Reshaping Argentina's Railways Jorge H

Reshaping Argentina's Railways Jorge H. Kogan & Louis S. Thompson

1. Background FA (freight, intercity passenger, and stopped, it would have been very diffi- the Buenos Aires City commuter pas- cult to resist the consequent political In early 1989, the Argentine economy senger services). pressure to restore them, or to expect was experiencing hyperinflation and Other symptoms were rolling stock any cooperation from union leaders. virtual fiscal collapse. In August 1989 (unreliable locomotives, and half out Action was imperative. after the change of Government, the Ar- of service), bad track (55% of the track gentine Congress passed the State Re- in less than acceptable condition), and Framework for change form and Public Enterprises Restruc- a high rate (30% to 50%) of fare eva- The comprehensive strategy was turing Law. The law's aim was to re- sion in the Buenos Aires commuter rooted in several principles: (1) The duce the deficit and revitalize the services. Government could no longer fund the economy by encouraging private sector The inevitable result was a chronic fi- huge deficit; (2) FA was unsalvageable operation of major state-owned enter- nancial disaster (US$2 million losses as an enterprise; (3) At least some rail prises. For railways, the largest state daily), combined with increasing freight transport was viable; (4) The enterprise contributing to the deficit, unreliability and unsafe conditions. commuter services in the Buenos private participation was to be imple- There was no further hope for a com- Aires Metropolitan Area, although un- mented through concessions. pany that was mainly a provider of sur- profitable, were so important that they When President Menem took office plus employment and uneconomic ser- had to be continued; and, (5) Existing in July of 1989, Ferrocarriles vices, subject to political pressures, and rail staff levels were far too large, but Argentinos (FA), the state-owned rail- strongly influenced by workers' unions, reducing staffing without a social and road, operated roughly 35,000 kilome- suppliers and local authorities. political consensus would have created ters with 92,000 employees, and was serious problem. losing about US$600 million annually. 2. Strategy for Change The history of the railways' decline Initial strategy and growing dependence on the Trea- There were two options: let the situa- By mid-1990, an integrated restruc- sury is not unique to Argentina. The tion continue until FA collapsed, or do turing program was agreed with the reasons are not difficult to identify, in- something drastic. Collapse would World Bank (IBRD). The initial pro- cluding a production, rather than cus- have transferred rail traffic to roads, gram included several key elements: (1) tomer-oriented culture, competition with higher tariffs and an adverse ef- Concession of four freight networks, from other modes (especially roads), as fect on exports, particularly grains. representing 60% of the total network; well as weak management and inad- This impact would have been aggra- (2) Grouping of all commuter services equate investments. These facts were vated when maintenance of important into a separate unit and establishment reflected in the falling traffic of the sectors of the national road network of a new state-owned commuter passen- three distinct "businesses" operated by was contracted out, since this would ger enterprise; (3) Rationalization of in- have led to highway tolls and vehicle tercity passenger services following a weight and size restrictions which detailed cost analysis in which commer- would have increased road charges and, cial and essential services would be paradoxically, improved the competi- identified; (4) Establishment of a new tive position of rail transport. railway regulatory agency, or agencies; The Argentine suburban passenger (5) Creation of a Buenos Aires Metro- system is among the larger systems in politan Transport Authority with par- the world, generating more traffic than ticipation from the Federal Govern- New York City and in the same league ment, the Province of Buenos Aires and as London and Paris. Discontinuing the City of Buenos Aires; (6) Revision of passenger services in the Buenos Aires operating practices and rules and de- area would have meant road congestion sign of a labor strategy to improve pro- and loss of the only available mode of ductivity and reduce redundant staff; transport for thousands of people. In and, (7) Disposal of excess assets, and addition, if railway services had creation of a railway real estate devel-

Note: This article is based on the personal options of the authors, and does not necessarily reflect policies or positions of the World Bank or the Government of Argentina.

24 Japan Railway & Transport Review / June 1994 Copyright © 1994 EJRCF. All rights reserved. opment unit. Some of these elements ing between 1.0 and 3.6 million tons standard gauge, and 2,500 km of broad became the conditions of an IBRD loan annually. There was a 1-meter gauge, gauge track — do not appear to be eco- of US$300 million that the government one standard gauge (1435mm), and nomically viable, nor do they have traf- has used to fund labor severance pay- four broad gauge (1676 mm) networks. fic of national significance. They have ments. After some study, the prior networks been offered to provincial governments were mostly used as the basis for the in case they have local significance. Objective of reform design of the new concessions. FA re- Those not accepted by the provinces The concession process had four pri- mained temporarily remained (until 10 will be abandoned. mary objectives: March 1993) in operation only to oper- As previous figures show, freight 1. To reduce the railway's financial ate some intercity passenger services traffic on most Argentine railway lines burden on the national budget by pending transfer to the provinces. After is very light (an average of 400,000 elimination subsidy to freight ser- that date, the FA shell served only as a ton-km per track-km compared, for ex- vices and the one viable intercity long-term repository for intercity and ample, with the USA where the aver- passenger corridor, and to focus any freight railway assets, which were to age is over 5 million). Improved and remaining subsidy on those intercity continue to be owned by the State and more reliable operations will increase passenger lines that could be justi- concessioned to the private sector for traffic levels, but the amount of traffic fied on social grounds and on com- operation. likely to be captured back from high- muter lines and, in addition, to refo- The government-designated six rail ways by the rail system is uncertain, a cus the subsidy to metropolitan pas- freight packages (see Map 1) include: risk that concessionaires must take. senger services from operations to 1. The Bahía Blanca-Rosario corridor, Without an increase in traffic, traffic capital improvements; linking the major grain export ports density is so low that operating ex- 2. To improve service to shippers and of Bahía Blanca and Rosario, and penses will have to be kept to an abso- passengers the lines and branch lines of the lute minimum. 3. To rebuild railway facilities by reha- area (5,300 km; broad gauge, The concessions had the following bilitating and renewing plant and formed by portions of the Roca and characteristics: (1) All cargo operations equipment as necessary, and Sarmiento lines; 2 million tons; mi- were to be performed by private-sector 4. To develop a cadre of Argentine pri- nor intercity passenger services); concessions for specific networks - con- vate-sector railway managers. 2. The Urquiza line (2,700 km; stan- cessionaires would pay the government dard gauge; 1.2 million tons; 1.7 a fee ("toll" or "Canon"); (2) The conces- 3. Concessioning million intercity passengers in sion would be for 30 years (plus an op- 1990, when bidding documents tional 10-year extension) and included Freight lines were drawn up); freight-train marketing, operations, Despite years of decline, parts of the 3. The Mitre line (4,800 km; broad rolling-stock maintenance and rehabili- rail freight business were viable given a gauge; 2.5 million tons; 3.0 million tation, and track maintenance and re- radical transformation of existing rail- intercity passengers); habilitation. The concessionaire would way culture and practices. Private, 4. The San Martin line and the re- have exclusive rights to its track, unless long-term concessions (30 years, plus maining portion of the Sarmiento it gave operating consent to others; (3) an optional 10-year term) were adopted line (4,700 km; broad gauge; 3.4 Although freight and intercity passen- as the best approach. However, it was million tons; 1.3 million intercity ger services were initially combined, both politically and economically diffi- passengers); the government subsequently divided cult to concession the entire FA net- 5. The remainder of the Roca system freight from intercity passenger ser- work in a single piece because: (1) The (3,300 km; broad gauge; 1.3 million vices because the obligation to provide financial resources required of the bid- tons; 1.8 million passengers), com- passenger services reduced the ex- der would be considerably greater than prising the Roca lines not included pected financial performance of the if the system were divided into smaller in the Bahía Blanca-Rosario pack- freight franchise. The ensuing freight networks; (2) It would be much more age, serving the area south of franchises required only that the difficult to change working rules and Buenos Aires and carrying cement, freight operator allow intercity passen- operating condition on a national basis; grain, chemical products, salt, and ger operations by FA, the provinces, or and, (3) Competition between networks stone; a third party concessionaire, in return might help promote efficiency (and the 6. The Belgrano line (6,400 km; meter for payment of a compensatory track first network could become a leading gauge; 1.5 million tons; 450,000 rights fee ("peaje"). The proposed level model for later concessions). passengers) serving the north and of that toll was among the items consid- The state-owned railway corporation central parts of Argentina and car- ered for awarding cargo franchise bids; was created in the late 1940s after the rying international traffic to Bolivia (4) Concessionaires were to hire only nationalization and merger of more and Chile, as well as grain, soybean FA employees at the outset, but only than 15 private railways into six rela- by-products, sugar, and containers. those required by the working practices tively-independent railway companies The remaining 8,000 km of the cargo and operational needs which the con- with track networks ranging between system — including approximately cessionaire negotiated directly with the 2,700 and 10,700 km, and traffic vary- 5,000 km of meter gauge, 500 km of unions, with the Government not being

Table 1 Results of Freight Concession Bidding (as of March 1994)

involved except for safety reasons. Per- Progress to date (Table 1) 2. The old Urquiza line concession sonnel not hired by concessionaires So far, the following steps have been (now called Ferrocarril would receive severance payment from accomplished: Mesopotamico Gral. Urquiza) was FA. In practice, the ratio between prior 1. The Bahía Blanca-Rosario conces- awarded to the sole bidder, a major FA staffing levels and concessionaire sion (two bidders) started operations Argentine metallurgical company, hiring has been around 4 to 1; (5) Al- on 1 November 1991. The consor- which chose the Railroad Develop- though rail freight rates were effec- tium (FEPSA) was led by a major ment Corp. (supported by Conrail) tively deregulated, present legislation Argentine construction and indus- from the USA as its operating part- requires that every railway operator trial holding company (Techint) ners. Operations started in Octo- file its maximum rates by commodity which chose Iowa Interstate Rail- ber, 1993; with the Secretary of Transportation. road, from the USA, as its operating 3. The Mitre line concession (Nuevo partner; Central Argentino — NCA) had two

Map 2 Buenos Aires Metropolitan Commuter Services

26 Japan Railway & Transport Review / June 1994 Copyright © 1994 EJRCF. All rights reserved. held in the group by Argentine firms. Map 3 Buenos Aires Underground System (SUBTE) The point system used for freight franchises changed very slightly from the first concession to the later ones; for the later one ones it was: • 30 points for the basic investment plan • 5 points for additional investments promised • 25 points for the organizational plan • 8 points for the maintenance plan • 12 points for the "canon" • 5 points for level of payments required for passenger operations • 15 points for the number of former FA personnel to be hired. The formula placed the greatest emphasis on investment followed by the quality of the proposed operational and investment plans. Points awarded on the basis of employment of FA personnel clearly reflect a political compromise, as well as the fact that the money for severance payments to surplus employees was limited. In addition, although the train- ing or development of a management cadre was not explicitly recognized, it was considered as part of the business plan evaluation. Table 1 shows the final results of the bidding process.

bidders, and was awarded to a group system, and making it more attrac- Intercity Passenger Services led by an Argentine grain and veg- tive. A detailed train-by-train cost study etable oil shipper, the major shipper Freight concession bids followed a was undertaken at the end of 1991. Its on the line. Montana Rail Link/ two-envelope system. Envelope 1 con- purpose was to distinguish between Anacostia & Pacific/RBC, from the tained technical and financial qualifica- commercially-viable services (covering USA, is the railway operator for the tion documents. Envelope 2 included: avoidable costs), commercially non-vi- consortium. Operations started in the present value of investments pro- able services, and essential services December, 1992; posed by the bidder for improvements (non viable but serving communities 4. The concession (two bidders) for the to railway equipment, facilities, and with no alternative form of public San Martín line (now called the right-of-way, during the first 15 fran- transport). Buenos Aires al Pacifico — BAP) was chise years; the bidder's business plan The study found only one service, awarded to the same group that won and a description of its previous railway Buenos Aires-Mar del Plata (formerly the Urquiza line. Operations started operating experience; the present part of the Roca system), that had the in August, 1993; value of additional investments to be potential to be financially viable. The 5. The former Roca system was made by the bidder during the first 15 Buenos Aires-Mar del Plata line, which awarded to the sole bidder (Ferrosur franchise years in non-railway prop- links Buenos Aires with its most impor- Roca), a group led by the largest ce- erty, such as intermodal facilities, tant beach resort, is 400-km long and ment producer in Argentina, and storage silos and port facilities; the carries 1.8 million passengers per year main shipper of the line. Its operator present value of the "canon", or fran- is CANAC (the consulting arm of the chise fee, that would be paid to the Canadian National Railway), and government for the exclusive freight operations started in March, 1993; use of the right-of-way and certain 6. No bids were submitted for the equipment and facilities; the level of Belgrano line. In October 1993, the "toll" or payment that the cargo fran- Government created a new state- chisee would require for the operation owned corporation to continue op- of intercity passenger services on its erations and transfer the line to the lines; the number of current FA em- private sector after improving the ployees to be hired; and, the interest Courtesy: D.Okubo I Retiro Station in Buenos Aires

(nearly 20% of FA's total 1991 passen- derstood at the time to be an interme- bidding process for a period of 10 years ger-km since most passengers ride the diate stage towards an even more am- (20 years for SUBTE), which may be in- full distance). It is the most heavily- bitious goal — private-sector opera- definitely extended for additional 10- travelled passenger line on the network tion of suburban services under con- year terms. Unlike freight and intercity and carries a significant number of pas- cessions. passenger franchises, metropolitan sengers willing to pay premium fares. FEMESA oversees a network which railway concessions require public fi- This service was offered using a bidding includes 899 km of lines, 267 stations, nancial support, so the concession looks process similar to that developed for and 1800 trains carrying over one mil- to minimum government outlay, not freight franchises, and four bidders lion passengers each business day. The maximum income. submitted offers in May 1992. Government divided the FEMESA Bidding documents defined the mini- On May 20, 1992, the government lines into seven packages, to be offered mum service (coaches per hour, fre- announced that all services other than as franchises together with the under- quency, travel time, punctuality) and Buenos Aires - Mar del Plata would be ground system (SUBTE), whose 44 km the specific capital program required. discontinued on 1 January 1993, unless of lines serving 76 stations and moving Also, maximum fares for standard ser- provincial authorities funded the losses 140 million passengers per year were vice and fare increases as a premium of services they selected to continue. previously operated by a corporation for performance were established. Con- Local governments had to state their owned by the Municipality of Buenos cessionaires will be responsible for the interest and start funding half of the Aires (see Map 2 and Map 3). commercial and technical development losses commencing 1 August 1992. FA's financial losses on commuter of lines, including fare collection, and Other services were to be closed on 1 services were never accurately calcu- must execute at least the capital invest- September. Provinces wanting to con- lated because joint and common costs ment program identified by the govern- tinue railway operations would have were shared with other FA railway ser- ment. Among bidders found to have ac- the service transferred for their own di- vices, but rough estimates showed a ceptable credentials and plans, the bid- rect operation or for operations to be suburban deficit of about US$150 to der requiring the lowest subsidy in performed by private concessionaires 250 million per year. Unfortunately, present value terms for the first 10 they selected. the day-to-day operating deficit was so years was awarded the franchise. Although the initial provincial reac- large that nothing was left for equip- A three-envelope bidding process was tion was cool, a few provinces eventu- ment, plant, and facilities rehabilita- used. Envelope 1, common to all pack- ally tried to continue services, but most tion, resulting in service deterioration. ages, contained information concerning could not afford the required subsidy. Within the framework of the bidder identity and qualifications, with After postponing the deadline from 1 FEMESA and SUBTE concessions, the emphasis on the railway or technical August to 10 March 1993, to allow more government will continue to own the operator's experience in conducting time, nearly 70% of the services were right-of-way, equipment, stations, and metropolitan railway operations. In En- discontinued. The remaining services facilities. All property not required for velope 2A, specific to each line, bidders were transferred to the four provinces service operation, including the large provided a detailed business and oper- that required them, including the downtown terminals, will be sold or ating plan for the franchise; last, in En- Buenos Aires - Mar del Plata line after franchised separately to real-estate de- velope 2B, also specific to each line, bid- suspension of its bidding process. velopers. Government revenues from ders submitted a financial proposal for These provinces have announced plans that development will be used to sup- the franchise, including their subsidy to concession their services in the near port metropolitan service subsidies. requirement. future. Concessions are being awarded After an initial Envelope 1, the gov- through an international competitive ernment asked all groups for addi- Buenos Aires Metropolitan commuter services Table 2 Results of Suburban/Metropolitan Concession Bidding The government started from the principle that, unlike the previously- fragmented FA operations, only an integrated oversight agency could prop- erly control the intense, peak, short distance railway services around Buenos Aires. Step one in the restructuring was the establishment, in December 1989, of the Suburban Railways Ad- ministration, initially as part of FA. Step two was more ambitious; in March 1991, Ferrocarriles Metropolitanos S.A. (FEMESA), was separated from FA and established as a new and independent * Indicates that the bidder expects an operating surplus of this amount over state-owned corporation. This was un- the period of the concession.

28 Japan Railway & Transport Review / June 1994 Copyright © 1994 EJRCF. All rights reserved. tional information as part of an "Im- tion or discontinuance, are also rec- stances. proved Envelope 1". This information, ognized. This said, there are few 4. Those managing concessioning together with Envelope 2, was submit- who would turn back the clock al- must balance a desire to explore ev- ted on 5 June 1992, for the Sarmiento, though the transition has not been ery aspect of the process and con- Mitre and SUBTE/Urquiza packages. troublefree; struct elaborate bidding mecha- The proposal for the Roca and San 2. Concessioning is inherently complex nisms, with the need to maintain Martin lines was submitted on 14 Au- and can never be perfect. It is pos- momentum and avoid discouraging gust, and, for the Belgrano North and sible to construct evaluation formu- bidders. Another high price of de- Belgrano South lines, on 5 September lae wherein a series of diverse, even lay is the damage done by indiffer- 1992. conflicting factors are included, but ent management and employees in The benefit of awarding solely on the the price for doing so is delay, along the interim after the changes have basis of the lowest bid, as the govern- with results that are hard for gov- been announced but before the ment is doing for the metropolitan ernment to evaluate and for bidders transfer has taken place. In some lines, is that the award process is direct to understand. Formulae depending cases, winning bidders are con- and transparent. Any bidder complet- more heavily on a pre-qualification fronted with properties and patron- ing the Envelope 1 and 2A process was process followed by a single financial age less valuable than they had bid fully acceptable, and the government outcome can potentially be faster for because of this delay; was free to select the lowest bidder. All and more defensible. The choice de- 5. Railway privatisation requires pa- seven packages were awarded at the pends on circumstances. tient education and consensus end of 1992, and contract discussions 3. Advance preparation goes a long way building among the various stake- then got well under way. Negotiations toward determining the outcome. holders (managers, employees, us- with one of the groups have been com- Bids can never be better than the ers, political leaders). This process pleted, and the subway and one com- quality of the request for proposals. took several years in Argentina muter line operations were transferred Further, as was demonstrated in Ar- and, in fact, may actually be rooted in January 1994. San Martin and gentina (and elsewhere, as in the in planning and analysis that began Belgrano North were transferred an 1 Conrail restructuring in the USA), years before. It has taken at least April and Belgrano South on 1 May. planning and evaluation formulae as long elsewhere. Table 2 shows the outcome of the bid- that reward optimism on the part of By far the most important factor in ding process. bidders will elicit just that. Railway the success of the process so far, is the concessions are always difficult to political will and clearly-expressed 4. Conclusion value correctly. Unclear or conflict- goals of the government. As is true ing criteria encourage unrealistic re- throughout the government's By mid-1994, there will be at least 10 quirements and engender miscalcu- privatisation program, the political and private railway operations. At the be- lations on the part of bidders. If the economic stakes are high; it has been ginning of this process, FA was losing successful bids are too unrealistic, absolutely crucial that the government over US$600 million per year, with there may well be a second round of be willing to retain its commitment metropolitan, intercity passenger, and privatisation. These processes are through the hard as well as the popular cargo services being liable for about not necessarily one-shot operations. steps to be taken. Countries undertak- 35%, 25%, and 40% of that amount, re- Not all private-sector ventures suc- ing a similar process must have the spectively. As a result of concessioning, ceed, even under the best of circum- same continuity of effort. I government outlays will fall below US$150 million annually. What has been learned from the ex- Jorge H. Kogan perience so far? There are a number of conclusions: Mr Jorge H. Kogan was born in Buenos Aries in 1946. After graduating with an MSc. from the 1. Under reasonable circumstances, University of London, he joined the Federal Ministry of Transport for 7 years as Director for National Transport Planning. He also served as Chairman of the Prices and Tariff Committee of concessioning works. Acknowledg- the Ministry of Public Works and Services. He was Director of Aerolineas Argentinas for 5 years ing that this has been a pioneering before becoming President of Dytecna, a consulting firm to the Government of Argentina man- effort and much had to be learned, aging the Railway Restructuring Unit. His responsibilities include developing the general strat- expectations are good, though still egy for restructuring the Argentine railways, rationalizing railway operations, and privatising the cautious. The response of domestic metropolitan railway and subways of Buenos Aries. and foreign private companies dem- onstrates that the private sector Louis S. Thompson agrees that there is an opportunity Mr Louis S. Thompson was born in 1941 in Florida. After graduating with an MBA from Harvard to be exploited, although the risks of University, he worked as a consultant engineer and economist in Cambridge, MA, and Washing- the traffic projections and financial ton DC. He has also worked for a number of years at various posts within the US Department of projections are only now emerging. Transportation. He has been Railway Adviser to the World Bank since 1986 where his responsi- Government risks, such as failure of bilities include consultation about all the Bank's railway lending activities and developing reports and policy positions. He has published articles on railways statistics and restructuring and is concessions, and service deteriora- researching energy use in transport.