Across the Border: Estranged railbed fellows

The relationship between Mexico's two major railroads continues to be defined by litigation. At issue is growth not foreseen when they were awarded operating concessions by the government eight years ago. Kansas City Southern of Mexico (KCSM) (www.kcsi.com), which operates the NAFTA Rail, has sued Ferrocarriles Mexicanos ( Ferromex) (www.ferromex.com.mx), which runs the West Coast line to Nogales. KCSM's claim before Mexico's Federal Competition Commission (Cofeco) is that when Ferromex bought out shortline railroad Ferrosur late last year, it created a monopoly.

The suit is a repeat of a similar accusation made four years ago when Ferromex first tried to acquire Ferrosur. At the time, the deal was rejected and Ferromex could not expand.

This time, Ferromex acquired Ferrosur by purchasing all its stock from the previous owner, Carso Group, without letting the government review the deal beforehand. This provoked ill feelings on the part of public officials who have voiced concern over the $300 million takeover.

David Eaton, corporate affairs executive for KCSM, says that surely Cofeco will make exactly the same decision it made it 2002 and turn down the buyout.

"Perhaps so, but this is a done deal and there's no turning back," claims Ferromex marketing director, Rogelio Velez. "The purchase was made with the Carso Group and can't be undone. What Cofeco could do is not to allow a merger between Ferromex and Ferrosur. We'll soon find out about that because Cofeco asked for more time to ponder on it."

Velez says Ferromex is already managing Ferrosur under a services contract. "We are committed to provide management, operational and commercial services using the resources of Ferromex to manage Ferrosur," Velez states. "The approval process could take months." Ferromex has already taken over Ferrosur, which runs its shortline from Mexico City to the Gulf of Mexico Port of Veracruz.

The issue is more complicated than it might appear since ironically neither KCSM nor Ferromex are direct competitors — each operates its own railroad. The underlying issue is railroad right-ofway. KCSM also goes to Veracruz and both companies have clashed before over letting one another use their respectiverails.

"This has a solution", says Eduardo AsperÛ, CEO for Pacer Stacktrain of Mexico (www.pacerstacktrain.com), who has to negotiate with executives for both companies. Pacer operates a Chicago-Mexico City route and works mostly with KCSM. However, now and then, customer demands force the right of way issue.

"We have a customer who wanted his containers delivered at Silao, a Ferromex station," AsperÛ explains. At first Ferromex didn't want to allow the delivery. In the end, there was the realization that we're in the business of customer service. Finally we reached a financial solution and got the right of way from Celaya, which is a KCSM station, to Silao, and now we're all in business." (Celaya is about 40 miles from Silao in the Central Mexico state of Guanajuato.)

The issue reached an easy and reasonable solution, perhaps because it involved a third-party operator. In other instances, government authorities have had to intervene since, by law, railroad companies are obliged to permit each other to pass along their right of way.

Even after governmental intervention, some under-the-table shin-kicking has been alleged, including causing each other unwarranted delays by holding up loaded trains for many hours for no apparent reason.

Otherwise, both KCSM and Ferromex are doing extremely well with substantial increased business.

Emilio Sacristan, president of the Mexican-Railroad Companies Association, says that both companies are aiming at operating seamless lines to make customers happy. "Over the past eight years they have reduced rates by 21%. The price per ton carried back in 1995 was $238 pesos ($24 U.S.), which went down to $188 pesos in 2004. In 2005 prices bounced up due to the increase in the price of diesel. Still, both companies are highly competitive against motor carriers."

KCSM is advertising the fact that it has been reinvesting all its Mexican profits to enhance infrastructure ever since it started operating NAFTA Rail in May 2005. "We're now positioned in the Port of Lazaro Cardenas to move containers from Asia to the U.S.," says KCSM's Eaton.

Velez of Ferromex says the acquisition of Ferrosur has created a true crosscountry operation. The company operates on the West Coast with connections to Arizona and California — and now, Veracruz — extending its options for customer service.

Market participation, says Sacristan, is good as long as "the competitive environment" goes head to head against motor carriers rather than each other. In the short time these lines have been under private management, they have seen volumes grow about 6%, climbing from 12% to 18% percent of the total Mexican cargo market.

"In the U.S. the percentage of cargo carried by train is around 40%, so we still have a lot of room for growth," says Ferromex's Velez. "We are continuing to look at getting containers off the road and onto a train."

However, it remains clear that contention over monopoly practices will linger even after Cofeco issues its statement on the KCSM suit. Despite that, the fact is both railroads will have to learn to get along with each other. Each has a 30-year renewable concession, and both are here to stay.


Both companies have clashed before over
letting one another use their respective rails.

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