VZCZCXRO2900
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1894/01 1812336
ZNR UUUUU ZZH
P 302336Z JUN 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7236
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHOT/AMEMBASSY OTTAWA 2634

UNCLAS SECTION 01 OF 02 MEXICO 001894 
 
SENSITIVE, SIPDIS 
 
USDOJ FOR HARROP 
STATE PASS TO FTC - RDAMTOFT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PINR PGOV PREL MX
SUBJECT: MEXICAN RAILROAD COMPANIES DERAILED FROM MONOPOLISTIC 
ASPIRATIONS 
 
REF: MEXICO 1307 
 
¶1.  (SBU) SUMMARY:  On June 24, cargo railroad companies 
Ferromex and Ferrosur were found guilty of monopoly practices 
and slapped with the maximum fine allowed under Mexican law 
(roughly equal to US$ 6 million each) by Mexico's anti-trust 
watchdog agency, the Federal Competition Commission (CFC). 
CFC also sanctioned the main shareholder groups in both 
companies as well as all the other actors involved in the 
transaction for a total fine of 419 million pesos, or US$ 31 
million.  This is a significant step in the maturation of 
Mexico's anti-monopolistic efforts, and it should not go 
unnoticed that among those shareholders sanctioned is Mexican 
tycoon Carlos Slim.  END SUMMARY. 
 
¶2.  (U) In the mid-1990s, Mexico's state-owned railroad 
network was privatized and divided into four different systems 
to avoid a monopoly.  Talk of mergers has been a staple ever 
since.  Carlos Slim's Ferrosur quickly consolidated two 
concessions, including the heavily-trafficked Mexico City to 
Veracruz line.  Mining entrepreneur Jorge Larrea formed 
Ferromex with minority partner Union Pacific and took the west 
coast network from Mexico City, Manzanillo, and Guadalajara to 
Sonora.  The central-north concession went to U.S. tier one 
railroad Kansas City Southern.  Ferrosur, Ferromex, and Kansas 
City Southern's Mexican filial (KCSM) jointly own the 
Ferrovalle system around Mexico City. 
 
¶3.  (U) A first Ferromex-Ferrosur merger attempt failed in 
¶2002.  The railroads tried again three years later, when in 
November 2005, Carlos Slim sold the profitable Ferrosur to 
Ferromex for US$ 360 million.  The two companies notified the 
CFC of their intention to merge, and the following day 
completed the merger without awaiting analysis of the 
transaction and a legal decision by the watchdog agency. 
Rival KCSM objected and appealed to the CFC to block the 
combination.  In June 2006, the CFC rejected the merger, 
stating it would have led to excessive concentration in the 
railroad industry to the detriment of consumers and competing 
shippers.  In April 2007, the Mexican Supreme Court upheld the 
CFC's decision, and in August 2007 the anti-trust agency 
embarked on investigations into whether the two firms fixed 
prices and engaged in other anticompetitive practices. 
 
¶4.  (U) Last week, the CFC announced its decision, to the 
delight of advocates for increased competition in Mexico as 
well as KCSM.  The investigation "produced sufficient evidence 
to note that, despite the prohibition of the merger, both 
companies are coordinating their operations and specifically, 
they have exchanged information with the objective of 
concerting pricing," states the final decision.  It fined all 
the actors involved in the transaction, including Ferromex, 
Ferrosur, Grupo Mexico (Larrea's shareholding company that 
owns 74 percent of Ferromex), Grupo Carso (controlled by Slim, 
one of the two shareholding companies that owned Ferrosur), 
and Inbursa (the second owner of Ferrosur, also controlled by 
Slim).  Each received the maximum fine allowed under Mexican 
law - 82.2 million pesos, or roughly US$ 6 million.  Other 
companies sharing the fines included Lineas Ferroviarias de 
Mexico, Grupo Ferroviario Mexicano, Infraestructura y 
Transportes Mexico and Infraestructura y Transportes 
Ferroviarias, each with ties to the two Mexican business 
moguls.  The total fine is the highest in Mexican history - 
419 million pesos, or US$ 31 million.  CFC also ordered both 
companies to separate and return to the original concession 
status they were awarded in 1998. 
 
¶5.  (SBU) As for next steps, Mexico's Tax Administration 
(SAT), and not CFC will be responsible for collecting the 
fine.  The media report that sources close to Grupo Mexico 
will file an injunction against the decision; Grupo Carso did 
not comment.  "There is no doubt that [the nine actors] will 
try to do something," CFC's Director General for Institutional 
Relations and International Affairs Kenneth Smith told 
ECONOFF.  "It's pretty clear that they engaged in collusive 
practices, and they're going to attack the procedure but they 
can't attack the decision." 
 
¶6.  (SBU) Smith commented that Ferrosur and Ferromex simply 
miscalculated.  We will never know why the two groups felt 
they had to move quickly to merge at the risk of ignoring 
government regulations, he said.  But they must have thought 
 
MEXICO 00001894  002 OF 002 
 
 
the worst punishment they might incur would be a "slap on the 
wrist" for an illegal merger.  According to Smith, what they 
failed to realize was that following the CFC's 2006 decision 
not to authorize the merger, both were in violation of Article 
Nine of Mexico's Federal Economic Competition Law (FECL), 
which prohibits the practice of such monopolistic activities 
as price fixing and other collusive efforts. 
 
¶7.  (SBU) ECONOFF asked Smith how the proposed amendment to 
Mexico's FECL currently under consideration in Mexico's Senate 
(see reftel) would alter the CFC's decision.  Certainly, he 
said, if the amendment was in place today it would raise the 
fines - the punishment to the five key players is the maximum 
allowed under current law.  The proposed amendment would allow 
the CFC to fine violators up to ten percent of that company's 
annual sales. 
 
¶8.  (SBU) Smith said that CFC has launched two initiatives 
recently that while not directly related to this case, would 
certainly impact future merger proposals in Mexico.  He 
estimated that 99 percent of all proposed mergers in Mexico 
are authorized by CFC.  He said that the watchdog agency was 
working to reform its internal process to allow for some 
mergers to be decided in a more expedited fashion, similar to 
the FTC's fast-track procedures in the United States.  CFC is 
also working on its benchmark analyses to measure the 
competitiveness of a market.  The current system is sufficient 
to measure the impact of a proposed merger on a large market, 
but needs more refined tools to measure a smaller market. 
 
¶9.  (SBU) COMMENT:  This is a significant step in the 
maturation of Mexico's anti-monopolistic efforts and the 
development of Mexico's anti-trust watchdog agency.  CFC is 
becoming an effective tool to stimulate competition in Mexico, 
and is not afraid of taking on Mexico's wealthiest tycoons, 
including Carlos Slim.  Congressional approval of the proposed 
amendment to the FECL will add more teeth to CFC's bite.  This 
will be especially important if the Calderon administration 
decides to go after Mexico's monopolies and oligopolies and 
remove these impediments to Mexico's growth in the remainder 
of its sexenio.  END COMMENT. 
 
FEELEY