RIGHT ON TRACK

Mexico 2014 | TRANSPORT | FOCUS: RAIL

Recent legislation sets the stage for increased competition in Mexico's railway sector. This is raising concern amongst industry stakeholders; however, significant government investment in new tracks and passenger rail services should create enough room.

In February 2014, Mexico's lower house of Congress overwhelmingly approved legislation to reform the railway industry. Like other anti-monopolistic components of President Peña Nieto's reform agenda, the new railway reform law seeks to open up a sector controlled almost exclusively by two concession-holders, Grupo Mexico's Ferromex and Ferrosur railroads, and Kansas City Southern de Mexico. Under the terms of the new legislation, which has yet to meet Senate approval, concession holders would be required to share their rail lines with other holders, or risk losing them. Railway companies would also be required to publish the prices charged for interconnections with routes owned by other companies. The new legislation also addresses a striking paucity in passenger rail services. Following the 1995 privatization of Mexico's Ferronales de Mexico (FNM), which was failing operationally and financially, the legal duopoly of Ferromex and Ferrosur, and Southern de Mexico, eliminated most passenger services and reoriented the industry towards moving freight from the north to south. According to one legislator, Mexico currently has no interconnection between Ferromex and Ferrosur, meaning detours of up to 400 kilometers, in some cases. Following privatization, almost 9,000 kilometers of passenger railway lines were abandoned, isolating unprofitable communities, stranding travelers, or reducing their alternatives. Under FNM, most rail lines had carried both passengers and cargo. Yet under the new regime, cargo transport replaced most passenger traffic.

While lawmakers argue that the bill will attract investment into the sector, re-introduce passenger services, lower prices, and increase rail's role in the cargo business, railway companies counter that the new legislation fails to account for their investments, and sets a worrying precedent during a period when Mexico is working to attract investors. Industry voices also point out that unlike the Mexican oil sector, which is fraught with inefficiencies and waste, the country's rail sector is the most efficient in Latin America. Between 1996 and 2012, tonnage transported by the rail system increased by 90% while ton-kilometers, a measure of efficiency, grew by 92%, according to OECD reports.

The concerns of Mexico's rail companies are partially justified, although industry experts are confident that the Senate version of the bill, slated for consideration later in 2014, will address their concerns. Two major concerns are how the new legislation will be implemented, and how it will affect extant, and future investment? Approximately 13 projects are planned as part of the reforms, three of which will improve the passenger trains between Mexico City and Toluca, Mexico City and Querétaro, and the Yucatán peninsula. Transport and Communications Ministry (SCT) rail director Carlos Almada announced that three projects alone are going to cost $7.18 billion, shifting investment focus back toward passengers. The SCT is also investing $2.2 billion in cargo rail transport, such as the Aguascalientes-Guadalajara line in Encarnación that will reduce the travel time between the ports of Manzanillo and Altamira by 16 hours. These, and other massive rail development projects slated to start soon, should help allay the concerns of major rail companies that passenger trains will congest major freight lines, or that increased traffic from multiple concession holders will make Mexico's railways unsafe.

Using the same tracks for passenger and freight services is possible; yet, doing so limits when freight trains can run. Given the existing level of US-Mexico trade, freight rail lines are already crowded, and rail companies are unable to approve competing traffic on their lines without potentially undercutting profits. The expansion of Mexico's railway system connecting areas of dense population should be taken as a sign by Mexico's nervous railway stakeholders that the Peña Nieto administration is eyeing a brand new passenger railway system. With billions of state dollars already committed, Business Monitor International predicted 9.4% annual growth in the sector from 2013-2017. As the government advances projects such as a 180 km/h high-speed rail linking Mexico City with the manufacturing hub of Queretaro, and eventually Guadalajara, concerns over intrusion should fade. Tomorrow, the salubrious effects of Keynesian economics, and free-market competition promise to make Mexico's tracks an asset for freight carriers and passengers.