Riding In on a Rail : Mexico’s Track Rights: Hot Ticket in U.S., Elsewhere

They might not want the whole Mexican railroad, which has some wretched stretches of track. But despite the peso crisis and Mexico’s political turmoil, U.S. and foreign railroad companies will be standing in line when the government of Ernesto Zedillo begins offering rights to his country’s history-rich rail system.

Long in the works, a constitutional change permitting the sale of railroad concessions was approved last month by the congress in Mexico, which urgently needs the cash that the Ferrocarriles Nacionales de Mexico might fetch on the auction block. The hard-pressed government also wants to shed an inefficient system that loses millions of dollars annually.

The sale of rights to operate the railroad--combined with the disposal of federal ports, power plants and petrochemical assets under privatization moves being demanded by foreign investors in return for financial aid--could bring more than $10 billion, according to Lawrence Goodman, an economist with Salomon Bros. in New York.

Critical issues, such as whether Mexico will require buyers to take on money-losing sections of the 15,000-mile network as well as the high-volume main lines, are yet to be addressed. But pieces of the railroad could be auctioned off this year.

“We think there is a great growth opportunity there,” said John Bromley, spokesman for Omaha-based Union Pacific Railroad, the line now doing the most freight business with Mexico. “We are interested in specific pieces of it, not the whole thing. If and when there is an opportunity to bid on those pieces, we would be interested.”

Bob Lowe, general director of Santa Fe Railway’s Mexican marketing operation, is a bit more reserved about whether or not Santa Fe would bid. “Not knowing what they are asking us to bid on, we don’t know whether we would be interested or not,” he said.

Other countries are also expected to bid. Indeed, Canadian, French and Spanish firms outbid American companies for the rights to operate Mexico’s railroad maintenance yards in 1992, so an international bidding war is not out of the question.

“It will be competitive,” one railroad executive predicted.

The reason is foreign trade.

Railroad executives say Mexico’s positives outweigh the negatives, especially now that the North American Free Trade Agreement has strengthened trade. U.S. railroads have enjoyed big increases in freight traffic with Mexico over the last six years as Mexico has lowered trade barriers.

And the recent devaluation of the peso has pluses to offset the minuses for any transporter whose routes go north as well as south: It has made Mexico’s exports cheaper and thus more attractive in the United States. Thus, railroad executives expect the growth to continue.

For competitive reasons, U.S. railroads are understandably coy about their specific intentions. But there is good reason to be cautious.

Southern Pacific, Union Pacific, Santa Fe and other potential bidders make it clear they don’t want the milk runs and out-of-the-way passenger lines--they covet the corridors that link Mexico’s giant auto plants, agricultural concerns and population centers with Laredo, Nogales, Calexico and other “gateways” that they already serve along the U.S.--Mexico border.

“There are key routes connecting the Gulf of Mexico and the U.S. border that would make ideal candidates for privatization,” said John A. Kirchner, professor of geography and transportation at Cal State Los Angeles and author of a book on the history of Mexican railroads.

But a large part of the Mexican system--lines that serve the poorer regions of Durango, Chiapas and Oaxaca states, for example--are unlikely to make money under any scenario, Kirchner said. Unless the government forces bidders to take them on, those routes may be abandoned in a privatization.

Huge investments will be required to bring Mexican lines up to U.S. standards. Trackage along major Mexican corridors is in good shape, but bidders will have to invest heavily in new sidings, electronics, car location systems, and “hot box detectors” that find faulty equipment, said Santa Fe’s Lowe.

Another problem: The Mexican system is short of locomotives, which cost nearly $2 million each. Union Pacific currently leases 34 of them to Mexico.

And Mexican railroads are grossly inefficient. The national system has three times the employees of Southern Pacific, with roughly the same track mileage. So a new owner would have to play villain and immediately slash payroll.

The ongoing privatization of Argentina’s railroad, a much larger system, has cost the jobs of 130,000 workers, or 60% of the work force. Argentina also discontinued 80% of its passenger service when it sold its rail lines to private interests.

U.S. bidders in particular--who built some of Mexico’s railroads to begin with during the 1800s--will have to overlook some old unpleasantries.

During Mexico’s 1910 revolution, guerrilla leader Pancho Villa and other rebels commandeered U.S.-owned trains to get their troops to Mexico City. And U.S. railroads were finally kicked out of Mexico, along with U.S. oil companies, after President Lazaro Cardenas nationalized the lines for good in the 1930s.

“The conditions are far different now,” said Bob Thruston, managing director of the Mexico Group for Southern Pacific in Houston. “The country is a developing nation and is producing goods that serve the world. It’s just a totally different situation.”

The nationalizations of Southern Pacific’s line and others were not that painful because the U.S. railroads were losing money on their Mexican operations, Kirchner said.

“The U.S. lines didn’t lose anything. They were actually paid off,” Kirchner said.

Today, adding Mexican lines would bolster U.S. railroads’ ties to manufacturers, container cargo shippers and agricultural producers that already move huge quantities of freight in and out of Mexico.

“If you look at North America as one big production basin and Mexico as a place where more of that production is taking place, then sure, a Ford or a Chrysler would be delighted to see U.S. railroads operating there,” said Andras Petery, a rail analyst with Morgan Stanley in New York.

Union Pacific and Southern Pacific say Mexican border traffic is among their fastest growing sectors. They and others lust after the four principal north-south lines that connect Mexico’s industrial cities with the U.S. border. Rail shipments of Mexican auto parts and container cargo have doubled since 1989, and most of it moves up and down those routes.

They ship consumer goods to cities such as Monterrey, Mexico City and Guadalajara and finished autos and components to and from giant assembly plants operated by Ford in Hermosillo, by Nissan in Aguas Calientes and by General Motors south of Monterrey.

Experts such as Goodman of Salomon Bros. say “the sooner the better” on rail privatization. He points out that Mexico is competing with several other Latin American countries rushing to privatize state-owned industries to raise cash.

“There’s going to be steep competition for capital in 1995,” Goodman said.

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Connecting With Mexico

There is a north-south orientation to the 15,000-mile Mexican national railroad for the simple reason that U.S. railroads helped build much of the system. Shown is how the Ferrocarriles Nacionales de Mexico would integrate with the routes of Southern Pacific, one of the potential bidders for the system.