Since its privatization in 1995, the Mexican rail industry has seen few changes as crucial as those to come. The discussion of a series of modifications to the law that regulates the sector and the merger of the parent company of one of the two major players in the country took the industry by surprise, but they also anticipate a series of changes that, although they pose new challenges in the eyes of companies, they also open the opportunity to reform a limited sector.
The first signs of this change come from the hand of a set of amendments to the Regulatory Law of the Railway Service, approved in the Senate last April and which is still being discussed in Deputies, which puzzled the railway sector both due to its sudden discussion, and due to the scenarios they propose: a reduction in concessions from 50 to 35 years – which was intended to decrease to 30 -, greater supervisory powers for the Railway Transport Regulatory Agency (ARTF) and higher penalties for events such as providing public service of transport without the respective concession. In this example, the fine previously ranged between 10,000 and 25,000 minimum wages and went from 112,000 to 224,000 times the Unit of Measurement and Update (UMA), amounting to 20 million pesos, according to the Mexican Railway Association (AMF).
The response from the railway sector was immediate and forceful. “We are concerned about the change in the rules of the game,” said Oscar del Cueto, president of the AMF, to the media a few days after the green light from the Senate. “The modifications impact the investment part. We are a very capital intensive industry and reducing concession times affects these investments ”.
However, the potential to change the rail law is high. According to a study recently published by the Federal Economic Competition Commission (Cofece), it would value the rail freight segment and would increase the participation of trains in national freight transport from 25% to 31%.
“It is necessary to create conditions of greater competition,” warns Jorge Molina Larrondo, specialist in public policy and international trade at Tecnológico de Monterrey. “The opportunities are there precisely because rail transport allows you to move large quantities of volumes at relatively cheap prices and more efficiently than other means, more than by plane or ship, and, unlike freight transport, move volumes that you cannot move. in a truck, ”he explains.
A crucial area where the authority and specialists consider that there is an area for improvement is in the area of rates. Although Cofece itself states that they are competitive at a general level, from 3 to 3.8 cents per ton-kilometer, while the maximum in Latin America exceeds 16 cents -, there are segments where they rise, such as interconnection rates for Freight that involves more than one network, since the prices charged for starting or completing 5% of a route – the so-called ‘first’ or ‘last mile’ – are 7.4 to 10.7 times more expensive than 95% of the route remaining.
“There is a margin to improve the current status of these rates, because the companies, apart from the fact that they are few, the competition is not the best,” says Pedro Canabal, academic at the Faculty of Business at the Universidad Panamericana and partner of the firm. Baker Tilly International. Although this does not depend on the dealerships as a whole. “There should be more players. You have to understand the prices, since they must cover certain contingencies at the time of the operation, talking about security issues, for example. They are not optimal, although it is not a single responsibility. I don’t think they don’t want to be more cost efficient. “
However, beyond the arrival of new players, what follows is the strengthening of some.
The new giant of the sector
A few weeks before the changes in the rail law were announced, the sector was already rocked by other news: the intention of the Canadian Pacific rail company to buy Kansas City Southern for 29,000 million dollars, which would end up becoming a bid when another competitor, Canadian National, offered around 33.6 billion for the American company. Kansas City Southern ultimately opted for Canadian National’s offer, prompting it to pay $ 700 million to Canadian Pacific to terminate the merger agreement.
The potential of this merger is not only to create the largest railroad company in North America, but to interconnect the three countries, which from Mexico would be done through Kansas City Southern de México. However, it also raises some concerns in terms of competition.
“The problem here is that both Canadian and Kansas use several of the roads in the United States, and they see that this could create a competition problem. That is why Canadian Pacific has not come down [from the purchase of Kansas], because their hope is that the merger will be fought by saying that it is anti-competitive, “explains Molina Larrondo.
To fix this, Canadian National has chosen to make some divestments in roads operated by both companies, such as a 70-mile (112.6-kilometer) stretch between New Orleans and Baton Rouge, in the United States.
Overcoming competitiveness problems would bring great benefits, not only in terms of better conditions, but also in terms of the entry of capital for future projects, Canabal considers.
“This mega-merger, which would lead to the largest railroad company in North America, also points to strong investment intentions for infrastructure projects. We are not here to give ourselves the luxury of losing those investments ”, he warns.
At the moment, all these changes are in suspense. While the discussion of the amendments to the Regulatory Law of Railway Service in the Chamber of Deputies is on pause, and it is unlikely that it will resume in an extraordinary period and even in the next legislature – which begins on September 1, with a view to attend the 2022 budget discussion – the merger of Kansas City Southern with Canadian National awaits the comments of its stakeholders until June 28 on the proposed voting trust presented to the US Land Transportation Board.
