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					                 The Fuqua School of Business




                               Mexican Road Re-Privatization:

           A new attempt to Attract Private Investment to the Road Network




It was 5:00 on Friday afternoon and Manuel Zubiria sat in his Mexico City office and looked at the
proposal on his desk. He had been working on this project for the re-privatization of Mexican toll roads
for the last six months and on Monday he would have to present his plan to the Secretary of
Transportation. Mr. Zubiria had been appointed two years ago by President Fox to head CAPUFE, the
government agency in charge of managing and developing the National road network. This plan could
not only catapult his career but could also stimulate the stagnant Mexican economy.

After the 1994 peso crisis, the Mexican government was forced to bail out 23 toll road concessionaires
and now was saddled with more than USD$12,000,000,000 of debt. The current plan was to package
three toll roads and privatize them as a test. If this project worked, then 23 roads that were recovered
could be phased back into private control over the next several years alleviating the Mexican government
of the outstanding debt and helping to generate additional revenues. However, there were many risks
associated with the project and Manuel wanted to make sure that he structured his plan to best promote
private investment while still benefiting the Mexican government.


                                                     Mexico
The 2000 election of Vicente Fox of the Partido Accion Nacional (PAN) as President of Mexico signified
the end of more than seven decades of political domination by the Partido Revolucionario Institucional
(PRI) and the beginning of a new era in Mexican politics 1 . For the first time in the country’s history, no
political party had an absolute majority either in Congress or in the Senate. The current president has been
slow in building consensus among the different political parties, delaying the approval of much needed
reforms to the constitution and legislation.

1
    “Country Profile 2002, Mexico”. The Economist Intelligence Unit.


Mary M. Rachide, Isabelle Niño, Luis Calzada, Alberto Gomez and Stephen B. Smith prepared this case under the
supervision of Professor Campbell R. Harvey as the basis for class discussion rather than to illustrate effective or
ineffective management.
                                                                                Mexican Road Re-privatization:
                                      A new attempt to Attract Private Investment to the Road N etwork




Political Background

After the Mexican Revolution and the institution of the PRI as the ruling political party, the country
enjoyed strong economic growth with improving living conditions for a vast majority of the population.
During this period, direct government intervention in the economy increased, beginning with the
expropriation of the foreign oil companies and the creation of Pemex as a government monopoly in 1938.

The economic progress achieved by the government came to an abrupt halt in the 1970’s. Fueled by
increasing oil prices and petrodollars, deficit spending increased at an explosive rate. Furthermore, direct
government intervention in the economy accelerated while more restrictive foreign trade and investment
policies were adopted. The government’s inability to curtail spending, in conjunction with populist
creeping economic policies, led to the beginning of the disastrous cycle of "end-of-administration
economic debacles": major devaluations and ensuing financial crisis occurred regularly in 1976, 1982,
1986-87 and 1994-95, always around the last year of the outgoing government. In September 1982,
President Jose Lopez Portillo announced the expropriation of 58 of the 60 existing private banks on the
grounds that these had generated excessive profits from bank operations and facilitated capital flight.

During President Miguel de la Madrid’s administration the country underwent a major structural reform,
aimed at reducing government spending and opening the country to foreign markets. In 1986, Mexico
became part of the General Agreement of Tariffs and Trade (GATT), later renamed as the World Trade
Organization (WTO).


The 1988-94 Reforms

During the administration of President Carlos Salinas de Gortari (1988-1994), the Mexican economy
went through a process of political, economic and financial liberalizat ion. The role of the state was
reduced, controls on interest rates and cash requirements were lifted and free trade agreements were
signed with various countries. In addition, many state-owned companies were privatized including
railroads; airlines, commercial banks and the National Telephone Company, and concessions to build and
operate toll roads were granted. The proceeds from the sale of public companies were channeled to public
debt reduction that went from 100% of the GDP in 1988 to 20% in 1994 2 .

It was during this period that Mexico augmented its economic and political ties with the world. In 1993,
Mexico was admitted as a full member of the Asia Pacific Economic Cooperation (APEC), and in the
following year became a member of the Organization for the Economic Cooperation and Development
(OECD). In January 1994, the North American Free Trade Agreement (NAFTA) with the US and Canada
was implemented.

The Mexican Peso Crisis

Under the Salinas administration the peso exchange rate was maintained within a crawling band. This was
used as an anchor for inflation, but resulted in real appreciation of the Peso, widening the trade and
current account deficits.



2
  Jose Manuel Suarez-M ier, “Mexico’s Mid-term Elections Foretell Deep Trouble in the Country’s Future: 14
lessons from Mexico’s history that help to understand better what is in store for that country and for its neighbor to
the North” Laffer Associates. October, 1997
                                                                                                                     2
                                                                         Mexican Road Re-privatization:
                                      A new attempt to Attract Private Investment to the Road N etwork



Although 1994 was a year full achievements, it was also characterized by deep social and political unrest.
The same day that the NAFTA came into effect, a group of indigenous communities, motivated by
profound poverty and lack of support of indigenous rights by the government, gave rise to a guerrilla
movement in the southeastern state of Chiapas. The social situation was worsened by the assassination of
important political figures, namely Luis Donaldo Colosio, PRI’s presidential candidate, and Jose
Francisco Ruiz Massieu, leader of the PRI. That same year presidential elections were held.

In order to halt the loss of foreign currency reserves, the government issued US$29.2bn of US Dollar
denominated bonds called Tesobonos. By the end on 1994, the Mexican Peso came under speculative
attack, falling from MXP$3 per Dollar at the beginning of the year, to MXP$5.33 by year-end. During
January 1995, the peso further weakened, as investors realized that the government lacked the resources
to pay the Tesobonos due in that same year. Exhibit 1 shows the performance of the Mexican Peso vs. the
US Dollar from January 1994, to January 2003.

In order to deal with the increasing outflows of capital, the government was forced to increase interest
rates. This situation led to an escalation of the debt-servicing costs of Mexican companies, with many
filing for bankruptcy. Many commercial banks faced solvency problems, as they experienced an
enormous rise in bad debts as well as increased costs associated with their external debt obligations.

The Effect of the Asian Crisis

Hit by plunging oil prices and the loss of conf idence in emerging markets following the Asia financial
crisis, the volatility of the Mexican Peso increased markedly during 1998. Tighter monetary and fiscal
policies were adopted by the central bank to cope with the situation. In spite of this, the economy
managed a 4.9% real grow in 1998 and inflation rate reached 18.6%3 . In January 1999, the Peso was hit
again by the devaluation of the Brazilian Real, but it quickly recovered as investor confidence in
President Zedillo’s government increased. Exhibit 2 contains the real GDP growth of Mexico from 1988
to 2001. Exhibit 3 presents a comparison of the 2001 GDP and change in Consumer Price Index of 11
Latin American countries.

Current Situation

After a period of economic stability and reduced inflation through the end of the 1990’s (Exhibit 4) and
strong growth in 2000, Mexico suffered from the slowdown of the US economy in 2001. A strong Peso
contributed to the poor export performance, and for the first time since 1995, the real GDP experienced a
contraction of -0.28%. Tight fiscal policy, together with the strong currency helped to keep inflation on a
downward trend, reaching 4.4%, the lowest annual figure since 1972 4 . Exhibit 5 contains the economic
forecast for 2003-04 prepared by the Economist Intelligence Unit.

It is worth noting that two of the major ratings agencies, Moody’s and Standard and Poor’s decided in Q1
of 2002 to upgrade Mexico’s sovereign credit rating to “investment grade” stating that the Mexican
economy has evolved well in recent times, implementing important management structural changes and
improved economic management. The steady improvement in Mexico’s economic fundamentals,
economy management and maturing politics since the devastating peso collapse of 1994, has been
reflected in the stable peso. Falling inflation, a closing fiscal deficit and closer economic integration with
the US have guarded the peso against the exchanges rate setbacks in other regional markets. Moreover
according to some analysts “A history of default, for example in 1982, and IMF emergency rescues that


3
    The government inflation target for the year was 12%.
4
    “Country Profile 2002, Mexico”. The Economist Intelligence Unit.
                                                                                                            3
                                                                             Mexican Road Re-privatization:
                                    A new attempt to Attract Private Investment to the Road N etwork



tended to impair Mexico’s credit worthiness appear to be a thing of the past”. For Standard and Poor’s the
stable outlook for Mexico’s ratings

    “…incorporates the expectation that the government will continue to pursue fiscal policy that
    contains the public sector's debt burden while gradually addressing growing spending needs in
    the social sector, government employee pensions, and physical infrastructure. The upcoming
    elections to the lower chamber of Congress are not likely to significantly alter the course of
    economic policy. However, the results could affect the probability of the passage of proposed
    energy sector reform designed to enlarge the scope of the private sector, and of other reform to
    liberalize labor markets. The slow pace of structural reform is not likely to undermine
    creditworthiness, but does lower growth prospects through both foregone private investment
    and constrained public spending on basic services and infrastructure. If unchecked, it could
    eventually result in larger fiscal deficits and rising government debt, weakening Mexico's
    credit standing. Conversely, implementation of measures to raise recurrent revenue and reduce
    the government's dependence upon oil-related revenue would slowly strengthen public
    finances and raise prospects for GDP growth. The ensuing decline in the public sector debt
    burden would, in tandem with stronger external liquidity, result in a positive outlook. 5 ”

According to preliminary data from national institute of statistics (INEGI), GDP grew by 1.8% year on
year in the third quarter of 2002, down from 2.1% in the second quarter. Future economic performance
depends heavily on developments in the external environment, most importantly the US. Export demand
should rise, leading to a strengthening of GDP growth later in 2003 and 2004. Infrastructure shortcomings
(especially in power, roads, and ports) become more binding constraints on growth over the longer term.
Fiscal reform that increases government revenue is necessary to channel resources into these sectors
without a sharp increase in public debt.



                    The Mexican Private Toll Road Program 1989-94
In the same spirit of privatization that swept through Mexico in the early 1990’s, the government decided
to increase the road network by authorizing the sale of toll road concessions to privately owned Mexican
companies.

Between 1989 and 1994, US$ 13 billion were                       Figure 1. Sources of Funding for the toll Road
invested in the Mexican Private Toll Road                                        Concessions
Program. The program awarded 53 concessions
for the construction, operation and collection of                                                    $3.8

tolls of approximately 5,500 km of roads. By
1995, 44 were in full or partial operation,
representing over 90% of the total kilometers of                     $6.7

the concessions. The investment was financed by
local commercial bank debt, concessionaire equity
and federal and state government grants and                                                        $2.5
equity contributions.6 Figure 1 shows the                          Concessionaire Equity
                                                                   Domestic Commercial Banks
                                                                   Federal and State Government Grants and Equity

5
 “Ratings Direct, United Mexican States”, Standard & Poor’s, February 7, 2003.
6
 Federal funding also included contributions by Petroleos Mexicanos (Pemex) and by Caminos y Puente Federales
de Ingreso y Servicio Conexo (CAPUFE), the federal highways and bridge operator, for mo re than 1,100 km of
public toll roads.
                                                                                                                    4
                                                                                 Mexican Road Re-privatization:
                                       A new attempt to Attract Private Investment to the Road N etwork



breakdown of the sources of capital for the program. 7

The concessions were originally granted for a period of 15 years, but later extended to 30 years, and
specified the work to be undertaken, operational standards, required maintenance, fees payable to the
government and the tolls to be charged. Upon termination of the concession, the right to operate and
collect tolls would return to the government, nonetheless, the ownership of the project remained in
government hands throughout the term of the concession. In order to reduce risk to the concession-
holders, the government guaranteed a minimum usage level on the new highways 8 .

However, a combination of macroeconomic and project-specific factors, TABLE 1
including the Mexican Peso crisis of December 1994 and miscalculation AVERAGE DAILY TRAFFIC AS % OF
of investment costs and operating income, led to an unsustainable set of GUARANTEED TRAFFIC
operating conditions. By 1997, the government cancelled 23 of the 53
                                                                                            Number of
concessions, recovering the right to operate, maintain and exploit these                      Roads
roads, while absorbing US$ 7.3 billion in bank loans and short-term
borrowings. The scale of buying out the combined debt and taking over          Above 100        5
                                                                               75 to 100        2
the roads for all 23 concessionaires was so large that it represented 1%        50 to 74        8
of the national debt and required its own government organization to            25 to 49        8
manage.                                                                          6 to 24        9


Among the main factors that affected the viability of the program were the frequent cost overruns and
construction delays. Information deficiencies, problems with securing right of way, unanticipated design
changes, local community resistance, among others, resulted in an increase in the average cost per
kilometer of new highway from $1.7 million to $2.8 million. In addition, traffic shortfalls and higher than
expected operations and maintenance expenditures caused the actual project revenues to be on average
30% below the original estimates 9 (Table 1). Carlos Ruiz Sacristan, former Communications and
Transport Minister, admitted that the government’s estimates of traffic and revenue flows were overly
optimistic:

         “Some started falling behind in 1993 and 1994”, he explained. “Then with the crisis in
         1995 and 1996, things only got worse.” 10

The financial structure of the projects also contributed to their downfall. High debt to value ratios in
combination with short-term commercial bank loans characterized by high floating interest rates further
hampered the profitability of the projects.

The Ministry of Communications and Transport also blamed the poor performance of the concessions on
the high tolls charged to motorists, redirecting traffic flows from the toll roads to parallel freeways and
back roads11 . Faced with crushing debt estimates and diminishing traffic flows during the 1995 recession,
the concessionaires kept the tolls high in an attempt to recover their investment. After the government
bailout in 1997, tolls on the newly stated-owned highways were reduced and average of 17% for cars,
27% for buses and 37% for commercial trucking. As a result, traffic in the 23 highways increased on
average 21.1% for cars, 15% for buses and 39.5% for commercial trucks during the first two quarters of

7
  A Retrospective on The Mexican Toll Road Program (1989-94), September 1997
8
  According to the Ministry of Co mmunicat ions and Transport (SCT) this practice has been eliminated. After the
Peso crisis, commercial and public transport fell dramat ically and toll receipts averaged 4 billion, about half of those
of 1989, leaving the government with a formal obligation to losing concession holders.
9
  A Retrospective on The Mexican Toll Road Program (1989 -94), September 1997
10
   Laura Carlsen, “Highway Rescue or Highway Robbery,” Business Mexico, October 1997
11
   Under the concession agreement, a parallel alternative to each highway was required.
                                                                                                                       5
                                                                                  Mexican Road Re-privatization:
                                       A new attempt to Attract Private Investment to the Road N etwork



1998 when compared to the same period in 1997. President Ernesto Zedillo referred to these actions
during his 1997-98 Union Address:

         “With these, the government is meeting its objectives of guaranteeing the optimal
         maintenance of the infrastructure recovered and increasing its utilization for the benefit of
         a larger number of users.”

A good example of the problematic of toll road concessions is the Cuernavaca-Acapulco turnpike
included in the bailout package. Poor planning and inaccurate costing estimates inflated the project
budget of the Autopista del Sol, as it is know, by 275% 12 . To make matters worse, steep tariffs explain a
road free of any congestion. At 8.25 US cents per kilometer, tolls for this road are about five times higher
than comparable turnpikes in the United States 13 .


                                             The Road Network
The National road network is integrated by more than 333 thousand                  TABLE 2
kilometers of all sorts of roads. According to their importance and                EXISTING ROAD NETWORK
characteristics, the roads are classified as: Federal Network, State
Network, Rural roads and “improved paths” (Table 2) 14 . Federal                   Road Type
                                                                                                           Extension
                                                                                                            (000 km)
roads capture the largest traffic, both passenger and freight, and are
extensively used for trade. State roads are crucial to regional                    Toll Roads                  5,933
                                                                                    CAPUFE & FARAC             4,715
communications while the importance of rural roads, most of which                   Private Concessions          786
are unpaved, lies on its social aspect rather than on its economic                  State Concessions            432
significance.
                                                                                   Free Roads               106,572
                                                                                    Federal Network          41,866
The extensive coverage of roads is hindered by the country’s vast                   State Network            64,706
geographic extension and by recurrent budgetary limitations. Thus
Mexico’s road density is relatively low when compared to other Rural   Paths
                                                                                                160,185
                                                                                                 60,557
                    15
countries (Table 3) . Some of the greatest challenges facing the road TOTAL                     333,247
system are the poor conditions as well as capacity and geometric
constraints on many of its most frequently used roads. As reported by the Ministry of Communications
and Transport (SCT), by the year 2000 only 25% of the network was on optimal shape while 35% and
40% were on regular and bad conditions respectively. 16 As a consequence the vehicles that used the
Federal Network incurred in additional vehicle repair costs that are estimated to be in the order of $2
Billion Dollars per year17 .

Through its different modalities, every year more than 2,700 million of individuals and 620 million tons
of freight are transported through the network. As the principal mean of communication, the roads capture
59% of all freight and over 98% of passengers transported in the country 18 (Exhibit 10).




12
   Andrew Watson, “The Road Ahead”, Business Mexico, November 2002
13
   Average toll rates in the Illinois Toll Way are 1.6 US cents per kilo meter.
14
   SCT Subsecretaria de Infraestructura
15
   The World Co mpetitiveness Year Book 2000.
16
   Programa Sectorial de Co municaciones y Transportes 2001 -2006, SCT.
17
   Ibid.
18
   Caminos y Puentes Federales y de Ingresos.
                                                                                                                       6
                                                                          Mexican Road Re-privatization:
                                       A new attempt to Attract Private Investment to the Road N etwork




       TABLE 3
       ROAD DENSITY


       Density (KM/KM^2)   MEXICO     US     CANADA   FRANCE   GERMANY      ITALY     JAPAN        UK
                            0.14      0.64     0.1      1.62      1.77       1.04      3.04       1.61




CAPUFE

The responsibility of managing and operating the toll roads lies on the government agency Caminos y
Puentes Federales y Servicios Conexos (CAPUFE). After the 1998 bailout, the number of kilometers for
which CAPUFE was responsible grew by 280% from 1,115 km to 4,234 km (Exhibit 6). Over the three
years that CAPUFE had managed the once privatized roads, traffic increased substantially (Exhibit 7).

Depending on the constitution of each road, they could be classified under FARAC 19 , CAPUFE or
private concessions (Table 4)20 . The network of FARAC TABLE 4
constitutes all of the operating roads bailed out in 1997 plus PRIVATE ROADS AND BRIDGES
those that were completed and began operations in 1998.
They are mainly new roads, supervised by the development Network                             # Roads Bridges
bank Banobras, whose traffic and income levels have yet to
reach a mature stage. The network of CAPUFE consists of CAPUFE & FARAC                          47      39
                                                               Private and State concessions    27      9
highways built by the Federal Government that were TOTAL                                        74      48
transferred to the agency for their operation and
maintenance. Finally the private roads are those built between 1989 and 1994 that were awarded as
concessions to private organizations, State governments and financial institutions (Exhibit 8).


                                     The Re-Privatization Proposal

Roads Proposed

Under the new re-privatization proposal, concessions for three roads within the central region on Mexico
would be sold as a package to test the viability of shifting the current toll road debt and management
responsibilities from the public to the private sector. The three roads in this package are the Mexico City-
Queretaro, the Queretaro-Irapuato, and the Mexico City-Puebla. All of these roads were controlled by
CAPUFE and had not been part of the original toll road concessions or the buy-out program in 1997.
Although these roads are associated with the government bail out, some of the FARAC debt would be
included with the concession sale. Exhibits 9 and 11 provide historical information of the income
statements as well as historical traffic statistics and toll rates of the three roads under consideration.

In addition to gaining the right to operate and collect tolls the operator is required to increase the quality
of the roads. Currently, CAPUFE’s and FARAC’s network rate between 380 and 410 points on an
international scale of 500 points, but the government has set a plan to increase the quality of the country’s
roads to 450 in the next four years. This plan will require large investments in major maintenance during


19
     Highway Concession Rescue Trust
20
     SCT, Subsecretaria de Infraestructura
                                                                                                            7
                                                                                  Mexican Road Re-privatization:
                                       A new attempt to Attract Private Investment to the Road N etwork



this period, but will scale back once the goal has been achieved, and it is expected that this investments
will reach a level equivalent to those on historic peak years.

Mexico City-Queretaro

The Mexico-Queretaro highway, as the backbone of the Mexico City-Laredo and Mexico City-Ciudad
Juarez highway corridors, is the main land gateway to the northern region of the country. It connects the
capital city with the main US-Mexico borders, and with other important cities such as Monterrey,
Mexico’s second largest city and most important in terms of GDP per capita. In 2001, more than 24.5
MM vehicles transited its 222 km of highways generating over US$ 210 MM in revenues.

Mexico City-Puebla

The Mexico City-Puebla toll road’s importance lays on the fact that it is part of the Veracruz-Acapulco
highway corridor. Most goods transiting between Veracruz and Mexico’s central and western regions use
the Mexico-Puebla toll road. Veracruz is Mexico’s most important maritime port where most of the trade
with US East Coast and Europe is done. Acapulco is considered a main tourist destination as well as an
important port for trade with Asia and the US West Coast. During 2001, traffic in the Mexico City-Puebla
highway increased by 10.5% to 36.6 MM, representing US$ 132 MM in revenues.

Queretaro-Irapuato

Considered as the least strategic of the three, the Queretaro-Irapuato is a short haul highway of 99 km that
connects Queretaro with Irapuato, a smaller city that has grown in importance due to its geographic
location and tax breaks offered by the local government to businesses in recent years. After a decline in
traffic and revenues during the period of the Peso Crisis, the Queretaro-Irapuato toll-road has recovered
steadily during the past 6 years, averaging 8.4% traffic growth. In 2001, 12.5 MM vehicles transited the
road resulting in revenues of US$78 MM.


The Importance of the Distrito Federal and Central Region in the Economic Structure

The importance of the Distrito Federal21 (Federal District) lies in its geographic location and its economic
relevance. It serves as a connection between two of Mexico’s most transited maritime ports, Veracruz a nd
Acapulco, located in the Gulf of Mexico and the Pacific Ocean respectively (See Exhibit 21 for a map of
the region).

In terms of economic significance, in the year 2000, the Distrito Federal accounted for almost 23% of the
country’s GDP. Moreover, the central region, including the surrounding states of Mexico, Queretaro,
Guanajuato and Puebla 22, generated more than over 40% of the total GDP23 .

Accordingly, the toll roads that run through the Distrito Federal are regarded as essential for the
development of the country. Although free parallel alternatives exist, most commercial transportation uses
these roads since they are faster and more secure.



21
   Mexico ’s Capital city
22
   One third o f the total population of the country lives within the Distrito Federal and the states of Mexico,
         Queretaro, Guanajuato and Puebla.
23
   INEGI. Sistema de Cuentas Nacionales de México.
                                                                                                                   8
                                                                              Mexican Road Re-privatization:
                                     A new attempt to Attract Private Investment to the Road N etwork



Deal Structure

If the concessions for these three roads were successful, Manuel felt confident that some, if not all, of the
23 roads in the FARAC system could be privatized in the future. A company showing success in this first
offering would have an advantage over others in the next bidding process.

The total price for the three roads would include the potent ial future profits (minus taxes and rights) as
well as US$2.2bn of debt that the government plans to assign to these roads. After calculating this
margin, the government would make sure their asking price included some of the margin to maximize
cash flows to the people. Not only would this process help eliminate debt for Mexico it would also
provide cash flows in the short term and on a continuing basis.

Current government debt for the US$17.3bn road system was at an 8.5% average interest rate. However,
new concessions would buy out the debt as part of their purchase agreement. Therefore, leverage and
capital mix could vary depending on the company. Because the roads would be offered as a package the
size of debt associated made local currency debt prohibitive. Concessionaires would have to finance with
dollar denominated debt and assume the currency risk from the peso denominated revenue stream.
Additionally, toll prices would be flexible over time but large real price increases would be limited due to
government supervision. The current corporate tax rate in Mexico is 34%.

Traditionally CAPUFE had to pay rights for the use of Federal Roads equal to 5% of the assets24 .
Similarly, concessionaires were bound to pay up to 35% of their revenues for the right to collect tolls on
the concession 25 . After a series of reforms to promote investment, the base for calculating the payments of
rights changed to 5% of Sales only.

As of February 2003, the Mexican Congress approved a law to impose a payment of rights of up to 25%
for all of FARAC’s roads and bridges. The proposal called for distributing 1/3 of the rights to the State
government and 2/3 to the municipality where the road was located. The objective was to “support local
development by strengthening State governments and municipalities, through the participation of multiple
entities and the Federation in programs that are of strategic importance to the Nation” 26 . Although the
initiative had still to be approved by the Executive, it was likely to be accepted. Fortunately this change
would not affect this project.

Hoping to minimize the risk of another buy out, the Mexican government has decided to give 30 year
concessions for toll revenues on the new road package. While the government will publish historical
traffic data by vehicle type they are unwilling to give minimum traffic guarantees unless absolutely
necessary to complete the deal.

Initial Estimates

Compelled by the importance of the project, Mr. Zubiria has contacted a team of financial experts tha t
have provided him with initial assessment of the value of these three roads. According to the report, the
government could expect US$6.2bn 27 on the sale of the roads based on their own traffic forecasts and cost
of capital estimates.

24
   Federal Law for Rights (Ley Federal de Derechos), December 31, 1981. Chapter VI Article 213.
25
   Op. Cit., Article 216.
26
   Parliamentary Gazette, Proposal of Reform to article 9-A and addition of 9-B to the Law of Fiscal Coordination
(Ley de Coordinacion Fiscal).
27
   US$4 bn for the concession fee and US$2.2 in debt.
                                                                                                                    9
                                                                                    Mexican Road Re-privatization:
                                         A new attempt to Attract Private Investment to the Road N etwork




                                                      Conclusion
Manuel Zubiria was confident that this deal could be structured to benefit both private investors and the
government but he still wasn’t sure if he had accounted for all of the risks. Over the last several weeks, he
had read many articles about discount rates and he felt that he should try to account for the project’s
currency risk in this manner as opposed to placing it in the cash flows. From the multitude of theories he
had narrowed his possible models to the Goldman-Integrated, the Ibbottson, and the Ebb-Harvey-
Viskanta (See Exhibit 20 ) 28 .

Manuel looked back up at the clock and realized it was already 8:00 P.M. and that he still had a lot of
work to do before he would be ready for the presentation. Which discount rate model would he use and
what sort of returns could he show for the government and the potential private investors? How would
the traffic forecasts, toll price limitations, and unpredictable maintenance costs affect the viability of the
privatization?




28
     Exh ibits 13 through 20 contain informat ion regarding traffic regressions and cost of capital analysis.
                                                                                                                10
                                                                                                                        Mexican Road Re-privatization:
                                                                 A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 1
EXCHANGE RATES MX. PESO VS. US DOLLAR (END OF THE PERIOD)


                           0.34
                           0.32
                           0.30
                           0.28
                           0.26
                           0.24
    US Dollar / Mx. Peso




                           0.22
                           0.20
                           0.18
                           0.16
                           0.14
                           0.12
                           0.10
                           0.08
                           0.06
                           0.04
                           0.02
                            -
                                        4




                                                    5




                                                                      6




                                                                               7




                                                                                                  8




                                                                                                              9




                                                                                                                                0




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                                       4




                                      95




                                                                     6




                                                                    97




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                                                                                                99




                                                                                                                               0




                                                                                                                              01




                                                                                                                                                               2




                                                                                                                                                              03
                                    l-9




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                                                                                                                            l-0




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                               9




                                                             9




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                            n-




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                                                                                             n-




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                                                                                                                           n-




                                                                                                                                                  n-




                                                                                                                                                           n-
                                 Ju




                                                 Ju




                                                               Ju




                                                                           Ju




                                                                                           Ju




                                                                                                           Ju




                                                                                                                         Ju




                                                                                                                                       Ju




                                                                                                                                                         Ju
                           Ja




                                Ja




                                                         Ja




                                                              Ja




                                                                                    Ja




                                                                                          Ja




                                                                                                                   Ja




                                                                                                                        Ja




                                                                                                                                                 Ja




                                                                                                                                                        Ja
Source: Banco de Mexico (Banxico)



EXHIBIT 2
MEXICO GROSS DOMES TIC PRODUCT (THOUSANDS OF 1993 MX. PESOS )

                                  8.00%



                                  6.00%



                                  4.00%



                                  2.00%



                                  0.00%



                                -2.00%



                                -4.00%



                                -6.00%



                                -8.00%
                                          1988   1989     1990   1991   1992       1993      1994   1995    1996        1997   1998   1999       2000     2001



Source: INEGI. Sistema de Cuentas Nacionales de México




                                                                                                                                                                 11
                                                                                             Mexican Road Re-privatization:
                                                          A new attempt to Attract Private Investment to the Road N etwork



     EXHIBIT 3
     COMPARATIVE ECONOMIC INDICATOR FOR 2001

                       Gross Domestic Product                                                  Gross Domestic Product
                              (US $bn)                                                          per Capita (US$ '000)




  Mexico                                                                      Argentina


   Brazil                                                                       Mexico


Argentina                                                                      Uruguay


Venezuela                                                                     Venezuela


Colombia                                                                          Chile


    Chile                                                                        Brazil


     Peru                                                                         Peru


 Ecuador                                                                      Colombia


 Uruguay                                                                       Ecuador


Paraguay                                                                      Paraguay


  Bolivia                                                                       Bolivia


             0   100     200      300      400      500     600    700                0.0       2.0          4.0           6.0        8.0




                       Gross Domestic Product                                                     Consumer Prices
                       % Change (year on year)                                                 % change (year on year)




 Ecuador                                                                       Ecuador                                             37.7%

    Chile                                                                     Venezuela

Venezuela                                                                     Colombia

    Brazil                                                                    Paraguay

Colombia                                                                         Brazil

     Peru                                                                       Mexico

Paraguay                                                                       Uruguay

  Mexico                                                                          Chile

   Bolivia                                                                        Peru

 Uruguay                                                                        Bolivia

Argentina                                                                     Argentina

        -6.0%    -4.0%    -2.0%     0.0%         2.0%     4.0%    6.0%               -5.0%   0.0%     5.0%         10.0%   15.0%    20.0%




     Source: Economist Intelligence Unit estimates: national sources

                                                                                                                                     12
                                                                                           Mexican Road Re-privatization:
                                                A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 4
YEARLY INFLATION

           1980         24.24%        1985       63.80%       1990      29.93%          1995      51.97%       2000     8.96%
           1981         29.55%        1986      105.81%       1991      18.79%          1996      27.70%       2001     4.40%
           1982         98.25%        1987      159.05%       1992      11.93%          1997      15.72%
           1983         81.42%        1988       51.67%       1993       8.01%          1998      18.61%
           1984         59.02%        1989       19.71%       1994       7.06%          1999      12.32%

   Source: Banco de Mexico




EXHIBIT 5
ECONOMIC FORECAST

                                                                                 2001      2002       2003e    2004e

                  Real GDP growth                                            -0.3%             1.0%     2.2%     2.9%
                  Inflat ion (year-end)                                       4.4%             4.9%     3.5%     3.0%
                  Short-term interbank rate                                  13.9%             9.3%    11.0%    10.5%
                  Exchange Rate M xp :US$ (average)                           9.34             9.7%    10.0%    10.0%

                  Source: Economist Intelligence Unit




EXHIBIT 6
LENGTH OF CAPUFE’S NETWORK


                3,500


                3,000


                2,500
   kilometers




                2,000


                1,500


                1,000


                  500


                  -
                         1991     1992 1993         1994    1995     1996 1997      1998       1999    2000 2001

                                                 Own      Concessions    FARAC
                                                                                                                                13
                                                                                             Mexican Road Re-privatization:
                                         A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 7
TRAFFIC INCREAS E WITH FARAC

                                                                                 Traffic                %
                      (000 vehicles)                                      1998             2001       change
                      Chamapa           Lecheria                         7,988         12,943         62%
                      Cuernavaca        Acapulco                         8,584         12,584         47%
                      Maravatio         Zapotlanejo                      6,434          8,865         38%
                      Guadalajara       Zapotlanejo                      6,336          8,527         35%
                      Estacion Don      Nogales                          6,596          8,400         27%
                      Guadalajara       Tepic                            5,428          7,130         31%
                      Zapotlanejo       Lagos de Moreno                  4,215          5,456         29%
                      Leon              Aguascalientes                   3,464          5,133         48%
                      Cordoba           Veracruz                         3,336          4,957         49%
                      La Tinaja         Coseoleacaque                    2,714          3,518         30%
                      La Carbonera      Puerto Mexico                    1,955          2,852         46%
                      Mazatlan          Culiacan                         1,939          2,389         23%
                      Libramiento NO Queretaro                           1,560          3,352         115%
                      Libramiento O Saltillo                             1,789          2,907         62%
                      Puente Reynosa Pharr                               2,026          2,548         26%
                      Source: SCT Subsecretaria de Infraestructura




EXHIBIT 8
THE THREE NETWORK OPERATORS

                                                      CAPUFE                 FARAC                    CONCESSIONS



                                                                     New, constructed
             Predominant                  Mature with hi levels of   between 1989 and 1994; Relatively new. Mixed
             Type of Road                 income.                    in process of maturing. levels of maturity.

                                                                     Public property.
                                                                     Concessioned to              Public property.
                                                                     Banobras (Development        Concessioned to third
                                                                     Bank) that contracts         parties for payment of
                                                                     CAPUFE to operate and        debt obligations and
             Property                     Public property            administrate.                recoup of investment.


                                                                     Authorized by FARAC's Authorized by SCT
             Rates                        Authorized by SCT          technical comitee.    under specific rules.

                                                                                                  Approved by the
                                                                     Approved by FARAC's          technical comitee of
             Budget                       Approved by Congress       technical comitee.           each concession.

                                          CAPUFE's Board of          FARAC's technical            Technical comitee of
             Decisions                    Directors                  comitee.                     each concession.




                                                                                                                           14
                                                                                                                                                                                             Mexican Road Re-privatization:
                                                                                                                                     A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 9
HIS TORIC INCOME S TATEMENTS

      México-Querétaro
      (000s of Adjusted 2001 Pesos)
                                       1988         1989           1990            1991           1992          1993         1994        1995         1996         1997          1998         1999          2000         2001

      Revenues                         16,201        17,182         16,236          16,675         17,670        17,746      18,388      16,982       18,067       19,657      1,196,512    1,411,705     1,737,187    1,958,494

      Expenses
      Operating Expenses               31,193        46,349         44,788          45,173         48,182        57,889      57,370      39,020       41,919       50,125        56,446       54,108       237,097       141,400
      Minor Maintenance                44,558        44,133         42,982          34,955         54,191        43,389      47,492      32,428       71,449       41,691        52,781       56,706        49,196        53,220
      Major Maintenance                74,100        50,704         94,350          62,834        144,145       137,310     158,388      20,179       90,648      113,810        78,051      120,643        86,918        38,426
      Administrative Expenses           6,266         9,957         18,317          10,353         29,160        31,781      38,506      30,451       46,670       62,046        52,195       82,155        82,411        67,945
      Total Expenses before
      fiscal obligations              156,117       151,143        200,437         153,314        275,678       270,369     301,756     122,076      250,687      267,673       239,474      313,612       455,622       300,990

      Payment of rights               134,763        166,053       373,601        139,826          302,691       346,201     589,717     677,825      325,074      351,899       384,355      421,312       429,902       410,766
                                      290,880
      Total costs including fiscal obligations       317,196       574,038        293,140          578,369       616,570     891,473     799,902      575,761      619,572       623,829      734,923       885,524       711,756
                                     (382,936)      (513,090)     (940,291)    (1,449,684)      (1,253,936)   (1,125,107)   (881,829)   (498,011)    (752,635)    (879,748)     (904,961)    (870,998)     (928,149)   (1,246,737)

      Profits                         (274,680)     (300,014)     (557,803)        (276,465)     (560,699)     (598,824)    (873,084)   (782,919)    (557,694)    (599,915)     572,684      676,781       851,663     1,246,737




      México-Puebla
     ('000s of Adjusted 2001 Pesos)
                                         1988           1989          1990             1991         1992         1993         1994        1995          1996         1997          1998         1999         2000         2001

     Revenues                             17,882         18,772           16,579       14,280       18,616       21,507       21,587      20,216        21,036        23,390       25,058       27,571       30,456       33,659

     Expenses
     Operating Expenses                   37,781         36,859           39,834       40,346       41,377       55,154       58,306      40,112        48,898        58,389       69,447       68,485      102,805      107,650
     Minor Maintenance                    40,272         39,588           39,083       36,395       44,646       31,993       56,986      41,748        67,791        39,942       43,109       76,587       59,167       62,473
     Major Maintenance                    59,784         36,265           90,087      118,268      202,975      210,975      156,593      60,108       161,651        98,793      225,434       87,026       68,373      139,609
     Administrative Expenses               9,198          9,639           23,219       10,071       13,093       29,892       43,004      24,931        43,151        72,073       58,537       92,999       68,061       64,671
     Total Expenses before
     fiscal obligations                  147,035       122,352        192,224         205,080      302,091      328,013      314,889     166,899       321,491      269,197       396,527      325,096      298,407      374,403

     Payment of rights                    58,392         74,794       174,910         139,826      115,731      143,056      272,521     314,678       160,868      178,350       208,803      228,881      234,492      225,597
     Total costs including fiscal
     obligations                         205,427        197,146       367,134         344,906      417,822      471,069      587,410      481,577      482,359       447,547      605,331      553,977      532,899      600,001
                                         (86,534)      (176,841)     (335,219)       (454,473)    (494,690)    (553,480)    (399,384)    (255,879)    (295,552)     (453,321)    (328,631)    (460,986)    (594,584)    (628,202)

     Profits                            (187,546)      (178,374)     (350,555)       (330,626)    (399,206)    (449,562)    (565,823)    (461,361)    (461,324)     (424,158)    (580,272)    (526,406)    (502,444)    (566,342)




                                                                                                                                                                                                                                     15
                                                                                                                                                                                            Mexican Road Re-privatization:
                                                                                                                                           A new attempt to Attract Private Investment to the Road N etwork


       Querétaro-Irapuato
       ('000s of Adjusted 2001 Pesos)
                                          1988            1989              1990             1991           1992        1993         1994        1995        1996        1997        1998        1999        2000        2001

       Revenues                             7,537            8,608            8,268               8,023       7,612       7,846         8,170      7,737       8,560       9,704     10,493      11,186      11,878      12,497

       Expenses
       Operating Expenses                 15,742           22,650           21,710           28,920         24,800      28,518         32,161    24,561      23,550      29,175      33,415      34,954      44,801      49,027
       Minor Maintenance                  39,276           33,885           41,845           38,900         45,721      28,218         41,353    33,159      49,152      33,803      35,910      27,180      27,848      43,953
       Major Maintenance                 122,868           87,317           70,480           21,516         53,974      89,508         89,571    28,906      42,472      36,561       3,349         600      35,673       8,400
       Administrative Expenses             5,380            4,469            7,635           16,355         13,376      13,416         28,123    19,025      33,608      46,653      36,382      50,567      35,552      37,623
       Total Expenses before fiscal
       obligations                       183,266         148,321          141,670           105,691        137,872     159,659       191,208    105,652     148,781     146,193     109,055     113,301     143,874     139,004

       Payment of rights                  44,521           58,606         128,756           279,652        115,285     132,154       232,912    268,465     130,022     139,844     150,183     164,624     163,980     156,824
       Total costs including fiscal
       obligations                       227,787         206,927          270,426           385,343         253,157     291,813      424,121    374,117      278,803     286,036     259,238     277,924     307,854     295,828
                                           5,181         (86,102)        (256,833)         (157,505)       (259,684)   (214,234)     (96,274)   (11,644)    (148,503)   (229,073)   (295,436)   (324,926)   (355,940)   (431,091)

       Profits                           (220,250)      (198,319)        (262,158)         (377,320)       (245,544)   (283,967)    (415,950)   (366,380)   (270,243)   (276,332)   (248,745)   (266,739)   (295,976)   (283,331)




EXHIBIT 10
FREIGHT MOVEMENT B Y MEAN OF TRANSPORTATION



                                                                                                           Rail
                                                                                                          10.10%                 Air
                                                                                                                               0.10%
                                        Maritime
                                        31.30%




                                                                                                                                  Roads
                                                                                                                                  58.50%



                                         Source: Asociación Nacional de Transporte Privado, A.C




                                                                                                                                                                                                                                    16
                                                                                               Mexican Road Re-privatization:
                                                A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 11
HIS TORIC TRAFFIC FIGUR ES AND TOLL RATES
        EXHIBIT 11
        HISTORIC TRAFFIC FIGURES AND TOLL RATES

        MEXICO CITY-QUERETARO
                              AVERAGE RATES                                                   TRAFFIC
                       CURRENT PESOS                       2001 PESOS                       (000s) VEHICLES
         PERIOD   CARS       BUSES     TRUCKS     CARS       BUSES      TRUCKS    CARS      BUSES     TRUCKS    TOTAL


          1980       $0.03     $0.03     $0.04    $27.37      $23.59     $35.88     8,460     1,774     4,489    14,723
          1981        0.04      0.03      0.05     22.64       19.08      29.32    10,057     1,765     5,133    16,955
          1982        0.05      0.04      0.06     14.39       11.83      18.31    10,477     1,762     5,252    17,491
          1983        0.15      0.19      0.29     25.03       32.46      49.16     8,848     1,627     4,389    14,864
          1984        0.28      0.39      0.59     30.69       41.60      63.30     8,326     1,585     4,382    14,293
          1985        0.45      0.61      0.79     29.91       40.04      51.90     8,671     1,580     4,727    14,978
          1986        0.80      1.05      1.45     25.60       33.59      46.31     8,876     1,548     4,496    14,920
          1987        1.72      3.45      4.22     21.22       42.61      52.09     9,352     1,415     4,488    15,255
          1988        3.49      5.54     10.78     28.41       45.06      87.73     9,757     1,554     4,889    16,201
          1989        4.45      8.41     16.02     30.28       57.21     108.93    10,299     1,667     5,196    17,162
          1990        9.90     23.99     45.73     51.79      125.53     239.30     9,785     1,291     5,160    16,236
          1991       12.28     37.16     61.84     54.11      163.68     272.41    10,103     1,420     5,152    16,675
          1992       13.58     40.92     69.20     53.46      161.01     272.31    10,633     1,411     5,626    17,670
          1993       13.60     40.83     69.29     49.55      148.78     252.48    10,402     1,243     6,101    17,746
          1994       13.61     40.91     69.46     46.31      139.22     236.39    10,401     2,025     5,962    18,388
          1995       17.48     47.44     86.40     39.16      106.23     193.48     9,624     1,911     5,447    16,982
          1996       22.77     51.38     94.10     39.94       90.11     165.03     9,761     1,999     6,307    18,067
          1997       26.46     50.88     77.03     40.09       77.10     116.73    10,478     2,070     7,109    19,657
          1998       30.17     57.52     85.63     38.55       73.49     109.41    10,854     2,068     7,696    20,617
          1999       34.38     64.77     92.62     39.10       73.68     105.36    11,629     2,029     8,063    21,721
          2000       39.64     73.74    166.72     41.38       76.99     174.06    12,793     2,142     8,224    23,159
          2001       41.88     80.42    178.04     41.88       80.42     178.04    13,823     2,223     8,516    24,562



        MEXICO CITY-PUEBLA
                              AVERAGE RATES                                                   TRAFFIC
                       CURRENT PESOS                       2001 PESOS                       (000s) VEHICLES
         PERIOD   CARS       BUSES     TRUCKS     CARS       BUSES      TRUCKS    CARS      BUSES     TRUCKS    TOTAL


          1980       $0.01     $0.02     $0.03    $11.94      $12.66     $20.76    11,541     2,011     3,502    17,054
          1981        0.02      0.02      0.03      9.81       10.87      17.32    13,200     1,961     4,102    19,263
          1982        0.02      0.02      0.04      6.35        7.47      11.11    14,184     1,979     4,401    20,564
          1983        0.05      0.08      0.13      8.80       13.47      22.98    13,081     1,722     3,244    18,046
          1984        0.11      0.15      0.27     12.24       16.28      29.64    12,522     1,732     3,028    17,282
          1985        0.19      0.24      0.45     12.63       15.90      29.62    12,554     1,688     2,855    17,097
          1986        0.34      0.43      0.78     10.79       13.64      25.06    13,159     1,317     2,334    16,810
          1987        0.81      1.70      2.25      9.99       21.04      27.76    13,988     1,017     2,029    17,034
          1988        1.64      2.71      6.19     13.36       22.06      50.42    14,600     1,120     2,162    17,882
          1989        2.21      4.26      9.47     15.03       28.99      64.38    14,370     1,559     2,842    18,772
          1990        6.36     10.04     35.98     33.28       52.56     188.25    12,894     1,463     2,222    16,579
          1991        9.00     22.36     60.81     39.62       98.51     267.88    11,234     1,473     1,573    14,280
          1992        9.86     18.64     70.42     38.82       73.34     277.11    14,182     2,319     2,115    18,616
          1993        9.33     11.12     62.91     34.00       40.53     229.23    15,031     3,021     3,454    21,507
          1994        9.16     11.95     60.26     31.17       40.66     205.07    15,094     3,124     3,368    21,587
          1995       11.76     33.72     69.60     26.33       75.53     155.87    14,335     2,574     3,307    20,216
          1996       15.20     25.75     74.79     26.65       45.15     131.16    14,796     3,371     2,869    21,036
          1997       17.83     33.26     36.39     27.02       50.41      55.14    16,295     3,447     3,424    23,166
          1998       20.35     38.39     47.52     26.01       49.05      60.72    17,280     3,223     4,027    24,530
          1999       23.05     48.59     62.77     26.22       55.28      71.41    18,942     3,008     4,394    26,345
          2000       24.60     63.54    136.74     25.68       66.34     142.76    21,951     3,073     4,872    29,896
          2001       25.57     78.14    142.30     25.57       78.14     142.30    24,921     3,029     5,098    33,047



        QUERETARO IRAPUATO
                              AVERAGE RATES                                                   TRAFFIC
                       CURRENT PESOS                       2001 PESOS                       (000s) VEHICLES
         PERIOD   CARS       BUSES     TRUCKS     CARS       BUSES      TRUCKS    CARS      BUSES     TRUCKS    TOTAL


          1980       $0.02     $0.01     $0.02    $12.85      $10.72     $19.62     3,111       696     2,416     6,223
          1981        0.02      0.02      0.03     11.36        9.30      16.78     3,825       705     2,790     7,319
          1982        0.02      0.02      0.03      6.75        5.58       9.91     4,055       701     3,033     7,789
          1983        0.10      0.11      0.20     17.52       18.98      34.39     3,539       616     2,067     6,222
          1984        0.20      0.22      0.40     21.51       23.64      42.93     3,386       594     1,963     5,943
          1985        0.35      0.38      0.65     23.19       24.79      42.53     3,495       590     2,004     6,089
          1986        0.60      0.65      1.14     19.20       20.79      36.58     3,491       565     1,747     5,803
          1987        1.30      2.59      3.13     16.10       32.01      38.66     4,108       537     1,805     6,450
          1988        2.59      4.16      8.20     21.11       33.86      66.74     4,797       609     2,131     7,537
          1989        3.51      6.57     12.22     23.87       44.66      83.08     5,758       613     2,237     8,608
          1990        8.39     21.25     40.85     43.88      111.19     213.73     5,853       606     1,808     8,268
          1991       10.58     32.17     53.41     46.62      141.68     235.28     6,009       582     1,431     8,023
          1992       12.00     38.35     61.37     47.24      150.92     241.50     5,745       529     1,338     7,612
          1993       11.96     37.68     60.07     43.58      137.29     218.88     5,701       200     1,945     7,846
          1994       11.92     37.07     61.62     40.55      126.15     209.72     5,954       905     1,312     8,170
          1995       15.01     44.03     70.11     33.62       98.60     157.01     5,536     1,033     1,167     7,737
          1996       19.25     38.11     78.83     33.75       66.84     138.25     5,833     1,094     1,633     8,560
          1997       22.64     44.01     51.10     34.31       66.69      77.44     6,423     1,057     2,224     9,704
          1998       26.52     50.99     61.93     33.89       65.15      79.13     6,882     1,074     2,537    10,493
          1999       30.70     58.46     70.99     34.92       66.50      80.76     7,438     1,089     2,659    11,186
          2000       34.64     66.13    140.16     36.16       69.04     146.33     8,048     1,138     2,692    11,878
          2001       37.12     69.90    150.36     37.12       69.90     150.36     8,538     1,095     2,864    12,496
                                                                                                                          17
                                                                            Mexican Road Re-privatization:
                                           A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 12
HIS TORIC POPULATION AND POPULATION FORECASTS FOR MEXICO


    EXHIBIT 12
    HISTORIC POPULATION AND POPULATION FORECASTS FOR MEXICO



           Year              Population       % Growth             Year       Population     % Growth

           1980                 69,655,000                         2016        117,242,286     0.77%
           1981                 71,305,000       2.37%             2017        118,121,705     0.75%
           1982                 72,968,000       2.33%             2018        118,981,977     0.73%
           1983                 74,633,000       2.28%             2019        119,821,678     0.71%
           1984                 76,293,000       2.22%             2020        120,639,160     0.68%
           1985                 77,938,000       2.16%             2021        121,432,566     0.66%
           1986                 77,567,000      -0.48%             2022        122,200,071     0.63%
           1987                 81,199,000       4.68%             2023        122,939,920     0.61%
           1988                 82,727,000       1.88%             2024        123,650,367     0.58%
           1989                 84,272,000       1.87%             2025        124,329,636     0.55%
           1990                 81,249,000      -3.59%             2026        124,975,961     0.52%
           1991                 87,836,000       8.11%             2027        125,587,863     0.49%
           1992                 89,538,000       1.94%             2028        126,164,122     0.46%
           1993                 91,261,000       1.92%             2029        126,703,740     0.43%
           1994                 91,858,000       0.65%             2030        127,205,586     0.40%
           1995                 91,158,000      -0.76%             2031        127,669,188     0.36%
           1996                 93,182,000       2.22%             2032        128,094,680     0.33%
           1997                 93,716,000       0.57%             2033        128,482,042     0.30%
           1998                 95,846,000       2.27%             2034        128,831,402     0.27%
           1999                 96,586,000       0.77%             2035        129,143,145     0.24%
           2000                100,569,263       4.12%             2036        129,417,761     0.21%
           2001                101,826,249       1.25%             2037        129,655,714     0.18%
           2002                103,039,964       1.19%             2038        129,857,508     0.16%
           2003                104,213,503       1.14%             2039        130,023,637     0.13%
           2004                105,349,837       1.09%             2040        130,154,661     0.10%
           2005                106,451,679       1.05%             2041        130,251,091     0.07%
           2006                107,525,207       1.01%             2042        130,313,225     0.05%
           2007                108,576,411       0.98%             2043        130,341,277     0.02%
           2008                109,607,255       0.95%             2044        130,335,385     0.00%
           2009                110,619,340       0.92%             2045        130,295,752    -0.03%
           2010                111,613,906       0.90%             2046        130,222,467    -0.06%
           2011                112,591,898       0.88%             2047        130,115,533    -0.08%
           2012                113,553,916       0.85%             2048        129,974,900    -0.11%
           2013                114,500,185       0.83%             2049        129,800,558    -0.13%
           2014                115,430,657       0.81%             2050        129,592,522    -0.16%
           2015                116,344,933       0.79%

    Source: Population Statistics Mexico




                                                                                                        18
                                                                                                  Mexican Road Re-privatization:
                                                 A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 13
INTERNATIONAL COUNTRY RIS K GUID E COMPOS ITE RIS K RATINGS, FEBRUARY 2003


Financial Risk Rating                                                                   Political Risk Rating
  Total Foreign Debt as percent of GDP (10)                                    8.0
  Debt Service as percent of Exports of Goods and Services (10)                6.5        Government Stability (12)                           7.0
  Current Account as percent of Exports of Goods and Services (15)            11.0        Socioeconomic Conditions (12)                       8.0
  International Liquidity as months of import cover (5)                        2.0        Investment Profile (12)                            11.5
  Exchange Rate Stability as percent-age change (10)                           7.0        Internal Conflict (12)                              8.5
                            Financial Risk Rating                             34.5        External Conflict (12)                             11.0
                                                                                          Corruption (6)                                      2.0
Economic Risk Rating                                                                      Military in Politics (6)                            3.0
 GDP per head of Population (5)                                                3.0        Religious Tensions (6)                              5.0
 Real Annual GDP Growth (10)                                                   8.0        Law and Order (6)                                   2.0
 Annual Inflation Rate (10)                                                    8.5        Ethnic Tensions (6)                                 2.5
 Budget Balance as percent of GDP (10)                                         8.0        Democratic Accountability (6)                       6.0
 Current Account as percent of GDP (15)                                       10.5        Bureaucracy Quality (4)                             3.0
                         Economic Risk Rating                                 38.0                    Political Risk Rating                  69.5

Country Risk Rating                                                           71.0

US Composite Risk Rating                                                      93.1




EXHIBIT 14
TRANSPORTATION S ECTOR GLOB AL EQUIT Y B ETAS



                         25 Year     25 Year        20 Year     20 Year     15 Year    15 Year       10 Year     10 Year      5 Year    5 Year St
                          Mean       St Dev          Mean       St Dev       Mean      St Dev         Mean       St Dev       Mean         Dev
Beta Price Returns v/s
          MSCI World          1.10        0.23           1.17        0.20       1.16       0.22           1.14        0.25       1.00        0.27
Beta Price Returns v/s
              S&P500          0.84        0.26           0.86        0.29       0.77       0.26           0.65        0.18       0.56        0.18

  Industry Average
     Debt/Equity              0.80


Government Approximation of Equity Beta

                  Max          0.8
           Most Likely         0.7
                  Min          0.6




                                                                                                                                              19
                                                                            Mexican Road Re-privatization:
                                   A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 15
SUMMARY OF HIS TORICAL EXPENS ES

                        MEXICO CITY-QUERETARO
                                   Expenses (excl.. Rights)       % of Revenue
                                   Min (5YR Historical)                   15.4%
                                   Mean (5YR Historical)                  18.7%
                                   Max (5YR Historical)                   25.1%

                        MEXICO CITY-PUEBLA
                                   Expenses (excl.. Rights)       % of Revenue
                                   Min (5YR Historical)                   26.5%
                                   Mean (5YR Historical)                  32.3%
                                   Max (5YR Historical)                   42.5%

                        QUERETARO-IRAPUATO
                                   Expenses (excl.. Rights)       % of Revenue
                                   Min (5YR Historical)                   18.8%
                                   Mean (5YR Historical)                  21.5%
                                   Max (5YR Historical)                   28.4%


EXHIBIT 16
INTEREST RATES (% )




            U.S. Government Treasuries1                            Mexican Government Treasuries3
    3 month                                  1.21             3 month                             8.35
    5 year                                   2.82             1 year                              9.16
    10 year                                  3.86             5 year BONDES182                    8.79
    20 year                                  4.85
    Long Term (25+ years)                    4.93

               U.S. Corporate Debt2                                 Estimated Corporate Debt Rates4
    Moody's Rated Aaa                        5.95             Long Term Senior Debt           8.50 - 9.50
    Moody's Rated Baa                        7.03             Long Term Subordinated Debt          12.50
                                                              Line of Credit                       10.00

    1. The Federal Reserve Board, Statistical Releases: Selected Interest Rates released Feb 28, 2003
    2. Ibid. Aaa Rated bonds represents average of rate on corporate debt on Aaa rated industrial bonds.
    3. Banxico Rates dated Feb 18, 2003
    4. Grupo Financiero Santander Serfin estimates related only to this project




                                                                                                            20
                                                                    Mexican Road Re-privatization:
                            A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 17
GOVERNMENT FORECAS TS


                                               MEXICO CITY-QUERETARO
                                              Prelim. Estimate     Final Estimate

                   2003 Traffic (thousands)             37,037               36,014
                     Annual Traffic Growth               2.24%                3.20%
                  Costs/Revenue Years 1-4                  30%                  41%
                Costs/Revenue Years 5 - 20                 30%                  16%

                                                  MEXICO CITY-PUEBLA
                                              Prelim. Estimate     Final Estimate

                   2003 Traffic (thousands)             31,080               31,362
                     Annual Traffic Growth               2.43%                3.20%
                  Costs/Revenue Years 1-4                  30%                  37%
                Costs/Revenue Years 5 - 20                 30%                  24%

                                                QUERETARO-IRAPUATO
                                              Prelim. Estimate     Final Estimate

                   2003 Traffic (thousands)             17,519               17,472
                     Annual Traffic Growth               2.45%                3.00%
                  Costs/Revenue Years 1-4                  30%                  34%
                Costs/Revenue Years 5 - 20                 30%                  27%



EXHIBIT 18
PROPOS ED ASSIGNMENT OF DEB T


                   Of FARAC's $140,612MM MXP of debt outstanding the
                    following will be allocated to this privatization project:

                 Total Senior Debt (8.5%)                        $22,808 MM
                    Mexico City-Queretaro                         $12,123 MM
                    Mexico City-Puebla                             $6,961 MM
                    Queretaro-Irepuato                             $3,723 MM




                                                                                               21
                                                                             Mexican Road Re-privatization:
                                   A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 19
REGRES ION ANALYS IS TO FORECAST TRAFFIC FLOWS



                                   Coeff.    Std.Err.   t Stat.   P-value    Multiple R R Square Adj.RSqr   Std.Err.
MEXICO CITY-QUERETARO

CARS                  Intercept    0.0035      0.0148   0.2390      0.8140     0.804     0.646     0.583     0.046
                      Toll Price   -0.1494     0.0399   -3.7462     0.0016
                  GDP Per Cap      1.1335      0.2898   3.9107      0.0011
                    Population     1.1492      0.5106   2.2505      0.0379


TRUCKS                Intercept    0.0139      0.0157   0.8821      0.3900     0.819     0.671     0.613     0.048
                      Toll Price   -0.0702     0.0213   -3.2918     0.0043
                  GDP Per Cap      1.3820      0.3038   4.5482      0.0003
                    Population     1.1202      0.5261   2.1295      0.0481
Buses
               Mean % Growth       0.0141
             Standard Deviation    0.0410


MEXICO CITY-PUEBLA

CARS                  Intercept    0.0499      0.0242   2.0585      0.0552     0.681     0.463     0.368     0.075
                      Toll Price   -0.2023     0.0569   -3.5548     0.0024
                  GDP Per Cap      1.0964      0.4847   2.2620      0.0371
                    Population     -0.1180     0.8318   -0.1418     0.8889


TRUCKS                Intercept    0.0543      0.0681   0.7965      0.4367     0.493     0.243     0.110     0.210
                      Toll Price   -0.1636     0.0828   -1.9761     0.0646
                  GDP Per Cap      1.9583      1.3331   1.4689      0.1601
                    Population     0.2175      2.2853   0.0952      0.9253
Buses
               Mean % Growth       0.0045
             Standard Deviation    0.1509


QUERETARO-IRAPUATO

CARS                  Intercept    0.0257      0.0247   1.0397      0.3130     0.634     0.401     0.296     0.075
                      Toll Price   -0.0702     0.0412   -1.7046     0.1065
                  GDP Per Cap      1.2132      0.4756   2.5511      0.0207
                    Population     1.3765      0.8319   1.6546      0.1163


TRUCKS                Intercept    0.0274      0.0639   0.4287      0.6735     0.535     0.287     0.161     0.194
                      Toll Price   -0.1359     0.0641   -2.1204     0.0490
                  GDP Per Cap      1.5805      1.2241   1.2911      0.2140
                    Population     1.0801      2.1230   0.5088      0.6174
Buses
               Mean % Growth       0.0292
             Standard Deviation    0.0615




                                                                                                                     22
                                                                      Mexican Road Re-privatization:
                                 A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 20
COST OF CAPITAL


  1. Basic Capital Asset Pricing Model

     Cost of Capital = Risk Free Rate +  * (Market Risk Premium)


  2. Goldman Integrated Model

     Cost of Capital = rf +  * (MRP) + Sovereign Yield Spread

     Sovereign Yield Spread = yield on USD sovereign bond/ US treasury bond yield


  3. Erb, Harvey, Viskanta Country Risk Rating Model

     Country Cost of Equity Capital = r f,US + 100* ( a – b * ln (Sovereign Country Rating) –
                              ((rf, US + 100* ( a – b * ln(US Country Rating) – (rf,US +MRP us ))

     Country Cost of Equity Capital = Country Risk Premium + r f,US + MRP us

             a=                      0.898
             b=                      0.117
             Country Ratings =       Institutional Investor’s Country Credit Rating

     Project Cost of Equity Capital = Country Cost of Equity + Industry Adjustment + Project Risk
                                         Adjustment

     Industry Adjustment = (industry * MRP us ) - MRP us

     Project Risk Adjustment = adjustment to sovereign country rating for each risk mitigated or
                                  added by the project.




                                                                                                    23
                                                                        Mexican Road Re-privatization:
                                       A new attempt to Attract Private Investment to the Road N etwork



EXHIBIT 21
MAP OF MEXICO AND THE CENTRAL REGION




                                                                                                    24

				
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