The release of a new study on the Mexican freight railway industry provides ammunition to the sector’s defense of its concession agreements, and hints at a potential compromise between the railroads and legislators aiming to open up industry to other carriers.
The results of the peer review — conducted by the Organization for Economic Co-operation and Development and in close collaboration with Mexico’s Ministry of Transport — were presented to a Mexican Senate committee last month. The Senate is currently debating rail reform legislation after the Mexican House of Deputies on Feb. 4 passed a bill that would require Kansas City Southern de Mexico and Grupo Mexico’s Ferromex and Ferrosur railroads to share their lines with other parties or potentially lose them. Rail reform proponents argue the legislation will jump-start lagging investment to the rail industry and lower rates
The OECD’s International Transport Forum report concluded the opposite when it came to investment. Concession holders have invested heavily in their networks, and allowing third-party operators to use their rails would hamper operations and future infrastructure spending, according to the report by OECD’s International Transport Forum. The report also noted that rail tariffs and trucking rates have increased to a similar degree in the last three years, and mirror those seen in Canada and the U.S. The freight tariffs of the three railroad are also among the lowest in Latin America, according to the report.
“Tariffs nevertheless remain much lower in real terms than before the reforms, especially when subsidies to rail prior to (the 1995) reform are taken into account,” according to the report. “Tariff freedom inevitably involves fluctuations and we see no evidence of misuse of railway market power.”
Since the Mexican government reformed the rail industry by granting 30-year concessions to KCSM and Grupo Mexico, rail traffic has doubled, while GDP has expanded 56 percent, the report found. When excluding the mining sector, Mexico’s two rail concession holders operate the most productive networks in Latin America, the report’s authors said.
“The performance of the industry has shown continuous improvement since 1995. The quality of management, technical quality of railway infrastructure and rolling- stock, capital and labor productivity, traffic levels and market shares have all improved markedly, a transformation in industry prospects that hardly seemed possible prior to the reforms,” according to the report.
Between 2007 and 2012, the two concession holders invested 27 trillion pesos, or roughly $2 billion, in their infrastructure. The robust investment needed to bring the railway previously operated by the government up to snuff has enabled Mexico’s manufacturing boom. Led by the auto industry, other manufacturers have added and expanded factories to take advantage of the country’s accessibility to the U.S and Canadian market, as transportation and Chinese labor costs have risen.
The House bill would also force the railroads to publish more of their rates, including those agreed on through privately negotiated contracts. Kansas City Southern spokesman Doniele Carlson previously said the requirement would “prevent privately negotiated agreements between railroads and shippers that meet specific shipper’s needs” and reduce manufacturing competiveness. The OECD report appears to recommend a middle road in which more rail data is collected — as the U.S. Surface Transportation Board does — so that regulators are more informed.
“By contrast, freight tariff regulation carries significant risk of deterring investment,” the report said. “All decisions on rights of access or exclusivity will benefit greatly from the understanding of how competition operates in the market that only this kind of data provides.”
The report doesn’t address the sensitive issue of reciprocal or competitive switching. The House bill would require Mexican railroads to publicize the rates they charge for switching cargo from their lines to competitors. The Canadian government requires the country's two major freight railroads to give shippers access to each other, while the U.S. Class I railroads have fiercely fought against having to switch cargo to competing lines.
Creating an independent safety commission was the only short-term policy recommendation made by the report’s authors. More detailed safety-related statistics are needed for regulators to gain a better understanding of the Mexican rail network’s performance, the report stated.