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Rail Transportation in Some South American Countries Measures for

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Rail Transportation in Some South American Countries Measures for

    Rail Transportation in Some South American

    Countries: Measures for Fostering Efficiency.

    by

    1Antoni Bosch-Domènech and José G. Montalvo

    Universitat Pompeu Fabra

    Abstract:

    The paper describes the present situation of the rail-transportation system in most of South-America and, on the basis of the EU experience, suggests some measures to improve the system efficiency.

     1 Antoni Bosch Domènech is the corresponding author (antoni.bosch@upf.edu).

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    Rail Transportation in Some South American

    Countries: Measures for Fostering Efficiency.

    by

    Antoni Bosch-Domènech and José G. Montalvo

    Universitat Pompeu Fabra

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1. Introduction

    In the 1990s and afterwards, the interregional trade in Mercosur and Comunidad Andina has surged enormously. This trade expansion is putting a greater burden on the transportation infrastructure. It appears that a modern and efficient transportation system is a prerequisite for the development of trade. But a modern and efficient transportation system can only be sustained within a competitive framework.

    In South America the land transportation network is a system of corridors that, starting in the main ports of the subcontinent (Rio, Santos, Montevideo, Buenos Aires, Valparaiso, Callao), reach the interior. These corridors are presently dominated by the road system, while the national rail networks are neither modern nor efficient and, in general, lack international connections. Many of its indicators show inefficiency, low levels of safety, overstaffing and, in general, low productivity related to the age and poor maintenance of track and rolling stock. This is compounded with a loss of importance as in Brazil, which had 38.287 km of tracks in 1960, and only 22.123 in 1990, or in Argentina, which went from 43,905 Km to 35, 754 Km. This decline has been general across the countries of the region as it is made clear in Table 1, which shows the increase in km of paved roads together with the simultaneous decrease of km of rail track. The unequal growth of the different modes of transportation has reduced railroad transportation to a marginal activity in most countries. In 1999 only 0,7% of the value of exports among countries in the Comunidad Andina was

    2transported by rail. (46% by road and 40% by ship). Equally marginal is the

    international rail transport in Mercosur or in the transversal axis Bolivia-Brazil.

     2 Comunidad Andina (2001), p. 4. Only in Bolivia, international rail transportation plays any role. In the remaining countries of the Comunidad Andina its relevance is nil..

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    Paved roads (kms) Rail tracks (kms)

     1960 1970 1980 1990 1960 1970 1980 1990

Argentina 22,172 33,375 52,194 57,28 43,905 39,905 34,077 35,754

    Brazil 12,703 50,568 87,045 161,503 38,287 31,847 28,671 22,123

    Colombia 2,998 5,98 111,98 10,329 3,161 3,436 3,403 3,239

Total region* 85,514 182,088 267,962 370,059 132,47 120,045 105,691 110,301

     * also includes Bolivia, Chile, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras,

     Peru, Mexico, Nicaragua, Panama, Paraguay, Venezuela and Uruguay

     Source: The World Bank, 1995.

    Table 1. Roads and Rail tracks in Latin America

    The lack of financial resources by the States and the inefficiency of public held rail corporations placed a heavy burden on the National governments that lead, with different speeds, to the privatization of the rail transportation infrastructures.

    Two basic models have been followed by countries that have tried to introduce more competition into their rail networks.

    a) Vertical desaggregation of the different railroad activities, separating

    basically track, passenger and cargo, and opening up the last two services to

    competition by selling the access to the use of the tracks. This is the UK model.

    b) Regional concessions that offer regional monopolies to the consortia that

    win the concession. This is the most common South American model.

    The railroad privatization process in South America began in 1991 1992,

    when Argentina privatized 5,000 km of tracks. After 1995, the privatization of rail services became general in South America. In Bolivia, privatizations followed the rule of transferring to private firms the control and 50% of the property of public

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    corporations. In Colombia, where the transportation by rail is basic to connect the interior with the Pacific and the Caribbean, 1880 km of tracks have been tendered to private firms. Ecuador with its highly mountainous profile lacks proper rail connections, which do not even exist between Quito and Guayaquil, the two main cities. Peru is going ahead with the privatization of its most important railroad, Cuzco-Quillabanba, basic in the transportation of minerals to be exported. Brazil began in 1996 the privatization of two important freight services, Ferrocarriles de San Pablo and Ferrocarriles de Rio. Paraguay and Uruguay need good transportation infrastructures since they are highly dependent on the trade with other Mercosur countries. Uruguay is partitioning the Compañia Nacional Ferroviaria and rehabilitating the corridors for wood, rice and cement transportation from the interior

    3to its ports.

    These reforms have not always been carried with enthusiasm. The

    participation of the private sector in the operation of services that were thought to be the sole responsibility of the public sector has been accepted but not fully encouraged. Overall, the inexistence of an appropriate regulatory law has been a brake to any privatization process. With weak regulatory structures lacking monitoring and control capabilities, private investors cannot be assured a fair return to their investments, nor have access to the appropriate mechanisms for a speedy resolution of disputes. In addition, the climate of high political and institutional risk has meant that privatization did not become synonymous of competition. With hindsight, it can be asserted that, often, governments privatized primarily in order to obtain revenues, and not only with little concern for increasing competition but, in some cases, with the

     3 See the Appendix for details on the privatization process in the South American countries involved in this paper.

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    purposeful design to maintain after privatization the monopolies that public services had enjoyed.

2. Revitalizing the railways

    Consequently, South American countries still tend to have antediluvian freight services and decrepit suburban lines at saturation point that release their floods of passengers into sometimes dilapidated and unsafe stations. Revitalizing this sector means finding the resources needed to reinvest in the industry, while fostering competition among the railways companies. A well-designed program of capitalization by means of concessions to private consortia could achieve both goals. The US example, where rail haulage is flourishing and accounts presently for about 40% of total freight, shows that the decline of rail need not to be inevitable.

    What is needed is a true cultural revolution in how public services are viewed in order to make rail transport competitive enough to remain one of the players in a South American transport system. Citizens will have to accept that public-owned services have efficiency problems; governments will have to accept not to interfere with managerial decisions and private firms will have to accept that their revenues must come from the quality of their services and not from the rents of market power or corruption. According to the European experience, a common South American market and the joint regulation of rail services in the whole of this market, replacing its present geographical fragmentation, should help to promote this revolution in attitudes. Unfortunately, the present political environment and the technical circumstances of the rail industry are not favorable to dramatic changes. Nevertheless, a number of steps can be taken in this direction:

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    1) The first steps will have to be taken domestically. They may include the separation of railway infrastructure from the provision of railway transport services, beginning with the accounting separation, followed by the

    managerial separation. This step will allow proper estimation of costs and revenues per area of activity as well as the independent decision making per area of activity. Further, separation of ownership between railway

    infrastructure and provision of rail services would foster competition and improve efficiency, but may not be feasible if the rail network lacks significant levels of traffic and revenue.

    The current poor state of most rail infrastructure (specially track and signaling) are an important limitation to the operation of large loads with sufficient speed. This combined with the different country specifications of track and signaling as well as the lack of intermodal links, dampens the interest of private operators. Unless the track owners, whether public or private entities, mobilize enough resources to modernize the track infrastructures and harmonize the rules and technical specifications across South America, the competition in railroad services will not fully materialize.

    In addition, in most South American countries railroads suffer a strong intermodal competition by the trucking industry. Often this competition has been called unfair for different reasons. Most important, because trucking services do not pay the full costs of their operations, in particular in reference to the damages caused on public roads by the operation of trucks, and for not incurring some of the costs of safety regulation. Since the experience with rail privatization in South America shows that, in the present circumstances, the

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    new ventures have not been profitable, it is important, in order to attract private investments in rail infrastructure and services, to make sure that the trucking industry is competing with the rail industry in a level field. Without it, railroad routes will not attract the levels of traffic needed to interest private investors.

    Finally, and perhaps more important, governments should consider implementing the necessary instruments to promote multimodal approaches to

    transportation, including container traffic in ports, airports, road and rail, that can make the economic prospects of investing in the rail industry much more attractive.

    2) The second step would be to create a genuine common network of railroads in

    South America, based in the opening up of rail transport to commonly regulated competition. This would certainly foster the arrival to the South American rail network of companies from other backgrounds, with solid experience in logistics and intermodal integration, and broad financial and investing capabilities, which would make the industry more competitive and efficient while encouraging the national companies to restructure.

    Moving form local networks to a common South American network would help overcome some of the obstacles that presently hamper the revitalization of the industry, namely:

    a) The technical and regulatory barriers existing in every

    country work in favor of existing companies and hold back

    the entry of new operators.

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    b) The fragmentation of the rail network creates further

    uncertainties about the financial viability of the different

    investment projects. With networks better interconnected,

    with a broader rail system accessible to private investment,

    and with revenues accruing along longer routes, some of the

    business uncertainties would even out.

    c) The lack of transparency of concession design and procedures,

    together with limited powers and little independence of

    regulatory agencies, do not provide incentives for attracting

    private consortia. A South American regulatory board could

    add independence to the regulatory decisions and reduce the

    exposure of concessions to political and institutional risk.

    The example of the European Union, providing an alibi for decisions that were politically controversial at the national level, should be encouraging. Some of the competition-fostering decisions that require eliminating “national presence” clauses could be implemented more easily under the umbrella of a South American rail network. We turn now to this experience.

    3. The EU Experience.

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3.1 Basic facts

    The decreasing market share of rail on passenger and freight transport is not a Latin American phenomenon. On the contrary, we can say that during the last 30 years the railroad is losing its market share against other transportation modes in almost all the

    4. Some basic facts may help to understand the extent of this trend: countries

    a. In the OECD the market share of railways in the transportation of

    passengers has come down from 10.4% (1970) to 6.5 (1995). More

    importantly, its share on freight transport has been reduced from

    31.3% (1970) to 15.2% (1995).

    b. In the European Union the decline in rail’s share of the freight

    market has been also very dramatic. In 1970 more than 21% of the

    freight market was carried by the railway. In 1999 this percentage is

    only 8%. Railway passenger traffic has also declined, in line with the

    OECD data, from 10% (1970) to 6% (1999).

    c. Other negative effects in the EU railway are: a reduction in the

    efficiency of the railway (the tonne/km performance of freight

    transportation has fell by 16% from 1970 to 1999; the average speed

    of international rail freight services has fallen to 18 km/h; less than

    60% of the trains arrive in time (less than 30 minutes after the

     4 One important exception is the US, as mentioned above.

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