A Wrong Turn on Mexico’s Tollways

Slumped against his tollbooth on Mexico’s Highway of the Sun, Isaias Arroyo leisurely ticks off the virtues of this Cadillac of Latin American roads--a billion-dollar freeway linking Acapulco to the outskirts of Mexico City.

There’s the gently curving pavement that permits cars to rocket through the desert scrubland at 70 mph. Four-lane swaths blasted through pink, rock-ribbed mountains to save time. Iron bridges so elegant they seem to be taking flight.

The only thing missing is traffic.

“We’re alone out here,” admits the young toll taker, turning to scan the cloudless horizon for drivers on the lonely road to Acapulco.

Impressive though it is, the stunning, 165-mile concrete ribbon is getting attention for the wrong reason: It has become a much-ridiculed illustration of how a reputed breakthrough for developing countries can turn into a financial disaster.

Initially, it seemed to represent a model idea for cash-strapped governments: Allow private companies to build the highways, and let them charge tolls. In one of the world’s most ambitious such programs, Mexico has built more than 3,000 miles of modern roads, stretching from Tijuana to the Yucatan.

But woeful miscalculations pushed the Mexican tolls to Rolls-Royce levels. For the three-hour, one-way trip from the outskirts of Mexico City to Acapulco, cars paid an eye-popping $70. For 18-wheelers, the toll soared to $630--the better part of a year’s salary for a minimum-wage worker.

Now, a red-faced government is embarked on a $2-billion bailout of the roads. And as countries from Poland to Colombia launch their own private toll-road projects, the Mexican experience has become a case study in what not to do.

Mexicans “paid a certain price for being innovators. They taught people some mistakes not to make,” said Jose Gomez Ibanez, a Harvard University professor who has studied the roads.

But despite the rocky experience, he insists, “toll financing makes sense for these [developing] countries, because there’s so much else competing . . . for these scarce tax dollars. These projects are getting done more than they would through other devices.”

Toll roads have existed in this hemisphere since the early days of U.S. independence. But the idea of having private companies build them, instead of governments, took off in developing countries only in the last few years, as privatization became a mantra of reform-minded leaders.

One was Mexico’s visionary but now discredited ex-president, Carlos Salinas de Gortari.

Mexico was hurtling into a new age. Salinas, whose term ended in 1994, wanted highways for the expected boom in trade with the United States and Canada. And, with the government-run banking system being sold to private companies, a revolutionary concept was catching on: auto loans.

“Until 1990, it would be very rare to find an average Mexican who had access to a car,” said Laurie Mahon, a project-finance expert at CS First Boston in New York who has studied toll roads.

The government, she said, was “presuming more and more people would buy cars and drive. They had very aggressive projections of how many people would use toll roads.”

Blindly optimistic about growth, the Mexican government also was in a hurry. As in some other controversial Latin privatizations, officials were anxious to produce results.

Their haste would prove disastrous.

Pressure and Errors

In some cases, government engineers drew up specifications for roads without carefully studying the sites. Meanwhile, Mexico granted concessions to construction companies that typically would agree to build and operate the highways for as little as 15 years, then hand them over to the government. The companies were expected to make their money in that relatively short time.

“There was a lot of pressure on the part of the government to move forward on these privatizations,” said Carlos Melcer, a private consultant who analyzed the toll program for the Transport Ministry.

“I don’t think they fully understood the consequences of making mistakes on that level.”

For Manuel Gomez-Daza, president of Grupo Mexicano de Desarrollo, which won the bid to build the Acapulco road, the engineering surprises proved a nightmare.

Sitting in his glass-walled, suburban Mexico City office, he recalled one unpleasant discovery after another.

There were higher-than-expected mountains to slice through. There was unstable land in an earthquake zone. And there was an unanticipated need for a half-mile-long bridge--the Mezcala span--the highest in Mexico.

By the time the four-year project was completed, it had cost about $1.6 billion--roughly twice the original estimate.

Without a doubt, the Highway of the Sun reflects the huge investment. For a driver, it is the First World. In contrast, the 71-year-old country road that also links the capital to Acapulco is distinctly Third World.

On the toll road, cars zip over smooth pavement that gently rises and falls, with a maximum 6% slope. Broad, pink-tinted breakdown lanes and orange SOS telephone boxes flank the highway. Shiny rest stops sell potato chips and Coca-Cola.

“Although the terrain is nearly the same as on the road from Denver to Vail, this has better technical specifications,” boasted Gomez-Daza.

In contrast, the two-lane “free road” to Acapulco winds through dusty villages, past restaurateurs grilling chicken outdoors and machete-wielding peasants waiting to slash a coconut for thirsty travelers.

There are hairpin turns, crawling trucks and, on a recent weekday, a dead horse, plopped in the middle of the road.

“It has lots of potholes,” volunteered Fidencio Texta, 52, a grizzled long-distance taxi driver who travels the old road. When it rains, “the mud covers the road, and sometimes cars can’t pass.”

But the old road sees brisk traffic--while the new road often is empty.

“That’s for the rich people,” snorted Texta, who disdains the toll road in favor of dodging trucks, pigs and children on the free road. For the price of tolls, he said, “I could pay for all the gasoline for my trip.”

A Road Yearned For

Initially, curious Mexicans did flock to the Highway of the Sun when it opened in 1993. Cutting the trip to Acapulco nearly in half, “it was a road everyone had yearned for,” said Gordon Lee, a construction analyst at ING Barings in Mexico City.

It remains the most expensive highway ever built in Mexico.

And with only a 15-year concession in which to recover their investment and turn a profit, builders of the Highway of the Sun argued they had no choice but to charge outrageous--and ultimately self-defeating--tolls.

Soon, traffic slumped. And when the severe economic crisis hit Mexico last year, cars and trucks all but abandoned the elegant toll roads. The recession hit the toll road to vacation mecca Acapulco especially hard.

“The first thing a middle-class family cuts from their expenses is their vacation. That means not going to Acapulco,” said Sergio Pena, an official at Banca Serfin who oversees one of the main loans for the highway.

The economic crisis wreaked havoc on the toll-road program in more ways than one. As the peso collapsed, for example, U.S. investment bankers dropped their pledges to convert builders’ bank loans into cheaper, long-term bonds for U.S. investors.

Builders like Gomez-Daza, who had adjustable-rate bank loans, saw their interest rates shoot from 20% to nearly 100% as Mexico’s inflation soared. Meanwhile, toll revenues were evaporating. Builders could pay little of the interest--grim news for banks already awash in unpaid loans.

Finally, the government stepped in with its $2-billion bailout program. One of the first roads to be financially restructured was the Highway of the Sun.

Now, the private concession has been lengthened to 30 years. The government is picking up about 40% of interest payments on the highway’s bank loans. And tolls have been reduced to encourage usage. For cars, the one-way toll to Acapulco is about $35.

Traffic now averages about 3,000 vehicles daily. But it’s still well below the government’s original estimate of 4,400. A reporter traveling the road on a recent Monday encountered only 44 vehicles.

Francisco Cruz, a gas station attendant near the Paso Morelos tollbooth, is hardly surprised. The toll at this booth, about 115 miles from Acapulco, is 99 pesos, or about $15--serious change in a country with a $3 minimum daily wage.

“This is half a paycheck,” he said, gazing at the booth. “It’s the most expensive in the country.”

Truck traffic is off most dramatically. While the Acapulco road had been planned mainly for cars, most toll roads expected heavy truck use. But, facing the steep rates, drivers balked.

Melcer, the consultant, said the government had predicted truckers would use the roads despite the fees because they’d save time.

“We told them, ‘That’s not true.’ It’s not how things happen,” Melcer said in a telephone interview. “The people they [the truckers] have delivered to for years are on a schedule. . . . Just because you build a toll road, that’s not going to change their inventory system and controls.

“It will take years for the [Mexican] market to become sensitive to time.”

If their customers weren’t going to pay the tolls, truckers certainly weren’t. Some already were barely getting by in the wake of deregulation of the industry.

Free Alternatives

And for nearly every toll road, truckers had an alternative: the free road that wound nearby. In the two cases where there was no adjacent free road, protests broke out. The government is taking over those two highways.

Despite the problems, not all the toll roads were disasters. A few, like the highway linking Mexico City to the nearby industrial center of Toluca, have had steady traffic. The success stories tend to be shorter roads that are alternatives to highly congested highways.

Some of Mexico’s mistakes, says Gomez Ibanez, were understandable. The government, for example, favored short concessions for the highways in part because there was little long-term financing for infrastructure projects available at the time.

“You have to put yourself back in 1989 . . . and appreciate the limits of the capital markets,” the Harvard professor said by phone.

And the government and builders have learned from their mistakes on the early toll roads. Thanks to better preliminary engineering work, for example, construction costs more closely match estimates.

Seeing More Clearly

With longer-term concessions, lower charges and a slowly recovering economy, the toll roads could even prove profitable eventually, analysts say. A chastened Mexican government, in fact, has plans to build more toll roads. But now, things will be different.

“The question is to see clearly which [roads to build], to see clearly where, to see clearly under what financial conditions they’re profitable,” said Oscar De Buen, an MIT-educated engineer who oversees the toll roads for the Transport Ministry.

Added Darryl McLeod, chief Latin American economist for Lehman Bros. in New York: “The final verdict isn’t in yet on whether these roads will work. There is a steep learning curve that involved making a lot of mistakes.”