September 10, 2001

This paper describes in very broad terms the current structure of the railroad industry in Mexico and the regulatory framework applicable to it. Perhaps the most important thing to understand is that both are in their infancy. From the Mexican Revolution of 1914 until 1996, the Government of Mexico owned and operated the only railroad in Mexico, Ferrocarriles Nacionales de Mexico ("FNM"). State ownership of the railroad was in fact mandated by the Mexican Constitution.

As with many such enterprises around the world, Mexico’s experience with state ownership and operation of the rail system was not generally a success. Efficiency, service, reliability and hence competitiveness suffered from politics and the absence of market discipline. Cross-border trade was impeded by the general reluctance of U.S. railroads to send their cars into Mexico because of the substantial risk that they would not be returned promptly or at all. Despite the generally poor quality of Mexican highways, FNM carried only 15 percent of Mexico’s inland freight in 1995.

1995 marked another revolution in Mexican railroading as Mexico amended its constitution and embarked on a program to privatize its rail system, By 1999, Mexico had sold seven separate rail systems to private companies. At the same time, Mexico put in place a regulatory structure to govern these enterprises the contours of which remain largely untested.

This paper will attempt to provide an overview of the industry that has resulted from Mexican rail privatization, the regulatory framework that has been enacted to control it, and some of the issues currently affecting cross-border rail transportation.

The Government of Mexico privatized FNM first by dividing the system into different regional systems and then by selling concessions to operate each system in a series of public auctions between 1997 and 1997. The major systems and the companies operating them are described below.

The concession to operate the largest and most heavily used rail system in Mexico, the so-called Northeast Railroad, was awarded in December 1996 to TFM, which had bid $1.4 billion for the concession. The system includes the main line running northeast from Mexico City through San Luis Potosi and Monterey to Nuevo Laredo/Laredo, the principal rail gateway between the United States and Mexico. It also includes lines to Matomoros/Brownsville, the ports of Vera Cruz and Tampico on the Gulf of Mexico and Lazaro Cardenas on the Pacific Coast. The line consists of almost 4,000 km (2,500 miles) of track. In the year 2000, TFM carried 46% of the total tonnage carried by Mexican railroads. A map of the TFM system is attached.

TFM is owned 51 percent by Transportacion Maritima Mexicana ("TMM"), one of the largest transportation companies in Mexico, and 49 percent by Kansas City Southern Industries, parent of Kansas City Southern Railway (collectively "KCS"). TMM and KCS also own, respectively, 51 and 49 percent of the Texas Mexican Railway Company, which operates between Laredo, Texas and Beaumont, Texas.

TFM began operating the Northeast concession in June 1997. Based on TFM’s figures, the improvements in volumes, service and customer satisfaction since privatization have been dramatic. The volume of traffic moved over its lines in 2000 is more than twice the volume moved by FNM in 1996. Transit times have been reduced 40 percent systemwide. On the route between Nuevo Laredo and Mexico City, average transit times have been shortened from 60 to 34 hours for intermodal and automotive trains and to 41.5 hours for commercial trains. TFM’s share of total traffic (rail and truck) moving between the U.S. and Mexico through Laredo has also increased significantly in the past two years, from 14.2 percent in 1998 to 16.6 percent in 2000.

Ferrocarril Mexicano ("Ferromex")

The concession for the second largest system, the Northern Pacific Railroad, was awarded in June 1997 to Ferromex. Ferromex was also awarded two other, smaller systems, the Chihuahua-Pacifico Railroad and the Nacozari Railroad. The combined system consists of approximately 8000 km throughout northwestern Mexico. It connects Mexico City and Guadalajara with the west coast ports of Manzanillo, Mazatlan and Topolobampo and with the U.S./Mexico gateways of Calexico/Mexicali, Nogales, El Paso/Juarez, Presidio/Ojinaga and Eagle Pass/Piedras Negras. Ferromex’s route from Eagle Pass to central Mexico provides significant competition to TFM’s route from Laredo.

Ferromex was formed by a group which includes Grupo Mexico and the Union Pacific Railroad.

In June 1998, the concession for the Southeast Railroad was awarded to Ferrosur. This system consists of approximately 1500 kilometers of primary track, and it includes the important Mexico City-Oriziba-Veracruz line linking Mexico City with the Gulf ports of Vera Cruz and Coatzacoalcos.

Ferrosur is currently owned by a consortium that includes Banco Inbursa and Omnitrax.

Linea de Coahuila Durango

In October 1997, the concession to operate a group of lines known as the Coahuila-Durango Railroad was awarded to a group formed by Grupo Acereo del Norte and Penoles, one of the largest mining groups in Mexico. These consist of approximate 1000 kilometers of track in north central Mexico connecting the industrial and mining centers of Monclova, Torreón, and Durango.

Ferrocarriles Chiapas Mayab

In July 1999, Genessee & Wyoming, Inc. won the concession to operate 1500 kilometers of rail lines in southeast Mexico that connect the cities of Merida, Campeche, and Coatzacoalcos along the Gulf of Mexico coast and Ixtepec, Tapachula and Ciudad Hidalgo (Guatemala) along the Pacific Coast. Operating as Ferrocarriles Chiapas Mayab, the railroad also has overhead trackage rights over 320 kilometers of Ferrosur track between Coatzacoalcos and Salina Cruz to connect the two parts of its system.

Terminal Ferroviaria del Valle de Mexico ("TFVM")

As part of the privatization plan, the Government of Mexico established TFVM to act as a neutral switching carrier to provide switching, car classification and distribution services for the railroads serving the Mexico City valley and to maintain and control the tracks within the valley area. The Government assigned a 25 percent interest in TFVM each to TFM, Ferromex and Ferrosur and retained a 25 percent interest for itself.

The improvements in service, efficiency and traffic volumes brought by privatization have not come without costs. Efficiency has been improved through large reductions in the rail workforce, reductions which began in the early 1990’s under FNM. By and large, the privatized lines have continued the downsizing without labor strife, through negotiated agreements and severance packages. One exception to this was a strike in February and March 1998 by workers on the Ferromex line, which ended with an agreement by Ferromex to save some of the jobs slated for termination.

In 1995, Mexico enacted a statute for the regulation of rail service, Ley Reglamentaria Del Servicio Ferroviario. The statute gives primary regulatory responsibility to the Secretaria de Communicaciones y Transportes ("SCT"). Certain responsibilities concerning rates and competitive issues are also given to the Comision Federal de Competencia ("CFC").

The statute authorizes the SCT to grant concessions to private entities to operate rail lines on terms and conditions established by the SCT, which terms and conditions are set forth in the concession titles. The statute limits the initial terms of such conditions to 50 years, but provides for the possibility of one extension, not to exceed 50 years. Pursuant to this statute, the SCT granted the concessions described in the previous section.

The statute limits foreign investment in Mexican railroad companies to 49 percent unless a greater investment is specifically authorized by the Foreign Investment Commission. In May 1996, the Mexican Congress passed a resolution recommending that such authorizations be granted in all cases except for routes in Baja California and the Southeastern route.

The concession titles issued by the SCT generally grant the concessionaire exclusive operating rights over the lines involved in the concession. In some cases, however, the title grants the concessionaire trackage rights over specified lines of other concessionaires, for which the tenant carriers must pay the other concessionaire compensation determined by the SCT. The law and regulations also allow concessionaires to provide agreement trackage rights and haulage rights to each other by agreement that are different from those specified in the concession titles, in which case, the rights established by the agreements will control.

Article 43 of the statute provides that concessionaires have an obligation to provide rail service to isolated communities that have no other means of transportation on terms and conditions establish in the concession title. In such cases, the statute provides that the government will provide a direct subsidy to the concessionaire.

Pursuant to the statute, in 1996 SCT promulgated regulations implementing the statutory directives in greater detail. The provisions regarding economic regulations are similar in many ways to the economic regulation of railroads in the United States. The matters governed by the regulations include rates, discontinuance or service and access.

Rates.

Articles 170 through 175 of the regulations govern rates. As in the United States, they provide that rates are determined in the first instance by the concessionaires. They require that the rates "will be applied in a non-discriminatory way and shall be the same for users in the same conditions." Article 170.

The regulations also establish a tariff system. They require that carriers "register" their "maximum" rates with SCT ten days before they go into effect, and they provide: "There can only be applied the rates being registered." Article 170.

Despite the requirement that rates be non-discriminatory and registered with the SCT and that only the registered rates are to applied (what used to be termed the "filed rate doctrine" in the United States), Mexican law permits confidential transportation contracts at rates less than the registered maximum. This appears to be sanctioned by the following provision of Article 170:

The rates registered shall be the maximum fee to be charged, and according to them the concessionaires and permit holders will be able to structure promotions and to give discounts to the users in equal circumstances, in an equitative and non discriminatory way, attending to the specific characteristics of each service, according to the classifications established in the regulations.

The regulations also establish a procedure for protesting registered rates and for asking SCT to establish a "rate basis" -- presumably, a new maximum rate for the movement. Before new rates can be prescribed, the protestant must show, and SCT must conclude, "that there exists no effective competition" for the movement to which the protested rate applies. In considering that issue, SCT must request the opinion of the CFC, but SCT is apparently not bound to follow the CFC’s opinion. If SCT does conclude there is no effective competition for the movement, it will prescribe a "rate basis." Article 174. Echoing the methodologies adopted by the Interstate Commerce Commission and Surface Transportation Board in the United States, Article 175 provides:

When fixing rates, the Ministry will establish a methodology that will consider the competitive rate that an efficient transportist would charge for the same service. In the preparation of such a methodology, the Ministry will request the opinion of the Federal Competition Commission.

The regulations indicate that, in deciding whether there is effective competition, SCT and CFC are to consider the existence and feasibility of alternative transportation. They do not indicate whether geographic or product competition would be a relevant consideration, although that is an issue that has been very contentious in the United States.

The regulations also authorize SCT to establish rates for the concessionaires’ obligatory service to isolated communities, required by Article 43 of the statute. In fixing such rates, SCT is to consider any subsidies provided by the government for the service.

Neither the statute nor the regulations provide for the awarding of reparations to shippers who have paid rates determined to be excessive.

By U.S. standards, the time frames established by the regulations for resolving rate complaints are speedy. In the most protracted case, SCT has little more than six months to resolve a rate complaint after it is filed, and if SCT fails to meet the deadlines, "the request that began the procedure will be considered denied." Article 173.

So far, there seem not to have been any formal protests of registered rates that have resulted in a formal prescription of rates by SCT. I am informed that there have been a number of complaints, either to SCT or the concessionaires, that have either been dismissed or have resulted in a negotiated adjustment of the registered rates. This is probably in large part a reflection of the fact that most rail traffic in Mexico is highly competitive with trucks and other transportation modes. Railroad movements in Mexico are generally much shorter than in the United States, and there is relatively little coal transportation, which, in the United States, is a key rail transportation commodity and the one that has given rise to most rail rate complaints.

As noted, confidential transportation contracts are permitted so long as the rate is below the registered rate, and such contracts are common. The regulations require that all rates, presumably including those contained in contracts, must be non-discriminatory and made available to all "users in equal circumstances." It is not clear, however, how one shipper can determine whether a railroad has offered him the same rate as the railroad is providing to another similarly situated shipper in a contract if the contract terms may be kept confidential.

The regulations distinguish between temporary and permanent "interruption" of rail services – what in the U.S. sould be termed a "discontinuance" of service. The regulations permit temporary interruptions without the prior authority of SCT, but only for reasons beyond the concessionaire’s control. In such cases, the concessionaire must notify SCT within 24 hours of the interruption and what measures it is taking to restore service. Concessionaires cannot permanently discontinue service without prior authorization of SCT. The concessionaire must show that the discontinuance is not contrary to provisions of the concession title and will not "affect communities which are isolated and which do not have any other alternative means of public transportation."

SCT is required to resolve all discontinuance applications within 30 days of filing. If it grants the application, SCT is directed to grant a concession to any other party willing to provide the discontinued service, and the discontinuing concessionaire is required to grant trackage or haulage rights needed by the new concessionaire to render the service.

As noted earlier, the SCT may provide in the concession title that the concessionaire must provide trackage or haulage rights to other parties on specified terms, and concessionaires are also authorized to grant each other trackage and haulage rights by agreement. Beyond rights granted in the concession title or by mutual agreement, however, SCT appears to have no general authority to grant (or impose) additional trackage or haulage rights to (or on) concessionaires during the terms of the concession. The only other specific obligation the regulations impose regarding trackage rights is the obligation of concessionaires to give other concessionaires access to repair shops on the first concessionaire’s system. Article 107.

The regulations require connecting railroads to interchange cars with each other, and provides: "[SCT] will determine the interconnection points and distances, where the interchange of railway equipment will take place." Article 104.

Whether or to what extent SCT can require reciprocal switching and can establish switching charges is less clear. As noted earlier, switching and other services in the Mexico City Valley is provided by a neutral switching carrier, TFVM.

The statute and regulations give SCT general authority to regulate the safety of track and equipment. As trade and the interchange of rail cars with U.S. railroads increases, the standards and procedures of the U.S. Federal Railroad Administration and the Association of American Railroads for the inspection of rail cars is being adopted and applied more and more in Mexico.

The authority of SCT over rail safety in Mexico appears to be exclusive and to preempt local regulation of rail operations. Recently, however, the City of Monterrey attempted to block rail operations through the city because of allegedly unsafe grade crossings. Eventually, SCT intervened and brokered an agreement between the city and the railroad, TFM, but it seems likely that such conflicts will persist unless and until SCT takes a firm position regarding its exclusive authority over rail operations.

As noted earlier, cross border rail transportation has increased and improved in the few years since privatization. At the main U.S./Mexico gateway of Laredo, privatization has facilitated agreements among TFM, on the Mexican side, and the Union Pacific Railroad and the Texas Mexican Railway, on the U.S. side, to make the movement and interchange of cars faster and more efficient.

The two main problems that continue to impair cross border movements are customs clearance and the scarcity of intermodal facilities in Mexico. Both problems are being addressed and have seen significant improvement in recent years. And while customs clearance is a problem for railroads, railroads have a substantial advantage over their truck competition in clearing customs, mainly because railroad cars, unlike trucks, are fully compatible throughout the North American rail network. Intermodal rail traffic has also increased substantially in recent years, and several new intermodal yards have opened recently in the border. Nevertheless, a significant scarcity of intermodal facilities through Mexico remains.

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Privatization has dramatically changed the landscape for the Mexican railroad industry. To date, all indications are that the changes have been greatly for the better. The regulatory structure Mexico has adopted to control the new private railroads appears similar in many ways to the U.S. regulatory system. But there are some significant differences, and it is far too early to tell how the structure will evolve and be applied in practice.