Upgrades and new systems boost Mexico's transit and trade capacity

Mexico’s transport sector is undergoing major expansion, providing increased investment opportunities. Among the ongoing projects is a $13bn international airport in Mexico City (Nuevo Aeropuerto Internacional de la Ciudad de México, NAICM), which was originally slated for completion in 2020 but is likely to be delayed until 2023. Work is also under way on a new urban metro system in the capital, and upgrades to the railway and road system. In addition, freight capacity has been expanded at the Pacific seaports of Lázaro Cárdenas and Manzanillo, and major expansion projects are being undertaken at the port of Veracruz.

Progress Made

Between late 2012 and early 2018 total investment in infrastructure, from both the public and private sector, amounted to MXN7.7trn ($416.1bn), according to the Ministry of Communication and Transportation (Secretaría de Comunicaciones y Transportes, SCT), equivalent to an average of roughly 5.7% of GDP per year. Resources were allocated to the significant upgrade of railways, roads and ports. This investment, which took place under the administration of President Enrique Peña Nieto, represents an 87.8% increase on the MXN4.1trn ($221.6bn) invested by the previous government, which was in office from 2006 to 2012. The investments were carried out during the implementation of the 2014-18 National Infrastructure Programme (Programa Nacional de Infraestructura, PNI), initiated by the Peña Nieto administration. However, with the new government, headed by Andrés Manuel López Obrador of the National Regeneration Movement, preparing to take office in December 2018, it remains to be seen what direction future policy will take in relation to transport and infrastructure projects.

Railways

The rail system has an operational network of around 18,000 km, making it the 18th longest in the world. Under the Peña Nieto administration, public and private investment in the rail network totalled MXN113bn ($6.1bn), with rail freight transport increasing by 18.9% since 2012 to 126.9m tonnes in 2017, according to the Regulatory Agency for Rail Transport (Agencia Reguladora del Transporte Ferroviario, ARTF). Meanwhile, foreign trade transported by rail increased 59.6% over the same period, with 79.8m tonnes carried in 2017. Average annual investment in rail infrastructure totals around $400m, Iker de Luisa Plazas, director-general of the Mexican Association of Railroads, told OBG. This capital has been largely directed towards adding sidings, which enable the frequency of freight trains to increase, as well as efforts to expand yards, undertake track maintenance and purchase new rolling stock.

Rail Pipeline

Investment in the rail network is set to have a substantial impact on passenger movement on the 57.7-km Mexico City-to-Toluca train project, scheduled to open in mid-2019. Upon completion, the line, which will be the first high-speed passenger link in Latin America, will have capacity to carry up to 230,000 passengers a day and travel at speeds of 160 km per hour. The total value of the project is expected to be MXN51.4bn ($2.8bn), according to the SCT. The service will connect to Mexico City’s Observatorio metro station, from where a high-speed train link to the NAICM is also planned. The intercity train will be the first intercity service in operation, apart from two tourist trains, since passenger services were discontinued in 1997 after the privatisation of national rail operator Ferrocarriles Nacionales de México.

After the liberalisation of the country’s rail system, concessions for the operation of the freight rail network were awarded to Ferromex and Kansas City Southern de México (KCSM) in the two main northern areas, while Ferrosur won the southern region. Ferromex and Ferrosur operate as separate companies, but the Grupo México mining and rail conglomerate owns them both. Ferromex’s concession was extended to 2032, following an agreement between the firm and the SCT in October 2016. Ferrovalle, which is owned by Grupo México and KCSM, operates a line in and around Mexico City.

In exchange for its concession, Ferromex agreed to invest MXN2bn ($108.1m) to complete a rail bypass in the city of Celaya, located in the Bajío region – a key manufacturing centre in the state of Guanajuato. The 45-km line, which would bypass the city of Celaya, is set for completion in the second half of 2018. In late March 2018 the SCT amended KCSM’s concession to include the Mexican section of the Brownsville-Matamoros rail bypass in the state of Tamaulipas. The bypass, opened in 2015, was the first new rail crossing built between the US and Mexico since 1910, and was designed to re-route freight traffic from the populated urban centres on the border and expand transport capacity. In addition, KCSM announced in August 2017 that it had signed a memorandum of understanding (MoU) with Bulkmatic Transport Company to found a joint venture to construct a liquid fuels facility in Salinas Victoria in Nuevo León. As part of the MoU, KCSM is expected to provide the transport links to facilitate the import of fuels from the US, and the two firms plan to invest $50m in the project, with construction scheduled to begin in mid-2018. The deal is one of 25 fuel storage terminals planned by companies including Lenovo, Howard Energy Partners and Windstar. These developments are significant given that 31% of the country’s rail network was used for the transportation of hydrocarbons in 2017, according to the Ministry of Energy.

Security

In spite of increased investment and growing capacity in the rail freight network, challenges remain regarding security. According to the ARTF, a total of 1752 incidents of thefts and robberies were reported on freight trains in 2017, a 10.2% increase on the previous year.

Veracruz recorded the highest number of incidents, with 276, followed by Puebla (230), Guanajuato (196) and Querétaro (122). Furthermore, this figure appears to be rising, with 852 such incidents reported in the first three months of 2018, a 582% year-on-year (y-o-y) increase. Nonetheless, the rail operators, the ARTF and the relevant government authorities are undertaking coordinated action to address this challenge. A unified surveillance operation is being implemented, and the current regulations for railway services are under review.

Public Transport

Investment opportunities in inner-city transport networks are also arising, with expansion work proposed on a number of public transport projects nationwide. Mexico City’s metro system (Sistema de Transporte Colectivo, STC) is the second largest in North America, but is operating over capacity and requires expansion. Since 1967, 226.4 km of metro line have been built in Mexico City, with the most recent addition to Line 12 of the STC opening in 2012. The STC is expected to require an additional 50 km of track to meet rising demand, with a number of plans under discussion by the city’s authorities. Mexico City also has a suburban rail network, as well as a bus rapid transit system with seven lines – one of which began operations in March 2018 with a fleet of red double decker London buses.

Further afield, the state of Nuevo León granted eight contracts in July 2017 for the construction of eight new stations of Line 3 of the Monterrey Metro system. With a total value of MXN479.3m ($25.9m), the new line should be completed by late 2018. Furthermore, a 21-km third line of the Guadalajara light rail system is earmarked for completion in late 2018.

Balancing Priorities

Even as increased urbanisation and population growth are driving investment in the country’s metro systems, there is currently no equivalent progress being made regarding the intercity passenger trains project. Indeed, in January 2015 a passenger train service linking Playa del Carmen in Quintana Roo state to Yucatán state capital Mérida, known as the Trans-Peninsula route, was cancelled due to budget restrictions. And while Leopoldo Domínguez Armengual, secretary of tourism for the state of Veracruz, informed local media in October 2017 that he had received signs of interest from companies seeking to revive similarly shelved plans for a Veracruz-to-Mexico City passenger train, Victor Flores Morales, leader of the railway workers’ union, stated in January 2018 that the service was infeasible given that passenger traffic would be impeded by a high frequency of freight traffic on the line, requiring the construction of a new railway.

Roads

Despite the growth in freight and urban rail traffic, roads remain the dominant mode of transport in Mexico. Indeed, the road freight transport segment contributes 3.1% of GDP and moves around 80% of freight in the country. Some 850,000 trucks are in operation, carrying 536m tonnes of cargo per year, according to the SCT. Furthermore, around 11.5m freight crossings took place between the US and Mexican border in 2017 alone.

As in other segments of the broader transport sector, the road network is currently undergoing expansion, with 18 new motorways slated to open in 2018. These include the Peñón-Texcoco road, which will serve as the main access route to Mexico City from the NAICM; and the 283-km Mexico City-Tuxpan motorway, the culmination of 15 years of work. Upon completion the new motorway will accelerate access to the Gulf of Mexico coast, while reducing the journey time for freight transport between the port of Veracruz and the country’s central regions, such as the Bajío manufacturing area, to 2.5 hours.

The new roads, with a combined investment value of MXN14.4bn ($778.2m), will add 589 km to the national road network, according to the SCT. Furthermore, in late March 2018 the government of the state of Guanajuato awarded a contract to build and operate the Silao bypass to México Proyectos y Desarrollos, an infrastructure subsidiary of Grupo México. However, the project provoked some controversy, as the contract was awarded without first undertaking a public tender. In total, there were 21 motorway projects under construction as of mid-2018, and four in the bidding process, with the government having announced 100 projects as part of the PNI, using a mixture of concession and public-private partnership (PPP) models. Since 2016 Mexico has used PPPs to fund maintenance projects on its 40,000 km, non-toll motorway network. One project for which a tender process is still pending is the Tuxpan-Tampico motorway, which is set to open up a fast coastal connection between two of north-eastern Mexico’s ports.

Forks in the Road

While a number of new roads are set to come on-stream in the near term, ongoing political discussions have the potential to impact international trade flows, and therefore the road network, given the renegotiation of North American Free Trade Agreement (NAFTA), which began in August 2017. US President Donald Trump’s protectionist agenda, which favours US truck drivers, could potentially result in an agreement to prohibit Mexican road transport companies from delivering goods beyond the immediate border with the US.

Another persistent concern is motorway robbery, with reported incidents of assaults on trucks increasing by 23% in 2017 compared with the previous year. A total of 7286 incidents were reported in 2017, of which 84% were violent, according to National Public Security System, the federal authority responsible for the coordination of public security. These issues have resulted in significant increases in the cost of insurance policies for road haulage companies, with average insurance premium rising by 150% according to local media reports. In light of these issues, Elías Dip Ramé, president of the National Confederation of Mexican Carriers, called on the government to build more secure official stopping points for commercial trucks, given that the majority of assaults take place when trucks are parked on motorways.

Airports

The air transport segment is also experiencing marked growth and an influx of public and private investment. The year 2017 marked the sixth consecutive year of growth for the segment, and the strongest increase since 2007. Passenger numbers were up 8.5%, with approximately 136.7m recorded, according to the SCT. This increase is the result of both rising domestic air travel and an increasing number of foreign tourists, bolstered by the entry of lowcost airlines. Until late 2016 regulations restricted the number of carriers on many US-Mexico routes, limiting competition and inflating prices. When these rules were lifted, a number of low-cost carriers increased their presence significantly, including US firm JetBlue and Mexico’s Volaris and VivaAerobus.

A total of 90m domestic air passengers and 46.7m international arrivals were recorded in 2017, with 823,000 flights registered in Mexican airspace, according to figures from the SCT and the National Air Transport Chamber. Furthermore, this expansion appears set to continue, with total passenger figures up 8.1% y-o-y in the first four months of 2018. Rising passenger traffic spurred the need to build Mexico City’s new international airport NAICM, which is scheduled to open in 2020. The current facility is operating above capacity, having served 44.5m passengers in 2017, a 7.5% increase on the previous year, despite being designed to handle 32m. This growth is accelerating, with passenger figures at the airport increasing by 13.2% y-o-y in the first four months of 2018. Speaking at a conference in Santiago de Chile in April 2018, Alexandre de Juniac, director-general and CEO of the International Air Transport Association, emphasised the importance of the new airport, stating that Mexico City’s existing aviation infrastructure constitutes a critical bottleneck for travel and trade.

The Regions

Regional airports have also experienced a significant increase in passenger traffic, with Cancún International Airport (Aeropuerto Internacional de Cancún, AIC) leading this trend, serving 23.6m passengers in 2017, a 10.2% increase on the previous year, according to the SCT. This was followed by Guadalajara International Airport (Aeropuerto Internacional de Guadalajara, AIG), which handled approximately 12.8m passengers, marking a 12.5% increase on 2016, and Monterrey International Airport (Aeropuerto Internacional de Monterrey, AIM), with 9.7m passengers and an increase of 5.5%. The largest jump was recorded at Chetumal International Airport (Aeropuerto Internacional de Chetumal, AIdC), in the state of Quintana Roo, where passenger numbers rose by 31.3% to around 276,000.

These trends continued during the first four months of 2018, with a 5.8% y-o-y increase at AIC, 6.9% at AIG, 7.3% at AIM and a sizeable 82.5% at AIdC. Rising passenger numbers have already prompted expansion works at terminal and runway facilities at airports in Acapulco, Chihuahua, Monterrey, Reynosa, San Luis Potosí and Zihuatanejo.

Stakeholders have also called for updates to facilities to accommodate advances in technology. “Service and experience for the air passenger have changed radically over recent years,” Miguel Lei, executive director in Mexico of SITA, a French firm that provides IT solutions to the aviation industry, told OBG. “The use of personal device-driven technology, such as mobile boarding passes, has been revolutionary, but also puts a strain on physical infrastructure, which needs to be adapted accordingly.”

Operators

Mexico’s airports are operated by four regional groups: Grupo Aeroportuario Centro Norte (OMA), which manages 13 airports in the north and centre of the country; Grupo Aeroportuario del Pacifico (GAP), which operates 12 airports on the Pacific coast; Grupo Aeroportuarios del Sureste (ASUR), which runs nine airports in the Gulf of Mexico region and in the south; and Aeropuertos y Servicios Auxiliares (ASA), a government-run agency operating 19 airports and co-managing five others, including Mexico’s City’s Benito Juárez International Airport in alliance with Grupo Aeroportuario de la Ciudad de México (GACM). The GACM operates four further airports in tandem with state governments and private firms, namely Tuxtla Gutiérrez, Toluca, Querétaro and Cuernavaca. Of these private operators, GAP reported the highest number of passengers in 2017, with 34m domestic and international travellers passing through its airports. This was followed by ASUR with 31m, OMA with 19.5m and ASA with 2.7m.

Controversy

Infrastructure projects of recent years have not been without controversy. In November 2014 the contract for the MXN50.8bn ($2.7bn), 210-km Mexico City-Querétaro high-speed train was awarded in a public tender to a consortium led by China Railway Construction Consortium. However, the project was cancelled in January 2015, following allegations that the family of President Peña Nieto had received favourable terms for a house built by Grupo Higa, one of the local firms involved in the consortium. The president denied these claims and was exonerated in a subsequent investigation, but the project remains suspended. However, Francisco Domínguez Servién, the governor of Querétaro, called for the project to be reactivated in November 2017, citing a need to alleviate congestion on the motorway between Mexico City and Querétaro.

In addition, two motorists were killed in July 2017 when a sinkhole opened on the Paso Express, 14. 5-km elevated section of the Mexico City-Cuernavaca motorway that opened to traffic in April 2017. While engineering problems were the apparent cause of the accident, a preliminary independent investigation uncovered financial irregularities in the four contracts awarded for the project, in which the SCT had invested MXN2.2bn ($118.9m). The road was repaired and reopened to traffic in October 2017.

Concerns have also been raised regarding the development of the NAICM. The project has come under fire for the alleged lack of transparency regarding the manner in which the contracts were awarded, with fewer than half conducted through public tenders. In statements to local press, President-elect López Obrador has pledged to revise the project’s construction contracts and cancel those with irregularities, and in the lead-up to the July 2018 general election all four candidates pledged to ensure transparency in the awarding of future contracts with the private sector. In March 2018 Juan Pablo Castañón Castañón, president of the Consejo Coordinador Empresarial, a body representing the private sector, urged the incoming administration to discuss the project but also to respect signed contracts, highlighting the economic benefits of the new airport.

Trading Nation

Along with urbanisation and population growth, trade is a key driving force behind the transport sector’s expansion. Strong trade performance and Mexico’s growing importance as a global centre of logistics are stimulating both public and private sector investment in supporting infrastructure. These growth prospects are likely to continue regardless of the outcome of the ongoing renegotiation of NAFTA. “It seems the renegotiation of NAFTA will not impact the economy the way people once expected,” Hans Bottger, CEO of Talma, an airport services firm, told OBG. “US and Mexican markets are closely interconnected, and many US firms benefit from the agreement. Therefore, it seems unlikely that significant changes will be made to NAFTA for now.”

Other multilateral efforts should also help ensure that the country’s export market remains formidable over the medium term. In April 2018 Mexico became the first country to ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a free-trade deal connecting 11 Pacific nations. Mexican exporters will benefit from the near-zeroing of tariffs across an international market worth an estimated $12.6trn. Upon implementation, the trade agreement is expected to open new markets and opportunities for Mexican producers, while enabling the country to leverage its location at the heart of Pacific and Atlantic logistics lines to increase its attractiveness as a trade gateway.

The same month saw Mexico reach a new deal with the EU, which will see the elimination of duty on virtually all goods, including agricultural products, as well as streamline Customs procedures for pharmaceuticals, machinery and transport equipment.

As a result of these agreements – along with rising domestic consumption and increased global demand for Mexican products – global shipping company Maersk Line predicts robust trade growth in 2018. Long-haul import trade was already up 13% in 2017, while total container imports and exports grew by 12%, making it one of the fastest-growing markets in the Americas, according to the firm’s “Mexico Trade Report” for the first quarter of 2018. It forecasts 6% long-haul container growth in 2018, with imports and exports increasing by 7% and 4%, respectively.

Outlook

While concerns remain over the impact of NAFTA renegotiation, the outlook for the Mexican transport and logistics sector remains solid. The sector has strong fundamentals and the country has wider opportunities for trade thanks to increased demand for its manufacturing products and new trade deals with Pacific nations and EU. Mexico has already achieved significant increases in capacity across all segments of its transport system, and while inefficiencies and security concerns, particularly in road and rail, will not be resolved overnight, there is momentum to overcome these challenges.

The completion of the NAICM will support rising passenger traffic, while increased usage of regional airports by low-cost carriers could help stimulate investment further afield. Additional opportunities for investment are also emerging in public transport, particularly in urban metro systems – many of which are currently operating above capacity. Furthermore, the successful delivery of the Mexico City-Toluca rail project could reinvigorate investor confidence in further expansion of the network, including the possible revival of both the shelved Querétaro highspeed train link and the Yucatán-Quintana Roo line.

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The Report: Mexico 2018

Transport & Logistics chapter from The Report: Mexico 2018

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