1. Assessment and recommendations

This chapter presents the assessment and recommendations from this report. The first section contains the assessment, which is divided between findings related to rail regulation, and findings related to the governance of the Regulatory Agency of Rail Transport. For each finding, the corresponding arguments which led to the particular conclusion are developed. The second section contains the recommendations, which offer concrete proposals to address the afore-mentioned findings.

    

Assessment on rail regulation

1. 1. Strengthening regulatory capacity through the establishment of the Regulatory Agency of Rail Transport (ARTF) was an essential and overdue step in the approach to fostering development of a safe, efficient and competitive rail system in Mexico. ARTF has made consistent progress in filling the gap in the regulatory capacity required to ensure that the Law on the Regulation of Rail Services is implemented. However, many challenges remain including budgeting, regulatory, and governance issues, in order to aspire to a full implementation of the legal provisions.

ARTF has implemented all of the short-term objectives set for it in the 2015 revisions to the Law on the Regulation of Rail Services. ARTF is focusing on ensuring the technical tools for execution of its mandate are in place. This includes the collection of detailed and accurate information on railroad revenues and costs as well as the ability of the agency staff to analyze and utilise such data. It includes updating the register of assets of the concessions and updating the technical requirements for inspection and maintenance of track. The latter has already made a significant improvement to ensuring safe operation of the system. Maintaining an updated register of surcharges on carriage rates is also important. Some traffic is extremely sensitive to these charges, and changes in the “discounts” applied by concession holders can have a major impact of the viability of traffic. It also includes the collection of accurate, verifiable information as to which trackage rights are currently being utilised, and the details of their usage.

However, budget restrictions have slowed progress, delaying recruitment of specialist staff and resulting in posts being filled by staff with additional duties in other areas of rail policy, diluting the resources available for regulation. Delays seem largely or entirely due to this underfunding, and management direction and planning has been effective in these constrained circumstances.

Additionally, there are gaps in the legislation which prevents action aimed at implementing the legal provisions fully, which has an impact in the development of rail services. These include issues on trackage rights, tariffs and competition issues, as well as challenges in the governance design of ARTF (discussed in detail below).

The delays and challenges mean that the full impact of the establishment of ARTF will not be apparent in the short term. Resourcing of the Agency should be strengthened to facilitate delivery on its mandate and any further reform should build on the successes achieved thus far through the interventions of ARTF rather than take a new direction.

1. 2. The time taken to implement some of the main trackage rights mandated in the concession agreements for interconnection and competition reflects inadequate regulatory capacity to enforce the law.

The 1995 Law on the Regulation of Rail Services provides for the Ministry of Communications and Transport (SCT) to grant concessions to private companies to operate rail lines under conditions established by the Ministry and set out in the concession titles. Terms of access to rail infrastructure are established by the three instruments – the law, the bylaw and the concession title agreements – together. The concessions were designed to maximise the income produced by sale of the leases and therefore provided long periods of exclusive access to markets.

Specific trackage and haulage rights were provided for in the annexes to the concession agreements as an exception to the exclusivity granted to the concession holder. These trackage rights enable a concession holder to operate freight services over the tracks of the other concession. Some of these trackage and haulage rights included in the concession deeds were to provide for competition, most for more practical operational reasons. Most are limited to specific products, routes, slots and origin-destination pairs (excluding commercial service between intermediate points).

Some of the rights designed to promote interconnection were implemented without delay,1 serving specific industry plants or connecting fragmented networks. However, there were cases of stalled negotiations between concessions on terms of use for many of the rights2, and the use of other trackage rights has been problematic.

The concession holders are also allowed to use trackage rights on a voluntary basis to manage disruptions and congested sections of track (Regulation 107). However, there is generally no incentive for concessions to agree to terms on rights designed to facilitate competition, and their underlying interest is to preserve exclusive markets rather than compete for clients and undermine exclusivity.

The government also reserved the right in the titles to assign additional trackage rights for passenger trains. It also reserved the right to assign additional trackage and haulage rights for freight trains in the public interest – conditioned on the economic and technical feasibility from the point of view of the concession, the international traffic and on the basis of reciprocity. Now, no test of economic feasibility has been specified, and no awards on trackage or haulage rights have been made. These provisions are set out in Article 1.4.2 of the concession agreements.

The establishment of the ARTF helped alleviate some of the limited regulatory capacity by the Ministry of Transport and Communications (SCT) to enforce and promote the use of trackage rights, which has an impact in the promotion of development of rail services though more intense competition, although there are still operational, legislative and governance gaps, which are discussed next. Weak enforcement capacity to date suggests there is possibly an unexploited potential for improvement in efficiency and quality of service through development of competition within the current framework of the law.

Combined with an operational basis for tariff regulation (see below), the recent expiry of the 20 year period of exclusivity from trackage and haulage rights in concession agreements as an alternative protection for captive shippers to regulated tariffs may demand more private agreements regarding trackage and haulage rights, with recourse for shippers to ARTF should agreements prove elusive, hence the importance to strengthen regulatory capacity for the Agency.

1. 3. There is a gap in the regulation to define the process and methodology to determine tariffs when two concession holders do not reach agreement in interconnection services, or for captive shippers in the absence of competition

The Law on the Regulation of Rail Services, as amended in 2015, has as its stated purpose “to regulate the construction, operation, exploitation, preservation and maintenance of railways and guarantee their interconnection … as well as to foster the conditions for competition in public rail transport services…”. The law and the concession titles balance the basic freedom of concession holders to set tariffs freely and enjoy exclusive use of their networks with rights for concessions to compete between them using trackage rights in specified circumstances and provide protections for captive shippers from abusive tariffs.

In line with this thinking, the amended Law on the Regulation of Rail Services includes specific provisions in article 35 for the ARTF to set tariffs whenever two concession holders with interconnection services and associated trackage or haulage do not agree on establishing access rights and charges voluntarily, and in article 36 to establish mandatory trackage rights on specific routes when COFECE finds an absence of effective competition in a specific area.

However, currently, there is not an established official methodology and process for ARTF to establish access rights and charges where these are not agreed voluntarily. Furthermore, the law omits to specify what action a shipper might take if neither concession proposes a tariff or if the proposals are unacceptable, and no role is identified for the Agency (or for COFECE) in the absence of agreement.

Therefore, a gap in the law exists, because it fails to specify procedures to be followed when concessions fail to offer rates for interline services or offer only uncompetitive tariffs. A lack of regulatory capacity until the establishment of ARTF may also explain the absence of any instance of recourse to the provisions of the law to protect captive shippers through tariff regulation.

1. 4. The recent and forthcoming end of exclusivity to the use of their networks in many concessions poses challenges to competition and regulatory authorities, with implications on the future of the rail system in Mexico

COFECE has undertaken a very thorough assessment of competition in markets involving interconnection between concession networks (COFECE, 2016[1]). Its preliminary assessment found widespread absence of effective competition, but ultimately it was deemed the evidence was insufficient to take action. The Law on the Regulation of Rail Services provides for ARTF to remedy specific instances of absence of effective competition. Should ARTF ask COFECE to examine specific markets where it expects to find a net overall benefit from intervention, with a narrower definition of the relevant market, COFECE could confirm a lack of effective competition if the provisions of the law are met, and the investigation of COFECE provides the necessary supporting evidence.

In this scenario where absence of effective competition is determined by COFECE, ARTF would have to act to ensure that trackage and haulage rights are awarded on the rail network under assessment, and that the corresponding tariffs are set.

COFECE (2016[1]) interprets that the capacity for ARTF to ensure the award of trackage rights in the absence of competition only applies once the 20-year period of exclusivity set in the concessions is over. Considering that in exclusivity periods in most of the concessions end in 9 years, an increase in the demand of functions and resources of the ARTF is warranted. This puts additional pressure to issue the necessary regulatory framework for an effective operation of the Agency, and to address the budgetary and governance challenges discussed below.

The government could make more systematic changes to the competition framework across the network, but during the periods of exclusivity awarded in the concession titles this may require compensation to be paid to the concession holders to the extent that the new arrangements could reduce the value of the concessions.

Additionally, SCT and the government more broadly needs to begin work on its vision for the railway system post 2027 without delay, as the investment cycle of railways is much longer than 9 years. In this vision, a balance between exclusivity and intramodal as well as intermodal competition should be sought.

1. 5. A key objective of the Agency is to issue regulation – notably safety and technical regulation. For the former, the ARTF follows good regulatory practices established by the National Commission on Regulatory Improvement (CONAMER); for the latter, the ARTF recently established a National Advisory Committee for Standardisation (CCNN) as mandated by the Federal Metrology and Standardisation Law. However, there is not a forward planning agenda to prioritise on the regulation to be issued, which is also affected by the ‘one-in, one-out’ rule established to control de flows of regulation by the Mexican government.

According to the organisation manual, one of ARTF’s key objectives is the issuance of subordinate regulation, including technical regulation. So far, prioritisation to issue regulation by the ARTF is on lagging issues as opposed to a structured forward planning agenda constructed from criteria discussed with stakeholders, i.e. government agencies, regulated entities, experts or public in general. This affects the capacity of the ARTF to focus resources on the most needed regulation.

Additionally, Mexico recently introduced a new General Law for Regulatory Improvement that obliges regulatory agencies to a “one-in, x-out” principle (see Box ‎1.1). Namely, if a regulation is to be issued, the compliance costs it generates need to be stricken from another existing regulation. This rule has limited the capacity of the ARTF to issue regulation as it lacks a stock of regulations to be eliminated to comply with the rule.

Box ‎1.1. The one-in, x-out practice in OECD countries and in Mexico

What is the one-in x-out practice?

A one-in, x-out rule is a policy to offset potential burdens created by new regulations, by reducing or eliminating current ones. Thus, the practice requires eliminating an x number of regulations in order to release any new. In practice, the one-in, x-out rule can be implemented in several ways. For example, eliminating rule by rule or by offsetting equivalent negative impacts (more like a cost-in, cost-out rule) instead of a specific number of regulations.

The most commonly rationale for limiting regulatory costs relies in the negative correlation between such costs (measured as a proportion of gross the domestic product) and the economic performance in terms of economic and employment growth

Summary of practices in OECD countries

The offsetting approach has its roots in setting net quantitative targets for reducing administrative costs. This was pioneered in the Netherlands in the 1990s with the introduction of the Standard Cost Model – a method to quantify administrative burdens in monetary terms. The United Kingdom was the first OECD country to formalise a One-In, One-Out approach in 2011. Canada, Spain and Germany, followed the rule in 2012, 2013 and 2015, respectively. More recently, Korea, USA, Mexico and France introduced their versions of regulatory offsetting. Australia implemented the rule and later abandoned it. Finland has just completed a pilot project testing a one-in, one-out policy.

United States: Agencies shall revise or repeal two existing regulations for every new federal regulation that imposes costs. The rule asks to ensure that the total incremental regulatory costs of all new regulations offset by revised or repealed regulations, should be no greater than zero. The US approach takes into account all opportunity costs to society, direct or indirect – according to the Office of Management and Budget the opportunity costs is the appropriate concept for valuing both benefits and costs. The approach makes the process better connected to the regulatory impact assessment process; however, calculating all opportunity costs might be time-consuming, costly and dependant on the appropriate (econometrical) models.

Canada: The One for One rule was introduced in April 2012 based on the Red Tape Reduction Commission’s Recommendation Report. The rule requires offsetting new direct administrative burdens on business imposed for any regulatory change, by removing an equal amount of burdens from the stock of regulations. The rule also entails removing an existing regulation every time a new enacted rule imposes new administrative burdens on business.

France: A moratorium established in 2013 for new regulations was similar to the One for One, in which departments are required to both: offset the increase in costs to businesses and to remove or simplify an existing regulation when other is enacted. The difference relied in the local governments and citizens´ costs, which were also considered. In 2017, the rule was extended into the two-for-one policy with the intent to impose greater control on the regulatory flow of texts, as the original approach did not achieve the desired results.

United Kingdom: The One-In, One-Out approach was established in 2011. The programme was deemed highly successful and the Government decided to double the offsetting targets by introducing the One-In, Two-Out. In 2015 the approach was even strengthened and every pound in cost created by any new regulation had to be offset by a reduction of 3 pounds, creating the One-In, Three Out. The rule was a tool to achieve the Business Impact Target of reducing regulatory costs for businesses by 10 billion GBP for five years until the end in 2020. Regulatory offsetting was replaced in 2017 with a focus on promoting more efficient regulation, founded on high-quality evidence and supporting by transparency and accountability for costs and benefits.

Challenges

The rule one-in, x-out has many challenges in their implementation. Here some of the most relevant:

• The proper identification of costs and benefits, which can be direct or indirect. The measurement of costs is also a relevant challenge as it is time consuming and costly.

• Simple rules do not fit all cases. In new institutions and rising or developing industries there may be a need to create regulation to control risks, instead of reduce burdens. Thus, offsetting is not a real option and there is a need to establish special situations.

• The offsetting rule may be a burden by itself if there is no training, transparency and clear rules.

• Efforts analysing the potential effects of the x-out rule may have an impact on the current resources used in the development of the Regulatory Impact Assessment.

The one-in one-out rule in Mexico

In March of 2017, the Federal Government published in the Official Gazette, a decree with the guidelines to implement the one-in, two-out rule, for any entity of the federal administration that pretends to issue administrative acts, according to the Federal Law of Administrative Procedures – specifically under the scope of the Article 69-H regarding compliance costs. The rule focused on preventing the issuing of administrative acts, if they were to create compliance costs – except for some exemptions. These include emergencies, obligations from primary laws, international commitments, recurrent regulations, net positive benefits, etc.

The decree indicated that, if an entity sought to publish an administrative act, it must include within the draft project, two regulations that will be dropped from the same sector – Article 5. Then, the COFEMER (now CONAMER) could verify a net reduction of compliance costs. According to the COFEMER, 73 regulatory drafts were subject to the decree between March 9 and October 31 of 2017, resulting in cost savings equivalent to MXN 31 347.94 million – the costs generated by the new regulations summed up 1 758.06 million of pesos and the net reduction of costs was 29 589.88 million (COFEMER, 2017[2]).

In May 18 of 2018, the government published the current General Law of Regulatory Improvement. The law states that if any regulation creates compliance costs, the draft project must include the regulatory obligations or acts that must be abrogated to compensate the new burden. Thus, the new rule in Mexico is from the type cost-in, cost-out.

In Mexico, the Comisión Nacional de Mejora Regulatoria (CONAMER) is responsible for overseeing the implementation of the current one-in, one-out rule, and for this purpose monitors the offsetting of compliance costs for individuals following the introduction of a new regulation.

As in the decree, the law resumes the exceptions of the implementation of the one-in, one-out. However, there are no guidelines to properly adopt the rule and standardise practices. Also, there are no considerations for cases as new institutions and new or non-updated regulations across sectors.

Table ‎1.1. Characteristics and challenges of the Mexican Law of Regulatory Improvement
Concept	Features	Challenge
One-in, one-out	Cost offsetting	Timing and cost in measuring.
Guidelines	No guidelines	No clauses for new institutions and rising industries.
Implementation plan	No implementation plan	There are no evidence of training and transparency efforts. Misconception of the tool. Trade-offs between human resources in the adoption of the tool.
Subordinate regulation	No by-laws	Uncertainty about specific cases and implementation of the tool.
Source: (Trnka and Thuerer, 2019[3]), "One-In, X-Out: Regulatory offsetting in selected OECD countries", OECD Regulatory Policy Working Papers, No. 11, Paris, https://doi.org/10.1787/67d71764-en.

Furthermore, the one-in, one-out principle lacks of guidelines to implement the policy in standard basis and with complete certainty. The rule up to now is only indicated as an obligation to compensate for new regulation but with few exemptions, it does not take into account situations of urgency, new institutions, etc.

The absence of a forward planning agenda to issue regulation (see below) along with the one in, one-out affects the capacity of the ARTF to address regulatory issues of prominence.

1. 6. The ARTF and the General Direction of Rail Development of the SCT (DGDFM) are formally separated, but still share personnel, activities, administrative procedures and functions. In the operation, the agency and the General Direction have not defined what information belongs to each entity and personnel may play different roles within the ARTF and the general direction simultaneously.

The ARTF was granted with specific regulatory capacities by the law, but the SCT, the Ministry of Finance (SHCP) and the Ministry of Public Administration (SFP) have not finished yet the administrative arrangements to transfer all designated personnel to the agency. The ARTF must have 67 officials, most of them stemming from the DGDFM. Nonetheless, after two years, the ARTF has 18 officials and the allocation of the other 49 is still pending. Nowadays, the ARTF has regulatory responsibilities that cannot formally develop as the personnel is still in the DGDFM.

Additionally, some staff pending to be transferred has roles and functions within the DGDFM that should be performed by the ARTF, and it is not clear whether these activities will also be transferred along with the personnel to ARTF, or will remain in the DGDFM.

There is crucial information that ARTF still lacks and requires to perform its functions properly. For instance, the ARTF does not have a complete copy of the rail concessions and the DGDFM fails to provide it. In this sense, the ARTF turns to the concession holders in order to get some information.

On the other hand, clear allocation of financial resources and separated functions between public officials are pending issues in both the DGDFM and the ARTF. For instance, personnel in charge of the inspection process receive their travel allowance from the SCT while supervision in fact comes from the ARTF. This situation arises, as the ARTF lacks of proper and enough personnel to undertake an inspection process. For instance, the ARTF requires support from SCT to conduct an inspection process and the ARTF is the oversight body.

1. 7. The regulatory framework of rail in Mexico does not establish provisions for the participation of the ARTF in the concession process – being the SCT the sole responsible. The ARTF should participate in the process as they can provide non-binding opinions on regulatory matters. This is relevant because the ARTF is the agency that will interact with the regulated firms after concessions are granted.

The SCT is the entity responsible for the concession granting process in the rail sector. The current law does not include the participation of the ARTF in such a process – even though they participate informally. However, a more systematic participation of the ARTF would be useful as it is the institution in charge of monitoring the behaviour of the regulated entities.

A concession process in which SCT and ARTF co-ordinate beforehand may avoid asymmetries of information and align expectations about the future participation of each party. Thus, a more efficient and effective implementation of the regulatory framework can be achieved.

Assessment on governance of the Regulatory Agency of Rail Transport

In a context where there is a constant expectation for quick and efficient policy results, establishing high-performing regulators is a relevant element to attain good regulatory outcomes. For this purpose, regulatory agencies should aim at establishing institutional arrangements and organisational structures that allow them to reach their objectives effectively and to address the challenges efficiently.

The OECD Best Practice Principles for Regulatory Policy: The Governance of Regulators sets forward seven principles for regulatory agencies to improve their performance (OECD, 2014[4]).

1. 8. Role clarity: the objectives, functions, attributions and duties of the ARTF are scattered between the Law on the Regulation of Rail Services and the decree of creation of the ARTF and are concentrated in its organisational manual. Currently, regulatory and promotion duties are combined, which blurs the role of the agency. Furthermore, the ARTF cannot undertake some regulatory duties due to the lack of institutional capacities and gaps in regulation. Additionally, after two years of existence, personnel and functions of the ARTF and the General Direction of Rail Development are still mixed and with overlapping functions.

The ARTF was established on August 2016 as a deconcentrated body attached to the SCT. According to the decree of creation, the agency is responsible for overseeing three main aspects of rail transportation: 1) economic regulation regarding tariffs; 2) technical regulation for safety purposes; 3) inspections, coupled with the powers to enforce regulation and issue sanctions, when applicable; and 4) trackage and hauling rights.

During its first two years of existence, the ARTF has focussed its resources on complying with the immediate and time-driven commitments contained in the different legal documents. For example, the creation decree states that the agency needs to issue its organisation manual within 180 days from its publication or the Article 8 of the transitory clauses of the LRSF, which states that ARTF needs to issue a noise emission technical regulation within 60 days after the creation.

Despite the recent reforms to the rail regulatory framework, there is a need to assess the role of the agency to separate regulation and promotion duties. An example of the roles that need to be further clarified is the promotion of the rail network. According to the LRSF, the ARTF has as a function the promotion of the expansion and usage of the rail network. The accomplishment of this function requires the establishment of specific goals in co-ordination with the DGDFM to avoid conflicts with other regulatory duties. The agency faces competing objectives regarding its regulatory role in the rail sector and the promotion and expansion of the system, which in principle should be the sole responsibility of the DGDFM. See Box ‎1.2 for an OECD country example on the clarity of role of a regulator.

Another issue arises with the lack of installed capacity for ARTF to carry out inspections, which prevents it from discharging its duties properly. Nowadays the SCT centres support the ARTF on inspection activities. However, this co-ordination is not made through formal agreements, which can create tensions in the effectiveness of the inspection process to meet the agency’s standards.

Additionally, the regulatory framework for sanctions and fines is yet to be developed through specific guidelines for their application.

Finally, as mentioned before, the agency still faces severe constraints due to lack of personnel. Since the creation of the agency, arrangements were made to transfer staff from the DGFDM to ARTF, yet this process has not been completed.

Box ‎1.2. The role clarity principle in regulator: country example

Federal Institute of Telecommunications of Mexico

The 2013 telecommunications reform in Mexico created the Federal Institute of Telecommunications (IFT), as the agency in charge of sector regulation and antitrust. The Law of Telecommunications and Broadcasting states the faculties of both the IFT and the Ministry of Communications and Transport (former regulator of the market).

The IFT is an autonomous body with legal personality and own assets. It is in charge of regulating, promoting and supervising the use and exploitation of the radio-electrical spectrum, orbital resources, public telecom networks and the concession of broadcasting and telecommunications. It regulates the access to infrastructure and other essential inputs. It is also in charge of the technical guidelines regarding infrastructure and equipment to access the telecom network. Finally, it is the authority on antitrust issues for the telecommunication market.

On the other hand, the tasks of the Ministry of Telecommunications and Transport are oriented towards the promotion of the market. This includes activities such as policy planning to ensure universal coverage, collaborate on international agreements on telecom, acquire infrastructure, and so forth.

From the point of view of the role clarity principle, the complete separation of the regulatory policy and promotion activities in two institutions makes more efficient the implementation of both tasks, as now they do not compete for financial resources, personnel, priorities, amongst others.

According to the strength of the institutional network in each country, the role clarity principle could require a formal separation of powers to grant autonomy in the decision-making. Formerly, the Ministry of Communications and Transport was the institution in charge of the promotion but at the same time, it was the head of the deconcentrated regulatory body. As such, the Ministry approved the budget of the regulatory body, negotiated it with the Ministry of Finance and finally, assigned it to the regulator. Thus, there was a risk that the Ministry may have a potential influence over the performance of the regulator and its policy execution.

1. 9. Preventing undue influence and maintain trust: the ARTF has yet to improve its regulatory framework and develop formal practices to build-up trust and support decision-making. Recent legal modifications granting de jure technical independence are a relevant step forward, but further institutional arrangements will ensure an effective operation based on trust and reputation.

The ARTF needs to stay close to the stakeholders as it can learn about the industry, understand the effects of regulatory decision and the potential impact on the public. The ARTF requires also co-ordination with public agencies to deploy an integrated strategy. A basic requirement to keep a strong and effective relation with relevant actors is a planned, institutionalised and public agenda on stakeholder engagement. See Box ‎1.3 for some country examples.

Independence demands more efforts on transparency and accountability. The ARTF however, does not have a yearly planned agenda to work with stakeholders. The evidence shows that ARTF meets continuously with regulated firms but these are neither formalised nor planned. Additionally, co-ordination with public entities with shared responsibilities is limited, reactive and done on case-by-case basis.

Transparency and accountability are strong tools to ensure trust. The ARTF complies with the legal obligations but there is a need to increase actions on these matters.

Box ‎1.3. Preventing undue influence and maintain trust: some country examples

Government’s expectations and regulators’ responses in Australia

The Australian Government’s Statement of Expectations (SoE) outlines its expectations about the role and responsibilities of the Australian Competition and Consumer Commission (ACCC), as well as its relationship with the Government, issues of transparency and accountability, and operational matters. This is part of the efforts for the good corporate governance of agencies and for reducing regulatory burdens on business and the community. The SoE states that the ACCC must act independently and objectively in the performance of its functions and in the exercise of its powers. The ACCC in turn provides a Statement of Intent (SoI) outlining how it proposes to meet these expectations.

The Australian Energy Regulator has a similar SoE with the Council of Australian Governments Energy Council (COAGEC). This SoE outlines the expectations of compliance with its functions and implements a work programme that supports the objectives set out in the national energy legislation. The SoE sets out its work programme for regulating energy networks and markets, and the benchmarks that will measure its performance; it also sets out how it aims to achieve the principles of accountability and transparency, efficient regulation and effective engagement with stakeholders and other energy markets.

Regular dialogue with operators and consumers in Italy

Since 2015, the AEEGSI has a Permanent Observatory of Energy, Water and District Heating Regulation to facilitate a continuous dialogue with representatives of national associations and to report on AEEGSI activities, within a broader developing process aimed at enhancing AEEGSI accountability.

The Observatory's functions are mainly to:

• Increase stakeholders engagements in the decision making processes, with particular regard to market and infrastructure regulation and to consumer protection;

• Facilitate the acquisition of data and information that may contribute to the preparation of RIA, as well as for the ex post evaluation of policies and implemented decisions of the regulator;

• Promote the preparation of consultation documents on matters within the responsibilities of the regulator;

• Acquire from representatives of consumer groups, users and end customers, suggestions for evaluating the actual results of the implementation of commitments of regulated entities.

Source: (OECD, 2016[5]), Being an Independent Regulator, The Governance of Regulators. https://doi.org/10.1787/9789264255401-en.

1. 10. Decision making and governing body structure for independent regulators: The head of the ARTF is a single member freely appointed and removed by the President of Mexico – meaning that there is no defined period for the position. The single member model holds more capture risks and lacks of internal checks and balances in the decision-making processes.

The ARTF’s creation decree defined it as a deconcentrated body with technical, operational and managerial capacity.3 Notwithstanding, the risk of biased decisions is high due to lack of conditions allowing actual independence, for example, the non-existence of fixed appointment periods and removal criteria. In fact, the Minister of Communications and Transport appoints and removes directly the head of the ARTF.

On the other hand, there is no regulation requiring neither a public contest for the appointment of the head of the ARTF nor establishing the necessary technical competences. This situation can lead to undesired political influence and unfitted profiles in the position. See Box ‎1.4 for country examples of a decision making body of an economic regulator.

Box ‎1.4. Decision-making and government body structure for economic regulators: country examples

Mexico’s Federal Institute of Telecommunications (IFT)

The Federal Institute of Telecommunications has a board of seven commissioners, the President and six members. The IFT has to follow a constitutional-defined process for appointing commissioners. First, the candidates must prove their experience and technical training relevant for the sector. The candidates’ application is analysed by an Evaluation Committee, which is comprised by the heads of the Central Bank of Mexico, the National Institute for the Evaluation of Education, and the National Institute of Statistics and Geography – autonomous bodies from the government of Mexico.

Thereafter, the Committee conducts a technical exam which is prepared by at least two universities. The Committee propose between 3 and 5 candidates to the President of the Republic. The President nominates one of the candidates to the Senate, and it has to be endorsed by at least two thirds. If the Senate does not approve the candidate, the President has to select another one from the Committee’s proposal and repeat the process. The process would be repeated until a candidate is approved or until there is just one candidate left.

According to the Constitution, the appointment of the IFT is for a fixed period of time and the removal of the commissioners is only under specific situations. Thus, the President of Mexico or the Congress cannot remove directly the members of the board.

The appointment process of the ITF and the Competition Commission of Mexico (both modified through the Competition constitutional reform of Mexico) is one of the strongest practices across OECD countries as it holds a based-experience and education public tender.

France’s Commission for Energy Regulation (CRE)

The French energy code provides that Board of Commissioners of the Commission for Energy Regulation comprises six members, while respecting parity between men and women. The President of the Board is appointed by a decree of the President of the Republic upon proposal of the Prime Minister, following public hearings and a formal opinion on the nominee expressed by the relevant parliamentary committees. Three members of the Board are also appointed by a decree of the President of the Republic, one of them upon proposal of the Minister in charge of the French Overseas Territories based on the person's knowledge and experience of non-interconnected areas. The Presidents of the National Assembly and the Senate appoint two additional members of the Board each (one based on the person's knowledge and qualifications in the field of data protection and the other in the field of local energy services).

Italy’s Regulatory Authority for Electricity, Gas and Water

The Italian Regulatory Authority for Electricity Gas and Water was established in 1995 by a Law, which defines the Authority’s governance system, including Board structure, the appointment mechanism, and members’ requisites. The Authority's Board is composed of five commissioners: the President and four members.

All commissioners are appointed by a decree of the President of the Republic following nomination by the Council of Ministers on the basis of a proposal by the Minister of Economic Development. Nominations are submitted to the relevant parliamentary committees for scrutiny, and the appointment is based on a two-thirds majority vote. In 2011, following a spending review which involved all public sector, the number of Board members was reduced from five to three.

The Prime Minister nominates a Chairman, in agreement with the Minister for Communications. The nominee is subject to the binding opinion of the relevant parliamentary committees of the Senate and the Chamber of Deputies, which can hold hearings of the nominee. Following a favourable opinion by two-thirds of the members of each relevant parliamentary committee, the Chairman is appointed by a decree of the President of the Italian Republic. In 2011 the number of Board members was reduced from 9 to 5.

Source: (OECD, 2018[6]), Driving Performance at Ireland’s Commission for Regulation of Utilities, The Governance of Regulators. https://doi.org/10.1787/9789264190061-en; Federal Law of Telecommunications and Broadcasting (Ley Federal de Telecomunicaciones y Radiodifusión).

1. 11. Accountability and transparency: The ARFT regularly publishes information on safety and other indicators in the rail sector; however, this information is limited in scope. Moreover, the agency is not currently accountable to Congress, nor it has practices to promote accountability to other stakeholders besides the SCT and the SHCP.

The ARTF publishes quarterly statistical information about cargo, tariffs, locomotives, cars, equipment, lines, etc. in the web portal (www.gob.mx/artf). In addition, since 2016, the agency produces quarterly safety reports, which did not exist before. Safety reports include information regarding accidents, theft and vandalism in the Mexican National Railway System public and transparent. Besides, the ARTF produces a yearly report with its main activities – two new indicators of the report are part of the Strategic Indicators of the INEGI.

Currently, the ARTF is accountable according to the requirements of the applicable laws. This includes obligations to provide information on its website on salaries and other organisational information. It is also accountable to SCT and SHCP, but not to congress. However, the ARTF can increase the level and scope of concepts to be accountable. For example, performance indicators, clear objectives and goals are not yet established. See Box ‎1.5 for a country example on practices of accountability and transparency.

Box ‎1.5. Accountability and transparency in the UK Office of Rail and Road (ORR)

Formally, the ORR is accountable solely to the Parliament. While members of the Board are appointed by the Minister they are not accountable to him/her but, as noted above, they are appointed to be independent of Ministerial control. The Minister is unable to direct the regulator or to overrule regulatory decisions. While the Minister may guidance rarely done and always done publicly through a published letter. However while the Secretary of State can provide guidance and make representations, he cannot direct the Board.

Along with the ORR’s formal accountability to Parliament, there are several measures in place to ensure that this accountability is tested. Firstly, the ORR publishes an annual business plan which provides its strategic objectives and provides a number of measures, both quantitative and qualitative around those measures. The business plan identifies medium and long-term outcomes under each of its strategic objectives. The plan then notes a number of activities taken from the former work programme that are expected to contribute to achieving the longer term outcomes specified in the plan. This is a strong accountability mechanism that commits the ORR to achieving and reporting on a number of goals that, taken together, provide a good picture of the operational success or otherwise of the regulator.

Along with the business plan, the ORR has a requirement to publish an annual report, which is enforced by the National Audit Office (NAO). The Annual Report summarises the key activities and events of the reporting year against the framework of the objectives set out in the business plan. This is a key tool in terms of both accountability and transparency, as it provides substantial performance information in a format that is easy to understand and assess.

While the ORR has an internal requirement to publish all major decisions, there are also statutory and legal requirements to publish certain types of decisions and give reasons supporting the pronouncements. The ORR must maintain a public register of all decisions relating to licences, access agreements, exemptions, consents and enforcement action in respect of its rail economic functions. On the safety side, it publishes details of all improvement and prohibition enforcement notices served on business and prosecutions.

Moreover, the ORR is required to participate as a witness and answer questions or provide evidence to Parliamentary Committees. These committees, the Transport Select Committees and the Public Accounts Committee scrutinise the ORR’s work performance in their roles overseeing government policy and performance.

Source: (OECD, 2016[7]), Governance of Regulators’ Practices: Accountability, Transparency and Co-ordination, Paris, https://doi.org/10.1787/9789264255388-en.

1. 12. Stakeholder Engagement: The ARTF has no proper communication channels with stakeholders, as there is no planned agenda elaborated in advance. Besides, the current meetings are scattered during the year without public records. The ARTF on the other hand, follows a strong consultation process for draft regulations.

The ARTF conducts frequent meetings with stakeholders such as regulated firms and public entities. Most of the time, the sessions take place when stakeholders request them or when the ARTF reacts to specific circumstances. Besides, the follow-up process lacks of proper records. See Box ‎1.6 for a country example on stakeholder engagement.

Co-ordination between the ARTF and public entities is scarce and depends on case-by-case. For instance, communication with COFECE is neither recurrent nor based on prevention.

The main contact points between the ARTF and its stakeholders are the programmed meetings and the consultation process during the draft of regulations, which is managed by CONAMER. However, this engagement is limited due to the restrictions ARTF faces to issue regulation due to the one-in one-out rule.

Box ‎1.6. Stakeholder Engagement: Corporate strategy and annual forward work programme of OFGEM in the United Kingdom

The Office of Gas and Electricity Markets of the United Kingdom has developed a corporate strategy that sets out, amongst other things, Ofgem’s mission, outcomes, regulatory approaches, priority activities. Ofgem has also separately published regulatory stances which are principles for drafting policy. These regulatory stances are:

• Promoting effective competition to deliver for consumers.

• Driving value in monopoly activities through competition and incentive regulation.

• Supporting innovation in technologies, systems and business models.

• Managing risk for efficient and sustainable energy.

• Protecting the interests of consumers in vulnerable situations.

Ofgem establishes an annual forward work programme for setting its corporate strategy. It initially publishes a draft forward work programme, and then seeks submissions, which are considered for finalising the forward work programme. For example, Ofgem’s draft Forward Work Programme for 2017-18 was released for consultation on December 2016 for a 3 months period for submissions. The final version was published on March 2017.

The draft forward work programme for 2017-18 sets out key initiatives in which were identified specific pieces of work that Ofgem considered that would deliver the greatest benefit to consumers given its resources. The initiatives presented were:

• Enabling a better functioning retail market;

• Facilitating the energy transition;

• Learning from the first RIIO* framework and setting RIIO-2 up for success;

• Introducing competition in monopoly areas;

• Becoming an authoritative source of quality analysis.

The forward work programme also sets out Ofgem’s budget for the period, and includes regulatory and e-serve performance indicators and deliverables for each of the pieces of work under the initiatives.

Note: * Revenue= Incentives + Innovation + Outputs.

Source: (OECD, 2018[6]), Driving Performance at Ireland’s Commission for Regulation of Utilities, https://doi.org/10.1787/9789264190061-en.

1. 13. Funding: the ARTF has limitations to get the necessary funding it needs to accomplish the objectives and functions stated in the legal framework.

The ARTF analyses its budget internally and subsequently negotiate with SCT the amount of resources for the next fiscal year. The SCT can however, limit the budget as it is the final institution accountable of the sector. After two years of the ARTF’s existence, it is important to analyse the actual needs of financial resources and personnel in order to accomplish the objectives of the agency.

The agency is yet to incorporate appropriate staff in sufficient number to carry out the tasks relating to its organisation and attributions. The regulator’s staff must be aligned in number and profiles with the regulator’s objectives and goals. Furthermore, it is important that the regulator develop the ability to manage human resources autonomously and effectively.

The budget of the ARTF may depend on the SCT’s financial resources. A direct source of funding can help to ensure financial independence. For instance, the ARTF can get and fully administrate the resources from fines and the licence fees established in the concessions – the current fee is 2% of annual revenues and goes directly to the SHCP. See Box ‎1.7 for an example of funding arrangements from the United Kingdom.

Box ‎1.7. Funding in the UK’s Office of Rail and Road

The Office of Rail and Road can work with more autonomy from the central government as its activities are funded by the rail industry and by the Department of Transport. On the rail side, it receives the funding from the rail industry (through license fees and safety levies). From the road activities, it receives a direct grant from the Department of Transport. The economic regulation funding comes from Network Rail’s licence fee. It also recovers costs from its work related to other networks not owned by Network Rail. The health and safety activities are funded through a safety levy, which is based on the turnover of each railway service provider.

Table ‎1.2. Rail’s Health and Safety Regulation levy scheme
Company turnover	Railway safety levy
<GBP 1 million	GBP 0
GBP £1 – 5 million	GBP 1 000
GBP 5 10 million	GBP 5 000
Over £10 million	Apportioned according to relevant turnover. As a guide for budgetary purposes, levy payments have in the past been around 0.1% of reported relevant turnover

For the 2018-19 period, the ORR received GBP 30.3m from the rail industry that represented around 93% of its total income:

• 51% corresponding to health and safety regulation

• 42% to economic regulation

• 7% corresponded to the direct funding from the Department of Transport.

Figure ‎1.1. Total income from ORR’s rail and roads functions

2018-19

An element to highlight in this scheme is that, there is no potential for cross-subsidies between these three funding streams.

The majority of its expenditure is on staff costs and the overheads that are necessary for them to carry out their work, such as building maintenance and IT.

By November 2018, the ORR had 316 employees and the staff costs expenditure was of GBP 19.8m (GBP 1.8 m per month approximately); this represents around 65% of the annual budget.

Even when ORR’s budget is not decided by the executive branch or approved by the Parliament, to ensure transparency of the budget management, the ORR sends to the Parliament and publishes on its website an annual report with detailed financial indicators.

According to an Oxford’s Economics paper on the economic contribution of rail in the United Kingdom published in 2018, the direct and indirect contribution of railway’s related activities goes up to GBP 36.4bn in terms of contribution to the GDP, and generates around 600 000 jobs. This represents around 2% of the GDP.

Source: (ORR, 2018[8]), Business Plan 2018-19, UK Government, London. https://orr.gov.uk/__data/assets/pdf_file/0006/27465/orr-business-plan-2018-19.pdf (accessed 2 March 2019); and (Godden, 2018[9]), The Economic Contribution of UK Rail 2018, Oxford Economics, London. https://www.oxfordeconomics.com/recent-releases/06ec32db-6550-44ed-ac64-6502b9530867 (accessed 2 March 2019).

1. 14. Performance evaluation: the ARTF does not have a performance evaluation or indicators (internal and/or external) that help the decision-making in the regulatory process.

Currently, ARTF does not have mechanisms to assess its own performance and the one of the sector. However, the agency aims to implement the National System of Railway Indicators which will publish information of the Mexican railway system for which there is no further information yet. At the time of preparing this report, the ARTF reported that it is preparing 12 indicators, which it plans to put for public consultation.

Indicators that evaluate the performance of the industry can be developed based on the analysis of collected data. This information would ensure that all railway companies have access to relevant indicators, which can contribute to improve compliance and the performance of the whole sector.

For regulators, performance indicators need to fit the purpose of the assessment, which is a systematic, analytical evaluation of the regulator’s activities with the objective of seeking reliability and usability of the regulator’s activities. The development of these indicators can help identify problem areas, orient decisions, track progress and identify priorities. Organisational and financial performance as well as the existence and effective use of tools are important aspects that should be measured.

Box ‎1.8. Italian Regulatory Authority for Electricity, Gas and Water performance indicators & assessment framework

The Italian Regulatory Authority for Electricity, Gas and Water (AEEGSI) tracks both service quality (outcomes) and the efficiency and effectiveness of the regulatory process (inputs and outputs). The aim is to improve the regulator’s performance and the quality of the services provided to consumers.

Outcomes

The AEEGSI defines outcome indicators to design incentive-based regulation and monitor the evolution of the regulated sectors. For instance, AEEGSI has been able to progressively increase the quality of supply through incentives and penalties paid to and by distributors by measuring the average duration of interruptions of electricity supply.

The AEEGSI conducts an annual review to monitor the evolution of the energy retail markets and eventually adjust regulatory provisions to foster competition and enhance consumer protection. The annual review uses, for instance, the HHI index (Herfindahl-Hirschman Index) to measure:

• competition

• the ratio between complaints and served customers to capture the quality of the interaction with energy suppliers

• the share of consumers changing their supplier (i.e. switching rate) to track the sector’s maturity (consumers’ awareness and trust, suppliers’ proactivity and the regulatory environment).

By assigning a standard cost for unit of energy not supplied, it is also possible to evaluate the direct impact on the final users through a cost-benefit analysis on the consumer side, considering incentives paid to distributors and avoided interruptions.

Inputs and outputs

The AEEGSI links the Strategic and Operational planning process to its objectives, which are assessed in terms of inputs and outputs. For each objective, inputs are mainly determined by the costs of the employed workforce. On an annual basis, each Department defines the working hours and the relative annual costs an objective has required to be met.

During the regulatory process, each deliverable may be considered an output to be associated to an objective. In order to distinguish contributions from different units, production processes have been broken down and intermediate outputs are also considered, as long as they could be identified as final products of specific phases of a process or sub-processes.

Considering the peculiarity of the regulation and the rapidly evolving regulated sectors, a quantitative estimation of output has been centred on the complexity inherent to their realisation. This feature is analysed summing indicators to be assigned in a dedicated IT information system, related to four parameters:

• Problem solving: it is measured with reference to the necessary professional skills, the discretion applied to solving the case, as well as the ordinary or innovative feature of the case in question.

• Effort: the intensity of the commitment sustained to bring the output to fruition, such as the quantitative dimension of the activities to be carried out, the severity of the approached internal procedure, and the intensity of the interactions with other stakeholders.

• Co-ordination among units: the need to make use of contribution of other organisational units and from which it is possible to infer a customer-supplier relationship.

• Time compression: the need to achieve output in a shorter time due to exogenous and unforeseen or foreseeable causes, such as the need to modify the current planning of activities.

• Performance assessment is carried out analysing, for each objective, the evolution of input and output indicators through the regulatory period considered in the Strategic and Operational Plans and their correlations to evaluate the overall efficiency and identify potential improvements.

Source: (OECD, 2018[6]), Driving Performance at Ireland’s Commission for Regulation of Utilities, Paris, https://doi.org/10.1787/9789264190061-en.

Recommendations related to rail regulation

• ARTF’s should evaluate if and where introduction of additional trackage rights of the kinds provided for in the concession agreements could unlock significant gains in network-wide efficiency and competitiveness for Mexican industry without undermining the sustainability of the rail services provided already by the concessions. A good network model would be extremely useful in making these assessments and evaluations.

• ARTF should also look into reporting requirements in regard to the location of wagons, as poor service in the return of wagons owned by third parties can readily be used as a non-tariff barrier to competition. Railinc already tracks wagons in international service and extension to domestic traffic might not therefore be too challenging. ARTF should also review existing arrangements for charges for the movement of empty wagons. Both concession holders and third parties see shortcomings in the current situation.

• ARTF’s first priority in developing capacity to make the provisions for connectivity and competition in the law fully operational is to establish the basis for tariff regulation, when needed, for both captive shippers and cases of failure to reach agreement on mandated trackage and haulage rights. Such charges will need to cover marginal costs, as stipulated in the Law. For captive shippers, a guideline for identifying abusive prices will need to be established.

  Methodology followed by the US STB might be followed, but its approach has been criticised as being overly complex and expensive to use as well as not resting on solid economic grounds (Pittman, 2010[10]), (TRB, 2015[11]). Alternatives have been proposed in the United States – including econometric analysis of comparable shipments in more competitive conditions, commodity-specific ceilings on mark-ups over variable cost, and location-specific rate-of-return regulation – but these have their own drawbacks and have not yet been used in practice.

• ARTF will need to develop a methodology of its own to define maximum tariffs, allowing for a reasonable contribution to the fixed costs of the railway informed by Ramsey-Boiteux pricing theory. The methodology adopted should also aim as far as possible to minimise modelling demands and the need for expensive consultancy to establish whether the thresholds set are met. There are no methods to provide theoretically perfect thresholds for “abusive” pricing or “fair” regulated tariffs – these are political and philosophical rather than scientific and economic concepts. The expertise of the ARTF should be relied on to set workable values following consultation with both shippers and concession holders. Consultation needs to go beyond a request for opinions on draft rules and involve thorough, but not protracted, discussion. An operational procedure is urgently needed, and in this as in so many contexts, the best may be the enemy of the good.

• ARTF should also examine the availability of interline services and develop procedures for setting regulated tariffs where concessions fail to offer services. It may be sufficient to interpret a failure to offer a tariff for an interline service as equivalent to setting an abusive tariff. Shippers are naturally hesitant to make complaints against railways on which they depend for transport services, in Mexico and elsewhere in North America, so the ARTF will need to take initiatives to monitor operation of the market.

  It should be kept in mind that overall the performance of the concessions and the system established in 1995 has been exceptional. The object of intervention by ARTF is not to overturn the system but to identify the areas of opportunity that certainly exist for developing rail markets. Interline services may present more opportunity for gains in the short term than additional trackage rights, with minimal damage to the existing markets of concession holders.

• SCT and the government more broadly needs to begin work on its vision for the railway system post 2027 without delay, as the investment cycle of railways is much longer than 9 years. ARTF’s expert opinion should be sought in this regard.

  An efficient system should continue to be organised around exclusive concessions but parts of the market might be suitable for more use of broad trackage rights. As in the United States, the eventual system will have to be based on a sustainable balance between exclusivity and intramodal as well as intermodal competition. The model of fully commercial railways is the most effective and financially sustainable option for essentially freight railways like those of North America. The framework established in Mexico has proved successful and durable, and a policy of incremental improvement rather than radical change is more suitable.

  See Box ‎1.9 for the Activities carried out to enhance the performance of the railway system by the ARTF 2018-2024 administration.

Box ‎1.9. Activities carried out to enhance the performance of the railway system by the ARTF 2018-2024 administration

Restructuring of Federal Rail Licenses (LFF)

Taking into consideration the public passenger transport projects that are currently being developed in the country, ARTF should pay special attention to the technical, operational and regulatory regulation in public freight rail transport and passengers.

In order to improve the safety in the operation of the provision of public services of freight, passenger and / or mixed transport, the Agency is evaluating the restructuring of the categories that currently exist for the issuance of LFFs, taking into account the delimitation between the functions performed by the personnel involved in the rail freight and passenger operation, as well as the personnel involved in the maintenance and conservation of the general communication routes, considering that these activities could intervene in the operation of the services provided therein.

Derived from the above, the Agency has sought the exchange of information with companies dedicated to training, such is the case of the Centro de Formacion Ferroviaria Adofer, S.A. de CV, which conducted a study of the "Railway Licenses in Mexico, Europe and America", which aims to publicise an overview of the granting of the various existing rail licenses in Mexico, Europe and America, identify the requirements necessary for issuance, applicable regulations and make a comparison of them. Likewise, identify those licenses that are not found in the Mexican rail system and that can be used according to the nature of the functions of the existing posts in the country.

The ARTF, in order to carry out the restructuring of the LFFs, should take into account the technological developments, studies and cutting-edge research worldwide related to rail freight and passenger transport, which could be implemented, for the update of the categories of the LFF.

Likewise, ARTF intends to carry out working groups with the concessionaires and assignees of the National Rail System to assess and agree on the updating of the existing categories of the LFF, taking into consideration the personnel involved in the operation of the railway equipment and the one that takes part in the maintenance activities, with the aim of improving the safety in the railway operation.

Collaboration agreement between the ARTF and National Autonomous University of Mexico (UNAM)

It will allow the Agency, through UNAM, to carry out road engineering studies, considering the danger index of railroad crossings, to assess the current impact they have on vehicular traffic and propose solutions to improve mobility and safety in the said crosses; studies that will provide the Agency with a planning and decision-making tool, which allow identifying the actions to be carried out in each of the crossings that are studied in urban areas and population centers, applying the current regulations such as the technical regulations NOM-050-SCT2-2017, “Provision for the signaling of crossings at the level of roads and streets with railways” and NOM-034-SCT2-2011, “Horizontal and vertical signaling of urban roads and highways”.

In this context, the integration of security committees in the federal states of Mexico with the highest incidence is promoted: Coahuila, Durango, State of Mexico, Michoacán, Nuevo León, Veracruz, in order to monitor the operation of the crossings that are identified as susceptible if financed by the National Safety Fund for Railroad Crossings.

Likewise, the survey and georeferenced registration of the existing crossings in the Mexican Rail System that will allow to know the universe to be considered for future fund financing is carried out.

Source: ARTF 2018-2024 administration.

• The Agency should establish a system of forward planning in which all the needs to issue or update regulatory instruments are identified, in a horizon of six months to one year, as it is now indicated in the new General Law of Regulatory Improvement. This planning should include both technical regulation, and all the other legal instruments, for instance, by-laws (reglamentos), manuals, and guidelines. This planning may effectively identify the efforts ahead and may help determine the resources needed to maintain the regulatory framework updated, including the need of regulation to be eliminated to comply with the one-in, one-out rule.

• One way to comply with the one-in, one-out rule is to take advantage of deadwood regulation of the SCT to compensate the regulatory costs that potential regulation of the ARTF may create. Thus, in the current situation, it is important to develop a joint SCT-ARTF strategic plan for the emission of regulation. The participation of the parties might facilitate the co-ordination efforts for the introduction of new regulations by the ARTF.

• Additionally, the ARTF and the SCT may seek to reach an agreement with the CONAMER to seek a moratorium or an exception to the one-in, one-out rule to issue the most pressing regulation or the one with the most significant impact for the performance of the rail sector.

• The SCT, SHCP, SFP and the agency should co-ordinate to complete without further delay the transfer of staff to the agency according to the original plans.

  Besides the transfer of the pending officials, it is important to conduct an analysis about the minimum human resources and technical profiles that the ARTF needs to perform its duties.

  Along with the staff agreed to be relocated, it is also necessary to finish the transfer of information from the DGDFM to the ARTF so the agency can perform according to objectives.

• ARTF and the SCT should work together to agree and prepare the necessary reforms to the legal framework to include ARTF in the process of assessing and granting of concessions. The ARTF could provide nonbinding technical opinions on regulatory matters. Besides strengthening the technical and regulatory aspects of the concession, this arrangement may help to deepen the co-ordination between the agency and the ARTF after the concession in granted, in favor of a better regulatory performance of both parties.

Recommendations on governance

• The regulatory framework that defines the role and functions of ARTF should be reviewed to strive for a reform that focus the Agency´s functions on regulatory roles, while allocating the promotion duties to DGDFM. In the short term, the ARTF should create a strategy document to define its priorities between its current regulatory and promotion duties.

• An assessment of the inspection duties of the ARTF should be carried out in order to define the resource needs to discharge this function properly. A short and long-term strategy to comply with these duties should be defined, considering formal co-operation agreements with the SCT centres while ARTF acquires its own capacities. See Box ‎1.10 for a short description of the activities carried out by the 2018-2024 administration of ARTF to enhance the performance of the inspections duties of the Agency.

Box ‎1.10. Activities carried out to enhance the performance of the inspections by the ARTF 2018-2024 administration

• Updating of specific ARTF areas through training: the model includes continuous improvement of inspections and supervisions focusing on four elements: infrastructure, operation, equipment and auxiliary services

• Harmonisation of criteria in the undertaking of inspections: harmonisation of the terms of inspection requisition in the three zones of Mexico (north, centre, south); Notification to the ARTF of the type of information requested by the Rail Transport Departments to the concessionaires / assignees

• Programme of smart verification. the objectives are:

  • Make intelligent use of the assigned financial ceiling, optimising the resources granted;

  • Schedule and execute verifications focused on quality and not quantity;

  • Contribute to the concessionaire's safety tasks to make rail transport more efficient; and

  • Increase the technical capacity of the inspectors through ongoing training

    The programme comprises four stages: planning, execution, evaluation, and follow up

• Integral programme of inspections for 2019: in includes in the short term the inspection of the complete system of the concession rail network, and in the short to medium term the inspections of the auxiliary rail lines without use. The programme will be carried out through Intensive verification operations, in which personnel from both the ARTF and the SCT centres will participate. The intensive verification operations will follow the following key criteria:

  • Railway Security;

  • Strategic corridors for the development of the Mexico;

  • Accident rate;

  • High risk corridors (for instance, hydrocarbon); and

  • Potentially important rail lines without use.

• Development of the automated system Rail Verification Module Project:, it will allow automated institutional system to incorporate the information generated in the railway inspection processes into a technology platform, reducing the criteria of human perception in order to standardise the consistency of the data, time reduction, shielding of the information generated and obtained, thereby reinforcing the safety and competitiveness of this mode of transport.

Source: ARTF 2018-2024 administration.

• Issue the necessary guidelines and other regulatory instruments to put in effect an effective sanctioning system.

• The ARTF should consider adopting guidelines as part of its regulatory framework and establish a strategy to avoid subjectivity in decisions and reduce the risk of regulatory capture, which can arise from government agencies, regulated entities and the public.

  This might include the establishment of formal channels of communications, as they may provide relevant information about the quality of the rail service. A clear and transparent engagement method and its monitoring create trust in the regulator. This engagement process can involve other institutions as COFECE and CONAMER.

  The build-up of trust can be strengthened with formal and public processes to co-ordinate with other public agencies with shared responsibilities. For example, with COFECE the Law on the Regulation of Rail Services mandates co-ordination when there is suspicion of lack of competition. Thus, both institutions should establish a detailed process indicating timing and resolutions of the intervention request.

• It is important that the ARTF establishes a yearly planned and public agenda with dates and topics to cover with the stakeholders. As it will be seen in the stakeholder engagement principle, this agenda should involve the participation of the relevant actors in the designing of public policies. The establishment of the agenda should be aligned with the regulatory objectives of the ARTF.

• The Agency should consider establishing practices on accountability and transparency that go beyond its current obligations that derive from the national framework. For instance, the ARTF should improve the quantity and the quality of information it publishes in its web portal in handily formats.

• The SCT and the Agency should consider exploring alternative models for the governing body of the ARTF. In this process, the SCT and the Agency should weigh in the advantages of having a governing body with arms-length distance of political cycles and decisions, which can help the agency discharge its regulatory duties more effectively.

• In order to strengthen accountability and transparency practices, the ARTF should boost its reporting mechanisms by considering submitting yearly reports to Congress as a separate item from the reporting of the SCT. Proactive mechanism could also be adopted to submit the report to other key stakeholders and seek their feedback, such as industry association and sector experts.

  For this purpose, the agency should assess the type of information it requires to comply with its objectives, in order to offer useful and relevant statistical information to its stakeholders. This can be done through an international benchmark and focus groups with relevant actors. In line with the former, another source of accountability and transparency is the evaluation of performance indicators, which is addressed below.

• ARTF has ample opportunities to enhance its practices on stakeholder engagement. This might include establishing yearly plans that set out regular meetings with stakeholders, provisions to record meetings, mechanisms to follow up on issues put forth, and the creation of permanent communication channels.

  Special emphasis should be considered to establish formal communication and engagement activities with entities such as COFECE and CONAMER, in order to maintain a fluid dialogue. This might help ARTF to discharge its regulatory duties more effectively.

  See Box ‎1.11 for a description of the Activities carried out to boost the stakeholder engagement activities by the ARTF 2018-2024 administration.

Box ‎1.11. Activities carried out to boost the stakeholder engagement practices by the ARTF 2018-2024 administration

Rounds of Dialogue to identify improvements to the railway system between users, concessionaire and the ARTF during 2019

The opportunity areas to improve the Mexican rail system were identified by dividing it into three parts:

• From the user to the concessionaire and Agency;

• From the concessionaire to the user and the Agency; and

• From the Agency for the user and the concessionaire.

There have been two meetings with each group, with the following progress:

• ARTF will work with an intermediary and an agreement document will be generated:

  • Traffic analysis where there is an interline rate to allow continuity, and

  • The cases of trackage rights that are not being used or where its use is is detrimental to the load.

• The conversion of cargo from truck to rail will be identified and promoted:

  • A joint strategy will be made with dealers and user associations,

  • A policy for intermodal traffic will be sought, and

  • The no charging of maximum rate in empty cars will be promoted.

• Users will report the problem of insecurity to add them to the collaboration with the national guard.

As a results of the round of dialogue, the ARTF will:

• Publish on its web portal

  • Good international practices.

  • Rights and obligations of users, concessionaires and ARTF, and

• Railway projects that affect the efficiency of the sector, for example mobility, level crossings, spurs in disuse, studies to increase railway capacity.

• Annual training program for the sector

• Incentives with the Tax Authority for users who invest in rail infrastructure

• Official conciliation procedure and its documentation, in accordance with Article 112 of the Rail Service Regulation

Source: ARTF 2018-2024 administration.

• In terms of consultation in the drafting of regulation, the ARTF should consider undertaking practices of early consultation more systematically. This entails engaging with stakeholders at the outset of the identification of a problem, before a solution has been clearly identified, and before a draft legal instrument has been prepared.

• The SCT, SHCP and ARTF should review the funding requirements of the agency in order to define the budget the agency needs to discharge its duties effectively.

  In this revision, consideration should be given to implement the necessary reforms to allow ARTF to propose its budget autonomously and negotiate it directly with SHCP, and to exercise this budget independently.

  Additionally, these reforms should consider including provisions to give a portion of the fee currently charged to the regulated entities directly to ARTF.

• The ARTF should develop a system of indicators in line with its main functions, which allows the evaluation of its public policy objectives in different periods. Some indicators should be of longer-term nature and focus on the potential impact of the regulatory policy (e.g. number of accidents/distance; freight tariff stability, etc.); however, it is important to mention that these are multidimensional indicators and its evolution is not fully under the control of the ARTF. These targets should be used as a basis for the design and evaluation of the public policy.

  The indicators should include other kinds of metrics such as administrative or managerial indicators, including number of inspections, budget allocation, number of fines imposed, etc. Although these parameters are relevant, it is important to bear in mind that they do not reflect the effectiveness or success of the public policy.

References

[1] COFECE (2016), Reporte Preliminar sobre Competencia Efectiva en el Sistema Ferroviario Mexicano [Preliminar report on the Effective Competition in the Mexican Railway System].

[2] COFEMER (2017), Informe Anual de Desempeño-COFEMER 2016-2017, http://www.cofemer.gob.mx/docs-bin/dg/Informe_anual_2017.pdf (accessed on 31 January 2018).

[9] Godden, D. (2018), The Economic Impact of UK Rail 2018, Oxford Economics, London, https://www.oxfordeconomics.com/recent-releases/06ec32db-6550-44ed-ac64-6502b9530867.

[6] OECD (2018), Driving Performance at Ireland’s Commission for Regulation of Utilities, The Governance of Regulators, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264190061-en.

[5] OECD (2016), Being an Independent Regulator, The Governance of Regulators, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264255401-en.

[7] OECD (2016), Governance of Regulators’ Practices: Accountability, Transparency and Co-ordination, The Governance of Regulators, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264255388-en.

[4] OECD (2014), The Governance of Regulators, OECD Publishing, Paris, https://doi.org/10.1787/9789264209015-en.

[8] ORR (2018), Business Plan 2018-19, ORR, London, https://orr.gov.uk/__data/assets/pdf_file/0006/27465/orr-business-plan-2018-19.pdf (accessed on 3 March 2019).

[10] Pittman, R. (2010), “Against the Stand-Alone-Cost Test in U.S. Freight Rail Regulation”, Journal of Regulatory Economics, Vol. 38/3, pp. 313-326, https://link.springer.com/content/pdf/10.1007%2Fs11149-010-9130-3.pdf (accessed on 2 March 2019).

[11] TRB (2015), Modernizing Freight Rail Regulation, TRB Publications, http://www.trb.org/Publications/Blurbs/172736.aspx.

[3] Trnka, D. and Y. Thuerer (2019), “One-In, X-Out: Regulatory offsetting in selected OECD countries”, OECD Regulatory Policy Working Papers, No. 11, OECD Publishing, Paris, https://dx.doi.org/10.1787/67d71764-en.

Notes

← 1. See Table 3.4. for the list of mandatory trackage and haulage rights included in the concession titles in Mexico.

← 2. The most significant of these stalled mandatory trackage rights were for Kansas City Southern Mexico (KCSM) to use track of the Mexican Railways company (Ferrocarriles mexicanos, Ferromex). Negotiations over implementation of these rights were protracted for several years, and were unresolved until the acquisition of Ferrosur by Grupo Mexico, owner of Ferromex.

← 3. A deconcentrated body in Mexican law is usually an agency at arms-length distance of a ministry, with varying degrees of autonomy.