Greater competition: The economy has benefitted from the modernised rail system but new laws may change the rules for operators

A successful privatisation of Mexico’s railway network and an increase in trade with the US has helped strengthen rail transport across Mexico. Having established itself as a strategic freight carrier for manufacturing inputs, agricultural goods and the mining industry, the sector now faces challenges from legislators aiming to open Mexico’s railways to more participants. “In Mexico, railway starts to be more competitive than road transport in distances above 500 km,” said Iker de Luisa Plazas, director-general of the Mexican Railway Association (Asociación Mexicana de Ferrocarriles, AMF). Despite the rising profile of railway freight as less expensive than long-haul trucking, a possible overhaul of the sector’s laws may change the rules of the game.

Overall, privatisation of the Mexican railway system has been a success. Railways now transport about 27% of Mexico’s freight, as measured in tonnes per km, compared to 12% before privatisation. Railway operators invested $7bn in the system since the concessions were granted, according to the AMF. Renovation of the existing railway structure has translated into higher speeds. In 2012 rail transported 709,165 train cars and almost 300,000 containers between the US and Mexico – equivalent to 3.1m truck trips, according to the AMF. “Railroads are the best option for the transportation of raw materials and finished goods for long distances and high volumes.” Erich Wetzel Storsberg, the general director of Ferrovalle, told OBG.

“Among all the railroad advantages, we can mention that running a train with 120 cars is equivalent to 240 trailers. This allows for a substantial decrease in environmental pollution, the ability to move as much volume/tonnes in only one journey and, consequently, more fluid highways and substantial cost savings by not requiring additional security guards,” he said.

REGIONAL PRESENCE: The six railway concessions are divided according to regional scope, and although most of the existing 26,727 km of rail is operated by private companies, the building of new links is still mainly in state control. After the government announced plans to allow private operators into the market in 1995, a joint venture by US-based railway operator Kansas City Southern (KCS) and Mexican shipping firm Transportación Marítima Mexicana (TMM) bought the Northeast Rail concession, with KCS eventually buying control of TMM’s share. Mexico’s mining giant Grupo México entered the fray by joining forces with US railway company Union Pacific and bought the Northwest Concession, which formed Ferromex. Grupo México also eventually gained control of the country’s southeastern railway concession. Smaller railway concessions include the Chiapas-Mayab line, operated by Viabilis and the Coahuila-Durango line, owned by Industrias Penõles. Terminal y Ferrocarril del Valle de México operates a set of railroads and terminals in the Mexico City area, and is owned by Ferromex, Ferrosur and KSC.

LEGAL CHALLENGE: Authorities are planning changes to the railway sector’s law. A recent ruling by the Chamber of Deputies aims to open the industry to new players. In February 2014, legislators approved a bill that that will force operators to share railway links with other concession-holders and publish prices charged to customers for using interconnections with rail links owned by different companies.

While the initial 30-year concessions promised exclusivity for the holder’s geographic area, authorities hope that a further opening will help bring prices down and increase investment. The bill still needs to be signed by the Senate, but private operators have already expressed unease. Grupo México announced possible cuts to its investment plans if the legislation is goes through. These plans include more than $500m for 2014 alone and a total of $2.2bn over the course of five years.

While the new administration aims to boost competition in the railway sector and ensure affordable freight prices, a change in the law managing railroad concessions might have negative consequences beyond the sector. Private operators have said they would revisit investment plans if the new law is approved, and the ruling could negatively impact Mexico’s image abroad.