Mexican rail privatization has significantly improved sector - OECD

Monday, March 10, 2014

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The privatization of Mexico's freight rail sector has resulted in significant improvements in the industry, according to a new report from the International Transport Forum at the OECD.

"Mexico has seen a transformation of its railway in the last 15 years, from a declining operation increasingly dependent on large government subsidies to what we have found to be a very productive and technologically improved system that operates profitably without public subsidy," according to the report.

The Mexican rail sector was privatized in 1995, with Kansas City Southern de México (KCSM) and Grupo México's ITM division - which includes Ferromex and Ferrosur - awarded 50-year concessions for the operation of the majority of the country's railroads.

Mexico's lower house approved a bill on February 4 that promises to open up the rail sector to increased competition by obligating existing concessionaires to share their lines or risk having the concession revoked. The move comes despite KCSM and ITM still having 15 years of exclusivity under their concessions.

The bill is currently being debated by the senate.

Lower house lawmakers have claimed that the two concessionaires have failed to invest enough in rail infrastructure, but the OECD report contests that stating: "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."

The performance of Mexico's two rail concessionaires "compares favorably with many of the busiest freight railway systems in the world and they are the most productive freight railways (if the mining sector is excluded) in all of Latin America," according to the report.

The report also cautions against the proposal to allow third party users to use the concessionaires' tracks as "the nature of railway cost structures suggest that unconstrained head-to head competition between operators on the same tracks can lead to some loss of operational economies of scale and scope, making it harder to recover the costs of fixed infrastructure, and reduce the incentives to invest in long-term assets."