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Research in Transportation Business & Management

Privatization of Mexican railroads: Fifteen years later

Juan Carlos Villa a, Emilio Sacristn-Roy b,
a
Texas Transportation Institute, Texas A&M University System
b
Asociacin Mexicana de Ferrocarriles

a r t i c l e i n f o a b s t r a c t

Article history: In 1995, the Mexican Congress passed legislation to modify the Constitution allowing the privatization of the
Received 5 June 2012 Mexican railroad system (Ferrocarriles Nacionales de Mexico [FNM]) as concessions. The system was divided
Received in revised form 22 November 2012 into three main lines and several short lines that were auctioned off as a 50-year concession for the right to
Accepted 22 November 2012
operate and maintain specic lines. This paper analyzes the process under which FNM was dissolved that led
Available online 21 December 2012
to the rail system privatization in Mexico, describing the federal government's effort preparing the legal and
Keywords:
institutional framework leading to the process.
Privatization The paper analyzes market gains since privatization and productivity of the private concessionaires.
Railroad Practicing managers involved in freight transportation policy development could learn from the experience
Mexico of the Mexican rail privatization process, identifying positive elements such as the preparation of the legal
and institutional framework, creating a liability-free environment, and allowing the concessionaires the
freedom to establish rates based on market conditions that encouraged private investors to participate in
the concession of the main trunk lines, as well as issues that were not resolved in the original process,
such as the trackage right agreement among rail concessionaires and the operation of the Chiapas-Mayab
short line.
2012 Elsevier Ltd. All rights reserved.

1. Introduction
A steady decline in the Mexican rail freight market share with
respect to the trucking industry in the late 70s and 80s prompted
the Mexican Government to start the modernization process of
Ferrocarriles Nacionalesde Mexico FNM (Mexican National Rail-
roads). In 1991, FNM registered an operating decit of $552 million,
which represented 37% of its operating budget. The decline in the
Mexican rail market share relative to trucking was attributed to issues
with the rail system that included poor quality service, pricing, and
poorly maintained track, as well as lack of equipment. The Mexican
government estimated that more than $2 billion would be required
to perform the changes needed to bring the system to a competitive
form. Based on this situation, the Mexican government decided to
embark in a privatization process via concessions to the private
sector.
2. Privatization process of the Mexican railroad system
The rst step that the Mexican government took was to make
structural changes through modications to the Constitution and
Corresponding author. Tel.: +1 979 862 3382.
E-mail addresses: j-villa@tamu.edu (J.C. Villa), esacristan.amf@prodigy.net.mx
(E. Sacristn-Roy).
other laws. In March 1995, the Mexican Congress enacted amend-
ments to the fourth paragraph of Article 28 of the Constitution,
reclassifying the railroad sector as a priority activity (area prioritaria)
for the nation. The Constitution denes a priority activity as an activ-
ity considered by the federal government as fundamental to the
development of the Mexican economy. Private investors may partici-
pate in such activities under the auspices of the federal government.
In addition, in May 1995, portions of the Ley de Vias Generales de
Comunicacin (General Communications Routes Law), which had
regulated all rail services in Mexico since 1940, were repealed and
replaced by the Ley Reglamentaria del Servicio Ferroviario (Law
Regulating Railway Services).
The Ley de Inversin Extranjera (Foreign Investment Law),
Mexico's foreign investment law, also was amended. Related guide-
lines, the Lineamientos Generales para la Apertura a la Inversin en
el Sistema Ferroviario Mexicano (General Guidelines for the Opening
of the Mexican Railway System to Investment), and regulations, the
Reglamento del Servicio Ferroviario (Regulations of the Law Regulat-
ing Railway Services), were enacted in November 1995 by the
Secretara de Comunicaciones y Transportes (the Secretary of Com-
munications and Transportation [SCT]), the government ministry
principally responsible for regulating railroad services in Mexico
and monitoring compliance with concessions and permits (Bninski
et al., 1997).
At the same time that the legal changes were made, the Mexican
Federal Government restructured the Mexican railroad system from
one large single company to several vertically integrated regional

2210-5395/$ see front matter 2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.rtbm.2012.11.012
46 J.C. Villa, E. Sacristn-Roy / Research in Transportation Business & Management 6 (2013) 4550
companies responsible for providing public rail transportation ser-
vices. The new system included:
Three regional railroad trunk lines: Ferrocarril del Noreste (North-
eastern Railroad), Ferrocarril Pacco-Norte (Pacic-North Rail-
road), and Ferrocarril del Sureste (Southeast Railroad);
One interconnection railroad terminal called Terminal Ferroviaria del
Valle de Mxico (Valle de Mexico Railroad Terminal Ferrovalle);
and
4969 miles of track classied as short lines, including the Chiapas-
Mayab, Nacozari, Coahuila-Durango, Ferrocarril Chihuahua al Pacco
(Chihuahua-Pacic Railroad), and the TijuanaTecate rail line.
Concessions for these lines, together with rail equipment and
other assets, were granted to three government-owned companies
and shares of these lines were put up for sale by the SCT through a
public bidding process.
2.1. Bidding Process
The privatization process is summarized in the following table,
and Fig. 1 presents the map of the Mexican concessioned rail system
(Table 1).
The characteristics of each of the rail lines that were concessioned
are presented below.
2.2. Transportacion Ferroviaria Mexicana (TFM)
TFM was awarded with the concession to operate Ferrocarril del
Noreste (Northeastern Railroad Line) (Transportacin Ferroviaria
Mexicana, 1998). TFM was a joint venture between Transportacin
Martima Mexicana (TMM) and Kansas City Southern Industries
(KCSI), in which TMM and KCSI own 80% of TFM's shares and the
Mexican government retaining the remaining 20%. The purchase
included a 50-year concession, with the option of an additional
50-year extension, and included the transfer of all related equipment
Fig. 1. Map of the concessioned Mexican rail system.
Source: Developed by TTI with information from the SCT.
and other assets, as well as 25% of the shares of the Valle de Mexico
Railroad Terminal. TFM assumed complete operational control of
the Northeastern Railroad Line on June 24, 1997, after meeting its -
nancial obligations.
The northeastern railroad corridor is the most actively traveled
corridor in northern Mexico, linking the Mexico City metropolitan
area with Laredo, Texas, where approximately 60% of the total U.S.
Mexico railway trafc cargo crosses the border. TFM serves the
major Mexican industrial cities, maritime ports, and intermodal and
automobile manufacturing facilities along the northeastern railway
corridor. In 2005, KCSI bought off TMM, and TFM became Kansas
City Southern de Mexico (KCSM). KCSM also acquired the 20% of
the remaining shares that the Mexican government had as part of
the original transaction, owning 100% of the company.
2.3. Ferrocarril Mexicano (FERROMEX)
Ferromex was awarded the concession to operate the Ferrocarril
Pacco-Norte (North-Pacic Railroad), which also included the
Chihuahua-Pacic Railroad. Ferromex was formed initially as a con-
sortium of Grupo Mexico, Ingenieros Civiles Associados (ICA), and
Union Pacic Railroad (UPR), in which Grupo Mexico owned 74%,
and ICA and UP owned 13% each. On February 3, 1998, UP announced
it had agreed to purchase ICA's entire share in Ferromex, increasing
its ownership to 26% (Union Pacic Railroad, 1999). Ferromex' con-
cession included a 50-year concession, with the option of an addition-
al 50-year extension, the transfer of all related equipment and other
assets to Ferromex and 25% of the shares of the Valle de Mexico Ter-
minal Railroad, which allows access into Mexico City. Ferromex also
took control of the Nacozari line under a 30-year concession
(Ferrocarril Mexicano, 2010).
The concession of the Pacic-North Railroad network is the largest
in Mexico with 5253 track miles, or 50.5% of the nation's main line
network. It also has access to the major Mexican industrial cities
such as Mexico City, Guadalajara, Silao, Chihuahua, and Hermosillo;
 J.C. Villa, E. Sacristn-Roy / Research in Transportation Business & Management 6 (2013) 4550 47

Table 1
Summary of the Mexican rail privatization process.
Source: Texas Transportation Institute, 2001.

Concessionaires Assigned Line Length (miles) Concession date Approx. amount Concession
(million US$) period (years)

TFM, S.A. de C.V.a Northeast Railroad 2670 26/06/1997 $1400 50

Ferrosur, S.A. de C.V. Southeast Railroad 922 18/12/1998 $322 50
Ferrocarril Mexicano, S.A. de C.V.b Pacic-North Railroad 5253 19/02/1998 $527 50
Ferrocarril y Terminal del Valle de Mxico, Valley de Mexico 185 30/05/1998 50
S.A. de C.V. Terminal Railroad
Compaa de Ferrocarril Chiapas-Mayab, Chiapas-Mayab Railroad 966 26/08/1999 $15 30
S.A. de C.V.
Ferrocarril del Istmo de Tehuantepec, Istmo de Tehuantepec 129 19/12/1999 50
S.A. de C.V. Railroad
Lnea Coahuila-Durango, S.A. de C.V. Coahuila-Durango short line 607 14/11/1997 23 30
Government of the State of Baja California Tijuana-Tecate short line 45 01/04/2000 50
a
Bid included only 80% of the company stock.
b
Bid included the Chihuahua-Pacico and Ojinaga-Topolobampo short lines for US$32 million, and the Nacozari line for US$2 million.

maritime ports in the Pacic Ocean such as Manzanillo and Guaymas,
and Altamira in the Gulf of Mexico, as well as border ports of entry at
Ciudad Juarez-El Paso, Nogales, and Piedras Negras-Eagle Pass.
2.4. Ferrocarril del Sureste (Ferrosur)
Grupo Triturados Baslticos y Derivados (TRIBASA) won the con-
cession of the Southeast railroad and created Ferrosur (Ferrocarril
del Sureste), which includes 940 miles of rail line. Ferrosur's conces-
sion included the rail line between Mexico City and the ports of Vera-
cruz and Coatzacoalcos in the Gulf of Mxico. The concession of
Ferrosur included the option of acquiring the Chiapas-Mayab short
line; however TRIBASA decided not to acquire this short line, and
the government had to open the bid for a different concessionaire.
2.5. Valle de Mexico terminal railroad (Ferrovalle)
Ferrovalle is a terminal railroad company owned 25% by each of
the three trunk line concessionaires (Ferromex, KCSM, and Ferrosur),
and 25% by the Federal Government. Ferrovalle operates 185 miles of
track in the State of Mexico and Distrito Federal. Ferrovalle has an au-
tomatic classication dispatch system, intermodal (bonded and
non-bonded) and classication yards, rolling stock, wheels and loco-
motive repair shops; and trans-load and distribution centers. In June
2002, Ferrovalle started the operation of the Terminal Intermodal de
Pantaco, which serves Mexico City's metropolitan area. The Pantaco
terminal offers intermodal transportation services with bonded and
non-bonded areas, as well as container storage.
2.6. Chiapas-Mayab Railroad
The Chiapas-Mayab Railroad started operations in September 1999,
when the Genesee & Wyoming railroad obtained the concession to op-
erate the 966 miles of track, serving both coasts of the country (Pacic
Ocean and Gulf of Mexico). Chiapas-Mayab operates in the Gulf of Mex-
ico from Merida to Coatzacoalcos, and in the Pacic Coast from
Salina-Cruz to Ciudad Hidalgo in the border with Guatemala. It also
has 200 miles of trackage rights that link the port of Coatzacoalcos
with Salina-Cruz, allowing trafc to connect in the two routes, as well
as having a connection with Ferrosur in Coatzacoalcos, facilitating inter-
connection to the center and north of the country.
In July 2007, Genesee & Wyoming Inc. announced that the
Chiapas-Mayab Railroad would discontinue rail operations, as the op-
erations were affected by Hurricane Stan in 2005, destroying or dam-
aging 70 bridges and track, making 175 miles inoperable in the Pacic
Coast. Since then, the Pacic Coast line has not been repaired, and the
rail trafc has deteriorated. Currently the Istmo de Tehuantepec Rail-
road (FIT) operates the Chiapas-Mayab railroad. It was granted a
temporary operation permit, including providing local service, as
well as the trackage rights to any of the other rail concessionaries.
2.7. Istmo de Tehuantepec Railroad (FIT)
The Mexican government decided to keep control of the Trans-
Isthmus Rail Line that has the capacity of serving both the Gulf of
Mexico and the Pacic Ocean. The Tehuantepec Isthmus rail line
links the port of Salina Cruz in the Pacic Ocean with the port of
Coatzacoalcos in the Gulf of Mexico. The FIT is a state-owned, open-
access rail line owned by the Mexican Federal Government. The
company initiated operations March 3, 1999, and it does not have
any rolling stock or locomotive equipment.
2.8. Coahuila-Durango short line
The Coahuila-Durango Railroad is property of Grupo Peoles and
Group Acerero del Norte, under a 30-year concession. The operations
of this railway initiated in April 1998. The rail line of the Coahuila-
Durango Railroad has a total of 607 miles of track. The line is divided
in two segments, one in the states of Coahuila and Chihuahua, and
another line that extends in the states of Coahuila, Durango, and Zaca-
tecas. In addition, it has trackage rights on the Torren-Escaln and
Sabina-Ciudad Frontera line of Ferromex.
2.9. TijuanaTecate short line
In 1998, the Mexican government announced that Medios de
Comunicacin y Transporte de Tijuana, which had won a short line con-
cession, did not meet its nancial obligations to purchase the conces-
sion of the TijuanaTecate Line, and the concession was revoked. The
Federal Government through the SCT, assigned the TijuanaTecate
short line to the government of Baja, California, and has a length of
45 miles. The rail line crosses the municipalities of Tijuana and Tecate,
and connects in both ends the U.S. border. On September 1, 2000, the
Administrator of the TijuanaTecate (ADMICARGA), a Baja California
state owned company was enacted and currently operates the rail line.
3. Accomplishments after the privatization of the Mexican
railroad system
Fifteen years after the rst privatized rail line in Mexico started
operations, the Mexican rail system is operating more efciently
than in the pre-privatization period. Tonnage and ton-miles have in-
creases steadily after privatization, except for the 20082009 period,
due to global recession. Tons and ton-miles transported on the Mex-
ican railroad system grew at an annual average rate of 4.1% and
4.7%, respectively (Fig. 2).
48 J.C. Villa, E. Sacristn-Roy / Research in Transportation Business & Management 6 (2013) 4550
Fig. 2. Total tons transported by the Mexican railroad system 19902010.
Source: SCT, 2011.
Trafc volume has increased substantially in the Mexican railroad
system since privatization, while the number of employees has de-
creased substantially, even at a faster pace than tonnage growth.
The workforce was reduced at a 6.7% average annual rate between
1997 and 2010. The most drastic decrease was experienced between
1996 and 1999, when the rail work force was reduced by 62%, from
45,500 to 17,500. The following gure shows the evolution of the pro-
ductivity from 1990 to 2010 in the Mexican rail transportation sys-
tem. Productivity was calculated as ton-miles per employee (Fig. 3).
Investments in the Mexican railroad system in the last 15 years
since the privatization reached more than $9 billion. Two thirds of
this has been made by the private sector and the rest from the public
sector. Public sector investments include rail bypasses around metro-
politan areas where trains and automobiles create congestion and re-
duce train speeds. The private sector has invested in rolling stock
renewing the car eet. The locomotive eet has been reducing in
size but increasing in power (Fig. 4). The amount of Capital Expendi-
ture on track and equipment made by the private companies follow-
ing the privatization was almost double of that required originally in
the concession contracts.
3.1. FerromexFerrosur merger and Trackage Rights Agreement
In 2010, Ferromex acquired control of and merged with Ferrosur
through a purchase, creating Mexico's largest railway (Business
News Americas, 2010). In November 2005, the Comisin Federal de
Competencia COFECO (Federal Competition Commission) rejected
the purchase, after KCSM's appeal arguing that the purchase would
create a monopoly in Mexico.
Grupo Mxico and KCSM reached an agreement on the Ferromex
Ferrosur merger after a trackage and access rights deal was made. The
trackage rights agreement, which involved the cities of Guadalajara,
Monterrey, and Aguascalientes, settled a long-running dispute be-
tween Grupo Mxico and KCSM. The agreement set rates the compa-
nies must pay each other for interconnection and rights of way on
each other's lines and at terminals. The agreement also included in-
creased access by KCSM to the central states of Puebla and Tlaxcala,
and to the port of Veracruz (Progressive Railroading, 2010).
With the trackage rights deal, KCSM agreed to withdraw its objec-
tions to the merger of Ferrosur into Grupo Mxico's transport and in-
frastructure division, which includes Ferromex and the Federal Court
canceled COFECO's decision, approving the merger between Ferromex
and Ferrosur.
4. Findings and discussion
Some distinctive elements of the Mexican Rail Privatization were
developed by the government before the actual rst bid concessions
were launched. These are some of the key elements of the strategy
that the Mexican government developed.
4.1. No liabilities
4.1.1. Financial liabilities
The Mexican government bought off the nancial liabilities that
FNM had before privatization. In 1995, the Mexican Budget Secretary
absorbed US$480 million in debt that the FNM companies had
acquired. This released the new concessionaires from any liability,
making it possible for them to start operations with no previous debt.
4.1.2. Labor liabilities
The Mexican Government re-negotiated the contract with the
Railroad Union (STFRM) and was in close contact during the design
and implementation of the privatization process, consulting with
the STFRM and kept them informed. The agreement of the union
was fundamental and one of the key elements of the negotiation
was the creation of a trust fund to pay all the retirees, and funds
came from the concession payments received from the private sector
during the bidding process. The agreement also stated that the gov-
ernment would pay all worker seniority and terminate their con-
tracts, so that the new concessionaires would be free to re-hire
experienced railroad employees with no liabilities.
4.1.3. Environmental liabilities
The Mexican government conducted environmental audits to
identify the status of shops, terminals, fuel depots, and other facilities
that might have caused an environmental issue. This established the
base line from which private sector concessionaires would be respon-
sible for environmental aspects. The Mexican government was re-
sponsible to remediate any environmental issue caused before the
concession started operation.
4.2. Freedom to establish rates
Even though rail rates were liberated in 1993, they were kept very
low and did not reect market reality. In 1995, the government in-
creased rates and discontinued some discounts so that the rail con-
cessionaires were free to set rates based on market situation. Under
the terms of the concession, Mexican rail concessionaires must regis-
ter their prices with the SCT, and the Secretary may intervene if no
effective competition exists. So far there have been no major shipper
complaints and prices have increased compared to pre-privatization;
however since services and quality have improved, it is difcult to
perceive a generalized negative response (Campos, 2001).
There are other issues that the Mexican Rail Concession process
still needs to resolve.
 J.C. Villa, E. Sacristn-Roy / Research in Transportation Business & Management 6 (2013) 4550 49

4.00

Productivity Index (Ton-miles per Employee

3.50

3.00

2.50

2.00

1.50

1.00

0.50

Fig. 3. Productivity index (ton-miles per employee).

Source: SCT, 2011.

The Chiapas-Mayab line is currently being operated by the FIT. The
Mexican Government is still negotiating with Genesee and Wyoming
a settlement for the initial concession that was granted to the US rail
company. Genesee and Wyoming is discussing with Viabilis Holding
the process to transfer all the rights of the concession. The Mexican
government cannot proceed with a new concession of this line until
this negotiation is nalized. In the meantime, the Mexican govern-
ment is investing in the reconstruction of the Pacic Coast line, partic-
ularly in the state of Chiapas where several bridges need to be
replaced. The 2011 budget that the Government had for reconstruc-
tion of the line was approximately $20 million (SCT, 2012).
Other issues that still remain to be resolved include the formaliza-
tion by the federal government of the use of radio frequencies for
communication. The concessionaires are using the frequencies that
belonged to FNM; however there is still no ofcial contract for their
use.
A trackage rights agreement was agreed between KCSM and
Ferromex in February 9, 2010, and rates were established for the
period starting from January 1, 2009. However, rates payable for
these services for the period between 1998 and December 31, 2008,
are still not resolved. If KCSM cannot reach an agreement with
Ferromex for rates applicable for services prior to January 1, 2009,
which are not subject to the Trackage Rights Agreement from
February 2010, the SCT is entitled to set the rates in accordance
with Mexican law and regulations. KCSM and Ferromex both initiated
administrative proceedings seeking a determination by the SCT of the
rates that KCSM and Ferromex should pay each other in connection
with the services. The SCT issued rulings in 2002 and 2008 setting
the rates for the services, and both KCSM and Ferromex challenged
these rulings (Kansas City Southern de Mexico, 2012).
Other elements that are not directly related with the privatization
process, but impact the rail operation system include increasing
speeds through urban areas and security issues along the rail lines.
As rail trafc increased after the privatization, urban congestion and
conicts with automobiles have increased. The current authorized
maximum speed for the railroads is 10 mph in urban areas. The fed-
eral government is investing in grade separation, as well as several
bypasses in larger urban areas. These actions will increase overall
speed and reliability for the rail service.
Additionally there needs to be a security plan to avoid robberies of
slow moving trains. The concessionaires are working with the federal
and local governments to implement security actions at hot-spots.
These actions also include stopping Central American immigrants
from jumping on northbound trains to try to reach the U.S./Mexican
border. This not only affects operation, but it is a very serious safety
issue (Douglas, 2012).

5. Implications for managerial practice

The Mexican Rail Privatization process could be considered relative-

ly successful, particularly compared to other privatization processes in
Mexico and other counties around the world. For example, the roadway
privatization process that Mexico launched in 1990, was one of the rst
ones in Latin America, but had poor results, with the Mexican govern-
ment having to rescue most the concessioned roadways. After analyzing
elements of success and areas of improvement from other rail, road,
and port privatization processes in Mexico and around the world, the
Mexican government developed a detailed strategy and plan that pro-
vided potential investors with a clear set of rules that made the Mexican
rail system attractive. Modications to the Constitution, changes and
creation of laws and regulations, as well as negotiations with the rail
workers unions were some of the elements that made the rail privatiza-
tion process a major government accomplishment.
Fig. 4. Number of locomotive units, and average horse power per unit for the period of
As mentioned earlier in this paper, there are areas that could have
19902010. been enhanced, such as that of trackage rights denition. The process
Source: Asociacin Mexicana de Ferrocarriles, 2011. was not clear and assumed that the concessionaires will reach
50 J.C. Villa, E. Sacristn-Roy / Research in Transportation Business & Management 6 (2013) 4550
agreements among themselves. This did not go as planned and led to
conicts that brought inefciencies to the overall rail system. Notwith-
standing this issue, the process that was followed in Mexico could be
useful to other transportation sector policy developers who are seeking
to improve transportation via privatization.
5.1. Contribution to scholarly knowledge
This research has identied important elements that were devel-
oped and implemented during the Mexican Rail Privatization process.
Other research aspects that were not part of this paper's objective, but
could enrich the analysis include identifying the impact of the rail
privatization on the rail passenger movement in the country. A total
factor productivity analysis and a detailed decomposition of the ef-
ciency gains of the current rail operators, and the overall transporta-
tion system could complement this initial research.
6. Conclusions
The Mexican Rail Privatization led to improvement in the rail ser-
vice in Mexico, compared to the pre-privatization operation. The ef-
fort carried out by the federal government in preparing a robust
framework was a key element for the relative success of the process.
A team was formed that worked on analyzing previous experiences
around the world and consulting with key stakeholders in the pro-
cess, mainly the rail workers unions and potential investors. The re-
sult of this process was a very clear set of rules that avoided
uncertainty and distributed risks among public and private sector.
The legal reforms that were made before the concession process
started attracted private sector investment, and most importantly
foreign investment that enlarged the group of potential sources,
given the substantial investment levels that were requires.
Practicing managers involved in freight transportation policy de-
velopment could learn from the experience of the Mexican rail privat-
ization process, identifying positive elements such as the preparation
of the legal and institutional framework, creating a liability-free envi-
ronment, and allowing the concessionaires the freedom to establish
rates based on market conditions that encouraged private investors
to participate in the concession of the main trunk lines, as well as
View publication stats
issues that were not resolved in the original process, such as the
trackage right agreement among rail concessionaires.
Since the privatization 15 years ago, the Mexican railroads have
experienced a renaissance very similar to what happened in the U.S.
after the Stagger's Act (Sacristan-Roy, 2012). Although the railroads
in Mexico have come a long way since the privatization, the challenge
is to reach operation characteristics comparable to U.S. and Canadian
railroads thorough continued improvements in capacity, efciency,
and productivity.
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