New rail links in Mexico upcoming as investment scales up

The Mexican railway system was privatised in 1995, with the government dividing the country into three major areas, and offering 50-year concessions to operate rolling stock and maintain the tracks in each.

Ferromex and Kansas City Southern de México (KCSM) won the concessions to operate the two main northern areas, while Ferrosur won the southern one. Ferromex and Ferrosur operate as separate companies, but the Grupo México mining and rail conglomerate owns them both. The busier northern concessions were carefully defined so that each operator there would have some seaports, together with a section of the Mexico-US border, thereby ensuring a share in the more profitable rail freight businesses, such as transporting components and completed vehicles for the automobile industry.

Apart from these three main concessions there are a number of other smaller rail operations. Three privately owned companies, Línea Coahuila Durango, Compañía de Ferrocarriles Chiapas-Mayab and Ferrocarril y Terminal del Valle de México (Ferrovalle) all operate their own concessions. A public sector company, Ferrocarril del Istmo de Tehuantepec, owns the track linking Veracruz on Mexico’s Atlantic coast with Salina Cruz on the Pacific side.

Successful Privatisation

“The rail sector in Mexico has had a successful privatisation model,” Juan Carlos Miranda, director of planning and projects at Ferromex, told OBG. “There has been significant investment in track and infrastructure, rolling stock, and locomotives. The proportion of freight cargo carried by rail has increased.”

Miranda said that new legislation introduced at the beginning of 2016, consisting of amendments to the Railway Law, had sought to increase competition and set up a new body, the Rail Transport Regulatory Agency. The relationship between the main concession holders is a mix of competition and cooperation. In fact, Ferrovalle is jointly owned by the three main concession holders, and operates railways and terminals in and around the capital, Mexico City. Under certain conditions, the law allows companies to run limited competitive freight services in the concession areas held by other operators. The rules also identify areas lacking competitive conditions where companies can offer freight services without needing regulatory approval.

The existing rail operators are continuing to invest. According to government officials, total rail investment during the first four years of the current government (2013-16 inclusive) was 50% higher than in the comparable first four years of the previous administration.

The three main companies announced plans to invest a total of $410m in equipment and infrastructure in 2017. Ferromex and KCSM said that they have plans to install a total of 27 fuel terminals at different points in the rail network, at an approximate cost of MXN$1bn ($60.3m) each. The background is that, due to falling local production, Mexico is now importing a greater volume of fuel. Pemex, the state oil company, now imports 68% of the fuel it sells, compared to 23% in 2010.

Freight Link

Mexico will gain a competitive edge in transit trade under a plan to build a freight rail link between the port of Veracruz, where a major expansion is planned, and the Pacific port of Manzanillo.

According to the minister of communications and transportation, Gerardo Ruiz Esparza, the 795-km rail freight journey between the two ports will take 10 hours, meaning that when it is completed Mexico will be able to offer multimodal competition to the Panama Canal. The concession to build and operate the rail connection is to be linked to the tenders to build four new port terminals at Veracruz.

High-Speed Link

Government plans to build a new high-speed passenger rail link between Mexico City and Querétaro, which were temporarily abandoned in 2014, appeared to be subject to reconsideration in early 2017. An original $3.74bn contract to build a link between the two cities was awarded to a consortium led by China Railway Construction Corporation in November 2014, but was suspended the following month after claims that there had been a conflict of interest involving President Enrique Peña Nieto’s family, which had financial dealings with a Mexican construction company that was part of the consortium. The president denied the claims, and was exonerated in a subsequent investigation, but the project remained shelved.

Unconfirmed press reports in late 2016 indicated that the project was being reactivated. Under the terms of earlier agreements China EximBank had offered to finance 85% of the cost. It is calculated that 27,000 passengers a day could use the service, travelling at speeds of up to 300 km per hour.

The government is also building a passenger link between Mexico City and Toluca. The line will be 57.7 km long, including 4.7 km of tunnels. Total cost is estimated at MXN$46.97bn ($2.8bn), with a completion date of April 2018. The six-station line is expected to carry 230,000 passengers a day, with a journey time of 39 minutes between Zinacantepec and Observatorio, a station on the Mexico City metro line. The contract has been broken down into different tenders for its various component elements. A European consortium including CAF, Thales, Isolux-Corsán and AZVI won the contract to provide the five-car electric multiple-unit trains, while Spanish and Mexican companies are building associated train maintenance facilities.

Challenges Ahead

With the privatised rail system now having operated for two decades, analysts say there are a number of new challenges ahead. According to Miranda, rail has grown to take 26% of all land freight in Mexico, up from around 20% previously. However, he told OBG that there is more room for growth, pointing out that in the US rail’s share is 37-38% of the total. The economics of rail show that it is the most efficient way of transporting heavy bulk products, with 100-wagon trains having much lower costs than 50-wagon ones.

On long hauls, Miranda said, the efficiency difference between rail and road was like the difference between a school bus versus every parent bringing their children to school separately in their own cars.

“Activities related to intermodality saw 6% growth in 2016. Placing an emphasis on efficiency through technology permits the whole network to carry more cargo. In addition, during 2016 investment in improved capacity and coordination with US authorities led to a year-on-year growth of 9.2% in cross-border traffic,” Rogelio Vélez, a former director-general of Ferromex, told OBG.

Transport consultant Francisco Gorostiza said that the rail system has concentrated on long-haul and international routes, particularly those running to the US. A big challenge for the future is to develop more services within Mexico, particularly for short-distance container services, which are almost non-existent. Vélez said that the operating companies have met their original challenge, which was to maximise capacity utilisation on existing routes. He said that the next objective should be to offer competitively tendered concessions for new routes, which might offset rail density in the centre of the country by opening up other areas.

Security

Most industry leaders have also expressed concern over security, such as cargo theft and the removal of steel track for sale as scrap metal. “Security remains one of the biggest challenges for the railways in Mexico. Trains regularly get vandalised and robbed due to the slow speeds they often travel at,” Erich Wetzel, CEO of Ferrovalle, told OBG. “There has been significant investment in technology from all entities but the crime rate still remains high. We have to look at other alternatives, such as drones to monitor all trains, but this would take time and investment over the long term.”