UNCLAS SECTION 01 OF 02 MEXICO 004614

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX
COMMERCE FOR 4320/ITA/MAC/WHA/ONAFTA/GERI WORD
DOT FOR FRA/SNEWCOMER
DHS FOR ABULLOCK
WHITE HOUSE FOR HSC/JHOFFMAN
STATE PASS TO GSA FOR SPEPPLER

E.O. 12958: N/A
TAGS: EIND ELTN ETRD EINV MX
SUBJECT: UNION PACIFIC MEXICO TALKS COLOMBIA RAILROAD
CROSSING, PUNTO COLONET PORT


Summary and Introduction


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1 (SBU) Summary. FCSOffs and EconOffs met with Juan Manuel
Carreon, President of Union Pacific de Mexico (UP), to
discuss issues currently affecting the company. Carreon was
clear that UP is not planning on moving to any new bridge in
the Laredo area. He did say that there were conditions that
would make the Colombia rail bridge more economically
feasible and push UP to consider moving. He said that UP and
Hutchinson Port Holdings have ended their joint venture to
purchase Punto Colonet. UP is working towards a resolution
on the trackage rights negotiations while they will remain
outside of any merger discussions. End Summary

Colombia Rail Crossing


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2. (SBU) Carreon began the discussion with talks on the
Colombia Rail Crossing and UP's position on the crossing. He
explained that the issue is very complex and not many people
in UP have a complete knowledge of the situation. He said
that UP does not support any of the current alternate rail
plans -- Colombia or Kansas City Southern's alternative --
and further does not see itself supporting the Colombia
crossing any time in the near future. He said that the
project is one with strong political backing but not strong
financial backing and that, thus far, it does not make
financial sense for any of the railroad companies to sign on.




3. (SBU) Carreon explained that the Colombia Rail Crossing is
a pet project of the state of Nuevo Leon, but the people
involved do not have a good sense of the business cost that
would be required from a rail company that diverts its routes
through Colombia. He further said that the state governor,
Jose Natividad Paras, has not pursued the matter extensively
in the first 4 years of his term and only has two remaining
to push the matter. He said that if Ferromex wins the
concession to extend from their line to Colombia, the bridge
may gain more economic feasibility and UP would consider
using it. Without another rail company taking the lead in
investment, UP will not plan on making the move.

Punta Colonet Port and Rail Line


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4. (SBU) Carreon also discussed the current status of Punto
Colonet. He said that UP has ended its partnership with
Hutchison Port Holdings to purchase the concession. He said
that, with the expansion of the Panama Canal, operated as a
concession by Hutchison, the need for Punto Colonet is not as
strong as when the plan was first conceived. He also
explained that UP met resistance from local farmers against
its plan to extend the Punto Colonet rail lines across the
border at Yuma, AZ to connect with its current lines. The
current likely plan, to cross at Calexico, CA, is less
desirable and likely to be met with even more resistance from
farmers and environmental groups. He also said that the
dispute over the previously issued mining concession that
previously stalled the plan appeared to be ongoing despite
the government of Mexico's (GOM) assertion that it had been
settled. He did say, however, that UP was willing to work
with whoever ultimately wins the Punto Colonet concession.

Other Rail Issues


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5. Despite the ruling by the Mexican Federal Competition
Commission (Cofeco), Carreon believes that the merger is not
dead yet. He said that Ferromex's majority owner, Jorge
Larrea and his Group Mexico, is not ready to take no as a
final answer. He also explained that the Secretariat of
Communications and Transportation (SCT), specifically
Undersecretary for Transportation, Manuel Rodriguez, support
the merger and are looking for ways to give SCT the ability
to approve it. He said that UP has been called upon at times
to mediate, but is too involved in the issue to be a proper
good office. (Note: Ferromex is 26% owned by UP with Grupo
Mexico holding the remaining 74%. The other merger company,

MEXICO 00004614 002 OF 002


Ferrosur is owned by Grupo Carso, Mexican monopolist Carlos
Slim's conglomerate.)



6. Carreon also discussed the renegotiation of trackage
rights in Mexico and says that 28 of the 34 problems have
been solved. However, he was clear that resolving the
majority of the problems does not equal success on the issue
as a whole. He said that the remaining issues are the most
difficult to resolve. (Comment: Competitor Kansas City
Southern de Mexico (KCSM) has come out strongly against the
lowering of trackage right costs for their portion of the
rail. They feel that SCT is pushing them on this issue while
simultaneously supporting the merger that they feel will
further undermine the credibility of the railroad industry in
Mexico. Many in the railroad industry feel that KCSM paid
too much for the concession in the beginning and that they
should not be able to continually pass on the cost of their
poor investment to other companies that need to use the lines
for which they have operating rights. End Comment.)

Comment


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7. Comment: Both the Colombia rail project and Punto
Colonet are being actively pursued by the GOM. The Cameron
Station-Colombia rail concession is included in President
Calderon's National Infrastructure Program (NIP) with a value
of 1.1 billion Mexican pesos (100 million USD) and plans for
it to be jointly funded by the federal government and the
private sector. The 61 km rail spur would begin along the
current line to Laredo, but divert to Colombia. It would
also include a crossing. As mentioned previously, however,
it could be a decade or more before any of the rail road
companies see a reason to begin investment in new lines
and/or yards. Until that time, the private funding needed to
begin construction will likely be unavailable.



8. Punto Colonet figures prominently in the NIP as the
largest rail project planned valued at 20.9 billion Mexican
pesos (1.9 billion USD). The NIP also calls for it to be
financed exclusively with private sources. It seems that UP
will have a smaller role in the project that originally
planned but are not completely abandoning the project. The
issue of trackage rights will likely be resolved in the near
to mid future, but Post will continue to monitor the
developments. UP has stayed out of the merger discussions
and will likely continue to do so. End Comment.


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