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Mexico: Railways Lack Investment

Mexico's rail sector needs more investment and liquidity to become more efficient, experts say.

Latin America Advisor

Mexico's antitrust commission in November rejected Grupo Mexico's planned merger of two railroad subsidiaries, Ferromex and Ferrosur, which would have created Mexico's largest rail with about 54 percent of the Mexican railroad market. The Mexican subsidiary of US rail operator Kansas City Southern argued the merged company would squeeze out competition. Is rail competition between the US and Mexico evolving in a healthy way? What trends are shaping the outlook for rail commerce between Mexico, the US, and Canada in the coming year and beyond? How does the North American rail sector's outlook compare to other transportation methods?

Héctor Mora Gómez, the head of Hector Mora y Asociados and former director of the Manzanillo Port in Colima, Mexico: Rail competitiveness in Mexico has been complex since its privatization various years ago. Between Ferromex and TFM there was competition not only as companies, but also between the families that own them. Now that KCS de Mexico has acquired TFM this situation should change, and coordination between these two important companies should improve. Until the railways in this country can be used by any rail company, it will be difficult to work in a coordinated manner to the greater benefit of clients. Fortunately, Mexican authorities are working together with these companies to achieve improvements in our rail system. Ferromex's acquisition of Ferrosur that was to take place would have been a great improvement in the connectivity between Pacific (Manzanillo) and Gulf (Veracruz) ports, which would have benefited clients and the most important ports in Mexico. These two rail companies, the largest in the country, are serious players and committed to important growth plans. Authorities need to find the mechanisms that will allow for the modernization of the current rail infrastructure, which dates back a hundred years with President Don Porfirio Diaz. New lines connecting Guadalajara to Aguascalientes need to be added, just to name one example. The port of Lazaro Cardenas in the state of  Michoacan has better connections to the interior compared to the Port of Manzanillo, both in the Pacific, given the lack of a direct rail line between the latter and Mexico City, which necessitates a detour to Celaya Guanajuato. The ports of Mexico's Pacific are capable of receiving cargo from Asia headed to the central and eastern states of the US; however, the current Mexican rail system is not prepared for this cargo, given the problems cited above.

Leslie Blakey, Executive Director of the Coalition for America's Gateways and Trade Corridors and a Principal of Blakey & Agnew, LLC in Washington: One of the most important trends for the foreseeable future is the expected growth in container traffic at all US gateways, including our borders with Mexico and Canada. By 2020, containerized cargo into the US is projected to increase by 350 percent, even though the largest container ports will be straining their capacity as much as 10 years sooner. Whether these goods move by road or rail, it is inevitable that there will be a significant increase across our Mexican border and over the trade corridors that carry that freight. Unfortunately, the United States is not investing enough in goods movement infrastructure to ensure this commerce will continue to flow efficiently, and this has negative implications for all sectors of our economy. Rail competition may help spur capacity enhancements and service capabilities on the Mexican side of the border, but unless these are complemented by investment in goods movement infrastructure on the US side, there will be serious consequences both nationally and locally. This looming supply chain crisis is not an issue of one mode versus another, but rather the necessity of increased capacity and improved linkages across all modes. Given theextremely long lead time on transportation infrastructure projects, we are way behind the curve in addressing this problem at the federal level.

John Price, President of InfoAmericas and Director of its Transportation & Logistics Industry Practice: North America's highly integrated rail network now links all three NAFTA countries, their leading cities, and, most important, agriculture and mining sectors. Crossborder mergers and acquisitions now blur the former nationalist operator lines and create a single market, as NAFTA intended. Mexico's antitrust commission took issue with the planned merger of Ferromex and Ferrosur. Their analysis fails to address two parallel issues that make the Mexican rail merger more complex than a simple monopoly-creating exercise. Mexico's rail sector, in spite of strong investment since it was privatized in 1998, remains inefficient and antiquated. Foreign ownership of Mexican rail companies is limited to 49 percent without special approval, and therefore any capital contribution by US partners must be equaled by Mexican shareholders. The lack of liquidity of Mexican partners under the existing scenario has led to the need to merge Mexican companies. The question should be asked if rail can ever be a monopoly given the sheer dominance of trucking in Mexico as a transport mode, responsible for 80-plus percent of crossborder (into the US) trade volume. Whoever runs Mexico's railways will face cut-throat pricing competition from Mexican truckers, whose per mile rates are half that of US trucking.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.  


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