments go to hydrocarbon production (PEMEX), the remaining 57% is designated for all other sectors. The environmental sector (including water investments) accounts for 8% of all infrastructure investments. The areas that expect significant investment growth are wastewater treatment and renewable energies.

The Mexican Government is aiming to improve Mexico’s infrastructure competitiveness to be in the range of 35 to 46 in WEF’s ranking by 2012. In order to do so it will need to invest between 4.0% and 5.5% of its GDP in infrastructure between 2007 and 2012. With the Fiscal Reform package passed by the Congress in August 2007, the Mexican Government expects that it will be able to meet its 4.0% of GDP investment goal, however additional reforms are needed to raise this figure to 5.5%, the most important being in the Energy and Healthcare sectors. It is estimated that Mexico will devote an average of US$3.7 billion per year to environmental investments in the next six years. The Mexico approved budget for 2008 includes a 30.1% increase in expenditures in environment as compared to 2007.

Despite the growing interest in renewable energy, alternative fuels, energy efficiency, and green buildings, the market has been slow to develop. In the electricity market, thelaw allows for privately-owned projects on a limited basis and the legal constraints surrounding the debate about electricity reform have conditioned the interest of private companies.

Cogeneration and small scale production of electricity for self consumption have seen an important increase. The need for new sources of energy for self-consumption to satisfy industrial demand has increased, electric tariffs are rising every month, investments in the public sector are growing very slowly and the quality of the service is going down fast. Large Mexican companies are searching to reduce the costs of energy through self-production of electricity or cogeneration.

Mexico’s Federal authorities have been seriously considering renewable energy and alternative fuels as an option for the country and have started doing viability studies on both areas. The results have been positive in general. The economics make the projects seem feasible, but political, legal and institutional constraints are still hindering further development of the market. The Mexican Secretariat of Energy (SENER) has forecast a steady growth of renewable energies to supply both on- and off-grid electricity demands. Canadian manufacturers of renewable energy and alternative fuels will find several business opportunities. The market for these technologies could be worth $2.6 billion over the next 10 years.

2. Market And Sector Challenges (Strengths And Weaknesses)

Environment Awareness 

The municipalities are responsible for providing water, sewer and wastewater treatment. They are also responsible for setting user fees, metering, billing and collection. In Mexico, there is a strong culture of not paying for environmental infrastructure services such as sewage or water supply treatment or for waste collection management. All the attempts to increase the charges for these services are usually strongly opposed by the majority of the Mexican population. The municipalities and companies are equally resisting paying for cleaner air emissions reduction technologies. There are also large problems with some unions in most cities resisting installation of new technology that could modify or eliminate their jobs.

Even though important advances in wind and solar energy have been developed in the last 2 years, with the construction of a 83 MW wind energy facility and the implementation of some solar projects, the Mexican market for renewable energy (i.e. biomass, biogas, solar, water and wind) and alternative fuels (i.e. ethanol and electricity) still remains a small proportion of the overall energy market. Although there is great potential for alternative fuels, current legal, institutional and market conditions framework does not offer powerful incentives.  The production of biodiesel is feasible in Mexico, but the economics makes it viable only to export to the US due to the subsidized prices of the Pemex diesel.

Mexico has limited opportunities to expand irrigated agriculture for energy purposes and to consider corn, wheat and other staples for ethanol making, since it is by and large a dry country and imports food. According to the Mexican Constitution, Pemex is the sole buyer of fuel ethanol and it has no interest in investing in refining processes, storage and handling infrastructure thus creating opportunities for the private sector to supply the services.

Municipalities

The Federal government is adopting a more regulatory and less operational role in environmental infrastructure. It creates new challenges at the municipal level upon which the burden of operations has been transferred, as most of them lack the financial and human resources to put in place and effectively manage environmental infrastructure. Also, the municipal administrations have short 3-year terms with no possibility of immediate re-election, thus the municipal authorities are reluctant to invest in longer-term projects whose benefits will not be clearly observable during their term.

Government tenders

All government contracts must be tendered by law. The price is the major deciding factor, more important than the technical capabilities or the quality of the product or service provided.

Cultural differences

Business relationships in Mexico must be built over time by gaining trust. The strength of the business relationship may supersede contractual terms. Doing business in Mexico’s environmental market requires patience, technology and developing local relations. Seeking for partners that match your size and goals will help you enter the Mexican market.

3. Sub-Sector Identification

Based on the challenges and problems faced in Mexico in both environment and energy sectors, five principle sub-sectors have been identified.

1. Water & Wastewater Treatment
2. Solid & Hazardous Waste Management
3. Air Pollution Control
4. Clean & Renewable Energy
5. Environmental Consulting Services

1. Water & Wastewater Treatment

To December 2006, potable water distribution reached 90% of the population although in rural areas, potable water service is only 72%, sewer reached 78% of the population and wastewater treatment only 36% of water served. The National Water Commission (CNA) is the main entity responsible for water resources in Mexico. The state-owned monopolies - PEMEX (oil and gas) and CFE (electricity) are by far Mexico’s greatest investors in water treatment plants.

At the municipal level, it is required that all cities over 20,000 inhabitants must have water treatment by 2007. As most do not yet have the required infrastructure, this presents very interesting opportunities for Canadian companies. During the last five years Mexican municipalities have installed an average of 4.72 lps per year in new wastewater treatment capacity, equivalent to 16 new plants per year. Approximately 80% of new wastewater investments come from a mix of Federal, State and Municipal funds and are contracted as public works, the remaining 20% are Build Operate Transfer (BOT) contracts. Activated sludge is the preferred technology, accounting for 41.6% of the installed capacity. Biologic Filters accounts for only 4.7% of the installed capacity but is one of the fastest growing technologies. Despite the fact that Mexican laws do not allow for service suspension, several cities including Mexico City recently began water supply restriction programs by installing devices that restrict the water received from the system meaning that the water pressure in the system is reduced but not completely shut down.

At the private sector level, new laws require companies that discharge over 1.2 tons of waste per day to treat their water. Many companies do not yet have the required infrastructure. The opportunities exist in all industrial sectors, especially tourism sector and housing development sector where there is a need for both potable and wastewater as well as desalination technology.

2. Solid & Hazardous Waste Management

Mexico generates 99,000 metric tons/day of solid waste. 88% is collected and 62% of the total generation is deposited in controlled landfills while the remaining is deposited in open-sky dumps. The Law for the Prevention and Integral Management of Waste entered into effect in 2004 and the regulation NOM-083-ECOL-1996 sets the standards of compliance for municipal landfills. There is a strong growth of recycling activities, increasingly incorporating unions.

In most cities, the waste collection and disposal services are still provided by the government, although there are some successful cases of private operation with some municipalities partially or completely outsourcing their solid waste management to the private sector (controlled disposal sites, waste reduction and waste collection services) and the trend is towards concession services. The municipalities are under pressure to modernize their solid waste management system.

A new law establishes shared responsibility of land owners and polluters for soil contamination. The generators are responsible for their waste. The responsibility for regulating those resides in the Federal Government and the regulations are enforced through PROFEPA (Procuraduría Federal de Protección al Ambiente), the Federal Ministry for Environmental Protection. PROFEPA has strengthened its verification and enforcement actions, and this has been a driver for new investments in both hazardous and non-hazardous waste management.

In the last 2 years, several municipalities have started to use biogas for emissions trading in the Clean Development Mechanism of the Kyoto Protocol. 24 municipalities have some form of biogas recovery systems to burn or vent. There is only one biogas plant to produce electricity (7 MW).
Hazardous waste sub-sector

The Mexican Government tracks approximately 3,700 - 4,000 million tons of hazardous waste per year through 12,514 generating companies; however private sector sources indicate that this figure could be as high as 8-9 million tons per year of toxic waste. Mexico still lacks of the needed infrastructure to properly handle and dispose these wastes and a significant percentage ends up in municipal landfills or illegally dumped.

3. Air Pollution Control

Federal, state and local environmental authorities have developed extensive air quality regulatory frameworks. Mexican industries and cities require significant investment in air pollution control equipment. The Program to Improve the Air quality (Pro Aire) is composed of measures that affect transportation, industry, the service sector, natural resources, health, and education. It focuses on the reduction of ozone and particulate matter, and emphasizes environmental education and citizen participation.The Pro Aire Programs are the main driver for the for air quality monitoring and control technologies and is composed of four main objectives: 1) Deployment of air quality monitoring infrastructure; 2) Inventory of pollution sources; 3) Issuance of specific (some time restricted) limits; and 4) Specific measures to mitigate emissions from fixed and mobile sources. The cities with Pro Aire include, in the phase III (2002-2010), Mexico City, Monterrey, Guadalajara, Toluca, Ciudad Juárez, Mexicali, Tijuana, Tula-Tepeji Corridor in Hidalgo and Salamanca in the state of Guanajuato, Puebla and Querétaro. Each Pro Aire program has city-specific measures and is adapted depending on the sources of the air-pollution problem. There are also stronger regulations for PM10 and Sulphur emissions.  

Most of the Canadian APC specialties are developed in greenhouse gas emission reduction technologies and include niche applications such as biofiltration, high tech monitoring and analysis, expert systems, pollution control for industrial emissions, indoor air quality and climate change. Other specialties include transportation control equipment, sustainable transportation, alternative fuel vehicles that use propane, natural gas or methanol; cleaner, smaller, more efficient engines; green buildings and energy efficiency.

4. Clean & Renewable Energy

Solar energy - With an average of solar radiation of  5kWh/m2 , Mexico’s potential is one of the highest in the world . By the year 2013, 25 MW with photovoltaic systems are expected to be installed. Large construction companies such as Grupo Urbi and Viveica are requiring photovoltaic panels and solar heaters for social housing. FIRCO, the Shared Risk Fund, is promoting the installation of at least 116,000 photovoltaic systems for water pumping in the agri-food sector in the next 5 years. CONAE, the National Energy Savings Commission, has established a program to install solar heaters at a rate of 75 000 m2 per year.

Wind energy - The potential identified is superior to 40,000 MW. The regions with the largest potential are located in the state of Oaxaca, in which certain areas register over 8.5 (m/s measured at 50 m height) with 6, 250 MW an other zones have velocities between 7.7 and 8.5 m/s with a potential of 8,800 MW. The Yucatan and Baja California peninsulas have important winds with a potential that ranges between 157 MW in the Mayan Rivera and la Rumorosa, Baja California 274 MW.  Seven permits have been granted already that will provide approximately 950 MW to the national electric system in the upcoming years.  CFE has started the operation of a 83 MW plant in La Venta, Oaxaca.

Small hydro - For plants with capacities lower than 10 MW, the potential is 3,250 MW. Few private companies are currently in the market; only 3 plants are in operation in the State of Veracruz with a joint installed capacity of 16 MW. In addition there are 3 hybrid plants (hydro-natural gas). There are permits for 142 MW more. The company Comexhidro has the first renewable energy project in Latin America that received carbon bonds.

Alternative fuels - Bioenergy currently supplies 8% of Mexico‘s primary energy consumption. The main sources of bioenergy in the country are sugar cane bagasse (used for the generation of electricity and heat in the sugar cane industry) and wood (mainly for heating and cooking). Mexico produces 45 million litres of bioethanol annually, which are currently not used as fuel but processed by the chemical industry. Agriculture and forest waste, estimated to be around 73 million tonnes, and municipal waste from 10 cities could lead to the installation of 803 MW. The operation of a landfill gas plant to produce electricity (7MW) in Mexico has been successful but institutional and political barriers have hindered the addition of new plants.

Energy efficiency - Mexico is a potential market for products and services in the areas of street lighting, water pumping, cooling towers, furnaces, steam and lighting systems and efficient conduction, air conditioned, and refrigeration systems. The market for cogeneration projects for large industrial groups and supermarkets is growing. The potential in Pemex is of more than 1600 MW. In the next 5 years at least 500 MW are expected to be bid. Tools to save fuel in cars and reduce emissions are required.

5. Environmental Consulting Services

The improved enforcement by PROFEPA and local authorities and improved compliance by industry have resulted in a dramatic increase in the number of environmental audits, risk assessments, feasibility studies, and environmental impact assessments. Many large industrial enterprises are or plan to become ISO 14000 certified. There is a need for Canadian capabilities in environmental engineering consulting, including the following specialty areas:

• Strategic environmental consulting
• Pollution prevention and Eco-Efficiency
• Environmental Impact Assessments
• Laboratory and analytical services
• GIS, Materials and Instruments
• Development of environmental management systems and capacity building

Specific market access and/or advocacy efforts are required in order to support Canadian companies considering access to the Mexican market. This is particularly important given the increased competition from the 43 countries with a Free Trade Agreement (FTA) with Mexico. In addition, Mexico is considering exempting duties for all environmental technology entering the country, even those without a FTA.

Conclusion

Mexico’s environmental industry is still emerging but growing fast as the legal framework is consolidating and authorities are becoming stricter. There are a few strong players in the market but there are important needs in each market segment, thus creating many opportunities for Canadian companies.