Mexico’s transport sector has witnessed rapid growth in recent years. Question marks over economic integration with the US – one of the driving forces of transport growth – are introducing a period of relative uncertainty. However, the fundamentals remain positive for the sector, based on demographic growth, rising living standards, a growing middle class, and the expansion of manufacturing and consumer services.
Background
Mexico has significant national transport infrastructure, and the government has been seeking to develop it further.
According to the Ministry of Communications and Transportation, in 2015 – the most recent year for which full-year data is available – the number of passenger trips by air rose by 12.5% to 73m, while the number of people travelling by rail increased by 11.9% to 54m. Total cargo rose by 2.2% to 935.9m tonnes, of which 55.9% was carried by road, 31.2% by sea, 12.8% by rail and 0.1% by air.
During the year the length of the national highway system consisting of four or more carriageways increased by 956 km, up by 0.2% on 2014. Mexico has the second-largest paved road network in Latin America after Brazil, totalling 137,544 km. Most of the network consists of two-lane roads, but there is a growing highway system with more lanes. Some of these have been built on a toll-road basis. The mostused highways link the country’s three main cities, Mexico City, Guadalajara and Monterrey. Highway development is costly, partly because the country’s terrain includes significant mountain ranges.
The rail network totals 15,389 km, the world’s 18th longest. The railway system was privatised in the late 1990s. In the aviation segment there are 21 registered carriers operating a fleet of 357 aircraft in total. There are 243 airports with paved runways around the country, the busiest of which is located in the capital, Mexico City International Airport.
The main seaports are at Altamira, Coatzacoalcos, Lázaro Cárdenas, Manzanillo and Veracruz. The main container terminals are at Manzanillo and Lázaro Cárdenas, while the main oil export terminals are at Cayo Arcas and Dos Bocas. The country’s merchant marine fleet includes 17 petroleum tankers and three liquefied natural gas tankers.
Gdp Contribution
According to the National Institute of Statistics and Geography, Mexico’s transport, postal and warehousing sector accounted for 5.9% of GDP in 2016. The largest subsectors within that classification were road freight (2.9% of GDP), passenger transport excluding rail (1.9%) and tourism-related transport services. Air transport represented 0.2% of GDP, with rail and maritime transport accounting for 0.1% each.
In recent years the transport sector has tended to grow at higher rates than the Mexican economy as a whole. Transport GDP grew by 4.3% in 2015, slowing to 2.8% in 2016, while total GDP growth in 2015 was 2.6%, falling to 2.3% in 2016.
International Comparisons
The World Bank’s Logistics Performance Index (LPI) ranks 160 countries on the basis of six key criteria: efficiency of Customs clearance; quality of transport infrastructure; ease of arranging competitively priced shipments; competence of logistics operators; ability to track and trace shipments; and timeliness of shipments.
In the 2016 edition of the LPI, Mexico was ranked 54th in the world, putting it in the upper half of the table, with an overall score of 3.11 out of five. In terms of the different categories, Mexico had the highest scores for tracking and tracing, as well as timeliness of shipments; its lowest scores were for efficiency of Customs clearance and quality of transport infrastructure. The country’s 2016 score was higher than in 2010 (3.05) but between those years Mexico had nevertheless dropped in the international ranking, from 50th to 54th. This was the result of other countries improving their scores more rapidly. For comparison, in 2016 Mexico’s northern neighbour, the US, was ranked 10th in the world with a score of 3.99. The top performer in Latin America was Panama, ranked 40th with a score of 3.34. Mexico was placed third in Latin America, behind Panama and Chile, and just ahead of Brazil.
Infrastructure Development
Oscar Callejo, the deputy minister of infrastructure, underlined the link between solid infrastructure and strong economic growth. “Mexico has both the infrastructure and the geographical advantages to position itself as a regional and global logistics platform,” Callejo told OBG. “As there is a direct link between infrastructure development and economic productivity, strategic investment by the public and private sectors could have a tangible, positive impact on the country’s global economic competitiveness.”
Sustainable growth is also a factor: “Mexico is growing fast, with promising new opportunities in various sectors but we must take the lead to grow in a smart and sustainable way,” Hermann Saenger, managing director of SGS, told OBG.
Francesc Casamitjana, Agility chief executive for the Americas, said that Brazil was improving in terms of growth prospects, interest rates and inflation, creating confidence in long-term logistics investment prospects. Casamitjana suggested that a recovery in international oil prices would be positive for Mexico, but that Mexican peso depreciation and uncertainty over the effect of the policies of the new US president, Donald Trump, on bilateral trade were giving cause for concern. “Mexico’s economy is deeply integrated with that of the US, the main market for its exports. Uncertainty is having a negative effect on Mexico,” Casamitjana said.
Strategy
The government is following a 2014-18 National Infrastructure Plan (Plan Nacional de Infraestructura, PNI). The transport and communications sector is listed as one of the PNI’s six strategic priorities (others include energy, health, and urban development). The value of the plan has been calculated at MXN7.7bn ($464.1m). The transport and communications component was originally listed as involving 223 projects and a total government spend of MXN1.32bn ($79.6m) – this excludes private sector funds, which will play a major role. PNI objectives include building multimodal links to improve competitiveness, security and development. However, at a time of significant government cutbacks – public infrastructure spending was reduced by 16.5% in 2016 – the PNI is moving ahead at a slower pace than had been expected. In December 2016 the minister of communications and transportation, Gerardo Ruiz Esparza, estimated that the PNI transport and communications programme – which is now listed as comprising 266 projects in total – was 55% complete.
The PNI is designed to form an integrated approach to the development of the country’s infrastructure with the ultimate aim of making it more interconnected and making the country more economically competitive. “It is critical to accelerate the development of transport and logistics services systems to support economic growth,” Luis Lauro, general manager of LM transport, told OBG. “The creation and improvement of port, road and railway infrastructure must be a point of focus for the government. Intelligent investing in infrastructure creates jobs and improves people’s quality of life.”
Private Investment
Government budget constraints mean the time is ripe for the entry of the private sector. Carlos Rojo Macedo, CEO of Grupo Financiero Interacciones, a financial group focused on providing financing and financial advice to the public sector, told OBG, “With public sector budget cuts being ramped up by the federal government, private sector investment has become a key vehicle to boost infrastructure development in the country.”
Aicm
One of the highest priorities in the portfolio has been the project to build a new international airport in Mexico City (Aeropuerto Internacional de la Ciudad de Mexico, AICM). The AICM, which will come at a total cost in excess of $10bn, will be partially self-funding, and has been described as the signature public works project of President Enrique Peña Nieto’s entire term in office.
Public-private partnership (PPP) projects represent more than half of the government’s $102bn total spend on infrastructure from 2014 to 2018. The PPP model has not been immune from criticism, however. The programme has left Mexico with some of the most expensive road tolls in the world, with the government nationalising 23 purely private projects in the 1990s and taking on board $5bn of debt.
That said, the administration has committed to the completion of 80 new highways, and has already delivered 30,000 km of new, renovated and modernised secondary roads. A number of important PPPfunded roads were inaugurated by President Peña Nieto in February 2017. Two in the western state of Nayarit were constructed by Mexico’s largest concessionaire, Red de Carreteras de Occidente, and Concesionaria Autopista Guadalajara-Tepic, costing $1.36bn and $3.5bn, respectively, on 30-year concessions. In the same month a 24.4-km, MXN632m ($38.1m) western bypass to the industrial centre of San Luis Potosí was also opened by President Nieto. The bypass will connect the central city’s major axes to Zacatecas, an important mining centre, and Guadalajara, the tech capital of Mexico.
Maintenance
The PPP model is not just used for construction of new roads. With each concession worth MXN4.96bn ($298.9m), the first two PPP highway maintenance projects were launched in 2016: one for the route from Querétaro to San Luis Potosí in the industrial Bajío region, and another for the road from the port city of Coatzacoalcos to Villahermosa, the capital of the state of Tabasco.
In February 2017 the Ministry of Communications and Transportation launched four more projects under the same model: Saltillo-Monterrey-Nuevo Laredo and Matehuala-Saltillo (both in the country’s north-east); Pirámides-Tulancingo-Pachuca (north-east of Mexico City in the state of Hidalgo); and Texcoco-Zacatepec (to the east of the capital).
“Each of these projects involves the maintenance and conservation of each road for 10 years, demonstrating that a long-term vision is needed not just for the construction of new infrastructure, but also the upkeep,” Callejo told OBG.
There is general recognition that the PNI has come under pressure since its launch because of fiscal austerity caused by lower oil prices and, more recently, uncertainty over the short-term outlook for trade with the US. Ignacio García de Presno, infrastructure lead for consultancy KPMG, said in January 2017 that the PNI had progressed more slowly than originally hoped, and that worries over US-Mexico relations under President Trump had made private sector investors more risk averse. However, de Presno was optimistic over what would be achieved in the last two years of the PNI (2017 and 2018), expecting significant progress in highway construction, natural gas pipelines and the AICM.
Policy Formulation Dialogue
Government and private sector stakeholders have been involved in a dialogue on how to best formulate infrastructure and transport development policy, and in early 2017 Mexico’s Construction Industry Chamber organised a workshop on developing a sustainable infrastructure plan up to 2030.
Roberto Martínez, representative of the OECD in Mexico, said that his organisation supported the idea of creating a national transport and logistics observatory, an organisation that would help fill information and data gaps, as part of the task of optimising plans for future transport development.
The government’s Mexican Institute of Transportation (Instituto Mexicano del Transporte, IMT) has already begun seeking to perform that function. IMT coordinator Carlos Martner said that the unit was developing a national transport and logistics model, using data on the national road network to track traffic flows and identifying operating costs and congestion points, and using it as a planning tool to prioritise new infrastructure investments.
One issue for consideration is whether Mexico has the right intermodal balance and multimodal capability. According to the OECD, around 80% of domestic land freight is carried by road and 20% by rail, with coastal and inland waterways having a minimal contribution. Martner said that the freight system is overwhelmingly skewed towards road transport, and argued that greater use of rail and maritime coastal freight would be positive in cost-benefit terms. For this to be viable, however, much greater investment would be needed in creating multimodal hubs where freight can be easily and efficiently trans-shipped.
Martner argues that, in the future, Mexican fuel costs will no longer be subsidised, increasing the commercial viability of fuel-efficient rail freight. However, this will not solve the last-mile problem, requiring more points in the distribution system at which cargo can be quickly shifted from rail to road.
“The successes of the automotive sector and the railways in Mexico are intrinsically linked,” Rogelio Vélez, former director-general of railway operator Ferromex, told OBG. “With 74% of exported vehicles travelling by train, the rail network forms the backbone of the country’s automotive infrastructure, conveying an increasing number of cars to the US.”
Gasolinazo
As part of phased energy sector reforms that started in 2014, Mexico began to open up the state monopoly in oil and gas, and to move away from a system of centrally controlled prices throughout the energy production chain.
As part of a move towards a more competitive downstream petrol distribution market, the pricing system at the petrol pump was liberalised in 2017. Prices were moved from complete central control to a system of partial central control taking greater account of international price fluctuations, and finally to a system of freely fluctuating market-based prices (due for introduction in 2018).
However, the first step in the process at the beginning of January 2017 came with steep increases in centrally controlled petrol prices, which were raised by between 14.2% and 20.1%. This sharp rise caught much of the population by surprise. Dubbed the gasolinazo, the move led to widespread protests.
Although in theory a market-based system should lead to lower prices in the long term, the short-term reality was that prices needed to rise in order to reflect refinery supply shortages, a small increase in international prices and significant depreciation of the peso. Analysts have argued that it will take at least two years for competition within the downstream sector to begin to make prices more competitive (see Energy chapter).
Increased Costs
Higher petrol and energy costs are therefore having a significant impact on the logistics sector. José Refugio Muñoz López, executive vice-president at the National Chamber for Cargo Transportation, described the increase in fuel prices as “disproportionate but not unexpected”. He told OBG, “The impact on road haulage companies will vary according to their overall efficiency and the fuel efficiency of their trucks, which in turn depends on how modern their fleets are.” López estimated that the January rise in the price of petrol was increasing the total costs of road haulage companies by between 6% and 8%.
Rising fuel costs are not the only cause of increased expenses for haulage firms. “Integration of new technologies into transport systems is making the sector evolve towards a more integrated market where innovation is a necessity to be competitive,” Lauro told OBG. “Location control systems, customer service and accessible prices have become the leading sector priorities. One downside of the continual technological improvement is the very high investment companies are required to make in order to stay competitive.”
Héctor Rodríguez, chief financial officer at Penske Logistics Mexico, a subsidiary of the US company, said that higher petrol costs were encouraging Penske to seek out efficiencies wherever possible. Rodríguez said that his company had negotiated an arrangement with an insurance provider that had cut its freight insurance costs to around 20% of market rates. Penske is also using expenses and billing software to control costs and eliminate double spending. Like many other haulage companies, Penske said that around 40% of its deliveries involved freight movements across the US border.
In a sector experiencing such rapid growth there are various structural necessities that need to be addressed, according to Lauro. “One of the primary needs of the transport sector is truck drivers,” he told OBG. “Many drivers moved to the US, where salaries are higher, while other drivers resign because of road insecurity. There is a need for specific programmes in schools to create qualified drivers, as well as universities to teach transport management.”
Air Travel Growth
Mexico’s domestic and international market for air travel is growing strongly, supported by the country’s demographic and economic trends. The government’s National Population Council estimates that the middle class – socio-economic groups C and C+ – will expand from 31% of the population in 2010 to 47% in 2025. Per capita flights taken by the middle and upper class population stand at 0.6 per annum, indicating that there is plenty of room for expansion (the per capita, per annum flight rate is 0.8 in Brazil, 1.4 in Europe and 2.4 in the US). Since the early 1990s the number of domestic passengers has been growing at an annual rate of 4.2%, with international passenger numbers expanding by 6.4% per year. In 2016, however, the pattern was reversed, with domestic passenger traffic rising by 12.4% to 41.92m, while international traffic increased 8% to 40.49m. In domestic travel, the top shares of passenger traffic were taken by Aeroméxico (31.2%), Volaris (27.5%), InterJet (21.7%) and VivaAerobus (14.3%).
New Routes
Despite capacity constraints, the list of destinations from Mexico City International Airport is slowly growing. In May 2017 Aeroméxico will start direct flights to Seoul in South Korea, and its existing Tokyo service faces competition from a new service by All Nippon Airways that started in February 2017. Beginning in April 2017, China Southern Airlines will connect Mexico City with the Chinese industrial powerhouse of Guangzhou, with a stop in Vancouver. This is in addition to cargo flights connecting with destinations as varied as Luxembourg, Doha, Dubai, Hong Kong and Anchorage.
Air Transport Agreement
Fernanda Reséndiz, vice-president of corporate development at Aeroméxico, told OBG that after the global financial crisis of 2008-09, which had hit the Mexican airline industry particularly hard due to a simultaneous country-wide flu alert and the depreciation of the peso, local operators had learned the value of diversification and flexibility. She highlighted the importance of the August 2016 Air Transport Agreement between the US and Mexican authorities, which greatly liberalised services, allowing more US and Mexican carriers to operate trans-border routes, while previously routes had been limited to a maximum of two or three operators per country.
In December 2016 Aeroméxico announced a cooperation agreement with US carrier Delta Air Lines, including a joint venture to operate cross-border services. Delta already owned an equity stake in Aeroméxico, and in February 2017 launched a tender offer to acquire a further 32% of the Mexican company, which would take its stake up to the maximum 49% allowed under Mexican law. “An important part of our strategy is to make the best of plans to help develop the AICM as a hub for the Americas, and for travel between Central and South America and Europe,” Reséndiz said. She acknowledged concerns over the potentially protectionist policies of President Trump and the weak peso, but noted that the Mexico-US relationship has historically been greatly intertwined and was unlikely to change, and that the sector was well-placed to respond flexibly.
Increased Us Tourism
While there were some early signs of a downturn in business travel between Mexico and the US, the weak peso has boosted US tourism flows. Operating in both countries, Aeroméxico has a natural currency hedge. It also has a long-term agreement to purchase 100 new aircraft from Boeing (90 B737s and 10 B787s), with built-in options to increase or reduce its total fleet.
Alejandro Cobián Bustamante, director-general of the National Air Transportation Chamber (Cámara Nacional de Aerotransportes, CANAERO), said that the development of the AICM, which is due to begin operating in 2020, was the single most strategic and highest-priority issue for the sector. “The vision is to develop the new airport into a national, regional and global hub, helping to increase our country’s economic competitiveness,” he told OBG.
According to CANAERO, the aviation industry is the source of over 2% of GDP, and directly and indirectly creates more than 1m jobs. Total air freight carried has been on the rise since 2010. In 2016 it increased by 6.3% to 873,405 tonnes, of which 68.3% was international and 31.7% was domestic.
It is hard to overestimate the importance of Mexico City International Airport within the national network. The CEO of airport operator Grupo Aeroportuario del Sureste, Adolfo Castro, told OBG, “Some 70% of domestic passengers from our nine airports travel to or from Mexico City. It is unequivocally a driver of growth across the entire country.”
Key Entry Point
For tourism, however, Cancún remains a key entry point, with 40% of international visitors arriving in Mexico through the city and 80% of those coming from the UK. Charter flights to Cancún International Airport operate from a wide variety of destinations, ranging from smaller UK cities, such as Newcastle and Bristol, to Warsaw and Moscow (see Tourism chapter).
“After the US, Mexico is the second-largest private aviation market in the world, fuelled by a strong second-hand market and low fuel prices,” Pedro Corsi, CEO of private aviation firm FlyAcross, told OBG. “That said, demand is still stronger for chartered services than the purchasing of individual jets.”
Industrial Parks & Warehouses
Mexico’s transport network has been increasingly influenced by the emergence of a range of industrial parks and warehouses, which have supported the country’s integration into North American value-added production chains. One example is the only industrial park in Mexico City, the Pical Pantaco complex, which has 58 ha and 280,000 sq metres of warehousing space in the north of the city. General manager Benjamín Wollenstein told OBG that Pical Pantaco’s basic business is renting out warehouse space, but that it also provides an intermodal trans-shipment point where, using a swing-arm crane, clients can break bulk cargo delivered by rail for storage and onward door-to-door delivery by road.
Industrial parks have special status under Mexican law. They are conceived as fully serviced sites offering factory shells, which can be leased on a cost-effective basis by international companies needing to work in a cluster with some of their immediate suppliers. The Mexican Association of Industrial Parks represents companies operating over 140 industrial parks with a total area of 16,000 ha and more than 2000 industrial tenants.
The parks cater to high value-added activities in the automotive, electric, electronic, engineering and aerospace sectors. They are a key part of nearshoring, and of what has become a transport-intensive production process, whereby specific components may be shipped backwards and forwards to different locations on either side of the US border for processing and assembly. Around 80% of Mexican exports are shipped to the US, but these already contain 40% US content. Automobiles bought in the US may contain parts and components that have crossed the border with Mexico up to eight times as part of the manufacturing process.
Ports
The government is pursuing bold port development objectives. Officials say that the aim is to lift port handling capacity from 260m tonnes when it took office in 2012 to over 520m tonnes at the end of its term in 2018. Cargo volumes moved through Mexican ports grew by 5.5% in 2016, faster than in Canada or the US. Container volumes increased to 4.1m twenty-foot equivalent units (TEUs).
In early 2016 the Ministry of Communications and Transportation was reported to be supporting 25 port expansion projects across the country, requiring total investment of MXN67.3bn ($4.1bn), of which 80% would come from private sector sources. “In terms of expansion of ports and new infrastructure projects, Mexico is doing well,” Mario Veraldo, managing director of Maersk Line’s Middle America cluster, told OBG. “The country has a network of ports on both the Pacific and the Atlantic, with continuous investments to upgrade and maintain these assets. Nonetheless, additional work is necessary to handle the arrival of containers and the logistics of moving them onwards throughout the country.”
A total of 40 companies expressed interest in a government tender to build and operate four new terminals at Veracruz New Port, in the Gulf of Mexico in the south-east of the country. The project has been described as Mexico’s biggest single port expansion in a century. Total investment is calculated at MXN30bn ($1.8bn). The expansion will multiply the current 900,000 TEUs capacity by a factor of five in the period up to 2030.
Under the government’s proposal for a PPP model, up to 80% of the funding will come from the private sector. “Mexico has 52 projects involving PPPs and private sector concessions alongside key geographical development plans, such as the Special Economic Zones,” Callejo told OBG. “The long-term development backed by the government’s latest 2030 plan means progress and necessities of the country’s infrastructure are being constantly evaluated in order to achieve our long-term vision.”
Bulking Up
Apart from container handling, the plan is for one bulk terminal to be built to handle minerals, one for grains, and one for oil and gas products. The fourth bulk terminal will be used for general cargo. It is proposed that the new bulk handling infrastructure become operational by 2018 with capacity to handle 66m tonnes per annum, rising to 90m tonnes by 2024. Tender results are expected to be announced by July 2017.
Mexico’s shipping sector has been enjoying a period of growth, but the tanker and offshore services fleet has been hit hard by the downturn in international hydrocarbons prices and, more specifically, by the financial squeeze experienced by Pemex, the state oil company. According to the Chamber of Maritime Transport (Cámara Mexicana de la Industria del Transporte Marítimo, CAMEINTRAM), up to $6bn has been spent on modernising the fleet in the last three years, with maritime shipping representing around 1% of GDP and generating 300,000 jobs. However, Celia Galicia Esparza, head of legal affairs at CAMEINTRAM, told OBG that the industry was facing a crisis, with the Mexican-flagged fleet dropping to 62 vessels, from a high point of 138.
Outlook
Most stakeholders in Mexico’s transport and logistics sector recognise that protectionist headwinds in US-Mexican trade could have a negative impact on their industry during the course of 2017. However, fundamentals in the industry are still positive, and there is room to increase efficiency and competitiveness. López said that around 80% of Mexico’s trade with the US is carried by road.
“Our strategy should be to develop a logistics and transport platform based first on our common frontier with the world’s economic superpower, second on transport routes linking us to Europe and Asia, and third on our network of free trade agreements with Central and South America,” he told OBG. López also stressed the importance of developing the country’s multimodal capabilities going forward, and of pushing ahead with the PNI.
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