Once again, the Mexican government is ruffling feathers as
it tries to modernize and open industries to competition and investment. This time, however, the government has not only drawn the
ire of its large rail operator, Grupo Mexico which manages Ferromex (25% owned
by US-based Union Pacific) and Ferrosur
railroads but also US-based Kansas City Southern Railway.
Mexico’s lower house of Congress has approved a measure to
reform its rail freight law and it now moves to the Senate for a vote. Under
the proposed law, concession-holders would be required to share their lines
with other concession-holders or risk losing them. Also, prices charged to
customers for interconnections with routes owned by other companies would be
required to be published. The purpose, say lawmakers who proposed the bill, is
to bring new investment into the sector, lower prices and expand rail's share
of the cargo business. Also, according to one legislator, Mexico currently has
no interconnection between the two operators, meaning detours of as much as
400km in some cases.
Grupo Mexico and Kansas City Southern control almost all of
Mexico’s rail freight and has stated that the proposed legislation ignores a
concession granting exclusivity of another 14 years plus it fails to recognize the sizeable
investments both companies have made over the years. In fact, Ferromex and Ferrosur are expected
to invest $2.2bn over the next five years, with $506.4m set aside for 2014, but
the figure could change if the reform gets approved.
If this legislation passes, it will likely have a negative
impact to Kansas City Southern. Its Mexican subsidiary is a growing part of the
company - responsible for the movement of over 40% of the company’s total
number or carloads and containers.
Both rail companies also cite the trucking industry as their
main competitor and indeed, based on NAFTA data, trucking is the predominate
mode of transport between Mexico and the US, carrying over 60% of freight by value.
Rail, on the other hand, carries about 14%.
However, over the years, little growth in weight seems to
have occurred in regards to US NAFTA imports from Mexico. Growth by weight, in
terms of kilograms, has been slight for rail, growing at a CAGR from 2004 to
2012 of only 1.65%. Meanwhile, for trucks for the same period it increased 3.1%
Opening the rail freight industry for competition and investment
is indeed needed and could possibly increase rail’s share of freight and also
help improve Mexico’s competitive advantage of its proximity to the US.
However, with concessions in place for another 14 years for Grupo Mexico and
Kansas City Southern, the legalities may win out over what is really needed.
