Mexican railroads face a long, uphill climb
One year after privatization of Mexico's rail network, shippers report that although service has improved, the rails still are a long way from meeting their expectations.
By Toby B. Gooley -- Logistics Management, 5/1/1999
The breakup and privatization of Mexico's state-owned railroad, Ferrocarriles Nacionales Mexicanos (FNM), was a watershed event in that country's efforts to encourage economic growth. Eagerly anticipated by shippers, rail privatization promised to bring U.S.-style efficiencies and improved service to Mexico.
To achieve that goal, the Mexican government three years ago began splitting Mexico's former rail monopoly into regional carriers and short lines. Since then, the government has auctioned off 50-year operating concessions for three major regional railroads, a number of short lines, and a neutral terminal and intermodal operation that serves all railroads within Mexico City.
The winning bidders for the three major railroads include:
* Transportación Ferroviaria Mexicana (TFM), a joint venture of Kansas City Southern Industries and Transportación Marítima Mexicana;
* Ferrocarril Mexicano (Ferromex), a joint venture of Grupo México and Union Pacific; and
* Ferrocarril del Sureste (FerroSur), managed by Grupo Tribasa.
Each of these railroads serves a particular region that includes one or more of Mexico's largest consuming and manufacturing centers, and has access to at least one of that country's major seaports. (See accompanying map.)
Now, less than one year after the third major concession was awarded, the new railroads and their shipper customers are assessing how much progress has--or hasn't--been made. At the Transporte Internacional '99 conference held in Monterrey, Mexico, in February, carriers and shippers offered their appraisals of where they stood. Here's what they had to say.
Significant Investments
Almost immediately after taking over, the new operators began to invest hefty sums to improve infrastructure, operational procedures, and information systems. Traffic volumes and revenues have been rising steadily, and from top management's perspective, the three major railroads already have begun to fulfill their economic promise. Even as they proudly point to their achievements, though, railroad executives acknowledge that problems remain.
* TFM: This year, TFM plans to invest $230 million in infrastructure and service improvements, according to Juan Ignacio López, the railroad's executive vice president, sales and marketing. One of TFM's most important projects is the construction of new intermodal yards in Laredo, Texas, and Nuevo Laredo, Mexico, through a joint program with sister company Texas Mexican Railway. TFM also is focusing on information-management projects, including the installation of automatic-identification tag readers and the creation of a centralized train-dispatch system on its heavily used Monterrey-Nuevo Laredo line.
López said a top priority was boosting customer-service levels to match those in the United States and Canada. Last year, TFM introduced a 24-hour, 365-day customer-service center. The railroad also realigned its customer-service organization by industry: agriculture, intermodal/automotive, chemicals and petroleum, and metals and minerals.
After less than two years in operation, TFM has recorded some important service improvements, López said. Among the achievements he cited were an increase in daily capacity at Nuevo Laredo/Laredo from 1,300 to more than 3,000 railcars; a 36-percent reduction in transit times between Mexico City and Nuevo Laredo; a 44-percent increase in average train speed; an 85-percent on-time record for positioning empty railcars; and an 80-percent reduction in cargo thefts. The percentage of cars sitting idle for more than 48 hours, moreover, dropped from 40 percent in 1997 to about 5 percent in 1998, he added.
As impressive as those achievements are, problems still remain, López acknowledged. "We still lack some reliability in service and in delivery times," he said. The railroad also continues to suffer from a shortage of certain types of equipment, despite having purchased 150 new locomotives and more than 4,000 new railcars since 1997. TFM plans to alleviate that shortage by using information technologies and better equipment-management processes.
* Ferromex: With more than 4,500 miles of track, Ferromex is the largest railroad in Mexico. Thanks to its operating alliance with FerroSur and trackage rights shared with TFM, Ferromex enjoys access to virtually all of Mexico's major consumer and industrial markets, six Mexican seaports, and five U.S. border crossings.
In 1999, Ferromex will invest $218 million in its operations; 60 percent will pay for new equipment, 21 percent will be spent on infrastructure improvements, 14 percent on telecommunications and signals, and the balance for administrative, environmental, and safety needs, according to Juan Manuel Correa, the railroad's executive vice president, marketing and sales. Other projects slated for this year include increasing intermodal- and railcar-handling capacity at the ports of Altamira and Manzanillo; improving security; modernizing office, terminal, and warehouse space; and implementing new business-management software.
As is true for all of Mexico's railroads, Ferromex is focusing not only on upgrading basic infrastructure, but also on introducing better technology and expanding automation in such areas as car tracking and tracing, equipment maintenance, dispatch, and telecommunications with an eye toward improving intermodal capabilities. All those changes, Correa said, were designed to allow Ferromex to compete in a market that will be shaped by shippers' needs. As globalization and competition based on total distribution costs and speed to market exert pressure on shippers, it will in turn influence shippers' demands on the railroads, he noted. "We believe that intermodalism is best able to respond to those economic pressures," he said.
Ferromex has been consulting with large customers to identify service problems and find ways to improve service. Although reliability is most important to some customers, Correa said, others are very focused on pricing and are not looking at railroads as long-term partners. To make the kind of improvements customers want, however, long-term thinking and commitments will be necessary, he noted.
* FerroSur: In operation for just six months, Ferrosur is the new kid on the block and the smallest of the three major rail concessions in terms of trackage. The railroad primarily handles automotive, agricultural, mineral, and petrochemical shipments via the ports of Veracruz and Coatzacoalcos. Future plans include capturing more intermodal business by increasing service frequency and capacity to those ports and concluding new interline agreements with Ferromex and TFM, said Frantz Guns Devos, FerroSur's director general.
Although it's too soon to quantify improvements, FerroSur already can claim some small victories, Guns said. The new railroad was off to an auspicious start. After a "cordial" renegotiation of its labor contracts, the transition to a privately owned operation went so smoothly that there were no service interruptions or delays, he reports. The railroad also has contracted with Canadian Pacific to provide technical assistance in such areas as equipment management, and that has helped FerroSur achieve excellent utilization rates for grain and other bulk railcars.
FerroSur has big plans to explore new markets, develop alliances with U.S. and Canadian railroads, and lure more traffic away from trucks. Before that can happen, though, the railroad must address the poor condition of both the equipment and the infrastructure it inherited from FNM, according to Guns. "[FerroSur's] potential is enormous ... but the situation today is fraught with hazards," he said.
Shippers Speak Out
Although the railroad executives presented a mostly optimistic picture, their shipper customers were less upbeat. In a conference session that was highly unusual by Mexican standards, transportation managers for two of Mexico's largest shippers presented their own "report card" on the privatized railroads' performance.
CEMEX, Mexico's largest cement producer, is a sophisticated user of railroad services, said Victor Mejía, director of transportation. All 17 of the company's plants are on rail lines with their own sidings, and volume is high enough to allow CEMEX to form its own unit trains. The company electronically communicates car orders, bookings, documentation, and other information with TFM and Union Pacific.
As rail privatization proceeded, Mejía said, his company suffered interruptions in service, equipment shortages, and communication problems caused by software incompatibilities. CEMEX was forced in many cases to divert shipments to barges and more expensive trucks, he said.
Those problems have been largely resolved, but significant problems remain, Mejía asserted. "There is uncertainty in pricing. Rates keep going up, plus there are pricing conflicts between tariffs for interlined traffic," he said. "The railroads also keep changing their administrative and payment procedures. ... We don't get notice of when the rates will go up, so we can't plan long term."
Interlined traffic in general is a problem, he added. Differences in information systems between the railroads, for example, make it difficult to keep information flowing smoothly to destination. Mejía also criticized the railroads' failure to make full use of authorized trackage rights.
Arturo Cháves, corporate traffic manager for Mabé, one of Mexico's largest manufacturers of household appliances, offered similar criticisms. Mabé relies heavily on intermodal service and does business with all three of the major Mexican railroads as well as with their U.S. partners. In a candid presentation, Cháves cited the strengths and weaknesses of each railroad individually. Common to all three, he said, was poor communication both internally and between railroads, slow response to customer requests, and insufficient attention to customers' needs. Inexperienced personnel, equipment shortages, and unexpected rate increases by TFM and Ferromex also topped his list of complaints.
Cháves praised the privatized carriers for making great strides in other areas. He singled out Ferromex and TFM as having greatly improved transit times and customer service; he also praised TFM for providing equipment when promised and achieving a "radical" reduction in cargo thefts. Despite FerroSur's youth, he added, the railroad deserves high marks for being very receptive to Mabé's requests. "That's very important to us," Cháves noted.
Both shippers had some advice for the railroads. In addition to improving equipment availability, transit times, and internal and external communications, they said, Mexico's railroads should turn their attention to helping shippers meet their customers' demands.
What would they like the railroads to do for them? Cháves' and Mejía's wish list included developing new spurs; creating mutually beneficial contracts that locked in pricing for a predictable period; proactively communicating with shippers and other railroads; optimizing interlined traffic; offering alternative routings; and being more oriented toward customer service at all levels of their organizations.
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