The dirty “e” word — expropriation — is doing the rounds once again in Mexico, this time in relation to a highly strategic stretch of railroad in the country’s south east.
Life is getting harder for businesses in Mexico under its “unpredictable president,” Andrés Manuel Lopéz Obrador (aka AMLO). That is message of a recent Bloomberg piece. In recent days, the AMLO government has revoked a railroad concession belonging to Ferrosur, a subsidiary of Group Mexico, a huge mining and infrastructure conglomerate majority owned by Mexico’s second richest man, Germán Larrea. According to Bloomberg, it has also scuppered US lender Citi’s attempted sale of its Mexican subsidiary, Citibanamex, to, of all companies, Group Mexico.
The problems began on Friday May 19, when AMLO deployed marines to occupy three sections of railroad operated by Ferrosur in the south-eastern state of Veracruz. Officials described the measure as “temporary,” in the “public interest” and “relevant to national security.” The government also issued a decree identifying large infrastructure projects such as the Mayan train project as matters of national security. This comes on the heels of a raft of new mining reforms that could also affect the operations of some mining companies in Mexico, including Group Mexico.
Mexico’s Inter-Oceanic Corridor
The railroad is needed to complete an Inter-Oceanic Corridor on the Isthmus of Tehuantepec, a narrow stretch of land between the Gulf of Mexico and the Pacific Ocean. The $12.9 billion project is meant to help boost economic opportunities in Mexico’s poorer southern states as well as offer an alternative to the Panama Canal. Roughly 300 kilometres in length, it will link up Mexico’s Pacific and Atlantic coasts with both freight and passenger rail travel. The Corridor will include highways, three airports, ten industrial parks, a gas pipeline and a fibre-optic network. If completed, it will represent by far the most important infrastructure project of AMLO’s presidency.
AMLO justified his decision to revoke Ferrosur’s concession on three grounds:
- Group Mexico doesn’t own the railroad tracks, but rather has a concession to operate them. Private property can be legally expropriated, but “recovering a concession of the nation” is “very different,” AMLO said, even though his decree cited an expropriation law.
- That concession, which had been gifted by the Zedillo government as part of its privatisation drive in the late ’90s, can be revoked at any time.
- The government is considering paying “market-value compensation” to Group Mexico for the temporary occupation, but Larrea had demanded a payment of 9.5 billion pesos ($540 million), which AMLO described as “abusive.”
Needless to say, investors are not impressed.
“It’s not exactly inviting for the government to seize a railroad,” said Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. “This is bizarre even for this administration, where AMLO has for the most part negotiated with the private sector to achieve his policy goals.”
It didn’t take long for the reverberations to spread. Two days after AMLO’s decree, US lender Citi announced it was cancelling its sale of its Mexican subsidiary, Citibanamex, to Grupo Mexico, the last remaining potential buyer for the 130-year-old bank. According to Bloomberg, the $7 billion deal fell through because Larrea had privately sought assurances that the banking sector wouldn’t become a target of AMLO’s interventions. When no guarantee was forthcoming, he decided not to move forward with the acquisition.
AMLO had already placed conditions on any deal for Banamex, including that it be backed by Mexican capital and that it does not lead to large-scale layoffs. This had the effect of reducing the pool of potential buyers.
It is also true — and this is something that much of the international media coverage conveniently leaves out — that a huge amount of uncertainty still hangs over the true size of Citibanamex’s liabilities as well as its ongoing litigation costs following numerous scandals, primarily involving the defunct shipping company Oceanografia (which we covered in January 2022). According to an article by Mexican news website La Silla Rota in February, the unresolved lawsuit had already shaved billions of dollars off Citibanamex’s value.
Now, Citi is stuck with little option but to activate plan B: to sell shares of its Banamex unit in an initial public offering. But that won’t happen until at least 2025. In the meantime, Citibanamex’s deposit base continues to shrink while its annual revenues for 2021, the last year for which Citi published results for the unit, were down by my more than half on where they were a decade ago.
AMLO himself has expressed an interest in the Mexican government taking a stake in the bank, saying he will urge Mexico’s finance minister to start talks over a possible public-private partnership with Citi. As for Larrea and Group Mexico, they are considering their options:
“Group Mexico Transportation continues to analyze the scope and effects of the [AMLO government’s] occupation decree, in order to determine which actions to take… If an agreement is not reached in the negotiation, the temporary occupation will ultimately lead to a deterioration of the company, its employees, customers, and the free market.
Little Sympathy for Larrea
Outside of Mexico’s investor class, Larrea’s troubles are unlikely to elicit much in the way of sympathy. After all, his company was responsible for Mexico’s worst ever mining disaster, the Buenavista Copper Mine toxic spill of 2014, as I reported at the time for WOLF STREET:
On August 6 the Buenavista del Cobre mine belonging to Larrea’s flagship company, Grupo Mexico, the country’s largest mining and infrastructure company, spewed 10 million gallons (40,000 cubic meters) of copper sulfate acid into the Sonora and Bacanuchi rivers, turning the waterways orange and poisoning the water supply of 24,000 people in seven communities along the rivers.
The fallout has been devastating. Even today, nine years after the disaster, thousands of people still have no access to fresh water or medical services; cases of illnesses — primarily respiratory and gastrointestinal disorders, skin conditions and high levels of heavy metals in the blood — have skyrocketed. Local farmers can no longer cultivate their land or sell their traditional products in the region, out of fear of contamination. Communities continue to demand justice, remediation, reparations, and assurances that this will never happen again.
Immediately after the spill Grupo Mexico was fined a measly $2 million. Through Mexico’s environmental agency SEMARNAT, the company was supposed to set up a trust fund of around 2 billion pesos (just over $100 million) to remediate the harm caused to local inhabitants and the environment. But many residents say they never saw a peso. A medical clinic was partially built and abandoned. Only two of 36 promised water purification plants are operating. A $307 million economic reactivation plan was never activated.
This is not the first time that Larrea had shown callous disregard for the occasionally destructive externalities of his line of business…
Read the full article on Naked Capitalism
Nick Corbishley 