CAMPOS JIMENEZ Evaluating Rail Reform in LAC.D

I Conference on Railroad Industry Structure, Competition and Investment. Toulouse 7-8 November 2003 Evaluating rail reform in Latin America: Competition and investment effects* Javier CAMPOS** Juan Luis JIMÉNEZ Workgroup on Infrastructure and Transport Economics Department of Applied Economics University of Las Palmas - Spain Abstract Building on the existing literature and the new data emerged in recent years, this paper discusses the results of the rail restructuring experiences of Latin America countries during the 1990s. We critically evaluate how rail services and infrastructures were transferred from Government hands to private operators, particularly in the three largest economies in the region: Mexico, Brazil and Argentina. The paper analyzes the reasons behind the restructuring decisions and, but is mostly centered on the policy results, which are evaluated focusing on the competition and investment effects on investment decisions. The main purpose of this paper is to draw core lessons in order to provide governments with better information related to how they could structure a reform package in transport to make the best of the growth opportunities within their countries. This should help bring about the economic growth that is central in helping to alleviate poverty in developing countries and moving these economies out of the stagnation that they currently face. * This paper has been prepared for the 1st Conference on Railroad Industry Structure, Competition and Investment (Toulouse, 7-8 November, 2003). The authors acknowledge the contributions from previous studies and the help of the Brazilian government. However, the usual disclaimer applies. ** Contact author: Department of Applied Economics. University of Las Palmas. 4, Saulo Torón. E-35017. Las Palmas. Spain. E-mail: [email protected]. Phone: +34 928 451 792. http://www.eitlaspalmas.com 1.– INTRODUCTION During the 1990s a significant number of developing countries around the world were deeply involved in restructuring and reform processes of their major infrastructure sectors. Latin America and the Caribbean (LAC) countries led the growth in private activity during this period. According to latest figures from The World Bank (2002), this region received on average more than 35US$ billion every year from 1990-2001, and the total investment in infrastructure projects with private participation in these countries amounted 360.5US$ billion, representing 47.8% of the world total. This private activity in LAC was marked by large privatizations in telecommunications (44%) and energy (33%), with transport occupying a relevant third place (18%). The changes in this sector affected both infrastructures (roads, railways, airports, ports) and services (mainly, buses and airlines) and were at the forefront of some novel reform mechanisms whose procedures would be later copied elsewhere.1 In the case of railways, at the end of the 1980s the industry was characterized in most LAC countries by a steady decline in market share started after the World War II. This was caused both by the failure to respond to the intermodal competition arising from road (freight) and air (passengers) transport and by the rigid market structure, often dominated by government-owned monopolies with a dire financial situation and very low efficiency records. Despite the long distances and the growing demand for transport, these national companies could only survive on public subsidies and the quality of their services and infrastructures were rapidly deteriorating due to lack of investment (Campos and Cantos, 2000). By the mid-1980s many countries in the region were aware of these problems and realized that, due to their financial weakness, the only long-term viable solution required private sector participation. The rail industry embraced the reform with more or less forced enthusiasm. In most cases, however, even the constitutions or the sectoral laws limited the participation of private sector, not only in the ownership but also in the operation of services, which were attributed to the exclusive responsibility of the existing national monopolies. Under these circumstances, the outright privatization of services and infrastructures was always a difficult policy choice. Important legal changes were needed to sell state-owned enterprises: Argentina and Chile had to change their entire legal systems, Brazil passed a new constitution in 1988; Mexicans had to reform theirs in 1995. Therefore, restructuring mechanisms without full privatization – particularly those involving concession of rail services while keeping the ownership of the assets – were preferred in most countries. The most relevant concessioning experiences in the region – in terms of the size of the rail industry, the amount of investment involved and the comparability with other countries – were those of in Argentina, Brazil and Mexico. In all three cases, the Government chose to disintegrate the existing national railways into several pieces and awarded each of them separately to private bidders through open auctions. Either explicitly or implicitly, there were two main objectives associated to this process: to alleviate the burden that subsidies represented on the public budget, and to ensure that the railways contributed positively to the overall performance of the country’s economy by providing efficient transport services. 1 For example, Chile was among the first in the world to undertake a significant reform of the railroad industry and created some innovative methods for road concessioning; Argentina’s overall transport reform is viewed as a pioneer in other countries, and Bolivia’s capitalization is a model of whole-scale reform later adapted by some economies in transition (Gómez-Ibañez and Meyer, 1993). See also Estache (2001). 1 Almost a decade after these restructuring processes were completed a growing number of critics have started to talk aloud about the ‘failure of privatization in Latin America”2, asserting that (transport) privatizations have failed to deliver the expected results in terms of social improvements for the poor. Even reckoning the necessity and desirability of these improvements, this paper argues that these distributive impacts are a long-term product that may only arise if the sector achieves a degree of sustainability that ensures its overall long- term survival. Predicting whether this will happen or not is very difficult. However, we think that two key variables to evaluate the likelihood of achieving this result are the investment levels compromised by private and public investors and the degree of competition achieved after the concessioning process. These two elements, evaluated altogether, provide useful insights on the real success possibilities of the privatizations. After stating the background and the objectives of this paper in this introductory section, the remaining of the work will be distributed as follows. Building on previous studies, Section 2 describes the rail reform processes in Argentina, Brazil and Mexico. It focuses on the situation before the rail restructuring and how the change was carried out. Section 3 discusses the consequences of the reforms in these countries in terms of investment (efficiency) and competition using the most recent available databases. Finally, Section 4 concludes summarizing the main findings and extrapolating some core lessons that could be useful for other countries. 2.– RAIL REFORM IN LATIN AMERICA From a historical perspective, Latin America rail system can be viewed as a network of traffic corridors where the movement of freight and people always started and ended at the main ports in the Atlantic and the Pacific, and was only gradually penetrating the richer areas in the interior. Since the World War II, however, road transport eroded the railways market share and the sector failed to adapt itself to the changing conditions of the economic environment. Regulation remained obsolete and the industry was slow to react. The policies adopted during the 1970s and 1980s did not halt the steady loss of market share, the growing financial deficits, and in some countries, the impossibility of raising the low productivity indices of the industry. Thus, more radical restructuring processes and overall reforms were put into practice. The three largest countries in the region – Argentina, Brazil and Mexico – provide the finest examples. This section explains the purposes of the reforms and summarizes key institutional and economic aspects in these countries that will be later useful for Section 3. 2.1.– The pioneering experience of Argentina 3 Mostly driven by fiscal reasons, Argentina was the first LAC country facing a restructuring process based upon extensive private participation. The pressure on the treasury imposed by public subsidies led to the 1989 State Reform and Public Enterprise Restructuring Law, whose objective was to revitalize the economy by encouraging the private sector operation in public services. For railways, the government decided that private participation was to be implemented by concessioning the freight and commuter networks that were originally owned as an integrated network by the national monopoly, Ferrocarriles Argentinos (FA). 2 See for example, McKenzie and Mookherjee (2003), for a recent survey and evidence from four countries. 3 This subsection draws on Estache et al. (2002). Further details on the Argentina rail restructuring process can be found in Estache et al. (1996) and Thompson (2000). 2 The freight network

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