Two companies that control almost all of Mexico’s rail freight market said that proposed legislation to open up the industry ignores a concession granting exclusivity for another 14 years and are weighing legal action to quash the bill.
Mexico’s lower house of Congress overwhelmingly approved a reform of the rail freight law, which seeks to open up a sector controlled almost entirely by two concession-holders, Grupo Mexico’s Ferromex and Ferrosur railroads, and Kansas City Southern de Mexico.
Under the terms of the bill, which still has to be approved by the Senate, concession-holders would be forced to share their lines with other concession-holders or risk losing them. They would also have to publish prices they charge customers for interconnections with routes owned by other companies.
The aim, say lawmakers who proposed the bill, is to bring new investment into the sector, lower prices and broaden rail’s share of the cargo business. It is part of much wider raft of economic reforms spanning telecoms to energy aimed at boosting competition and long-lagging economic growth.
But the rail proposal has angered Grupo Mexico’s subsidiaries and Kansas City Southern de Mexico, who say the bill threatens the 14 years of exclusivity that remain in their concessions, fails to recognize their sizeable investments and sets a worrying precedent as Mexico tries to lure new investors into its oil and gas sector.
Now both companies are mulling legal action.
“We don’t want to go down the legal path, but we’re certainly looking at those options,” said Kansas City Southern de Mexico’s President Jose Zozaya, who added the company had already begun looking into using an arbitration panel set up as part of the North American Free Trade Agreement (NAFTA) treaty.
Speaking at an event in Guadalajara, Ferromex’s Chief Executive Officer Rogelio Velez denied his company was one half of a duopoly, despite ITM and Kansas City Southern controlling more than 90 percent of the market, noting that the national competition watchdog signed off on their concessions and that the rail freight industry competes with trucks.
He, too, warned of possible legal action, adding that U.S. railroad Union Pacific Corp, which owns about a quarter of Ferromex, had written to Mexican President Enrique Pena Nieto threatening to cut investment if the law were approved.
“In Mexico, we have the injunction,” he said, referring to a legal tool used regularly by companies to stall, often indefinitely, unfavorable legislation. “It’s a resource we have of course thought about using, but there shouldn’t be any need to get to that point.”
Velez said Ferromex and Ferrosur expected to invest $2.2 billion over the next five years, with $506.4 million set aside for 2014, but the figure could change if the reform gets approved.
“Yes, we would certainly reconsider our investment, for sure. That’s a definite possibility,” he said.
The proposed bill also removes any incentive to push ahead with a long-awaited initial public offering of Grupo Mexico’s ITM transport unit, which groups Ferromex and Ferrosur.
“It’s on stand-by,” said Ferromex’s head of operations Salvador Mancera.
The plan comes at an awkward time for Mexico’s rail freight sector, which was privatized in the late 1990s, but has been building momentum recently thanks to brisk NAFTA-linked border trade. Wages in Mexico are higher than pay in manufacturing competitor China and Mexico has a vibrant auto industry that is now the world’s fourth largest exporter.
“We don’t think it’s a coincidence that car factories are installing themselves on our routes,” Velez said.
A recently approved energy reform that aims to lure private investment into the country’s ailing, long-shuttered oil, gas and electricity sectors was expected to bring important new revenue streams to the industry.
The companies said they will now focus their energies on lobbying lawmakers in the Senate to try and tone down the reform, with Zozaya adding that it will be impossible to lure new entrants without building new lines - something only the government can do.
“We’re sending a terrible message that concessions are not respected here,” Zozaya said. (Reuters)