Mexico’s reform train: do not derail

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One of Mexico’s reform plans is under attack and there are investors who want it derailed.

Don’t panic – it’s not energy, the crown jewel of the reform package pushed through by the government last year, for which a kind of steering committee of legislators and officials are busy drafting secondary legislation they hope to have ready by the end of the month.

Nor is it one of the other five big reforms passed last year: financial, tax, education, telecoms and labour reform.

No, it is rail freight. Advocates see reform of the freight rail network as an essential step as Mexico upgrades its infrastructure to meet future growth. But current concession holders are not happy.

The story so far. The lower house of Congress last week overwhelmingly passed a bill to open up the rail freight sector, which is currently controlled almost exclusively by two companies: subsidiaries of the mining giant Grupo Mexico, called Ferromex and Ferrosur; and Kansas City Southern de Mexico.

Illustrating why reform is needed, one ruling party legislator told beyondbrics that Mexico currently had no interconnection between the two operators, meaning detours of as much as 400km in some cases. For a manufacturing country keen to keep logistics costs down (it’s competing with China, after all), that’s mad.

But the two operators are unhappy with the bill, which has now gone to the Senate for approval, saying it is a bid to railroad their rights. As Reuters reports, they are weighing up legal action to quash it, arguing that it ignores their right to another 14 years of exclusivity.

Lawmakers in favour of the bill see it is a modernisation that will attract investment and drive down costs, while boosting more rail freight. Pressure on the senators is mounting.

Not surprisingly, the concession-holders believe that Mexico risks sending a terrible message to investors eyeing prospects in, say, the energy or telecoms sectors, that contracts are rather less than secure.

It’s a similar argument as that made by Fumisa, an infrastructure company controlled by the fund, Advent, which is embroiled in a bitter dispute with Mexico City’s airport, AICM.

In that case, Fumisa argues that it has not achieved the agreed rate of return on its investment and has the contractual right to continue operations (it leases shops and runs aircraft boarding bridges and car parking slots at AICM’s Terminal One) until it does so.

No, says AICM, with the backing of the government. It says it has the full legal right to take back control of the Fumisa-operated areas (Fumisa says it has already kicked it off boarding bridges and taken over some vacant shops, as well as sought to get shops sub-letting space to sign rent agreements with AICM not Fumisa).

That row is still boiling. But it looks like there’s a cautionary tale here for the government. Infrastructure spending is a government priority and upsetting existing and potential investors could herald problems ahead.

Modernisation is needed. But whoever is right – or whoever prevails – in the airport and rail disputes, Mexico must ensure it is seen as a safe place to invest and keep its pro-reform credentials on track.

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