By Samuel Peña Guzman Foreign Investment Coordinator of Nuevo Leon

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Lately debt issuance has brought strong criticism by several sectors of the population, and even by former governors of one of the most developed states in Mexico: the State of Nuevo Leon.

This is a very interesting and complex topic which could be applied to other states.

The states' public debt is ruled by article 117 of the Constitution, Fraction VIII, which states several limitations and prohibitions, among others preventing states to enter in Mexico, with domestic creditors, into obligations (debt issuance) or loans (direct credit). An exception is made for funds that will be used in productive public investments, including those acquired through decentralized organizations and public companies.

It is quite clear that due to constitutional ranking, the state is bound to be subject to what is stated in the Constitution.

However, the rules to acquire debt for productive public investments calls for the funds obtained from said debt issuance not only to be supported by future income of a given government and be therefore used to finance investment projects, but also this investment must be productive and generate resources by itself to pay for the debt service. This last issue is the one that could bring questions into the ability to have access to eventual resources, product of said financing.

I consider debt issuance as a development mechanism in itself not only feasible, but also a very effective and innovating mechanism in Mexico; especially considering the lack of enough resources to achieve a larger economic development and tangible infrastructure in the states. Also, this financing means (debt issuance) forces to establish a clear financing strategy able to forecast and calculate the capital flow that will enter into the state's treasury and channel said resources to projects (productive public investment) that are not only useful but also a priority in the development plan of any state, not to forget the productivity. It is to be considered that issuing debt means committing future income in exchange for an injection of fresh capital, which is done through the issuance of debt or going public through an institution or trusteeship to meet the debt service.

On the other hand, it is important to mention that those who criticize these debt mechanisms argue - with a point - not only the logical increase in the amount of debt, but also the productivity of the investment according to the Constitution's provision.

These two arguments are quite complex, because in terms of current circumstances, it would not be convenient or logical to opt for a zero debt and wait until the full amount is collected from taxes and federal moneys to start new works. This would be hardly achieved because by collecting the funds through savings in one sole administration the amount would not be reached or there would be a risk for this - hypothetical - savings, trying not to have any debt, to be spent in special circumstances or even in revenue expenditure.

Also, the interpretation of the concept "productive public investment" is maybe quite complex and even wide, because productivity in some cases is hard to quantify. How to quantify the productivity of required vial works? It would be absurd to have toll boots in the streets. How to quantify productivity of hydraulic infrastructure, dams or sewage? How good and efficient is avoiding debts when there is the capacity to do so and there are so many needs and lack of structure in a state? It is as if a person had several credit cards and would not use them even when he had no food, dress and/or education for his children, parents and/or siblings. It would be irresponsible not to provide said essential needs, refusing to incur into a debt with the purpose to cover the priority needs of his family.

I think that due to the insufficient resources to carry out projects that generate a larger development and social welfare, it would be necessary to look for new resources such as going public or issuing debt, such as the political-economical models of developed countries. These mechanics could be applied to states and municipalities achieving with it a larger self-sufficiency and less dependence on the "unfair" federal moneys and in case of municipalities state moneys. I recur, I am convinced that these new financing sources would allow for a larger autonomy both political and in the execution of projects and productive investment, especially when there are not enough resources to make them, and stop depending only on the moneys sent by the Federation or on increasing taxes that only harm the population.

No doubt, I think no one, no state, company or individual, is pleased when incurring into a debt; however, whenever there are not enough resources to achieve certain purposes or objectives, the new and smart debt and development mechanisms are means that undoubtedly help us to reach the goals and/or purposes previously established, taking advantage of the financial engineering and strategy which is at our reach.

Some debt issuance critics have called governments and legislators irresponsible for incurring into and approving the above-mentioned mechanisms. I would likewise consider irresponsible not to use the mechanisms and capacity within governors' reach to achieve a larger benefit for the states and at the same time achieve a larger social and economic development, especially when there are so many lacks similar to those in almost every developing country.

Unfortunately political parties "interests" in many occasions produce a "fog or blindness" that prevent them from objectively analyzing and judging the multiple benefits that can be generated by works or productive investments implemented in the short term versus the long term, notwithstanding, maybe the decades an investment could maybe take, for being skeptical to acquire a debt.

I think it is necessary to see beyond our present in order to be able to make the great works of the future and if it is necessary, use must be made of the innovating financial mechanisms within our reach, making a correct interpretation of the law. I think the spirit of the law in our legislation (productive public investment) was created looking for the largest benefit to the population and not looking for its drawback or to put obstacles to the means required to achieve the economic development our country needs.

Hector Samuel Peña LL.M, MPA Currently works as a Foreign Investment Coordinator for the State Government of Nuevo León, he has LLM Masters in Law from American University, Washington, College of Law, and a Masters in Public Administration from the George Washington University and has advised foreign companies who are expanding operations in to Mexico. He is also a professor at the State University of Nuevo Leon in Monterrey, Mexico and a Member of the Consejo Mexicano de Asuntos Internacionales COMEXI. The point of view is strictly from the author and does not represent the vision on any of the author institutions relationships. He can be reached at: samuel.pena@mexicoglobal.com