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Mar. 31, 2014

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SURFACE & DOMESTIC TRANSPORTATION TRUCKING | RAIL | INTERMODAL | AIR & EXPEDITED | DISTRIBUTION 38 THE JOURNAL OF COMMERCE www.joc.com MARCH 31.2014 By Mark Szakonyi CHANGE IS COMING to the Mexican freight rail industry, but it's too soon to determine whether the push for reform will lead to a major overhaul or something much more moderate. Shippers will get a better idea in the coming weeks as the Mexican Senate is expected to vote on a rail-related bill after the lower chamber in early February passed legislation that would require the two rail concession holders to share their lines with third parties. Kansas City Southern de México and Groupo México, operators of Ferromex and Ferrosur railroads, say that striking their concession agreements, which last for another 14 years, would hamper their operations and decrease investment. The government granted the duo 50-year concessions to run their businesses, but the railroads' rights to be sole operators of their respective lines last for only 30 years. The striking of contracts also could send harmful signals to foreign investors, just as President Enrique Peña Nieto tries to build on the country's success in attracting foreign direct investment. Rail reform proponents contend that jump-starting what they see as lagging rail investment and lowering freight rates is worth the risk. The push comes as Mexico enjoys a manufacturing boom. Accessibility to U.S. and Canadian markets, rising transporta- tion costs and competitive labor costs with China have spurred shippers to open or expand factories in Mexico. KCS, which has the only U.S.-Mexico cross-border network, and other Mexican railroads have ridden the wave that started with automobile manufac- turing and aerospace and has expanded to white goods and apparel. Two factors appear to be driving the Mexican rail reform push. Since taking office in 2012, Nieto has sought economic reforms, overhauled the country's tax code, opened the fiercely government-controlled energy sector and made some inroads in breaking the nation's telecommunications monopoly. That many rail shippers believe they don't have a vehicle to challenge rail rates also appears to be fueling rail reform momentum. Unlike in the U.S., where ship- pers can gain some rate relief via the Surface Transportation Board, Mexican railroads just give authorities their lowest and highest tariffs, said Marco Avila, CEO of EFENSA, a Mexican rail repair and maintenance com- pany and consulting firm. What shape the proposed reform takes depends largely on which side is most successful in lobbying. U.S. Secretary of Commerce Penny Pritzker reportedly raised concerns about legislation by Mexico's House during a February trade mission to Mexico, in which KCS executives participated. Union Pacific Railway told Nieto in a letter that it would curb investment in Ferromex, of which it owns a quarter, if the concessions were broken, according to Reuters. Despite the pressure, Avila told the JOC he thinks the major elements of the House bill will become law, because Nieto gave the bill his blessing. The head of the National Steel Chamber and friend of the president convinced Nieto to get on board with the reform bill, according to The Economist. Avila expects the government will strike the exclusivity element of the carriers' conces- sion agreements and allow shippers to run their own trains on the networks. "Most of the users don't know how to run a railroad, and the railroads will do anything they can to obstruct service," Avila said. The Senate will pass a less aggressive version of the House's bill that will maintain the concession agreements and could cre- ate some safeguards for shippers that have access to only one rail line, said Erik Marke- set, a Mexico City-based logistics consultant and principal and founder of logistics con- sulting firm Tsol who has spoken with an unidentified senator involved in the debate. Markeset told the JOC he has heard the majority of House deputies didn't even read the legislation and were simply attracted to the mention of reform in the bill's executive summary. "I think the Senate is going to be reasonable," Markeset said. KCSM President Joe Zozaya told Bloom- berg he is optimistic the Senate will reject the House's plan to strike the concession agreements and pass language that would increase connections between the carriers. The presentation of a study — conducted by the Organization for Economic Coop- eration and Development in collaboration with Mexico's Ministry of Transport — to a Senate committee supported the railroads' argument against striking the concessions. Between 2007 and 2012, the two conces- MEXICO TAKES A NEW TRACK With manufacturing booming, the country is pressing for more rail competition. Will it be a major overhaul?

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