EconomyFinancialCap rail fares? This is the government's bet to...

Cap rail fares? This is the government's bet to contain inflation, but it may not be enough

The federal government seeks to limit the rates of rail transport, which until now are determined by the two largest players in the market – Kansas City Southern de México and Ferromex –, with the aim of mitigating the transfer of their prices to the consumer through products of the basic basket, a measure that is presented as part of the Package against inflation and famine ( PACIC ).

The measure, called the Emergency Guideline for the well-being of users of the public freight rail transport service , will be in force for six months, and urges the Railway Transport Regulatory Agency (ARTF) to establish a methodology, set the compensation for the interconnection services and the maximum rates in the provision of the public service of freight rail transport, “considering the establishment of conditions for affordable access”.

Although the setting of rates by two large players is a problem warned by several organizations, the specialists consulted agree that the result of the government measure aims to be limited, and bring to the table an adverse environment for transport companies.

On the one hand, the Secretariat of Infrastructure, Communications and Transport (SICT) points out several problems that are not new in the railway sector: monopolistic practices –because two concessionaires move 99% of the load–, the high level of the maximum rates registered ( which, according to the authority, are up to 83% above the accumulated inflation until August), as well as conditions that favor those who move large volumes frequently and effective competition routes.

“It is evident that the problems described in this document take on a national security dimension, as they are costs that are transferred to the economy and the well-being of Mexican families, and there is a lack of control that causes conditions that threaten the development of the citizens directly or indirectly,” says the document published in the Official Gazette of the Federation.

These problems have been warned by international organizations, such as the Organization for Economic Cooperation and Development (OECD), which sees in the authorities a certain inability to maintain rates at optimal levels in some circumstances.

There is a gap in the regulation to define the process and the methodology to determine the rates when two concession holders do not reach an agreement on interconnection services, or for captive carriers in the absence of competition,” says the agency in its study ‘Regulatory Governance of the Railway Sector in Mexico’, published in April 2020.

However, the presence of this sector varies depending on what type of goods it transports. According to an estimate by the Federal Commission for Economic Competition (Cofece) with data from the ARTF, almost half of the products that moved by rail in 2019 were industrial , while just over a quarter were agricultural. However, it moves up to 83% of the country’s supply of soybeans and 66% of that of wheat.

“Compared to trucking, the railway can move large volumes of cargo with greater economies of scale, resulting in lower average costs to transport high volumes of cargo over greater distances,” says the authority in the document ‘Study of competition in the public freight rail transport service’, published in August 2021.

This could be the ‘Achilles’ heel’ of the guideline, since its purpose of containing the prices of the basic basket would be limited given that another part of the inputs of various products move by other means of transport .

“We want to attack the price of tortillas, we are already talking about trying to control it, even if it had an effect, it is already dangerous, because it is a plug, we are forcing the market ,” warns Luis Pérez Lezama, managing partner of SABER ThinkLab. “It’s like the Special Tax on Production and Services (IEPS) on gasoline: they only give us a little oxygen.”

In this regard, Iker de Luisa, general director of the Mexican Association of Railways (AMF), considers that the measure “is inefficient and has little impact” to achieve its objective, since the railway transports small volumes of products from the basic basket in comparison with auto transport.

“In the specific case of tortillas, freight transport moves approximately eight times more tons of white corn than the railroad. Furthermore, rail freight only represents 30 cents for a kilo of 20-peso tortilla , the price of which is affected by other factors such as the international cost of grain, maritime freight, rail hopper rental, the exchange rate, among others.” said the representative of the sector in a comment sent through the National Commission for Regulatory Improvement (Conamer).

The AMF also warned that the SICT promotes “inequity” between means of transport through price control, such as diesel subsidies through the IEPS and the lack of regulation in weights and dimensions, among other items.

Until August, the consensus among the private sector is that the year is heading towards closing with an inflation level of 7.8% , although by 2023 it could stabilize at levels of 4.5%.

“The world is not going to see low inflation. Just as in the last 10 years we had controlled inflation worldwide, we are going to go through a process in which it will be very normal to see high prices, and it will be very normal to see scarcity, because almost all spending is going towards pandemic inflation linked to health , medicines, transportation, and issues that have to do with well-being”, concludes Pérez Lezama.

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