Mario Alvarado, CEO of Graña y Montero, Peru’s oldest and largest construction company, discusses the country’s growth, his company’s strategy, and the future for one of the most admired conglomerates in Peru and best managed cement and construction companies in Latin America.
Regarding Peru’s economic growth, to which all the sectors have contributed, and seeing the latest growth indicators; how do you perceive the investment climate nowadays taking into account that Graña y Montero (GyM) has activities in most of them?
That is a two-part question. The first one refers to the last years of continuous growth in the country, and it is amazing how the general expansion starts having repercussions in the different sectors.
On the other hand, we have experienced 20 years of growth, of which 10 have been steady, but in the other 10, the development of capabilities has been very important. We have also learnt that through exposure and by undertaking increasingly sophisticated projects, one develops many capabilities, not only as a company but also as a country. So I think that the most important thing in the last years is the size of the country, which is much larger in its production capacity. Also the sophistication of the companies, their productivity, which is something that you can only get in a market like Peru: a completely open one. This market has no barriers, companies from all over the world can enter, but one that is not easy because it is very competitive. This leads to the trend seen until the end of last year, when Latin America hit the brakes, including Peru, because of the China and the commodities’ effect. Among the commodities are the minerals and, in second place, oil.
Many years ago, growing was a luxury, but since many years of expansion have gone by, one begins to forget the way it used to be. We must not forget the crises we have been through. This lower growth implies adjustment, and the projects have to do so as well, which is a problem because we enter a vicious circle we need to break. What everyone has been saying for the past year is ‘efficiency’, ‘cutbacks’ and ‘investment reduction’.
In the past 20 years, particularly in the last 10, the country’s companies have grown considerably, competing in very sophisticated projects.
During these times of deceleration, one of the trending topics in the Pacific Alliance was the need to have more public-private alliances. What the leaders from different companies say is that the State can sometimes be a deterrent, and that there is a series of events that hinder drive, particularly now that the country is in this situation.
All these topics are very complex, and not only in Peru but everywhere.
I am going to explain two things, and we have to be careful not to be confused. I was invited to that presentation to talk about innovation, and the Minister of Production gave a presentation that really surprised me because of the enthusiasm it showed, but also posed a complex issue that is complex by nature: innovating is going against the rules, and the State equals setting rules. A private entity can do everything that is not forbidden by law, but the public sector can only do what law allows. These are two completely different logics from one another, so it is not easy to settle here or in any part of the world.
These are slow processes everywhere. It is just that they are even slower when there is no continuity and there is no progress in the projects. There comes a point when there are many mature projects each year, so if at given time the momentum is curbed, then the effect is not seen right then but many years later. If engineering studies for new projects are stopped, it will take 5 years before the problem is spotted. Having the clarity to see in what direction infrastructure projects–which are more and more every day– need to go, is not an easy topic, even harder when there is a change in government and the policies are modified. Luckily, this has not happened here, there have been changes in the intensity but not in the policies.
It is true that it is very hard to pull projects ahead nowadays, harder than it used to be, because the government has not had the dynamisms in its projects, as they were not part of its fundamental vision, which made it difficult. But if I think of all the countries where I work, I am more convinced every day that Chileans want to come to Peru because they think things are easier, and Peruvians want to go to Chile because they think things are easier. It confirms the saying: ‘The grass is greener on the other side.’ The problem is complex, there are many parties hindering development, because that is the way it was designed.
One of the reasons of this company’s success is diversification. What is the key to diversifying? Considering what is going on in each sector, how can you keep growing and at the same time contribute to Peru’s dynamism?
When we started growing, they told us ‘Focus on mining and construction.’ At that time, we already were in the stock market, and we decided to diversify. Time elapsed and they told us ‘Do whatever you want, because you do it well, but do it within Peru, do not open up, focus here as this is our only means of investment.’ And we decided to open up.
This has to do with the short and long-term perspectives; this is the difference that can exist in approaching the regulations and the decisions. We are always looking to create a company that is sustainable, which is why we need to aim and plan much longer cycles.
One of the two things we look for are non-construction revenues, meaning revenues that come from different construction cycles. Since construction is cyclical, there comes a time when it stops, and that is when you need steady cash flows, you need to keep going. But it takes time to get this, we need years and years of construction, we need long-term projects. We have moved forwards in this direction. We also look for international revenues and total revenues. These are two big measures.
Construction cycles are very dangerous. Nowadays, around 60% of our revenues are with non-construction cycles. The constructions ones are executory contracts, of which 68% are not related to construction. This percentage is very high, which gives us much stability.
We really are not in that many sectors, what we actually do is to stretch the concept of engineering as much as we can. We are not marketers; we do not sell to the public, except in the real estate part. We do not sell products; it is all based on engineering.
In the infrastructure part, we invest by providing all our engineering knowledge, our operation knowledge, etc. Based on technical knowledge we have tried to build our business. We are mostly business-to-business.
We provide infrastructure and mining construction, we do pretty much everything in the oil and gas sector, but we are neither an oil nor an exploration company. We really are not in many sectors, our income comes from different sectors but we are not that involved in them.
Regarding public funds, we only have 4%, meaning the State, as a project generator, is not that important to us. It is important as a regulator, as 21% comes from concessions.
Do you feel Peru has been dwarfed and that is the reason you opened up? Moreover, you are one of the few companies that are listed in the New York Stock Exchange. Has the capital market also been dwarfed for Graña y Montero?
The capital market has rendered too small for what we wanted to do. When we went public, we rose around USD 400 million, which is a number that could not be raised here, and if it could, there would have been little rigidity, particularly in the business we were in. We saw that market integration would take too much time, because of the taxes on income, the stock market, etc., would not flow, which has now been proven. So we went public in New York, and the IPO went great but the results were abysmal. Meaning, the stock market has dropped tremendously, we got the funding right on time. Despite we knew it was a long-term thing, the stock results have not been in our favor.
The fall in the stock market has had much to do with expectations, and expectations in terms of numbers are not what they used to be. In fact, there are people that today, as it is cheap, are buying in international markets. They are waiting for the big growth rates.
Our perspective has always been in the long-term, and that plays against, particularly in terms of the opinion of the investors about what to do against what we actually do, which has to do with perspective, the term under one sees things.
Nonetheless, the company is doing well, the effect of construction is real, because one of the main markets is mining construction, which is our main market and expertise since this is a mining country, like Chile. The second most important market for us is the oil and gas one, which is why the company we purchased in Colombia has the expertise in this area, in order to pass the know-how along.
In times of elections’ uncertainty, the international investor somewhat retracts, which has also been stressed by a series of indicators pertaining different sectors of the economy.
We are associated with mining, more than we really are, so if mining decelerates the conclusion is that we do too. The truth is there is an effect, and projects are downsized. In mining, great projects are almost through.
We have some large projects that will cause an increment in the Peruvian mining sector when they get started, not investment- but production-wise. Cerro Verde is a considerable project that starts production next year, trebling the local production.
When did you decide to open up to the world?
We have been working outside Peru for the last 25 years, but we did so in a project-to-project basis: we went do a project in another country and then we returned. In Mexico, we built the Four Seasons Hotel and we must have built 4,000 different hotel rooms in Dominican Republic. We have decided permanently to settle in Chile and Colombia, and we are in Panama, Guyana and Bolivia, where we decided to buy companies and complement them with ours, as these are markets we believe will provide funding in the long run. We do not have a project-to-project basis; we now have fixed investments.
In Chile, there will be 8,000 people working by the end of the year, and our operations in Colombia are growing considerably as well. In fact, our last announcement was a gold mine we will exploit in Colombia. These markets will widen ours.
When it comes to choosing partners in Peru for each of your projects, what is the process like?
As incredible as it sounds, it all depends on the stock of knowledge, there are other issues but this is the main one. As an example, we are building a wastewater treatment plant in La Chira, an important project for Lima as it treats the water from part of the sewage system. So we looked for a company, in this case Acciona from Spain, which was a specialist in water treatment.
Thus, in each case, we have had the luck that the companies were looking for a local partner, and we have had the chance to choose the best company in each case. We have four future projects in the region of Talara, with different partners. These were chosen because of the technological knowledge they bring, and because of how many times they have done the same.
For example, we operate in Metro Lima, which we had never done before since there was no subway. We had to collaborate with someone who knew, and now we have the knowledge. In the next project that arises, we will be able to undertake it; we will be able to do it by ourselves.
We operate on our own in the mining sector because we have done many projects, we are the company with the most mining experience in Latin American, and we want to reach that level in the oil and gas sector.
The Titicaca project is a very interesting one; it is a process that implies innovation from a completely different point of view than the traditional technology innovation processes. Innovation has implied being able to solve a problem in five different municipalities and one regional government, presenting different plans and treatment options, and getting together to solve the water problem. This was the innovation: solving a social issue. Because in the end one uses innovation to solve a problem, which is not necessarily technological. This is how we see it.
This project will take time but already is on its way. Everyone is excited about what we have done; the government is backing the project.
GyM has a low profile when it comes to advertising, but its projects have had an impact and people have seen them in each of the sectors GyM is in. What are the projects you are most proud of?
I think the most interesting one, because of all the awards and recognition it has received, is the Metro Lima, which has received an international award as one of the projects with the most impact in Latin America. We also feel proud of this project because it is easy to explain from the point of view of our corporate social responsibility. We see it is much more powerful to carry out corporate social responsibility through our projects than through philanthropy. Every time we do well, every opportunity we have, we try to outspread it and support the society.
When we won the tender to build the subway, it was a competition so that the subway would operate in the most efficient way possible, charging per kilometer and paying with the fares. Once we won, we dedicated to thinking on the resources we had and how we could lean towards the society. We analyzed the situation and we discovered the ones who did it the best were the ones in the Medellin subway, so we convinced them to give us counseling. We could develop the project and we created a show called Cultura Metro. The level of acceptance has been very successful, and the impact on the citizens is very important.
We have mental obstacles in Peru, because we thought the general opinion was a consequence of a lack of education, and our theory was that this was not the case, that it was due to a bad administration. So much so that the Lima subway is clean, people do not litter, they give up their seats; there is an outstanding level of education. We are so proud of the impact the subway has had on the city, we are currently working with the Ministry to double the number of trains. The level of service and the opinion of the people are great.
There are 1 million Peruvians in the US, who are looking at Peru, and there are investors in New York who are looking at Peru as well. How can you display this company as an example of direct and indirect relationships with US companies and investment partners?
I myself travel at least once a year to New York or Boston to meet with investors and explain to them what our plans are. US banks also support us we have credit lines in the most important banks in the country. Besides, we have just finished an important industrial project with a US company. We even have some cases in which we do an exchange, one of them in collaboration with GE, where there is an internal college in Cotton Ville, and we have an internal college called La Academia. Some of their executives have come here; we share the way they work and our development and knowledge logic against theirs, which is very interesting. Like this, such opportunities are always popping up.
Finally, thinking of all the investors who will read this interview. How would you invite them to use your expertise and know-how in this country and in Latin America, as EuroMoney has named you the best managing company in Latin America in 2014?
We are an open and transparent company, which helps plenty in the relationships with other parties. We like to work, and we have experience working with companies from every country so it is easy to speak the same language, connect with a common goal and try to achieve it. It seems minor, but it is not. Cultural differences between companies and countries need to be understood, and these differences have to be recognized to work together. It is something that takes some time to develop.
We have been working with different companies for many years; we know how to collaborate. Maybe one of our greatest capacities is to complement other companies, see what each knows, and have each other’s support. We have local know-how; we have many people working for us, which helps in doing large projects. For example, large mining projects need our capacity to summon the workforce; we have a great reputation in the labor market, particularly with the blue-collar sector. We have been developing for many years, we have a large database, many professional well-trained engineers, and we can quickly build a team with companies from anywhere.