RETUJN To REPOR.TS DETS RE ST RI C T E D Wtri-nN FIE COPY ReportNo. WH-116 ONE: WEEK

Public Disclosure Authorized This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank afcepts no responsibility for the accuracy or completeness of the contents of the report.

INThRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

A REVIEW OF

CHILE'S TEN-YEAR NATIONAL DEVELOPMENT PROGRAM

Part II: Chapters 9-14

Tranportation Policy

Railways

Public Disclosure Authorized Roads and Highways

Air Transport and Airports

Ports

Shipping

April 9, 1962 Public Disclosure Authorized

Department of Operations Western Hemisphere TABLE OF CONTENTS

PART TWO

(CHAPTERS 9-14)

CH-APTERS PAGE (numbering is self- contained within each chapter)

9. TRANSPORTATION POLICY

Abandonment of Railroad Lines ...... 2 The Principle of Self-Support ...... 3 Criteria for Investments ...... 4 Co-ordination and operational control ...... 6 Control over Investment Decisions ...... 9 Summary of Transport Investment ...... 11

10. RAIUThAYS

The Government Program ...... 1 The Railroad System ...... 2 Evaluation of the System ...... 3 Specific Lines ...... , 6 Administrative Reforms ...... , 9 Proposed Modification of the Program ...... 12 Sumniary ...... l...... 1 Appendix 10-A: Specific Conclusions referred to in paragraphs 29 and 30 ...... 16

11. ROADS AND HIGHWAYS

The Program ...... 1 The Highway System ...... 4 The Highway Department ...... 6 Appraisal of the Program ...... 8

12. AIR TRANSPORT AND AIRPORTS

The Program ...... 1 Appraisal of the Program ...... 2 Summary ...... 7

13. PORTS

The Program ...... 1 Assessment of Port Authority Program ...... * 3 Assessment of the Public VWorks Program ...... 11 General Comments Related to the Mission's Recommendations ...... 14 Organization for Port Development ...... 16

1. SHIPPING

The Program ...... 1 Assessment of the Program ...... 1 Summary ...... 6 -1-

CHAPTE.t 9

THN-SPOKATATION POLICY

1. The present chapter discusses transportation policy in general. The chapters which followi on railroads, the road system, air transportation and ports and slhipping deal in detai'l with specific transportation facilities; in the present chapter we are concerned with the principles of a well co-ordinated, economnically and financially sound total system.

2. As the 10-year program recognizes, and as is true in most rapidly developing countries, transportation is a key factor in the Chilean economy. -ithout an adequate and well planned transportation system it will be difficult, if not impossible, to accomplish the objectives of the other sectors of the 10-year program. In our opinion, the amount of capital outlays programmed for transportation (excluding private auto- mobiles)-- 15% of all investment planned for the 10-year period -- is in balance with the rest of the program.

3. The major transportation problem facing Chile is to make a transition in an economic manner from primary reliance on railroads to increasing utilization of highwiays. This transition has been made in more fully developed countries -- though admittedly with painful readjustments by the railroads. The transition will also be painful for the railroads in Chile, but the present heavy financial burden that the railroads impose on the country must be eliminated. The achievement of an economnical railroad system will necessarily imply a much greater emphasis than hitherto on road transport wqhich, with present technology, should offer a superior means of transportation in Chile.

4. Roads are capable of handling large and small traffic and they are suitable for iTdividual as well as collective transport. Road trans- port satisfies a greater range of demands than any other, and has more flexibility in use. In rural areas, roads encourage short distance travelling and permit the growth of rural communities as an alternative to individual families living in relative isolation. In the transport sector of the economy, roads and road-transport investrmient should be of first priority.

5. In Chile, with its enormous distances from the far north to the far south, air transportation must also play an important role. Investments in airports, air security, and airplanes should be of high -2-

9. TitAHSPOHT.TATION I:OLICY

priority. The principal object of air transport in Chile will remain the passenger service. Air freight service will also develop, but the complementary role will always be greater with air freight than with passenger service.

6. Coastwise shipping still has an important function in a country with the geographic peculiarity of Chile, where few areas are more than 100 miles and where most important centers of production are wvithin 50 miles of the ocean. This type of transport remains the cheapest for long distance hauls of bulk raw materials and general cargo. The coastal transport of general cargo by ship will probably only hold its present level, while transports of bulk rawg materials can be expected to increase. The investments in coastwise shipping, foreign trade shipping, and ports necessary to meet future demands are expected to be small.

7. With up-to-date roads and strongly expanding road transport, modern air transport facilities, and the specialized services of coastwise shipping, it follows that the operations of the railways must be confined to the areas of high traffic density. Railway management must adapt itself to that new role for railways, and make the necessary changes. Without these changes, the railways will con- tinue to be an enormous burden for the State and the taxpayers.

Abandonment of Railroad Lines

8. Today in Chile the major transportation facilities are the longitudinal railroads with a very large number of branch lines serving limited economic demands. WiJithout doubt, most of these branch lines will soon be paralleled by usable roads. lvhen this happens, most of the branch lines will have to be abandoned. The major problem today is to anticipate this development and to begin abandonment of' branch lines which are or soon will become a liability to the economy. This will not be an easy task. The experience of a number of countries shows that strong pressures come from users of uneconomical rail facilities to prevent their abandonment. These pressures are often legitimate: the users may have located their dwellings or businesses along the rail line on the reasonable assumption that transportation would remain available. Under such circumstances, it can be argued that they should not be forced to bear the losses incurred if they were left without transportation, especially if the decision were made, or sanctioned, by an agency of their government. We believe that this situation exists on some branch lines and in such cases it wfill require a careful balancing of costs versus broader -3-

9. iJS?OstATI0:1 POLICY considerations to reach the right decision. In other words, it is not always possible to decide for or against the abandonment of a public facility on financial grounds alone.

9. At the same time, it is clear that continual maintenance of a transportation facility is undesirable if it is uneconomic, and if its beneficiaries can be offered satisfactory alternatives. It is our belief that a large number of branch lines and the Northern part of the longi- tudinal line can be abandoned now or in the near future by providing such alternatives. As a good guess, as much as 60% of the track length should disappear in the next 10 years. This would be on lines which now carry on the order of 20% to 25% of the traffic.

10. Chapter 10 contains specific recommendations for the abandonment of rail lines. The recommendations are made on the basis of pragmatic judgment, and require careful examination. In a large measure they go hand-in-hand with recomz;iendations concerning the nature of the highway program which we think is appropriate for Chile and which is outlined in Chapter 11.

The Principle of Self-Support

11. The mission believes that the whole transportation system should be financially sound and that each major sector should pay its owqn way. This principle is a most important element of transportation policy. Of course, this does not mean that every mile of railroad, every mile of highways, every scheduled airplane flight, or every item of cargo handling at a port should pay its own way. But each major system should be self- supporting, and all major segments of each system should have a reasonably well balanced relationship between costs and benefits to the users. We found in the case of the railroads, for example, that finances were in a deplorable state, with the main systems covering barely 50%0 of costs. Other sectors, such as the airline and the national shipping line, are also financially unsound. There is no need for a precise exercise in cost accounting to reach these conclusions. They were as obvious to our contacts in Chile as they were to the mission. Thus we are emphasizing a transportation policy which wrill ease the inevitable transition towards an integrated system in which each sector pays its own way.

12. We urge the Government to adopt, as a financial policy objective, the general rule that each major transport sector should pay its own way. We use the term "general rule" advisedly, because we recognize the need to make at least two exceptions.

13. As the first exception, there might often have to be a compromise betwieen financial and other considerations. It must be taken for granted that the Chilean Government will occasionally, for reasons not related to 9. TlNuPORTATION POLICY the calculus of economic operation, want to maintain transportation facilities or rate schedules which are clearly losing propositions. It is the opinion of the mission that under such circumstances the Government, through the ministry or agency whose policies require such uneconomic activities, should indemnify the transportation authority on a cost-of-service basis for the difference between an economically supportable charge and the charges that are actually put into effect. The concept of indemnification is considerably different from the concept of subsidy. Direct subsidies usually take the form, as they have in Chile, of making up deficits from the general budget after the deficits have occurred; they have the effect of generating larger deficits because they relieve the pressure on management to control costs. In contrast, indemnification based on a cost estimate is a payment for services rendered. Wvhatever subsidy is involved is a subsidy to the beneficiaries -- as it should be -- and not to the transportation authority.

1. Secondly, in the case of highways, it is virtually impossible to equate government revenues from road-user taxes with the costs of financing and maintaining a road system. People who pay no direct taxes benefit from the roads: they walk, ride horses, build road-side restaurants, etc. A rough attempt can be made, however, at achieving self-support, principally through fuel and axle-load taxes. They should be designed to cover much of the average annual cost of the road network, in- cluding maintenance and capital charges. The objective should be to malce all forms of transportation competitively equal, with due consideration to the quality of service they offer. The special problems of trying to make a highway system self-supporting, with individual user costs somehow related to user benefits (as in the case of rate charging carriers), will be dealt with in more detail in Chapter 11.

Criteria for Investments

15. The above discussion raises the question of just how it can be determined whether or not a facility is being run at a deficit. Since revenue can be determined with a fair degree of accuracy, the question is best framed in terms of costs that should be attributed to any particular facility. There is often talk about covering "full costs", and about covering "marginal costs", but it is more basic and useful to clarify the criteria which should be used when deciding upon investments and disinvestments. Here we shall touch only upon the case of abandon- ment of railroad branch lines, but the principles involved are applicable to other facilities as well. 9. TAITSPORTATION POLICY

16. The key to the problem is the use of resources. Continuing operations on a branch line implies the necessity for some resources which could be utilized on other parts of the railway system or in other sectors of the economy. It is desirable for the economy that these resources be assigned to the branch line only for so long as the benefits from this use exceed the benefits which would be received from an alternative use. If the users of the resources are not prepared to pay the price which the resources could bring in an alternative use, the resources should be transferred.

17. In the case of a railroad branch line, the resources include not only the fuel and wages of personnel, but also less obvious resources such as rails, buildings, sleepers, locomotives, district supervisors, and even accountants in Santiago. They include, in sum, not only resources which would be immediately transferred to other uses if the branch line were abandoned but also those resources which would be required as replacements over a period of many years. The only assets (resources) which are not included are those which never have to be replaced, such as tunnels and the infrastructure of the way: these resources usually have no alternative use and cannot be transferred. A branch line should be continued in operation indefinitely only if the cost of all the transferable resources is being covered by the revenue.

18. If the cost of these replaceable resources is not being covered by revenue, the branch line should be slated for abandonment. This does not mean, of course, that the abandonment should be immediate if revenue covers all the costs except for depreciation of some resources, such as stations and the way, which must be renewed only after many years. But under no circumstances should new investments be made. The abandonment should be immediate if the revenue does not cover the cost of tlae resources which can be immediately transferred, such as personnel, fuel, maintenance of the way, buildings, and rolling stock.

19. In actual practice these calculations are most difficult to make with any precision. There is a continuum of possibilities between zero maintenance of a roadbed and full maintenance. There are numerous alternative uses for rolling stock, motive power, and manpower throughout the rail system. Tracks in place may be more valuable if they are torn up and used as replacements elsewhere. And so on. As is the case with determining whether or not a highway system "pays its way", it is necessary to take a rough-cut at the decision to maintain a branch line fully, abandon it, or do something in between. But at all times the overall objective of a sound financial policy must be kept in mind: only those means of transportation which are covering their full costs should be continued indefinitely -- and where necessary improved and expanded. Decisions with regard to specific branch lines should depend, in general, -6 -

9. TRANSPORTATION POLICY on the proposition that no line should be preserved if informed judgment indicates that it is not covering its foreseeable marginal costs. The exceptions noted above with respect; to broader economic or social con- siderations apply, of course, to this proposition.

Co-ordination and Operational Control

20. We believe that the best organizational device to assure finan- cial soundness is the creation for each transport sector of authorities having administrative and financial autonomy, as explained more fully in paragraph 25. We therefore propose that the autonomy and independence of the railways, the National Airlines, and the incipient Port Authority, be greatly strengthened, and that the administration of airports be con- centrated in the hands of an autonomous Airport Authority. We also recom- mend that the Highway Authority, which for obvious reasons cannot be made financially independent, in the sense of being able to establish user charges on its own authority, be given broad operational autonomy. The operations of the transport authorities will require policy supervision and control regarding investment decision. For that purpose we recommend that the functions of the Undersecretariat of Transport in the Ministry of Economy be strengthened and that it (i.e. the Under-Secretariat) be transformed into a M'inistry of Transport.

21. Viewed as an integrated whole, the growth of Chile's trans- portation system has evidently been haphazard. The railways have devel- oped without regard to the simultaneous development in recent years of road transport and road transport equipment, and both have developed without regard to coastal shipping and air transport. This type of com- petitive development has been typical of the highly industrialized coun- tries, and it has led to an increase in the efficiency of transport operations. However, transportation is highly capital intensive. Equip- ment, roadbeds, ports, airfields - all are very expensive to install. There is serious doubt in the mission as to the advisability of a highly competitive transport system in a country like Chile, where capital is scarce and where the experience of the industrialized countries can be drawn upon as a guide to transport planning. Pather, Chile should make a determined effort to rationalize transport investments so as to get the best possible social value from them. To achieve this goal the operations of transportation should be entrusted to autonomous organiza- tions. But the general policy controlling investment decisions and operating regulations should be determined by the Government.

22. Given this policy, we come to questions about how to carry it out. One set of questions has to do with administrative regulations, regardless of where in the Government the regulation originates and is enforced. - 7 - 9. TRANTSPORTATION POLICY

23. Administrative regulation of railroads, shipping and ports, and air transport is facilitated by the followJing considerations. In the case of railroads, the Government is already the owner and 6perator of practically all of the rail network. In the case of international shipping and air transport, rates and other conditions of service are normally set through interna- tional conferences, and in any event the carriers are few, conspicuous, and easily controlled. The chief problem of regulation has to do with road transport. It will be dealt with in Chapter 11.

24. Another set of questions has to do with organization. For the purpose of influencing the operation and development of the transportation system, we should not confuse the policy making functions of Government or quasi-Government agencies with their operational functions. For the various sectors of the transport economy Government operations range from providing and maintaining basic facilities, such as roads and airfields, to providing a complete transport service, as is the case with most of the railroad system. In all sectors, the Government is involved to some extent. With respect to basic facilities, roads, airfields and ports must be built and maintained; air and port traffic must be controlled. With respect to end-use service, the Government operates the railroads; it owns and operates the Chilean airlines; it operates a fleet for coastal shipping.

25. We believe that these various operational functions can best be per- formed by specialized authorities, set up completely outside of the Government's regular organizational structure. There are three principal features which should characterize such authorities, and set them apart from regular Government operations.

a. Transport authorities should have considerable administrative autonomy. They should be uinfuenceTT as little as possible by political trends and public service practices. That is, tenure of the operating officials should be independent of political changes; accounting, communications, and other internal matters should be geared to the needs of the operation, and not to pro- cedures laid down for regular Government Departments; labor policies, including wages and hours, should be on the pattern established in the private sector of the economy. The Ministry of Transport should be concerned only with a general overall policy control designed to aid in the coordinated development of the entire transport system and to influence in some measure the directions of the investment program and the whole trans- portation economy. Within the limits set by law and by broad policy set by the Government, the policy guidance for management should come from the Ministry of Transport with advisory assistance from a Board consisting mainly of members representing the more important users of the facility. -8-

9. TRANSPORTATION POLICY

b. Financially, they should be relatively independent. With the exception of the Highway Authority, they should aim to make their receipts from service cover all costs, including depreciation, interest on loans, etc. They should have full power to borrow on their own creditworthiness, subject only to the fiscal, monetary, and economic development priorities established by the responsible agencies of the Government; and on the whole, they should be required to make a showing of financial soundness before borrowing. They should rely on general budget receipts only during limited periods of trans- ition. If the Government, for whatever reason not related to the operations of the facility, wants certain rates to be lower than the economic level, then, as we pointed out above, the Government should make up the difference in the form of an in- demnity based on a calculation of what the economic rate should be. This indemnity should never take the form of the Govern- ment making up a deficit.

c. They should have commercial management. This point is related to the two above, but sufficiently different to warrant separate statement. Again excepting the Highway Authority, management methods should, so far as possible, be the same as those used in the private sector -- a flexibility designed to meet constantly changing needs. Within broad limits set by Government, management should have the right to alter rates as circumstances suggest. Also, management should be promotion-minded, in order to promote traffic and establish good relations with the users of the facility. Taking into account Government policy and objectives for transportation as a whole, the authorities should compete as fiercely with each other as they would if they were operating in a completely free-enterprise environment.

26. The Highway Authority is excepted from points b. and c. above because it would be unrealistic to expect a public road system to be operated on a basis of rate fixing and commercial practices. In some details -- as elaborated in Chapter 11 -- the Highway Authority presents a special case.

27. With respect to other forms of transportation, Chile already has incipient forms of the kinds of authorities we have in mind. The railroad Empresa is nominally autonomous under its own management; the same applies to the Chilean National Airline (LAN), and to the National Shipping Line which operates the publicly owned part of the coastal fleet. These three entities might be classified as "enterprises" rather than authorities, but this semantic difference does not alter the principles which we are suggesting -- the "enterprises," in fact, should also follow these prin- ciples. A Port Authority has recently been established, but with far less -9-

9. TRANSPORTATION POLICY autonomy than we would advocate, and with far too little scope of operation. Plans have been proposed for an authority (CORCHhC: Corporacion Chilena de Aeropuertos y Aviation Civil) to handle construction, operation, and administration of airports. In following chapters, an evaluation will be made of each of these entities in terms of the criteria we have proposed. At this point, it should be sufficient to say that they all fall con- siderably short of the ideal -- largely because they are operated either as adjuncts to regular government departments or because they are bound, by tradition or regulations, to operate according to regular government procedures and practices.

28. In this connection, it should be noted that with the exception of roads and commercial airports, all government sponsored transportation facilities are in competition with, or alongside, similar privately operated facilities. Most shipping and international air transport is privately operated; there are many privately operated ports; there are even privately run railway lines. As a general rule, the mission found the privately operated facilities to be more efficient than similar facilities operated by the Government. This is not a criticism of government enterprise as such. Rather it is evidence that suggests government transport enterprises should emulate the organizational and operational practices of their private counterparts.

Control Over Investment Decisions

29. In the preceding sections we were concerned with the operational aspects of the transportation system. Now we come to the question of general policy covering investment decisions and operating regulations. As we pointed out, the controlling policy should be determined by the Government. But this does not mean that the individual authorities (or enterprises) should be deprived of the right and obligation to make important policy decisions. For example, the Highway Authority should have the sole right to decide on the priority of maintenance funds and equipment, to set design standards in accordance with public policy, to determine the degree and methods of traffic control, and so on. Similarly, CORCHAC (the Airport Authority) should have the responsibility to determine runway lengths and load specifications, traffic control systems, landing fees, etc. Such decisions require responsible policy determinations by people wqith a high degree of technical competence.

30. Yet at the same time, the evolution of a balanced transportation system cannot be entrusted to the investment decisions of competing and independent transportation authorities. Capital is too scarce in Chile, economic progress too urgent, to permit an unplanned application of resources. There must be central guidance, backed by authority, to ensure the most rational use of the country's scarce resources during the next 10 years -- and beyond. We are proposing in this report a planned program - 10 - 9. TRANSPORTATION POLICY for transportation: an orderly transition from principal reliance on rail- roads to increasing reliance on roads, an emphasis on road maintenance and improvement, a selective improvement of ports based on forecasts of volume and types of traffic, a concentration of airline facilities on domestic service, and so on. Other planned programs may be feasible. How- ever, it is clear from experience that the success of any program cannot be expected if there is diffusion of basic policy responsibility.

31. And at present, responsibility for basic transportation policies in Chile is quite diffused: the Ministry of Economy, with its Under Secre- tary of Transport, the Ministry of Public Works, the Ministry of Defense, and COPERE, all have policy making functions in this field. In addition, the operating entities -- the Empresa, the Port Authority, etc. -- make and carry out fragments of a total policy. It is because of this diffusion of basic policy making that we recommend the creation of a Ministry of Transport. This ministry has proved its worth in many countries. The functions of the Chilean Ministry would be twofold: (1) to formulate a unified transportation policy and to exercise general control over the operating authorities to see that the policy is put into effect, and (2) to issue regulations governing standards of public safety and convenience. To preserve the operating autonomy of the various authorities and to make them financially responsible, the Ministry should intervene in operating and investment decisions only when management decisions appear to be contrary to policy or regulation.

32. A large part of the Ministry's job will be technical. The Minister himself, of course, will bear the political responsibility for transportation policy; but unless the experience in Chile proves differ- ent than in most countries, the Minister will seldom be a transportation expert in the technical sense. Therefore we recommend that the Ministry have a permanent Under Secretary who will provide continuity as well as technical competence at the top level. In our opinion, it is most impor- tant that this Under Secretary position be filled by a highly qualified man. He should be an outstanding expert with managerial qual]ifications. His competence is crucial, because it will be most difficult in the next few years to make the necessary changes in Chile's transportation system. Also, as another point worth emphasizing, it has been the experience in some countries that the divisions of the transport ministry which oversee the individual authorities tend to identify themselves with their special- ized interests. If this happens in Chile, the diffusion of policy making cannot easily be corrected. Thus the Under Secretary must be a strong personality, who can make sure that all parts of the Ministry pull to- gether to reach the desired policy goals. 9.. TRANWSPORTATION POLICY

Sinmary of Trans-ort Investment

33. With this background, we now summarize the missionts recommendations with respect to transportation investments. The total investment recom- mended by the mission amounts to the equivalent of E° 1,438 million, as compared with the government program figure of EO 1,501 million (Table 9-1) Greater details are given in the Appendix to this Chapter, and in the individual sector chapters.

table 9-1: Total Transport Ivvestments, 1961-1970 (in millions)

The Prograr5/ Mission Recommendations J.S,5 EC UT.S$ EB

Railroads 115 208 8-1 128 Ports 22 40 21 36

Shipping 99 - 60 -

Roads 132 396 141 396

Motor Vehicles 224 161 279 185

Airports 28 14 28 14

Planes 29 1 26 1

Total 649 820 636 760

Total E° Equivalent: E0 1,501 E O,h28 a/ The total for this program, of the magnitude of E° 1,501 million, dliffers from the El 1,387 million listed for the Government program for transportation in Chapter 1. All references to the transportation program in this, and the following chapters are to the revised transport program presented to the mission at the end of its visit to Santiago.

34. The reduction it overall investment, as can be seen in the table above, is almost entirely due to the substantial reduction wqe recommend in expenditures on railroads, in line with our considered judgment that much of the existing rail network should be abandoned. W.Je have also proposed some reductions in exoenditures for ports, shipping, and aircraft. We foresee, on the other hand, the need for much more expenditure on com- mercial motor transport as the road network is improved. Since road maintenance is not a capital expenditure, we do not include it in the investment program. But if our concept of transportation policy is - 12 - 9. TRANSPORTATION POLICY accepted in Chile, there must inevitably be more current account expendi- ture on road maintenance -- approximately EO 175 million over the 10-year period. Thus our recommended actual expenditure, capital and current, is greater than the Government's estimate. The real difference lies in the kind of expenditure and the direction of transport development.

35. All the investment cost estimates for the various projects dis- cussed in the subsequent sector chapters are to be regarded as only indica- tive of orders of magnitude. The limited time that the mission spent in Chile did not permit the checking out of the cost estimates presented in the program. Consequent'ly when detailed studies of the various projects are undertaken, suostantial differences with the cost estimates presented in the following chapters may emerge, - 1 -

CHAPTER 10

RAIL'.TAYS

I. THE GOVERNMENT PROGRAM

1. The 10-year railway investment program proposed by the Govern- ment calls for an expenditure of E° 208 million plus the equivalent of nearly $115 million in foreign exchange. For reasons which have already been given -- mainly the increasing ability to transport goods more effi- ciently by road -- the mission believes that these investment goals should be substantially reduced. The suggested reductions, by major categories, are summarized in Table 10-1, which compares the Government program and the mission's suggested revisions.

Table 10-1: Investment in Railways. 1961-1970 (in million E° and $;equivalent of foreign exchange)

Category The Frogram Recommendations Difference

$ EO $ E° $ EO

Electrification 44.3 10.1 25.9 4.2 -18.4 -5.9 Diesel Locomotives 19.0 - 19.0 - 0 - rrack Relaying 17.5 54.0 17.5 54.0 0 0 Signals & Tele- comrm-unications 5.5 4.6 5.5 4.6 0 0 Carriages & Wapaons 12.2 81.1 7.5 42.6 -4.7 -38.5 Buildings - 16.3 - 7.9 - -8.4 Other 16.2 41.9 5.6 14.7 -10.6 -27.2

Totals 114.7 208.0 81.0 128.0 -33.7 -80.0

2. The Government's program is apparently based on the concept that the existing rail network should not only be preserved, but should be modernized and to some extent expanded. It also contains a large element of prior commitment, in that contracts have already been let for a number of locomotives, much electrification equipment, some parts for rolling stock, a large amount of relaying equipment, and for improvements in sig- nalling. As of July 1, 1961, commitments in foreign exchange had been made as follows: - 2 - 10. RAILWAYS

Category U.S. $ Equivalent

Electric locomotives, railcars, and electrification equipment 23,940,000 Diesel electric locomotives 17,600,000 Renovation of permanent way 18,024,640 Brake gear 380,000 C.T.C. and telecommunications 5,730,000 Other equipment 630,000

Total 66,304,640

3. Thus, out of a 10-year capital outlay program of $114.7 million in foreign exchange, roughly 60% ($66 million) is already committed. There are, of course, complementary but less precise prior commitments for local currency expenditures, especially in connection with the acquisition of new rolling stock (which is predominately a local currency expenditure) and for local labor and materials for track relaying and buildings.

II. THE RAILROAD SYSTEM

4. The Chilean State Railways are officially called Ferrocarriles del Estado, but are more generally referred to as the Empresa. The Empresa network is owned entirely by the Goverrment of Chile, 3 The chief characteristic of this railroad network is that it consists of a continuous longi'tudinal main line with many lateral branches, as would be expected from Chile's topography and geography. The network is composed of several different systems. The most important are the Red Norte and the Red Sur, with a dividing line between Valparaiso and Santiago. Red Norte extends north as far as Pueblo Hundido, principally as a longitudinal line with many branches; total track length, including branch lines, is 1447.5 kilometers of one meter gauge. Red Sur and its branches serve the area south of Santiago as far as Puerto Montt; its total track length comprises 3,146.2 kilometers of 1.676 meter gauge, 376.1 kilometers of one meter gauge, and 23.4 kilometers of 60 centimeter gauge.

5. Morth of Pueblo Hundido is the Longitudinal Norte section, which continues the pattern of longitudinal lines with lateral branches as far as Pintados. This section handles very little traffic, but it does have some potential for hauling minerals if the area develops along lines twhich are evidently expected in some quarters. The total track length is nearly 700 kilometers of one mneter gauge, the same gauge as that of the Red Norte, with which the Longitudinal Norte section connects at Pueblo Hundido. Operation of Longitudinal Norte was transferred to the Government from private interests only in May 1961. An organizational peculiarity of Longitudinal Norte is that one of its branches (Augusta Victoria-Salta which connects with Argentina) is actually operated by

1/ Excepting a small proportion of the shares in an international branch line. - 3 - 10. RAIL14AYS a private railroad company. There are two other relatively minor publicly owned sections of the T`mpresa. The Arica-La raz Railway is operated under an international agreement with Bolivia under which Chile bears 80% of the running costs and receives only 60% of the revenues. The Iquique-Pintados Railways originally was built to serve the nitrate trade, but this traffic has been dropping off steadily for many years.

6. There are also seven privately operated railway lines; most of their traffic consists of nitrates (in constantly decreasing quanti- ties) and ores and concentrates (in constantly increasing quantities) hauled from production site to port. Only one of these, with a trackage of some 800 kilometers, can properly be called a rail network; this is the Antofagasta (Chile) and Bolivia, also known as the FCAB. It is the same company which operates the Augusta Victoria-Salta branch of the Longi- tudinal Norte. None of the other privately owned roads has as much as 200 kilometers of track, and one of them has only 25 kilometers. Most of the private railroads operate their trains over some portion of the Empresa on their waiy to and from the ports; some of the mining companies own wagons which are hauled on a toll basis by tlhe Empresa locomotives. The possi- bility of enlarging the private railway system should be fully explored. Some of the branch lines now run by the State at a loss are operated almost solely to serve private mining interests.

III. EVALUATION OF THE SYSTEM

7. The railway system as a whole is not financially viable. Finan- cial data show that every section operates at a loss. In fact, in recent 0 years the operating loss of the railroad has been of the order of E 40-45 million per year; in 1962 funds needed from the budget to cover the opera- ting loss and finance new investment are of the order of EO 100 million. In the opinion of the mission, no program of feasible investinents can by itself make even a modest start towards reversing this situation. In fact, the wrong type of investments, based on the simple concept of maintaining and modernizing the present facilities, can perpetuate a perverse trend in the development of the Chilean transportation system. Similarly, opera- tional improvement, though important, cannot make the system viable. MIore drastic reorganizational steps are required.

8. The mission believes that the railways can make their proper contribution to the Chilean economy only if they concentrate on those activities which promise a reasonable rate of return over, say, the next 20 years. This means that they must give up their weak and losing acti- vities -- certain services on operating lines, and also some of the lines that are patently uneconomic. It should be remembered that rail- ways in Europe and North America have adjusted (and are still in the process of adjusting) in this manner. - 4 - 10. RAILWAYS

Methods of Reorganization

9. There are several ways in which this reorganization of the rail system should take place, and which the mission recommends as a basis for government policy.

10. Concentrate on hauling goods. Insofar as possible, the rail- ways should concentrate on goods rather than passengers. Passenger traffic in Chile, as in most other countries, will be increasingly moved by high- ways and airlines. Once the road network has been brought up to date, there should be cheap passenger transportation over all distances by bus, with a saving in time as compared with the present rail schedules. Even today there are routes served by both on which the trains take almost twice as long as the buses to make the runs. This kind of time differential will be extended throughout the country along with the development of the road system. We see justification for future rail passenger service only between Santiago and Valparaiso and between Santiago and Chillan, where electrification is going on and where there will be no effective competi- tion from the airlines. There is apparently considerable railway passen- ger traffic from Santiago to the beaches around San Antonio and Cartagena. But the railway cannot live on the proceeds of weekend traffic when the weather is good; traffic of this kind almost invariably is carried at a loss. Since the railway should specialize on profitable classes of traffic, it must give up this unprofitable activity.

11. Of course, it has been demonstrated (especially in Europe) that the possibility exists to run modern trains and to speed them up with intricate signal and communications equipment. But this would require heavier investments than the potential traffic in Chile would warrant -- especially when there is the alternative of good passenger transport by bus,

12. Eliminate weak stations. By a "weak" station, we mean one in which, as a minimum, the revenue from incoming and outgoing traffic is less than enough to cover the costs of operating the station. As a rule of thumb, we would consider a station where freight traffic is less than 100 tons a day or where passenger traffic is less than 500 persons a day to be uneconomic. The long-haul traffic served by these stations, both incoming and outgoing, can be taken care of by a European-style "systeme des gares-centres."

13. A gare-centre is a station with large incoming and outgoing traffic, e.g., 1,000 tons and several thousand passengers a day. The pickup and delivery between the gare-centre and the outlying areas is done by the cheapest means, often with shunting engines. If there is no rail service to the outlying areas (perhaps because branch lines or marginal stations have been closed) access to and from the gare-centre

-6- 10. RAILWAYS IV. SPECIFIC LDIES

19. Or the basis of the o1i'cy outlined above, the iission reached its specific conclusions concerning the _.radual abandonment of unprofitable lines. It is necessary to emphasize tl,at some of the conclusions i,a. reciire further detailed study. For the sake of con- verience, tihe lincs are arran,ed accordin_ to the d-Lvisions of thie Eanpresa, rumi-nEl from north to south. 20. a. Arica - La Paz Railway. This railway is operated under agreement with the Bolivian Government, in accordance with the Iturralde- Blanco Viel Protocol of 1928. Chile bears 80% of the running costs, and receives only 60% of the receipts. Bolivia has been in arrears on its payments for some years, and owes Chile $2.1 million on account. During the past four years, for which figures are available, the line has carried freight as follows:

Year Tons 1956 177786 1957 57,698 1958 94,868 1959 83,923 1960 79,049

It runs at a loss: E° 660 thousand in 1957, EO 1.3 million in 1959, and EO 2 million in 1960. And, since the railroad has to be maintained as an international obligation, with rates which cannot be increased without the agreement of the Bolivian Government, the deficit incurred should call for a specific indemnity payable to the Empresa from the national budget.

21. There are 44 kilometers of rack section on this railway (6% gradient) on which the locomotives are required to push for the sake of safety. This unusual method of traction is said to have caused heavier than usual wear and tear to the locomotives. Three different locomotives are used for each train: one below the 6% grade, one on it, and one above it.

22. The Arica Progress Committee (Junta de Adelanto de Arica) has asked the railway to makce estimates of the cost of electrification (industrial voltage; 26Kv; AC) and it is thought that the Junta might pay for 80% of the whole cost of electrification. The cost, including locomotives, is estimated at EO 5 million; and if authorized now, it could be in operation in 1964, when power is scheduled to be available from the first stage of the hydroelectric scheme now under construction. The study of possible savings is not complete, but there is no doubt that the operating costs would be reduced. One locomotive would do the whole distance, thus eliminating two engine crews, and one whole workshop could be closed, with consequent staff reductions. However, the mission believes - 7 - 10. RAILWAYS

this railroad to be too uneconomic to warrant the allocation of investment funds, regardless of the source.

23. b. Iquique - Pintados Railway. This railway originally served the nitrate trade, which is declining in this area. In 1960 it carried 182,487 tons, of which 104,006 tons came from one station (Augusta Victoria). It runs at a loss (nearly E° 625,000 in 1957; figures for later years have not been published), and it is required to continue to provide services. An indemnity should be paid through the budget of the Ministry of Nines. The section from Troya-Penasol and Humberstone-Zapiga is closed to traffic at present, but for national policy reasons the tract has not been picked up. The reasons for this policy may cease to exist when the Pan American Highway in this area is paved. hlienthis happens, it is also possible that the whole system could be abandoned, provided that what remains of the nitrate traffic can reach Iquique by road.

24. c, The T tCuLdinal aortstir^ludine the Augusta Victoria-Salta Branch. As it Ias o';- ten osor scorn pr:i.vrate e-nterprise in May 1961, no traffic figures for this raili-aya were available to the mission. It clearly runs at a lcss, howe'rer, and consideration should be given to closing it down, section by se`tion, as roads become available. According to informed opinion, there are possibilities for mineral extraction in the area served by t1iS system. If for this reason the Ministry of Mines wants the sys-tem to be maintained, this ministry should provide an adequate indemnity in its budget.

25. The Augusta Victoria-Salta section is privately operated.ar.d costs and receipts are separately accounted for in the Budget for 1962. This line, Which connects with Argentina, was built with the idea of bringing agricultural products from Argentina to Chilear. ports -- a trade which has never developed. The line was built as cheaply as possible, and if heavy traffic ever does develop (as might happen if the new iron ore resources at Laco are developed), considerable expenditure on renovation of the track might be necessary. In the meantime, this section should be treated as part of the Longitudinal Morte, but separately accounted because of its international status. The necessary indemnity to the Empresa should be borne by the national budget.

26. d. Red Norte. This system will never be viable as now composed. As road facilities improve, the operating deficit in its present form is bound to increase, whatever improvements in operating techniques may be made. At the same time, some five million tons of iron ore and some two million tons of copper and copper ore passed over parts of the system in 1960, and the tonnage is believed to be increasing. Since such tonnages could not be handled by roads in the foreseeable future, the main line from Calera to Pueblo Hundido should remain. But the maximum possible number of stations should be closed, and excepting the mining area, track maintenance should be reduced to the barest minimum to enable one train - 8 - 10. RAILWAYS to be run in one direction when required. The branches to the ports of Chanaral, Caldera, Huasco, and Coquimbo (Guayacan) should be maintained and improved where necessary. The following unleconomic branches (kilometer location in parentheses) should be abandoned as soon as conditions permit existing traffic to be carried by road:

Paipote (Km. 904.2) to Nantoco 14.5 km. Islon (Km. 500.5) to Rivadavia 72.1 km. Choapa (Km. 190.2) to Salamanca 31.6 km. Rayado (Km. 49.0) to Petorca 57.1 km. Quinquimo (Km. 54.4) to Papudo 18.1 km.

Total 193.4 km.

27. The Quinquimo section, last named above, may be required if it is eventually decided to build a meter-gauge rail connection to the copper smelter now under construction at Las Ventanas, but no decision has been taken about this connection, nor has a location survey been carried out. The track from Calera to I.Kelon (Ym. 12.0) must be kept in good condition to carry the cement traffic from the works at Melon.

28. An irrigation project now underway in the neighborhood of Ovalle will necessitate a diversion of the Red Norte costing perhaps up to E0 3 million. This would eliminate 16.8 kilometers of existing main line (submerged waen the irrigation dam is built) and require the construction of a diversion of 22.8 kilometers. The mission believes the Government should give serious consideration to not building this diversion. This would break the north-south rail link, of course. And such a decision would go even further than the conclusions with respect to abandoning through railway service on the Red Norte, but the potenti- ally heavy ore traffic moving to the ports of Chanaral, Caldera, Huasco, and Coquimbo would not be affected.

29. e. Red Sur. This system is mostly 5.5-foot gauge (1.676 meters) with one or two branches on one meter or 60-cm. gauge. The main line is necessary to the economy of the country, and the mission believes that it can be made to be self-supporting -- provided appropriate measures are taken with regard to those parts of the system which make its present operation uneconomic.

30. The best statistics the mission could get during its rela- tively short stay in Chile are far from conclusive. Indeed statistics on gross ton-kilometers were not available. Nevertheless, on the basis of the most reliable figures of tons and passengers received and despa- tched at each station upon the main network, the mission reached a number of specific conclusions with regard to branch lines. These conclusions are submitted in Appendix 10-A to this Chapter. It is appreciated that they must be examined in detail to determine: - 9 - 10. RAILWAYS

a. What main line earnings will be lost if a branch line is closed.

b. What annual savings would resalt from closing down a branch or a station.

c. The optimum time for making the change.

31. If the conclusions in Appendix 10-A to this Chapter are accepted and followed up, the possible reduction in route kilometrage would be about 3,300 kilometers, as follows:

Railway Lines Reduction

(a) Arica - La Paz Nil

(b) Iquique - Pintados 445.2 km. (when Pan American highway is paved in that area)

(c) Augusta Victoria - La Salta 177.7 km. (if a road can be substituted) Longitudinal Norte 699.2 km. (if Ministry of Mines do not require it)

(d) Red Norte 193.4 km.

(e) Red Sur 440.4 km. (abandoned outright) 1,344.4 km. (abandoned with provisos) Total 3,300.3 km.

32. Further studies may show that in the more distant future, some of the branch lines now indicated for retention should also be given up by the Empresa. Altogether we would estimate that abandonment of roughly 60% of the present kilometrage would be desirable. It should be noted, however, that only a much smaller share of present traffic -- perhaps not more than 20% -- would be affected. - 10 - 10. RAILWAYS

V. ADNINISTRATIVE REFORMS

33. In addition to the relatively substantive changes in the Empresa recommended above, the mission believes that administrative reforms wuald improve operating efficiency. A team of experts, some from outside the railway, should be set up to study rationalization of administrative pro- cedure in the departments, to decide tinat statistics of operation and cost are to be maintained, and what system of cost accounting is to be intro- duced.

3h. A key reform, without w~hich all others might turn out to be meaningless, is to give considerably more financial responsibility to the Empresa management. To all intents and purposes, the Empresa is now run as an ordinary department of government. One consequence is that 5mpresa pay scales at professional and higher levels are grossly non-competitive with other Government-otned and -operated enterprises.

35. It has been the custom in Chile for some railway engineers to hold professorships at the University, and in past years these professors w0ould recruit their rnost promising students for the Empresa. This is no longer possible on any reasonable scale because of the differential in pay rates. The railway law makes salary scales subject to the approval of the President, something which is required of no other Government enterprise. Evidently there is reluctance to increase the Empresa scales for fear that this would result in increased pressure for a general increase throughout the reg- ular Government departments.

36. The mission vwould not, of course, urge that the Empresa be given a competitive advantage in bidding for scarce engineering and other talent. But we do believe that if the Director General had more freedom to set salary levels, the Empresa would be able to attract and hold the high caliber of professionals it deserves. 1/ Also, if the Empresa were officially an autonomous operating agency its salary policies should not affect the poli- cies of the regular departments.

37. Similar considerations apply to rate fixing. At the time of the mission's visit to Chile, the Director General's recommendations for certain rate increases, which he considered necessary for economical operation, were being held up by the Government. We would not debate the merits of the rate changes from the standpoint of national policy. We would reiterate, however, that the mission is recommending a proper way for the Government to intervene in a rate structure determined, presumably, j This observation should not be read as a criticism of the competence of present personnel. The mission found that the quality of persomnel throughout the organization was high. However, recruitment of new blood at the management and engineering level is difficult. - 11 - 10. RAILVWAYS by reference to costs and revenues. This is to pay an indemnity for rates which Government considers should be set below economic levels in the national interest. We strongly recommend that the Empresa be given the right to set rates designed to make it a financially self- sufficient enterprise, with policy guidance from the Ministry.

38. The weakest point in administration is the lack of adequate statistics, both of operations and of cost. Some of the published statis- tics are capable of misinterpretation because they are based on guesswork or averages. The railway does not now collect, on a continuing basis, separate data on gross-ton kilometers for passenger and freight working; these are basic data by which to judge performance. Sometimes a specific effort is made to measure performance over a short period, but tile statis- tical results are not very useful. At the time of the mission's visit, the basic documents from which the Empresals data are compiled were com- pletely out of date. There are some indications, however, that this statis- tical deficiency is now being remedied. The mission is in thorough agree- ment with any measures which will tend to provide better statistical infor- mation, but we want to point out that the information is needed primarily for operating purposes, and therefore the operating entity should be the one which in the first place controls the content of the data being gathered.

39. The lack of adequate autonomv has also delayed publication of the annual reportL. The latest year for which th-s doc-.ument was available when the mission was in Chile was 1D57 -- four years benind the times. The delay is said to be due mostly to the requirements of the Government audi- ting system, which is designed to discover errors or malfeasance on the part of civil servants. It is not designed to provide management with up- to-the-minute financial data which can be used as a guide to operational and policy decisions. Legislative and admi-nistrative steps are under con- sideration to correct this deficiency in the timeliness of financial information. Yet the point that most impresses the mission is that a financially responsible Enapresa, freed of Government routine and cut off from Government subsidy, would not only have the right to compile its owvn up-to-date financial data, but would be forced to compile it in order to stay alive.

40. Nevertheless, the mission believes that an improvement in the overall railway situation can be brought about in a short time if the reform measures which are recoimmended are adopted. Our optimism is based on the elements of basic strength to be found in the senior staff, which operates with as much competence as can be expected in the ligh)t of the inhibitions created by the present organizational arrangements. Indeed, the same can be said of the entire employee force of the railroads. Also, from a physical point of view, the newer elements of the system are of a very high standard. This includes such physical characteristics as road- bed ballast, spacing of cross-ties, quality of rails, repair and maintenance - 12 - 10. RAILW4AYS facilities, and the quality of motive equipment and rolling stock.2;/ Our purpose is to point out the areas in which operational and organi- zational improvement can reasonably take place in order to capitalize on the real strengths of the railway system.

41. The mission believes that the present program of works in progress, involving electrification of nearly 400 route-kilometers of the Red Sur, including the erection and equipment of 16 sub-stations, the relaying of 1062 km. of the net, and the installation of Centralized Traffic Control (CTC) over 942 km., with execution of all projects over- lapping for some time, will overtax the capabilities of the lirrited amount of professional and technical supervision available in Chile, whether within the railway or outside. The three projects are liable to fall behind in completion -- as indeed has already happened with the electri- fication and the relaying. We therefore recommend that the railwlay supplement its available supervisory facilities by emplo-ying consulting engineers to provide sufficient professional and technical supervision to ensure completion in time.

VI. PROPOSED MODIFICATION OF TE.E PROGRAk;

42. In the opening paragraphs of this chapter, the mission presen- ted an alternative investment program for the railway system in terms of financial aggregates for each major investment sector. In light of the foregoing description and evaluation, the reasons for the mission's proposals can now be put forward in more concrete terms. Before doing this, however, it is necessar" to enter a caveat: Because of the new (for Chile) concept of railway operations which the mission recommends, involving considerable change in operational requirements for capital equipment (and hence considerable change in the investment program), our figures of necessity have the character of rough estimates. In practice, the investment requirements in financial terms will depend on the degree to which our recommendations are accepted.

Electrification

43. It will be noted from the table at the opening of this chapter that the largest single saving in foreign exchange cost, as recommended j/ Ilote that these observations apply to the newer elements of the system. There are some very poor examrples of equipment, road design, repair and maintenance facilities, etc. For example, station nameboards are, in many instances, illegible and buildings lack paint. Some of the older repair shops are completely antiquated. A high proportion of the rails are 30 to 50 years old, and rail breakages on the main line are increasirng rapidly (8 breakages per week on the Santiago-Chillan section alone in July 1961). Of the 790 locomotives operating on the Red Norte and the Red Sur as of Decernber 31, 1958 (again no later figures are available), 522 were over 30 years old. In large measure the impact of the mission proposals would be on these outworn and outmoded facilities. - 13 - 10. RAILWAYS by the mission, is in the electrification sector. This cormes from our conviction that two electrification projects which are not yet under way -- Chillan-Temuco and San Rosendo-Talchhuano -- would prove to be uneconomic. The .Dtpresa is very anxious to extend the electrification from Cliillan to San Rosendo (74.9 km.) at a maximum cost, at present day prices, of US$ 2.5 million and EO 1.9 million. The proponents of this project claim it would show a return of 11.3% on the capital invested, after meeting depreciation charges. The mission is not satisfied that the basic data on which this calculation depends are entirely correct, and therefore recommends that the railway should make a careful reappraisal of the project before finally deciding to proceed with it.

44. The mission does not agree with the conclusions of earlier studies relating to the financial feasibility of electrifying from San Rosendo to Conceucion and to Terr,uco. It feels that they are based on inadequate data; moreover, these studies also could noL have taken into acccuntL a most imp-rtanL consideration: if cur remOnnmendations are accepted wivh -is`&etto abandonment of cerTain lines and stations, a fair number Of muodern aieIeLocomotives will be released for use on the lines now plannied to bc electrified. Furthermore, the substitution of good highiways for rail lines along these two routes will probably decrease the amount of rail traffic to the point that investment in electrification is not warranted. Accordingly, we recommend abandoning plans to electrify these two parts of the Red Sur, with a consequent saving (as compared with 0 the Government procram) of ';18.4 million in foreign exchange and E 5.9 million in local currency.

Diesel Locomotives

45. The mission makes no recommendation for a change in the contem- plated investment in diesel locomotives. Virtually the whole amount called for in the Government program has already been contracted for. If the mission recommendations are followed, it rmght be found that some of the diesels now on order will not be needed. If this should be the case, these diesels can be used to substitute for steam traction. Many steam locomotives are clearly overage.

Track Relaying

46. Here again the mission does not propose to change the Govern- ment program. The necessity to relay many sections of track is obvious. Material is already on order from Japan, and a program has been set up which calls for no new foreign expenditure conmiitments after 1963. The program appears to the mission to be a good one, but it imposes a very heavy burden on the Government budget because the railroads do not have the necessary local currency.

Carriages and Wagons

47. The mission has recommended a very substantial reduction from the Government's plans for investment in this category over the next 10 - 14 - 10. RAILW4AYS years. As highway development takes place, and as uneconomic branch lines and stations of the Empresa are eliminated, the need for freight cars will clearly be less than it is today; similarly, as the highways and the airlines take over passenger traffic, the need for passenger coaches will be less than is now forecast. host of the savings will be in escudos rather than foreign exchange, because it has been play.ned to use Chilean facilities for most of the work on the wagons and passenger cars. (Chile has four enterprises capable of building equipment of this sort, with a reported annual capacity of 1,000 freight cars and 100 passenger cars.)

48. However, we are mindful of the fact that some replacement of present rolling stock is necessa-ry. In 1958, nearly 40% of the freight cars in service on the Red 1lorte and Red Sur were over 35 years old. Vve estimate that, without danger to the efficient operation of a reorgani- zed railroad system, proposed investment expenditures in this category could be reduced by $4.7 million (from $12.2 million) in foreign exchange, and by EO 38.5 million (from EO 81.1 million) in local currency, In carrying out this recommendation, we suggest concentrating on the elimi- nation of unnecessary passenger vehicles.

Buildinps

49. The 10-year Government program calls for expenditure of EO 16.3 million on buildings. No foreign exchange expenditure is contemplated. Many of these buildings are scheduled for erection or repair along branch lines that we have recommended for eventual abandonment. The mission believes that an adequate program for building along the routes that will stay in operation should be no more than EO 7.9 million, a saving of EO 8.4 million.

Other Investments

50. The Government program is quite vague under the heading "other investments." The mission was unable to get sufficient details to make a full evaluation of investments in this category. However, on the basis of the information furnished us, we are able to recoTrirend, at least for planning purposes, that the Government estimates be cut drastically. For- eign exchange costs, estimated by the Government at "16.2 million over the 10-year period, could be reduced to $5.6 million, a saving of $10.6 million. Escudo costs for ten years were estimated by the Government to be EO 41.9 million; this could be reduced to EO 14.7 million, with a saving of EO 27.2 million.

VII. SUMAARY

51. Adding all the above items together, the mission concludes that, during the life of the 10-year program, it is possible to save on the railway investment program alone $35.3 million in foreign exchange and EO 81.6 million in local currency. The validity of this estimate is, of - 15 - 10. RAILWAYS course, dependent on the degree to which the Government follows the mission's recommendations with respect to rationalization of the whole transport system, including a substantial reduction in railway services. In addition to the savings on the capital investment program, there would be considerable savings through the reduction of operating losses which are now an important item in the Government's budget.

52. The figures relating to potential savings should not be taken as precise ones. They are the best estimates that we can make at this time. vie believe that the orders of magnitude correctly reflect the savings which can be made through the kind of program we have proposed. Eut the potential capital investment savings are relatively unimportant compared to the over- riding necessity to put the Empresa on its feet as an autonomous and finan- cially self-sufficient enterprise. If this is done -- if the Ehpresa begins to operate according to the principles that we have suggested in Chapter 9 -- then there would be no doubt in our minds that the management would, under the pressure of competition, come to conclusions very close to our own. - 16 - APPENDIX 10-A

Specific Conclusions Referred to in Paragraphs 29 and 30

Branch Action

San Pedro (Km. 137) to Abandon unless required to Quintero -- 39 km. supply the new copper smelter at Las Ventanas,

San Felipe (Km. 31.1 from Llay) Abandon when highway construc- to Putaendo -- 16.1 km. tion permits. (Branch now closed to freight; two cars in service under agreement with local residents that no buses will be put on the road.)

Los Andes (Km. 45.7 from Llay) This, the Chilean section to Las Cuevas -- 76.0 kim of the Transandine Railway, must be retained in operation.

Rancagua (Kmb 81.8 from Santiago) Abandon, unless Braden to Coltauco -- 34.3 km. Copper Co. wishes to buy or rent it.

Pelequen (Km. 117.1) to Abandon from San Vicente El Carmen -- 54.0 km. to El Carmen (26.1 km.). Consider abandoning the whole branch.

San Fernando (Km. 133.8) to Abandon vhen road. Pichimelu -- 119.1 km. conrlitions permit.

Curico (Km. 185.2) to Abandon. Licanten -- 83.8 km.

Talca (lm. 249.3) to Close all stations and Perquin -- 27.0 km. services and operate on "one-engine-on-steam" basis as seasonally required for agriculture. Abandon completely when road con- ditions permit.

Parrall (Km. 339.2) to Abandon. Cauqenes -- 49 km.

Rucapequen (Km. 414.9) to There are some industrial Concepcion -- 130.5 km. plants in this section. Make a study to find out if the originating nass- enger and freight t^XH'ic can be handled by road. If so, abandon the section.

Monte Aguila (Ku. 46h.6) to Abandon. Polcura -- 72.5 km. - 17 - APPENDIX 10-A

Branch Action

Santa Fe (Km. 526.4) to Santa Abandon when road conditions Barbara -- 60.0 km. permit.

Coigue (Km. 538.1) to Mulchen Abandon when road conditions -- 41.2 km. permit.

Coigue (Km. 538.1) to Nacimiento Abandon when road conditions -- 7.6 km. permit.

Concepcion (Km. 70.2 from San Abandon the branch from Rosando) to Curanilahue and Carampangue to Arauco branches to Arauco -- 97.1 km. (8 km.), and as much of the line from Lota to Curanilahue as is not required by the coal mines.

The Renaico (Km. 551.0) to Los Abandon the whole of this Sauces-Lebusaboya and branches complex when road conditions complex -- 338 km. permit.

Pua (Km. 637.4) to Sierra Nevada Abandon this branch; turn - 95.9 km. the tunnel leading to the Argentine border over to the Highway Authority.

Cajon (Km. 680.9) to Cherquenco Abandon when road conditions -- 47.5 km. pernit.

Temuco (Km. 690.6) to Carahue Abandon when road conditions -- 56 km. permit.

Freire (Km. 716.0) to Tolten Lift the track, transfer the -- 70.8 km. right of way to the Highway Authority for conversion into a road.

Freire (Km. 716.0) to Cunco Abandon when road conditions -- 56.9 km. permit.

Loncoche (Km. 769.6) to Villa- Abandon when road conditions rica -- 41.9 km. permit.

Lanco (Km. 785.h) to Pangui- Abandon when road conditions pulli -- 52.5 kmn. permit. - 18 - APPENDIX 10-A

Branch Action

Antilhue (Km. 835.h) to Retain to serve the Dort Valdivia -- 28.3 km. of Vfaldivia

Las Lagos (Km. 849.7) to Damaged by the earthquake. Rinihue -- 39.7 km. Do not rehabilitate it; abandon when road conditions permit.

Cocule (Km. 916.0) to Lago Abandon when road conditions Ranco -- 66.4 km.; with permit. (Presently has one branch to Puyehue -- 36.2 km. train per week.)

Corte Alto (Km. 1000.7) to Los Abandon when roadl conditions IMuermos -- 75.3 km. permit. CHAPTER 11

ROADS AND HIGHWAYS

I. THE PROGRAM

1. The program for investment in roads consists of three docu- ments: 10-year projections incorporated in the overall 10-year plan; and a three-year Department of Highways program, supplemented by a program for immediate attention proposed by the Department in a memo- randum received by the mission shortly before its departure from Chile. There are no inconsistencies among these documents. The 10-year pro- Jections give the physical volume of road construction and the approxi- mate cost by major categories; the three-year program is specific about what should be undertaken in the short run; the memorandum deals mainly with policy. The following table shows the Government 10-year program and the mission's recommendations in financial terms. - 2 - 11. ROADS

Table 11-1

Investment and I4aintenance Expenditures (in millions)

1961-70 Program Mission Recommendation U.S.$ E0 Total (E0) U.S.$ E° Total (Eu)

Construction and major improve- ments including structures 132 396 535 141 396 544

Maintenance and minor improve- ments including- a/ a/ a/ a2 small structures a/ a/ 142 142

Motor vehicles 224 161 397 279 185 478

a/ The Government program does not show maintenance separ- ately, except for P24 million of imported equipment, which is included in the construction figures. The mission recommends a total of $'33 million of such imports.

b/ Commercial vehicles only. Mlission recommendation includes E° 160 million (equivalent) for agricultural use.

2. As Table 11-1 shows, the mission recommends an increased em- ohasis on the improvement and maintenance of existing roads. The mission also foresees considerably more need for investment in commercial motor vehicJes than is reflected in the Government's program.

3. A major part of the Government's proposed expenditure is for the construction of new roads and road sections. As is the case with railroads, the highway system of Chile consists basically of a longi- tudinal road -- The Pan American Highway -- with numerous transversal roads and even more numerous feeder roads. The 10-year program envisages the construction of 1L,214 km. of new roads and road sections, the improvement of 5,327 km., the paving of 936 km. with concrete and 5,936 km. with a bituminous surface, and repaving 1,381 km. (concrete and bituminous).

4. The construction program includes completion of the Chi;e section of the Pan American Highway. This will cost the equivalent of E 85 million. It is estimated that construction will be substantially com- pleted by 1966, with improvement and widening of some sections to take - 3 - 11. ROADS place later. When it is completed this highway will run practically the entire length of Chile, from a point near Arica in the north, through Santiago, terminating at Castro (on the island of Chiloe) in the south. The Government evidently considers completion of this road to be of high priority. At present, 500 kilometers of the high- way are paved, extending both north and south of Santiago. The com- pleted sections of the road by-pass almost all built-up areas, are of good alignment, and offer a good standard of rapid long-distance transport.

5. The conditions and present outlook for transversal and feeder roads present a much less satisfactory picture. In the 10- year program, the Government lists the typical defects found in the transversal and feeder roads: (a) inadequate embanknent height, causing inundation by rainfall; (b) inadequate cover of gravel or stones; (c) bad alignments; (d) deterioration of pavement; and (e) old and narrow bridges not strong enough to support modern traffic with safety.

6. In addition to these defects, which are general through- out Chile, many sections of roads were destroyed by the earthquakes of 1960. Reconstruction of roads in these devasted areas, together with works previously planned for the southern part of the country, accounts for a large proportion of the funds included in the 10- year program. A development credit from the International Develop- ment Association (IDA) has already been obtained for financing of some such road reconstruction.

7. The 10-year projection shows equipment inports amounting to ^94 million, as shown in the following table:

Table 11-2: Imported Equipment Requirements (in $1,000)

Needed before 1965 Needed 1965-70

By Contractors 32,9942 37,919

Of which: Earth moving equipment 18,695 Earth compaction equipment 795 Crushers and sieves 4,505 Surface compaction equipment 3,015 Paving 963 Spare parts 14,199

By Government agencies

Maintenance equipment 11,024 12,993

Totals 43,966 5W,912 Grand Total, 1961-1970 94,108 - 4 - 11. ROADS

II. THE HIGHWAY SYSTEM 8 The mission is very much in agreement with the assertion of the 10-year program that Chile's road system is, on the whole, in poor shape and that improvement and extension is a matter of high priority. Only 6% of the total kilometrage has a concrete or bitum- inous surface. (The 10-year Government plan will raise this figure to 18%.) There is a "ripio" surface of gravel or broken stones on another 35% of the kilometrage. The rest of the road system consists of native dirt road surfaces, some well compacted, but mostly sus- ceptible to wash-outs, excessive rutting, and shoulder erosion. It has been estimated that during the winter 45% of the road system south of Santiago is unusable.

9. The worst road conditions exist in the area which suffered from the recent earthquake but much of the bad condition is unrelated to earthquake damage. These roads require early rehabilitation. Many of the roads outside the earthquake area which are scheduled for early rehabilitati6n (according to the Highway Department's three-year plan) were visited by a member of the mission, and he concluded that im- provement was necessary beyond all reasonable doubts. There is a strong probability that a s.riila;^ -eed f'or imrovement exists on roads not included in the 1';liee-year rchubilitation rrogrcm; but on the question of priorities the mission defers to the judgment of the High- way Department.

Traffic Density

10. The highest density of road traffic is found just outside of Santiago. On a summer week-end in January, 1960, on the road leading out of Santiago to the seaside resorts around Valparaiso and San Antonio, the average daily traffic count was 9,NC10 vehicles. The average daint traffic over a full year is about 5,000 vehicles at the same point.-

11. The Pan American Highway is also busy near Santiago. A short distance south of San Bernardo (a suburb of Santiago), the traffic density is 4,000 per day; at 100 kilometers south of Santiago it is about 2,600; and at 400 kilometers (Chillan) the traf- fic drops to 1,250 per day. Just below Chillan the count is roughly 1,000 vehicles. North of Santiago the picture is much the same.

12. Little is known about the traffic density on the transver- sal roads beyond the informed opinion of provincial highway engineers. Two hundred vehicles per day is generally considered to be a high figure for most of the transversal reads.

2J The average daily traffic over one of the Potomac River Bridges serving Washington, D.C., is 60,000 vehicles. - 5 - 11. ROADS

13. On most rural roads, it appears that the proportion of heavy trucks to passenger vehicles is much higher than in most other countries. The general rule is that commercial vehicles account for about one-third of rural traffic. In Chile, they account for two-thirds. In part this can be attributed to the high import duties on passenger motor vehicles. But we believe the major factor keeping passenger cars off the roads is the state of the roads themselves. On the typical rural road, the lighter and cheaper type of passenger car is quickly ruined, and heavier ones are expensive to maintain (including tires). Even for heavy trucks, the Government report estimates that operating cost on rural roads is 20" to 30% higher than on paved roads.

Deficient Maintenance

14. Washboarding, loose stone, protruding culverts, narrow bridges, frequent washouts, etc., make travel in passenger cars ruinous to the vehicles and disagreeable to the riders. Under such conditions the classical means of forecasting traffic density on a new road -- by counting average daily traffic over existing and inadequate roadways -- is irrelevant. A poor road discourages traffic. A good road generates its own traffic. Poor roads also inhibit the development of two- wheeled traffic, such as bicycles, motor cycles and scooters.

15. Two wheeled traffic can have a great importance to the devel- opment of an economy. It is cheap. And when road surfaces are ade- quately smooth, it greatly enlarges the possible area of the user's activity, enabling him to find better work or to find better living quarters away from his work. Employers in other countries have found that extensive use of two-wheeled traffic expands the area from which their labor force is drawn; some employers therefore finance the pur- chase of bicycles, etc., for their employees.

16. Proper maintenance is hampered by the low level of expendi- tures, and by an inadequate training program. In the United States about one-third of the roads budget is allocated to maintenance. In Chile the figure is only one-seventh. The United States' Operations kission in Chile has organized a school near Cartagena for instruc- tion in up-keep and handling of modern road-maintenance equipment. It is to be hoped that this school will be continued, and that similar schools will be established in other parts of the country. With res- pect to asphalt surfacing -- which can be a major maintenance activity-- two foreign consultants found that the technical competence of Chilean engineers doing this work was high, but that there were too few such engineers. They recommended training of new people by foreign consul- tants and by Chilean engineers familiar with this type of work. - 6 - 11. ROADS

17. Proper maintenance is also hampered by poor selection, procuring, and mixing of aggregate, coupled with poor spacing of stockpiles along the rights of way. In general, the aggregate is too coarse. Either more crushing of gravel or stone, or handling these materials from pits farther away, seems indicated.

18. Maintenance would be far better if proper use were made of the large amount of road-maintenance equipment already present in Chile. Unfortunately, this equipment is of many different makes, in various conditions of usage, and is spread all over the country. There exists no complete inventory of equipment and no program of spare-parts replacement. Repair shops are not located properly with respect to the concentration of machinery. The mission is confident that rationalization of the location and distribution of equipment would make it much simpler to attain a higher standard of road main- tenance.

III. THE HIGHWAY DEPARTMENT

19. Physical construction and maintenance of the road system is the responsibility of the Highway Department. The Pan American High- way and other roads attest to the ability of the Department to design and assure the construction of high standard highways. The road labor- atory is becoming very well equipped. A number of Chilean engineers have been abroad to study techniques of road building and maintenance; there has been considerable technical assistance in Chile from foreign experts. The Highway Department staff is bound to profit from foreign experience.

20. Yet in spite of the high level of the Department's past and present performance, the mission must raise some doubt as to the abil- ity of the Department, as it now is staffed and organized, to prepare and supervise the amount of roadwork foreseen in the various Govern- ment programs. The Department is currently understaffed, and routine duties threaten to leave too little time for careful study and deliber- ation about future actions. Both the Government's 10-year plan and the Highway Department's three-year version suggest the need for 60 more engineers and 85 additional technicians. Perhaps these figures are on the high side, but the mission believes that substantial staff strength- ening is needed.

Decentralization and Reorganization

21. One way to take part of the load off the Highway Department is to decentralize responsibility for road administration. Today all responsibility for road planning, construction, and maintenance resides in Santiago. This leads to an abundance of red tape and loss of time, - 7 - 11. ROADS and a lack of local interest and initiative. 'The purpose of most transversal roads and feeder roads -- which make up the bulk of the roads program -- is to serve local communities. It makes for good government and good administration to put much of the responsibility for maintaining a public facility on the people who benefit most from it. In many other countries, this responsibility is wholly, or in large part, in the hands of authorities lower than the central Govern- ment. This decentralization has great advantages and usually results in adequate and timely provision for traffic needs. The explanation lies in a combination of local incentive, knowledge of the local situ- ation and needs, evaluation of benefits against expenses, quicker decision making, economical use of funds, etc.

22. A basis already exists in Chile to encourage decentraliza- tion of responsibility for road building and maintenance. This is the system of erogaciones, under which any authority (or even pri- vate person) may request the central Government to undertake certain road works upon offering to pay one-third of the costs. While we would not support one-third over some other fraction (say one-half or two-thirds), it would seem that this system could well be an entrance gate to decentralization of highway responsibility.

23. In the opinion of the mission, the task of the Highway Department would be much easier if it were separated from regular or- ganization of Government -- it is now part of the Ministry of Public Uork,s -- and re-established as an autonomous Highwiay Authority. The reasons for this opinion were given in Chapter 9. The Authority would be responsible for highway specifications and design, and for all rele- vant traffic regulations. It would have the responsibility of carrying out programmed works and, most importantly, for maintenance. It would set load limits on all roads where gross-weight per wheel is important.

24. At the time of the mission's departure from Chile, there were no regulations affecting the axle load and other dimensions of vehicles using the public roads. All countries in which motor traffic has be- come significant have found it necessary to regulate traffic factors which adversely affect the road surface and the road bed. Roughly speaking, these factors consist of a combination of speed and axle load. As a practical matter, each of these must be regulated sepa- rately. Regulations concerning such matters were under consideration, and it is understood that these regulations made ample provision for exceptions in the case of some roads which were intended for continu- ous heavy loads of ores, etc. We recornend that the Chilean authori- ties put the necessary regulations into effect as soon as possible. - 8 - 11. ROADS

IV. APPRAISAL OF THE PROGRAM

25. The mission is in general agreement with the Government's estimates of the financial cost for a 10-year program of highway con- struction and improvement. The mission also agrees with the Govern- ment experts that at the present stage of Chile's rural development it is most difficult to make a detailed long-range plan for highways. Many long-term uncertainties exist, e.g., the development of the vari- ous areas to be served, the physical capacity of the Highway Depart- ment to carry out the works, the growth of motor traffic, etc.

26. It is because of these uncertainties that we welcome con- centration on a three-year program for immediate action, leaving the balance of the 10-year program to be worked out in the light of future developments. We have consequently incorporated the Government's 10- year cost estimates for highways into our own recommended primary in- vestment program. The only addition we have made is for an extra $9.0 million for road-maintenance equipment. We accept this program with the full knowledge that future development might necessitate changes, but in the hope that construction and improvement can be accelerated. This will depend on the rate of growth of the economy, and on the de- gree that investment plans are co-ordinated between the Highway Depart- ment and the other transport branches of the Government, especially the railroads.

The Question of Maintenance

27. In the case of Chile's road network, however, the mission believes that it is necessary to depart from the conventional defini- tion of "investment". The mission would supplement the investment pro- gram with the very important item of road maintenance and repair. The Government program includes only the costs of imported maintenance equipment. The mission would add the local currency cost for major maintenance work. The conceptual difference between "new investment" and "maintenance" is vague. But there is nothing vague about the con- ception that poor maintenance of roads eventually leads to substantial capital costs for rebuilding; this is a demonstrated fact. A provision for maintenance of the road system is a necessary part of any capital investment program -- and the financial provision should cover all ma- jor maintenance costs, not just the costs of imported equipment. Conse- quently, the mission recommends explicit provision for maintenance work in the current budget; the 10-year plan total costs would be approxi- mately EO 175 million.

28. With respect to the importance of maintenance, the mission and the Department of Highways seem to be in full agreement, as judged by the memorandum on policy presented to the mission. In fact, the mission would make maintenance of the entire road network a more im- portant immediate undertaking than the construction of new roads. - 9 - 11. ROADS

29. Improvement vs. New Construction. Related to the question of maintenance is the improvement of alignments, grades, and road beds. Highway authorities must often make the choice between building en- tirely new roads and improving existing ones. The extremes of the choice -- there are many points in between -- are as follows: a. Spend no more money on existing roads than is absolutely necessary to keep them in their existing shape; use the balance of the existing funds to build new roads to high design standards that are adequate for future, intensified traffic. b. Concentrate on improving existing routes (above the point of strict maintenance, but perhaps with the same equipment and personnel) where appropriate by lay- ing light narrow pavements, reinforcing shoulders, streng- thening bridges and other structures, etc., so as to make the roads adequate for present traffic and for traffic in the near future.

30. From a purely engineering point of view-, the first method is the preferred one, even though it might be more costly. In some cases it might truly be the most economic method of road building. However, the second alternative -- to concentrate on improving existing roads -- will provide a greater kilometrage of adequate roads at a faster rate and for the same amount of money. Although these roads will not be perfect, they will serve their purpose provisionally. Comparatively little preparatory work has to be done for survey, comparison of pos- sible locations, getting agreement of local authorities, design, or condemnation. No great earth-moving works need to be carried out.

31. Of course, it is impossible to state a general preference for either of the two methods that would be valid in all circumstances. Nevertheless, the mission believes that it would be desirable in many cases to give serious thought to the second method, taking into account the desirability of providing better traffic ccnditions throughout the rural areas in the shortest possible time. The mission gained the impression that a number of roads were being relocated, with sometimes considerable earth-moving work, where present and foreseeable traffic could be taken care of for a long time by the laying of a light one- lane pavement along the existing road. The mission does not recommend road improvement as a means of saving money. Rather, this method is recommended for serious consideration as a means of making the highway funds go farther. Passing cars would require some reduction of speed and other minor inconveniences; but this would be a small price to pay for the faster and more widely spread improvements that can be achieved. - 10 - 11. ROADS

32. Standards. Design standards, whether for improved roads or new ones, should not be too high. In the design standards received by the mission from the Highway Department, the classification of roads is based on a conservative estimate of future traffic densities. Although the standards contain a bias against over-designing -- which is not an infre- quent tendency of highway engineers in virtually all countries -- this bias may not be enough to prevent genuinely uneconomic works if all design standards are adhered to rigidly. For example, Article 8 of the Revised Road Law (No. 206 of March 26, 1960), provides non-level crossing with all railroad tracks on main roads. In view of the low traffic densities on both the roads and the railroads (one train per week in some cases) this seems to be an extravagant requirement in many cases.

33. On new works, design standards could be modified by permitting staged construction; for example, a provisional narrow pavement can be laid on a road bed that is designed for a normal two-lane pavement, the other lane waiting until traffic warrants it. The Highway Department has done this on some projects, but the mission thinks that the method can be resorted to more frequently.

Priorities for Road Projects

34. Although the Government's 10-year plan states that it has not yet been possible to assign priorities to the various road projects under consideration, the existence of a fairly concrete three-year plan of the Highway Department means, in effect, that priorities have been established for at least the first three years of the 10-year program. These priorities are: first, rebuilding roads in the area devastated by the 1960 earth- quake; second, prolongation of the Pan American Highway, both to the north and to the south, but with no expectation of completing the work during the three-year period; and, third, construction and improvement of a number of transversal roads, mainly in central Chile. It should be observed that these are not sequential time priorities; rather they are a simple state- ment of which works receive preferred attention in design planning, alloca- tion of equipment, etc. Work on all thiree sets of projects will be going on at the same time.

35. Transversal Roads. The mission agrees generally with this order of priorities in the short run, but with some misgivings as to the alloca- tion of funds for transversal roads between the southernmost area and the central and northern areas. It is apparently planned in the Highway Department three-year program to spend more than three times as much for the repair and reconstruction of transversal roads in the devastated areas than is planned for similar roads in the rest of the country. We are con- scious of the pressing need to restore the transportation facilities which were destroyed by earthquake. We realize that roads in this area are more expensive (per kilometer) to build and maintain because of excessive winter rainfall; if roads in this area are built to standards which are accept- able in the rest of Chile they quickly become impassable. Another point - 11 - 11. ROADS in favor of relatively larger expenditures on roads in the devastated area: there is evidently a more urgent need to develop agricultural market crops. But the mission would hope that after the three-year Highwqay Department program is under way, there will be a thorough review of the priorities as now established between the devastated area and the rest of the country. There is sufficient flexibility in the 10-year program to permit such a review.

36. The Pan American Highway. In much the same vein the mission would put a somewhat higher priority on the extension of the Pan American Highway, especially to the north. The more rapidly this road is extended northward, the earlier it will be feasible to eliminate uneconomic rail lines, as proposed in the preceding chapter. It must be emphasized that a rational transport system wrill never be developed in Chile -- or else- where -- if the various sectors of the system expand or contract without regard to what is happening in the other sectors. The Pan American High- way is literally the backbone of the Chilean road-transport system. Although we put emphasis on extension northwards, we believe that southern extension is also highly desirable.

37. Substitutes for Railways. Whenever it is found economical to substitute roads for uneconomic railway branch lines these should, in the mission's opinion, receive relatively high priority. Evidently, in a number of cases the possibility already exists to make such a substitu- tion at very low construction costs. Since many railroad branch lines carry so little traffic, it must be supposed that the areas they serve are also served by roads -- although possibly by roads in bad condition. It is not necessary for the road to follow closely the route of the rail line for which it is a substitute. The road network can provide the same, or better, communications along other itineraries.

38. An investigation should be made immediately to see how far the existing road network is now a substitute for uneconomic rail lines, or can be made to be through relatively minor improvements. Where this sub- stitution is not possible, then tentative plans should be drawn for replacing the weak rail lines with new roads.

39. The possibility of using the bed of an abandoned railway line for a new road should also be considered. This practice has been followed in some places in Chile with good results. Not only are construction costs likely to be much lower than they would be for an entirely new road, but also a very good alignment of the road is usually already in place. A certain time for the construction of the road would, of course, be necessary after the rail service has stopped, e.g., one or two years if the work is well planned beforehand. The use during that time of existing roads, probably in poor condition, would be of some disadvantage to traffic, but in view of the short duration of this disadvantage it will usually be outweighed by the ultimately better traffic conditions and lower construction costs. - 12 - 11. ROADS

4o. Tunnels. The roads in Chile often have to pass mountain ranges. This is done generally by rather steep zigzag inclines leading up to a pass and down from it. A few tunnels have been completed and are in service; some have been started and then stopped for various reasons; still more are being planned. The mission recommends that the necessary studies be made to determine the possibilities of economic tunnel construc- tion with a view to realizing reductions in transport costs.

41. In some cases it appears that tunnel construction has been started without a thorough investigation of geological conditions or of ventila- tion requirements. An outstanding example is the Chacabuco tunnel, north of Santiago. Half of its projected 1,800-meter length was completed more than a year ago, when there occurred a serious cave-in with fatal results. This was entirely due to the soft nature of the rock, which could have been determined by a proper geological survey. The engineering question of how to continue the work has not been solved. Completion of the tunnel has been estimated to cost $5.3 million as a minimum, even without provi- sion for a ventilating system which will be necessary when traffic increases.

42. The mission recommends that before a decision is reached with respect to future work on the Chacabuco tunnel, there should be a thorough geological investigation and study of tunnel design. Also, even though the mission is aware of the psychological advantage of completing a work on which so much money has already been spent, serious consideration should be given to two proposed road alternatives which would not involve a tunnel. This might well be a case in which the costs of the tunnel far outweigh the advantages.

43. International Roads. The Governments of Chile and Argentina jointly proposed to build or improve four roads connecting the two coun- tries, and have asked for outside assistance to meet some of the foreign- exchange costs involved. The total costs of the projects on the Chile side would be approximately the equivalent of $10 million. The cost on the Argentine side would be about the equivalent of $5.7 million.

4h. The mission has serious doubts as to the economic advisability of starting these works at the present time. Traffic on existing rail links between Chile and Argentina is very small. For example, the rail- road from Argentina to Antofagasta runs only one train per week, and the rail connection from Mendoza via Los Andes to Valparaiso is grossly under- utilized. This is in spite of the fact that northwestern Argentina's natural shipping outlets lie on the Pacific coast in Chile. Cargo shipped from these ports can reach northern hemisphere destinations much more economically than would be the case from the Atlantic coast ports in the Argentine. As for passenger and light cargo traffic, the facilities of the existing Los Andes-Mendoza road are supplemented in bad weather by the railroad tunnel, through which vehicles below a certain size can be moved on railroad flat cars. - 13 - 11. ROADS

45. The mission is favorable, in principle, to providing more and better transportation facilities between neighboring countries in South America. Such facilities will ultimately be necessary if the objectives of the Latin American Free Trade Area are attained. However, we question the need at present of international road construction or improvement at a time when the need for improving the internal road network is so obvious. We would be reluctant to recommend the proposed work on the international roads until a thorough survey has been made as to the possibilities of future traffic, including an investigation into the question of why the present rail facilities are so little used. If then an improvement of roads to the border still appears desirable, they should be included in the project for the construction of transversal roads outside the devas- tated area.

Highway Finance

46. Although the highway system, unlike other transport entities dealt with in this report (the railways, airlines and airports, shipping, and ports) cannot be expected to become demonstrably self-sufficient from a financial point of view, an effort should be made to strike a rough equivalence between costs -- chiefly taxes -- and the value of the benefits to that part of the population which uses the roads; and within that popu- lation, to strike a similar equivalence as among the individual users. These principles have been spelled out in the discussion of transportation policy (Chapter 9).

47. Two innovations would be required to put these principles into effect in Chile:

a. As between owvnership and use of a vehicle in Chile, the tax system tends to stress owvnership. This is because import duties on all kinds of motor vehicles are quite high, and use taxes (mainly gasoline taxes) are quite low. For the sake of equity among users of the road system, the mission would favor an increase in gasoline taxes, a graduated axle- load tax which would reflect the size and carrying capacity of the vehicle, and a reduction of import duties on vehicles and parts as soon as balance of payments considerations will permit. In connection with the recommended axle-load tax, it should be noted that Chile has a higher proportion of heavy vehicles than is found in most countries.

b. A good road system confers benefits on more people than those who use it for transport purposes. Specifically, it raises the value of land and of business establishments along the route. The mission recommends that the enhanced value of land on new and improved roads should be reflected in a higher valuation for tax purposes. - 14 - 11. ROADS

48. A more direct way of equating costs and benefits to individuals is to charge a toll on certain roads, bridges, and tunnels. This is spe- cifically authorized by the Revised Law on Roads. In recent years the experience with toll facilities has been quite good in the industrialized countries of Europe and North America. Toll charges are especially appro- priate for tunnels.

Control over Commercial Vehicles

49. For commercial road transport, we recommend a system of licens- ing similar to that used in the industrialized countries. The ultimate objective of the licensing system would be to exercise some control over the quality of service offered by the truck or bus operator to the public.

50. It has been suggested that a licensing system should be used also to exercise some control over the quantity of service which is offered by road transport companies, and hence over the balance of investment in the various systems of transportation. The mission is opposed to this latter type of control as a long-run objective; as experience in many countries has shown, it leads to a proliferation of regulations and regu- latory personnel (in the face of a scarcity of administrative talent) rather than to an economic allocation of a country's capital resources within the total transportation system. It tends to freeze the total system into its present pattern.

51. It is the belief of the mission that an appropriate road-user tax system, combined with licensing of road-user vehicles, can put into effect economic forces which will automatically lead to an orderly transi- tion of the Chilean transport network at the lowest feasible cost to the Chilean economy. An appropriate road-user tax will force operators to pay close attention to their current costs when setting rates, and will thus assure balanced development of the entire transport network. The licensing system will guarantee the quality of service offered to the public. There is no continuing need for Government intervention beyond these two points.

52. The mission believes that a road-transport licensing system should lead to the following objectives:

a. Technical fitness of the vehicles. Every licensee should be required to have his vehicles inspected periodi- cally to make sure that they are in proper technical condition to serve the public.

b. Reliable service. The licensee should warrant good and reliable service. Passengers and goods should be insured at the expense of the licensee. - 15 - 11. RQADS

c. Common carrier service. Each licensee should be required to accept all cargo lawfully offered by the public, subject only to limitations of capacity or prior commit- ments as to destination. Passenger carriers should be required to accept all passengers with similar limitations.

Investment in Motor Vehicles

53. If the mission's transportation policy is followed there will be a need for more motor vehicles during the 10-year period than is con- templated in the Government's program. The closing down of uneconomic railway branch lines and their replacement with highways will increase the requirement for basic carriers -- i.e., heavy trucks and busses. Much of the increased need will be for transport in the agriculture sector. Consequently, as Table 11-3 shows, the mission recommends a somewhat higher investment target for these two classes of vehicles. No change is proposed in the Government's program for investment in pick-up vehicles (camionetas) or in taxis.

Table 11-3

Investment in Commercial Motor Vehicles (in millions)

Government Program Recommendations US$ Total (El) B US Total (E°)

Trucks ( 222 280 ( 117 162 132 204 Pick-ups (65 65

Busses ( 77 100 (4 4 62 5 75 Taxis ( 32 32

Totals 161 224 396 185 279 478

54. We agree with the Government's decision not to count the expendi- ture on private automobiles for personal use as a part of the investment program. However, it is obvious that improved roads will increase the demand for private cars. The mission therefore felt it necessary to esti- mate the likely private expenditure on automobiles which would result from carrying out the recommended transport policy. We assumed (a) that the number of private cars would increase by 70,000, i.e., doubling the 1960 figure; (b) that 100,000 replacement cars would be needed; and (c) that the average cost would be the equivalent of US$ 1,500, plus EO 750 for assem- bling, body work, etc. On these assumptions we have estimated the cost of private automobiles for the 10-year period will amount to the equivalent of US$ 255 million in foreign exchange, plus E° 127.5 million in local currency. - 16 - 11. ROADS

The Santiago Traffic Problem

55. The increase in motor traffic throughout Chile will most certain- ly worsen traffic conditions in the urbanized area centering on Santiago. The Government's 10-year program does not consider this problem because it does not, for the moment at least, appear to require any large capital ex- penditure. However, we think it deserves some attention here because the problem will be intensified as traffic increases0

56. iThile the mission was in Chile an interim report was made on this matter by a United Nations expert. The report recommended early action for further study. The further study would be much more detailed than the United Nations expert's interim report (which was completed in a matter of weeks). Three alternatives were suggested in the report:

a. Formation of a group or committee from the Ministries concerned and the city. b. The use of a United Nations team. c. The employment of a specialist firm of consulting engineers.

57. The latter method is favored in the interim report. The cost is estimated at E° 500,000, and it is recommended that the study take place over a two-year period. The consultant firm would be required to appoint Chilean engineers and other technicians to its resident team so as to train a staff which could implement the recommended program and handle other prob- lems that arise.

58. The mission is in agreement with the conclusion reached by the United Nations expert. The economic importance of improving traffic con- ditions in the city and providing for adequate public transport is self- evident. The mission urges that the study be undertaken. However, the expenditure is so small in relation to the entire program that we have not specifically provided financing for it in our estimated investment program expenditures. - 1 -

CHAPTER 12

DIR TRANSPORT AiND AIRPORTS

I. THE PROGRAM

1. The Government's 10-year investment program for air transport and maintenance is entirely for the Linea National (LAN), the Government- owned company which now handles more than 90% of the traffic carried by Chilean planes. Investment in airfields is proDrammed in the amount of ED 32.8 million, and the sum of EB 10 million is scheduled for airport safety installation. The program envisions a total investment of the escudo equivalent of E° 74.3 million (Table 12-1), of which only EO 14.4 million would be in Chilean money. The balance, equivalent to $56.9 million, would be in foreign exchange.

Table 12-1

Investment for Air Transport and Airports (in E° millions) 1961-70

For Aircraft and Maintenance 31.5

Aircraft 29.1 Maintenance Facilities 2.4

For Airfields 32.8

International 16.6 National 6.8 Local 9.4

For Airport Safety 10.0

Total 74.3

2. The present fleet of LAN is composed of 26 planes -- 16 DC-3's and seven DC-6B's -- with a total passenger capacity of 622 million seat-kilometers per year. According to the Government program, the fleet in 1965 would be 15 planes: six DC-6B's (one for freight only), six Convair jets, and three medium-range jets of the Caravelle type. Capacity would be 758 million seat-kilometers per year. By 1970 the fleet would still total 15 planes, but with a stronger emphasis on jets: two DC-6B's, both for freight, eight Convairs, and five jets. The 13 passenger planes (compared with 26 now in service) would produce 1,141 million seat- kilometers annually, of which 888 million would be in jets.

3. The airports program provides for improvement or newq construc- tion at three sites concerned with international flights: Pudahuel -2-

12. AIR. TRANSPORT AND AIRPORTS

(Santiago), an alternative airport in case Pudahuel should be closed for emergency reasons, and a third international airport at Chacalluta to serve the Arica region. Among national airports - which are not equipped to receive large jets - there would be installations near Antofagasta, Concepcion, Puerto Montt, Punta Arenas, and Balmaceda (an emergency airport between Puerto Montt and Punta Arenas). The proposed sites for local airports are too numerous for detailing here. The pro- gram does not give a breakdown of the way in which the E° 10 million for airport safety installations would be spent.

TI. APPRAISAL OF THE PROGRAM

General Comments

4. Before commenting on the Government ts plans, we first want to state our position regarding the desirable long-range development of aviaticn in Chile. In our view Chilean aviation is an integral and im- portant part of the domestic transportation system. It should concentrate on the task of moving people over the vast distances that separate the major population centers of the country. Internal freight movement should be a secondary consideration; except for emergency traffic and the move- ment of perishable goods, cargo carriage should be left to the highways, railways and coastal shipping.

5. We see no need for LAN to make a major effort to expand its international traffic. There are now 14 international airlines serving Santiago, and the number soon will be increased to 20. Thus, from a traffic-carrying point of view, Chile is well served by international carriers. And so are the foreign cities which LAN might want to include in its international expansion plans. WJhile we would not rule out all international service for LAN, we strongly recommend that such service be judged strictly on economic merits, with none of the "prestige" ele- ment that has been so costly for so many countries.

6. An expansion of international service to and from Chile is to be expected, however, and it will definitely be in the interest of the Chilean economy to encourage it. Therefore adequate international air- ports are required. To permit the exp.ansion of air transport for domes- tic passenger service, adequate air,sorts must be installed near the main centers of population.

The Aircraft Investment Program

7. Our principal objection to the aircraft procurement program relates to the evident intention to acquire jets larger than the Cara- velle type. There is no need for such large jets for domestic service; in fact, they would be a liability on short runs. The Caravelle type can easily handle the present international routes to Montevideo, Lima, and La Paz. It can even handle the existing IMiami run (but not in comnoe- tition with through traffic) by using airports now operating on the Atlantic side. When the number of airports capable of accommodating - 3 -

Caravelle-type planes increases along the Pacific Coast, this route can be used also. We are in full accord with the C-overnment's plan to buy three Caravelle-type aircraft as soon as feasible. As we stated above, these planes can serve the existing international routes adequately. They can also improve domestic service with internal "express runs."

8. As for smaller planes, it appears to us that the Government program contemplates too early a demise for the whole of the present fleet of DC-3's. These planes should continue to be floin where oper- ating costs are reasonable as long as they meet proper safety standards. We have not studied the question of appropriate aircraft types in detail, but there is adequate experience in other countries to suggest the proper type of aircraft to replace the DC-3 as replacement becomes necessary. The phasing of the DC-6B's (from seven at present to only two in 1970) should be based strictly on operational reliability and economy. Whether the present passenger carrying capacity of the DC-31s and the DC-6B's can be properly augmented (in view of the expected increase in domestic passenger service) with Convairs and Caravelles is a question which requires further study. Both proposed replacements give greater range and carrying capacity, but with fewer aircraft. In the kind of domes- tic air network which we think Chile ought to have, there should be many and frequent short flights. This suggests that some replacement should be in smaller planes, and more of them.

9. We are in accord with the proposal to spend nearly E 3 million on equipment, buildings and other maintenance facilities for LAN. It is our provisional judgment that abandoning the plans to purchase large jets would permit a saving of the equivalent of E° 3 million in foreign exchange over the 10-year period, and that further study of requirements for conventional aircraft, both short and long range, will lead to the conclusion that approximately the programmed amount of expenditure will be needed for this type. Therefore, we recommend a revised investment figure of E° 27 million for aircraft and maintenance facilities, as compared with the Government's figure of BE 30 million. Less than E° 1 million of our recommended figure would be in escudos. lirports

10. On the whole we agree with the airport program proposed by the Government, which we understand is based largely on studies con- ducted by the Technical Assistance Mission of the International Civil Aviation Organization (ICAO). It appears to us that it gives the correct emphasis to the development of each of the three main types of airports: international, national, and local. Our only reservation with respect to the airport progr.nm itself is that there might be an effort under way to develop too many smaller airports too fast. However, we are iniclined to leave this question open for further detailed study and, for programming purposes, to accept the Government's plans.

11. Wie are particularly in favor of the Government's intention to allot E0 10 million over the next 10 years to the improvement of airport security installations. It is noteworthy that in spite of inadequate 12. AIR TRANSPORT 4NB AIRPORTS safety installations at a number of Chilean airports, LAN's accident record is outstanding. To achieve this, LAN has had to only cancel or postpone flights when weather conditions have made it necessary because of the limited facilities. The fli!i hts have had to be mainly day flights, and service is erratic, especially to the south in winter time. Better security installations, such as telecommunication point to point, navi- gational aids, air traffic c:ntrol, and meteorological services are to be welcomed. With these installations Chile can attain I1la-l-veather" air transportation. Of course, the meteorological conditions in the south of Chile especially will allways present some difficulties. Safety installations can help to foresee difficulties when they cannot be over- come.

12. The GovernLmentts proposed total of expenditures for airports and airport security facilities appear reasonable. We propose, however, further study of the priorities for the s&aller airports. Thus the Government's proposed expenditure of E° h2 million over the 10-year period is carried unchanged in our alternative program.

Organization of the Airports

13. It has been suggested (by IC.A) that there be organized a Cor- poracion Chilena de Aeropuertos y liviation Civil -- also known as CORCHAC to handle cunstruction, operation and administration of all airports. l,!e endorse this proposal wholeheartedly. In line with the general trans- portation policy we propose, CORCHAC should be a relatively autonomous agency responsible for the service facilities, including traffic con- trol, which are required by the air carriers. At present these respon- sibilities rest with several different agencies. The Ministry of Public Works is responsible for construction and major maintenance; the Sub- Secretary for Transport in the Ministry of Economy is responsible for much policy direction; the Ilinistry of Defense is responsible for such operational matters as normal maintenance, traffic control, communica- tions, and meteorological services. There is also a Junta Aeronautica Civil, a kind of Civil Aviation Board, which has, however, mainly con- sultive functions in connection with both the Ministry of Defense and the Ministry of Economy. This organizational set-up results in a some- what chaotic operation of the entire air transport system. ii. Thile the Chilean defense forces may wish to have priority use of any and all airfields in the event of an emergency, to assure physical security of the airport at all times with its own forces rather than with civilian police, we believe that these two aspects should be quite separate from the day-to-day operational function of commercial airports. A well organized civilian agency should be able to operate the civilian facilities with economy and efficiency.

15. In our view, CORCHhC should take over all operational aspects of the airport system, subject only to prudent limitations for defense reasons. As was suggested in our chapter on transportation policy -5 -

12. AIR TRANSPORT AND AIRPORTS

CORCHAC would operate autonomously writh broad guidance from the Ministry of Transport; the department of the Ministry concerned with aviation affairs would take the place of the present Civil Aviation Board and would act, under the blanket transport policy of the Government,as the body which determines the mejor directions of the airport expansion policy.

16. CCRCHAC would thus become one of the transport authorities which we have previously recommended. As such, it would be expected eventually to be financially self-sufficient under the criteria we have proposed for such authorities. What are the chances of attaining financial self- sufficiency in the future? Under present fees, according to data given to the mission in July 1961, they are pooor indeed. For airports, inclu- ding security installations, the total annual Government contribution to the current budget of CORCHAC would amount to EO 1.2 million in 1962, E° 3 million in 1963, E° 3.9 million in 1964, and E° 4.3 million in 1965. During the same period there is expected to be a reduction in the number of air- craft using each facility, because of a shift to larger capacity planes. Thus landing fees, etc., based on the nr_mber of planes using the facility (and not on their capacity) will decline. As a result of increased annual costs and decreased annual revenues, the Government program anti- cipates that annual revenues will cover annual costs to the extent of 52% in 1962, 33% in 1963, and 30% in 1964 and 1965.

17. The above figures overstate the expected deficits to some extent, because included as "annual" costs are some of the capital costs of constructing airports and putting in the necessary security I,:AJaIn-icnsd Nevertheless, it is clear that self-support for CORCHAC will be an impos- sible task unless a very determined effort is made to reach the objective. A practical example from Swiss transportation policy will give an illus- tration. When the Swriss airports were adapted to jets some years ago, huge investments had to be undertaken. Prior to these investments, the Swiss airports had reached about 55% of self-support. Without special measures, this figure would have fallen to about 30%. The Swiss Govern- ment then decided to accompany the new investment with an increase in landing fees, certain other fees, and a passenger fee for the use of airport facilities. As a result, self-support is now figured at about 70%, with the expectation that within five years there will be full self-support.

18. Much the same could happen in Chile. One estimate by ICAO is that by 1974 self-support will be attained on the basis of present fees, allowing for the projected increase in traffic. I;e believe that an effort should be made to attain self-support much earlier by raising fees for aircraft, and by introducing a passenger fee along the line that is now common in most European countries. One of the ICAO reports states:

".....international air transport should pay a somewhat greater amount in landing charges than it does at present, in order to produce a more reasonable relationship between the economy of the air transport industry and the economy of the airport industry." -6 -

12. AIR TR\NSPORT AND AIRPORTS

We are in full agreement with this statement, but would apply it to domestic air transport as well.

Organization of LAN

19. I'Te believe that LAN should have more autonomy. Today it seems to be considered as a Government department. We believe that it should be operated strictly as a commercial enterprise under the policy control, of course, of the Ministry of Transport, just as CORCI1AC should be operated. If national policy should reqttire certain operations at a loss (for security, prestige, service to remote areas, orcther reasons) the loss should be made up by direct indemnification from general funds at the time the loss is incurred. This principle has been recognized as a valid one by the Government. The text of the 10-year plan, for example, has this to say:

"If, for socio-political reasons, LAN finds it necessary to maintain certain re-ional services of a non-economic nature, such as, for examDle, to Aisen or the Straits of 1Magellan, such services should be considered in a separate category which makes a frank and direct subsidy necessary."

20. T;Teagree, except for the word "subsidy." Fees for such services should be paid for by the State as a straight indemnification for services rendered not to the airline users, but to the State itself. This would bethe arrangement if LAN were privately owned and operated. There is more than a semantic difference here. Wqhen the State pays directly for un- economic services which it wants, then the payment can be negotiated strictly on the basis of an additional cost calculation and can be treated by LAN as part of its operating revenue. Wvith a "subsidy," however, we run the danger of falling into the error of covering defi- cits, with no check on what costs ought to be. This danger has been .pelled out in our general chapter on transportation policy.

21. As is the case with all transport enterprises and authorities, the financial objectives of LAN should be self-support. It should be possible to attain this objective for LAN earlier than is the case wqith the airport system. Today LAN is subsidized for about 10% of annhal costs. In addition there are indirect subsidies such as free meteorolo- gical services and low landing fees. It would seem to us that these subsidies can be made unnecessary by better efficiency and a modest increase in fares. A United Nations expert will soon make a thorough study of LAN's commercial, financial and operating policy. It is to be hoped that on the basis of his detailed recommendations a financially sound rate and schedule structure can be worked out. - 7 -

III. SUMMARY

22. The principal objectives of our proposal are to turn CORCHAC and LAN into independent and self-supporting entities under the general policy and regulation guidance of Government -- such guidance to come exclusively from the Ministry of Transport (which, of course, would res- pect and express the agreed upon policy objectives of other interested parts of the Government). This sort of arrangement wqill, we believe, assure the successful operation of air transport in Chile within the framework of a coordinated transportation system. Wqith the exception of EO 3 million for aircraft, representing the excess cost of large jet aircraft over the cost of Caravelle type, we agree, for programming purposes, to the Government's projected level of investment expenditure over the next 10 years. - 1 -

CHAPTER 13

PORTS

I. THE PROGRAM

1. The program for investment in port facilities, given to the mission prior to its departure for Chile, was being revised when the mission arrived in the country. During the mission's stay a com- pletely new program emerged. This new program is largely the work of the recently established (March 1960) Port Authority (Empresa Portuaria de Chile). The revised program covers the 10 "fiscal" ports now under the control of the Port Authority, plus the capital expenditure estimates of the Public Works Department for work on ports for which it is still responsible. The Port Authority also has a small program at the port of Valdivia, and has the right to get the approval of the President for the addition of others.

2. The revised program contemplates expenditures nf E0 63 millien over the 10-year piriod. Of the total, some En 6 million had already been scheduled for expenditure in 1961, and a detailed breakdown was not available for this. Thus the equivalent of EO 57 million is required for the planned program over the nine-year Period, 1962-1970,1/ of which apDroximately E0 35 million would be in local currency, and the balance in foreign exchange. Expenditures by the Port Authority are estimated at the equivalent of E0 44.5 million; expenditures of the Public Works Department for minor ports and dredging equipment make up the balance. Taking a comparison of the 10-year period as a whole (Table 13-1), the revised program is some 30% larger, in terms of financial costs, than the original program.

1/ The revised program which was actually given to the mission covered the period from 1962 to 1971. In order to preserve consistency with the treatment of other sectors in this report, we have eliminated the year 1971 and have added the E° 6 million scheduled for 1961. -2- 13. PORTS

Table 13-1

Ports Investment 1962 - 1970 (C000) Revised Gover_nm.ent Program Mission Recommendation Port Local Foreign Total Local Foreign -Total Authority Currency Exchange EO Equi- Currency Exchange E° Equi- Program E° U.S. $ valent E0 U.S. $ valent

Arica 6,032 2,230 8,373 5,332 1,900 7,327 Iquique 535 538 1,100 535 538 1,100 Antofagasta 790 2,017 2,908 790 2,017 2,908 Coquimbo 650 555 1,233 650 555 1,233 Valparaiso 2,934 3,472 6,580 2,934 3,472 6,580 San Antonio 3,377 2,935 6,458 3,377 2,935 6,458 Talcahuano 516 424 961 516 424 961 San Vicente 7,422 2,934 10,503 7,422 2,934 10,503 Valdivia 292 337 646 292 337 646 Puerto Montt 2,019 2,113 4,238 2,019 2,113 4,238 Punta Arenas 507 997 1,553 507 997 1,553

Total 25,074 18,552 44,553 24,374 18,222 43,507

Public Works Program

Valdivia 1,500 480 2,000 - - _ Chacao 500 190 700 500 190 700 Puerto Montt to Aysen 1,500 1,500 1,500 _ 1,500 Bahia lIansa 300 - 300 - -- Chacabuco 400 95 500 - - Fishing Ports 800 190 1,000 800 190 1,000 Dredging Plant - 1,330 1,400 - 1,330 1,400 iliscellaneous 4,500 - 453,500 3,500

Total 9,500 2,285 11,900 6,300 1,710 8,000

Grand Total 34,574 20,837 56,453 30,674 19,932 51,807

All Ports Expendi- tures 1961 5,300 900 6200 5,300 900 6,200

Total 1961- 1970 39,874 21,737 62,653 35,974 20,832 58,007 -3 - 13. FORTS

II. ASSESSMENT OF PORT AUTHORITY PROGRAM

3. It is our opinion that the revised expenditure plans for the 10 major ports under the jurisdiction of the Port Authority may be too large in financial terms and that the newly organized Authority is not fully equipped to carry them out efficiently. Furthermore, we believe that some of the planned projects should be modified. Our comments on the projects for each of the major ports follow.

Arica

4. Arica is at present a lighterage port with an open roadstead, Traffic congestion is now bad, being aggravated by the lack of modern handling equipment, suitable pavements, warehouses and open storage areas. Operation is complicated by the need to segregate Bolivian and Peruvian traffic. Handling costs through the port are high and the turn-around of ships slow.

5. A new deep-draft and protected harbor is planned for this port; an L-shaped breakwater will be constructed with three berths behind it having depths from 8 to 15 meters. The new facilities will include ample reclaimed areas; warehouses; paving, railtracks, complete with wharf cranes; mobile equipment; plant shops; administration building and services. Also planned are improvements to the open areas and a new small warehouse for the present lighterage piers, In all, the programmed investment through 1970 would be EO 6,032,000 for local works and U.S.$2,230,000 for plant and equipment, a total of EO 8,373,000 (equivalent).

6. Most of the Airica traffic is miscellaneous general cargo, both foreign and coastal. Cargo quantities have averaged 150,000 tons per year with a tendency to fall away in recent years, particularly for Bolivia and Peru. No one item is of any outstanding magnitude, the largest being the export of fish meal, some 22,000 tons in 1960. Bolivian tin and other metals totalled only 11,000 tons for the same period.

7. The forecast in the program for 1970 of 2140,000 to 300,000 tons per year appears satisfactory even if the annual Bolivian trade increases by 100,000 tons per year. But the provision of three deep-draft berths complete with all facilities at a total cost of some EO 9,000,000 is more than appears necessary.

8. It is realized that treaty agreements with Peru and Bolivia must be considered, that the local Progress Commission (Junta de Adelanto de Arica) has offered to finance the port investments from its own funds, and that a contract has been committed for a large part of the above works. However, the planned development should be reviewed for possible ways to reduce or eli.minate some of this large expense, which seems unduly high in relation to the relatively small tonnages, both present and predicted. It is suggested that one berth, the outer one and all its equipment not -4 - 13. PORTS be undertaken; this berth could be added at a later date, if future trade proves that it is warranted.

9. Alternatively, basic work for all the berths could be completed if this should be more economical than stage construction. Still, the building of warehouses, the installation of cranes and other equipment, and the paving should be deferred for this berth, and perhaps the next to the last one, until such time as increased traffic justifies the expenditure.

Iquique

10. Improvements at Iquique are to consist of the purchase of mobile wharf equipment, the paving of wharf areas both on the pier and the break- water wharf, the renewal of and additions to railtracks, one modest ware- house and associated small buildings and services. Total investment would be E° 535,000 for local works and $538,000 for plant and rails from foreign sources. These improvements would modernize the handling of all commodities other than the export of bulk materials such as the present nitrate trade.

11. Traffic through the port has fallen from ho0,000 tons in 1957 to 250,000 in 1960 mainly because the shipment of nitrates has declined from 266,000 tons to 118,000 tons in the same period. Other cargo, mostly miscellaneous general, has remained fairly constant at about 150,000 tons a year. The modern equipment is mainly intended to speed handling and reduce the costs for general cargo. Part of the modernization is related to a Government scheme to establish a fishing center in the Iquique port. Processing wiorks and allied activities will occupy some of the port property behind the nitrate storage zone and the fishing fleet will make use of two of the three berths of the breakwater wharf. Fish oil would also be exported in quantity.

12. The existing mechanical installation for loading nitrate in bulk has much more capacity than the present tonnages; however, it is expected by Chilean authorities that iron ore will be shipped through this port in the future. It should be possible to use the installation for iron ore with little modification.

13. No great increase can be seen for general cargo traffic at Iquique. However, the program of installing modern equipment and its associated work is considered justified.

Autofagasta

14. This port is to have its four old berths modernized and the fourth berth of the recently completed new wharf is to be fully equipped with mechanical handling plant and warehouse. For the old berths the program contemplates new warehouses and wharf cranes for two inner berths, paving -5- 13. PORTS and railtrack renewal for four berths, and for the new-wharf berth one warehouse and set of wharf cranes, together with a pool of mobile handling equipment, administration and other small buildings, services, etc. Total investment would be E0 790,000 for local works and $2,017,000 for plant and rails from overseas. This would result in four modern berths with large warehouses and ample open areas and three modernized berths with modest warehouses and open areas, all well-equipped for mechanical handling of cargo.

15. Cargo statistics reveal that total trade has averaged 550,000 tons per annum over the last 10 years, with a peak of 660,000 tons in 1956 but only 490,000 tons in 1960. The major item is copper, in the vicinity of 150,000 tons a year but with the last two years a little higher. Bolivian cargo, mostly ores for export, has dropped considerably in recent years to about 80,000 tons; this is one of the reasons for the port's overall decline. Coastal trade has been remarkably constant for four years within a range of 190,000 - 210,000 tons.

16. Trade for 1970 has been estimated at from 700,000 to 850,000 tons per year. The lower limit appears to be more realistic even with the like- lihood of small copper companies coming into production. Fully equipping seven berths, four of which should be capable of handling 500,000 - 600,000 tons a year, appears somewhat more than required; it is likely that some of the handling plant will not be needed until towards the end of the pro- gram. However, it is realized that port facilities should not constitute a bottleneck which usually takes long to remove. Therefore, we do not recommend reducing the financial program.

Coquimbo

17. The relatively new wharf with two deep-draft berths at Coquimbo is to have cornpleted the paving, railtracks, drainage, etc. of its open areas; it will have a second warehouse, a mobile handling plant for general cargo, a mechanical handling installation for ores in bulk, and the associ- ated small port buildings and services. The total investment would require Eo 65o,ooo for local works and U.S.$ 555,000 for plant and equipment.

18. Coquimbo's total trade has shown a decided increase in the last 10 years, from about 400,000 tons a year to the vicinity of 600,000 tons a year, the latter being maintained for the last four years. Coastal traffic has fallen greatly, from 300,000 to 100,000 tons a year, whereas foreign trade, almost wholly from iron and other ores, has increased con- tinuously from 50,000 tons a year to 500,000 tons a year.

1i. Forecasts are that the coastal trade will reach about 300,000 tons and the foreign trade 1,000,000 tons a year by 1970. It is difficult to see how coastal trade can recover to this extent; in fact, the port's proximity to Santiago and the competition from road traffic makes it most -6-.

13. PORTS unlikely that its coastal trade will rise above the present 100,000 tons a year. However, growth of the ore traffic is to be expected.

20. Therefore, it appears that the port should be planned for up to 1,000,000 tons of bulk ores outwards and about 100,000 tons a year of general cargo. It would then be advisable to equip one berth wfith a modern, fast ore-loading installation and allow the other berth to cater for general cargo. In this case there would be some change in the planned works and equipment, but overall the investment costs should be about the same. It would be most advisable for the Port Authority to assume the responsibility for ore handling within its boundaries, particularly as there are five private companies presently carrying out this operation by makeshift methods.

Valparaiso

21. The program for Chile's major port calls for modernizing the present berths, thus increasing their cargo capacity and the speed of cargo handling. Additional berths are not feasible because they would entail exorbitant costs in extending the breakwater. The modernization would be achieved by the replacement of many of the old wharf cranes, the acquisition of modern mobile handling equipment, the provision of two warehouses, a passenger terminal, the repair of sheds and warehouses, the paving of much of the port area, the renewal and addition of rail- tracks and associated small port buildings and services. The bulk handling plant is to have additional storage facilities and its pier paved and tracked so that one side can be used as an overflow general cargo berth. Also included is a new Port Authority Head Office to be built on its own property. Investment would total E° 2,934,000 for local works and U.S. $ 3,472,000 for foreign plant, equipment and materials.

22. The trade of Valparaiso consists essentially of general cargo (foreign and coastal) and incoming Chilean coal. Annual tonnages have been variable in the 800,000- to 1,000,000-ton range, a maximum in 1952 and a minimum in 1959. Over the past few years general cargo has varied very little from 700,000 tons a year and coal from around 150,000 tons a year, both without any particular trend up or down.

23. The coastal trade (including coal) is expected by the Government to rise from 300,000 tons in 1958 to between 450,000 and 500,000 tons by 1970, and the foreign trade from 500,000 tons to between 800,000 and 1,000,000 tons a year. The prediction for coastal trade is a little optimistic when the growth in road transport and the forecasted industrial use of coal is considered. It is also difficult to foresee that present tonnages of foreign general cargo will double; imports of general cargo will probably rise by only 60% by 1970, and exports are not now a large item and are not likely to increase enough for the above target to be reached. -7-

13. PORTS

24. However, in view of the difficulties of projecting trade sta- tistics over long periods and with a view to avoiding inadequate port facilities from becoming a bottleneck, the mission proposes no modifica- tion in the 10-year expenditure program for this major port. Five modern foreign trade berths and four coastal berths should be able to handle the general-cargo trade for a long time, and the coal pier should be capable of taking any likely increase in bulk goods.

San Antonio

25. The dual ports of San Antonio and Valparaiso have many similar- ities in trade, capacity, location, etc. It would be very costly indeed to increase the sheltered areas in both places by extending breakwaters into very deep water. Both represent valuable assets in fundamental works and should be used to their limits of capacity. Both serve the same produc- tive and consumer zone and each should be used for the best purpose to which it is suited. San Antonio is better situated to handle bulk goods and any unforeseen increase in this type of cargo should be channelled through this port, if at all possible.

26. San Antonio has suffered badly from poor maintenance. Develop- ment plans call for rebuilding the two southern berths and improving the two northern berths of the pier; extending the bulk berth at the end of the mole wharf and its conveying plant and storage area; providing four new warehouses, paving wharf cranes, mobile handling equipment; and making major repairs and renewals to warehouses, railtracks and small port build- ings. Total investment would need EO 3,377,000 for local works and $2,935,000 for foreign plant and materials.

27. The total trade for the port has shown no particular trend over the last 10 years. Trade has varied between 1 and 1.2 million tons a year, with the last three years just under 1 million tons. M4ajor items are coal of some 300,000 - 35O,000 tons a year and copper of some 170,000 tons a year, both showing very little change in the last few years. The remainder consists mainly of general cargo.

28. The Government forecasts that the total coastal trade (including coal) will increase from 500,000 in 1958 to about 600,000 tons per year in 1970, and the annual foreign trade from 450,000 to around 750,000 tons per year. Both appear reasonable when compared with the forecasts con- tained in the industrial, agricultural, and other sectors. If this is so, the modernized general-cargo berths and the bulk-handling berth should have just sufficient capacity to handle the tonnage.

Talcahuano

29. The present program proposes to improve the present shallow draft and lighterage port of Concepcion to increase its efficiency until such time as a new deep-draft port is created, and then to continue it as the coastal- trade port for the long-term future. This would involve the purchase of -8 - 13. PORTS mobile handling equipment and the associated works of paving, railtracks, and major renovations to warehouses and pier wharf as well as general small buildings, all at an estimated cost of E° 516,000 and U.S.$424,ooo.

30. Less trade passes through the fiscal port zone than over private piers and landings in the near vicinity. But there has been a pronounced increasing traffic over the last five years -- from about 50,000 tons to 110,000 tons annually. The trade is composed almost wholly of mixed general cargo, both foreign and coastwise in varying proportions. Tonnages handled privately have fallen continuously over the same period from 350,000 tons to 220,000 tons a year.

31. The predictions in the program for 1970 combine the cargoes for this port and the proposed new one at San Vicente (discussed below). The total is 400,000 tons a year for coastal trade and 850,00 to 1,300,000 tons a year for foreign trade.

32. If the fiscal port zone at Talcahuano is modernized as planned, much of the privately handled trade is expected to transfer there. The two berths of the pier should be able to handle around 200,000 tons of coastal cargo a year without the use of lighters. This is practically equal to the present tonnage of the private zone, a capacity that should be satisfactory for a long time.

33. Much of the plant and equipment in the program could be trans- ferred to the new deep-draft port if it was found necessary at a later date. Since only a small part of the proposed investment would become redundant when the new port is completed, this is a relatively small price to pay to hold the present trade until San Vicente or an alternative is constructed and ready for operation in four or five years,

San Vicente

3h. The scheme for a new deep-draft port at the northern end of San Vicente Bay calls for a new three-berth wharf of 10-meter depth; a large area of working space would be formed partly by reclaiming on the seaside and partly by excavating the hillside. The wharf would be provided with three transit sheds, ample storage areas, good road and rail traffic way, ancillary buildings and services. Modern cranes and mobile handling equipment are included. The investment totals are EO 7,422,000 for local works and U.S.$2,934,000 for foreign plant and construction materials.

35. The anticipated foreign trade has been variously estimated as between 850,000 tons and an upper limit of 1,300,000 tons annually. According to a consulting firm's estimate - which agrees with the lower limit -- paper, cellulose, timber and steel products by 1970 would form the bulk of the trade, each of the order of 200,000 to 300,000 tons. The projection assumes that the private pier serving the steel mill will be almost completely occupied with the intake of raw materials for the mill; -9- 13. PORTS hence the company will find it expedient to ship through the proposed wharf, and this development appears likely.

36. There is no doubt that the Concepcion locale needs a deep-draft port because of its rapidly growing industrialization and production. The locale shows most promise of all ports for a rising trade in exports and imports. Providing for deep-berth traffic of around 800,000 tons annually should be a satisfactory target at this stage.

37. The proposed port at the San Vicente site appears to be generally well-conceived along modern practices for general-purpose berths. The preliminary scheme prepared by the Public Works Department has been checked by a consulting firm and found satisfactory in layout, design, and capa- city, except for minor variations. The site is the most sheltered in the district and provides ample navigating space in its approach. It is very near to, but at the same time on the outskirts of Talcahuano. The wharf is capable of moderate expansion on its inland end. In these matters the proposal appears sound.

38. However, a geological fault that cuts right along the rear of the reclaimed area has been recently reported as a possible danger in any future earthquake, Hence, it is essential that more extensive geological and engineering examination and tests be made forthwith, in order to determine the degree of risk that the fault may slide along its plane and wreck the port area. This investigation should be made before any new work is undertaken. If it can be shown that the risk is very small, the scheme for this site can be adopted. If not, another site must be sought for further investigation.

39. In the final design of the wharf, consideration should be given to providing for a berth depth of 11 meters, in line with the trend towards larger cargo ships.

Puerto Montt

4o. The port facility at Puerto Montt was almost completely destroyed by the 1960 earthquake. It is proposed by the program to construct a new wharf, 575 meters long, along the line of the wrecked wharf and just behind it, and to raise the filling up to wharf level. The three berths would be equipped with warehouses, paving in the open areas and access, railtracks, drainage, and services. Modern wharf cranes and mobile handling equipment would be provided, as well as new administration, labor and plant buildings. The total investment would require EO 2,019,000 for local works and $2,113,000 for foreign plant and materials.

41. Puerto Nontt's trade has been variable for the last 10 years, ranging between 115,000 and 173,000 tons a year. It has been almost wholly general cargo with the bulk of it coastal, which has also varied up and down from 100,000 to 150,000 tons. It is interesting to note that in 1960, with the loss of the wharf in May, Puerto Montt handled a record volume of 173,000 tons with makeshift piers and beach landings. - 10 - 13. PORTS

42. The forecasts made for 1970 give a coastal trade of 110,000 - 130,000 tons and a foreign trade of 30,000 - 50,000 tons a year. WTe believe that the estimate is too low. As stated later in regard to Chiloe, all traffic from this island should be served by good roads and a ferry service across the Chacao Channel. Hence Puerto Montt should expect to handle some of this trade. If no deep-draft port is provided near Valdivia, Puerto Nontt can expect to receive much of the former's trade, particularly the timber exports from the hinterland between Valdivia and Puerto Montt. Altogether, the total probably will be in the order of 300,000 to 400,000 tons annually.

43. Puerto Montt is strategically placed to become the shipping center of the zone stretching from Valdivia in the north and to Aisen in the south, including the island of Chiloe. It is very centrally located, it has perfectly sheltered water, it has no problems of variable rivers or sea bed, and it lies on the national highway and main railway. Most of its trade would use road and rail transport, and that from Aisen and other isolated settlements could be handled by landing craft types of vessels. Thus Puerto Plontt could be the distributing center of a large zone, as it is now for the oil trade. Very likely this area will develop rapidly in the future, along with a new paper industry and better exploita- tion of timber.

44. We consider the proposed reconstruction program to be sound, provided it is designed for a future depth of 10 to 11 meters in the berths (for larger ocean-going vessels) and adequate swinging space for the vessels opposite the wharf, and provided that the type of wharf and its stability is thoroughly examined in regard to earthquake effects. The earthquake question needs the services of an expert in soil mechanics and foundation engineering, with particular attention to the type of filling used for the reclamation behind the wharf. Should this foundation problem prove prac- tically insolvable, consideration should be given to a potential site halfway down the Tengle Channel in preference to the sea front of Puerto Montt.

Punta Arenas

45. Improvements programmed for the free port of Punta Arenas com- prise the installation of new cranes, mobile equipment, and works to make full use of the ample space available; two warehouses; topping up of the southern reclaimed area; paving; sealing of retaining walls; small build- ings and services. This calls for an investment of EO 507,000 and US$ 997,000.

46. Trade in the past was consistently around 100,000 tons a year until 1955; it rose to 165,000 in 1957, fell to 90,000 in 1960, and indications are that 1961 will be a record year with 180,000 tons. The port handles predominantly coastal trade of very mixed general cargo, including transshipments of equipment, materials, and supplies for the oil fields of N4agallanes. 13. PORTS

47. The Government's forecast is for a total tonnage of 200,000 to 250,ooo by 1970. Considering its isolated position, Punta Arenas will surely rely mainly on sea transport for a long time; hence the expected economic expansion of this district underlines the wisdom of developing this port. Transshipments for the oil fields, both in Chile and Argentina, and to nearby farm lands of Argentina are likely to increase, particularly in view of the Latin American arrangements for a Free Trade Area. The important products of the district -- wool, skins, and meat -- have a high unit value with relatively little bulk (less than 10,000 tons in any one year). Therefore even if increases in exports are large in terms of value, they will not be an important factor in the tonnage moving through the port.

48. The modern plant and other improvements should enable the two berths to handle the upper limit of the estimated tonnage, even with the normal 30% lost time due to rain and snow; in fact, the mechanical equipment appears to be a little more than is necessary. Siltation in the two berths is a problem, and its removal is a continual maintenance expense. So if additional berths become necessary, careful cost com- parisons should be made between dredging inland along the pier (with likelihood of much more siltation) and extending the pier seawards (where siltation should be practically zero).

III. ASSESSMENT OF THE PUBLIC l.ORKS PROGRAM1

49. We believe that the port-improvement program as developed by the Public Works Department is, in financial terms, nearly twice as large as it should be. It should be reduced from the programmed total of E° 12.4 million to about E0 6.6 million. Our reasons and recommendations, in detail, are given below.

Bahia Mansa

50. In the program it is proposed to add a smrl bre~kwater and werehouse to this minor port of one pier, at a cost of Fc 30n,000. ICo cergo statistics are available. At present the port is very exposed and dangerous to shipping; it has no facilities other than the pier and is not connected with other centers by rail or good roads (although one is planned). It is difficult to see the economic justification of a port so near to Valdivia and Puerto Nlontt and midway between them. Most of the producing areas would be as near to these two ports as to Bahia Mansa, and wiould be better served by road and rail. The present low cargo-handling costs, made possible by non-union labor, cannot be expected to be retained for very long.

51. It would be advisable to forego further costs on this facility. - 12 - 13. PORTS

Valdivia

52. The Public Works Department has programmed EO 2 million to cover a deep-draft port either near Valdivia or at the mouth of the river.

53. The total trade through Valdivia and the nearby anchorage of Corral fell continuously from 280,000 tons in 1954 to 141,000 tons in 1958. Due to the earthquake, the 1960 figure was about 14,000 tons. Coastal traffic declined from 200,000 tons in 1952 to 80,000 tons in 1958, to 11,000 tons in 1960. The cargo has been practically all of the mixed general class.

54. Government predictions for 1970 indicate a coastal trade between the limits of 100,000 and 130,000 tons and a foreign trade between 300,000 and 480o,000 tons a year, the high figure being in expectation of large exports of timber. These figures are reasonable, though perhaps on the optimistic side.

55. The need for a deep-draft port to serve the Valdivia district, considering the port's location and investment cost, is most uncertain. Either a fully equipped up-river port, with its large dredging and river- training works, or one at the river entrance with road and rail connec- tions from Valdivia, would be high in capital cost -- perhaps not far short of EO 10 million -- and probably also high in maintenance and dredg- ing costs. Before either location can be fully assessed, the problems of river stability and entrance shoaling must be solved afresh because of the changes caused by the earthquake. It is understood that a new program of model testing and hydraulic investigation is to be undertaken.

56. Viewing the problem in the overall transport pattern, it appears probable that using road and rail connections to either Puerto Montt or Concepcion will prove more economical than building a high-cost port to service this traffic. The major item of trade, native timber, is pro- duced in a part of the lake district that is just as near to Puerto Montt as it is to Valdivia, and is served well by roads and railway.

57. Therefore, a study should be made of the comparison between having a deep-draft port either near Valdivia or Corral and having no such port at all. A large port investment should not be planned unless this overall economic examination reports in its favor.

58. The Port Authority's program (as distinct from the Public Works program) at Valdivia would provide only for the completion of a small facility at Mulatas (just downstream from Valdivia) by the filling of an area behind the short wharf, paving it and adding a small wharehouse, mobile handling equipment, port and labor center, and services. The estimated cost is EO 292,000 for local expenditures and US$ 337,000 for plant, excluding the wharf work which was nearing completion in 1961. - 13 - 13. PORTS

Th.e Mulatas project appears to have merit, but we advise not to proceed with it until a decision has been reached on the deep-draft project for Valdivia. Depending on the decision, the friulatas facilLty may have to be altered.

Chacao

59. Ferryboat landings either side of the Ghacao Channel are planned for Chacao at a cost of EO 700,000. This project is essential in order to make road transport to the island of Chiloe possible.

Puerto Montt to Aisen

60. The Government proposes to spend, over a 10-year period, the equivalent of E0 1.5 million on all the ports between Puerto Montt and Uisen, building minimum works to accommodate transport using landing craft. The investment in each port would be small, but the development is considered by the government to be extremely important to the area served. The mission agrees, in view of the likely increase in local transuortation requirements in this region.

Chacabuco

61. An amount of E0 500,000 for wharf extensions to the present small landing place at Chacabuco is contemplated by the Department during the latter part of the 10-year period. Cargo tonnages have not been given but obviously they are relatively small. As mentioned in the discussion on Puerto llontt, much of the trade from the Aisen district, particularly exports, could be taken to Puerto ML[ntt by small craft such as navy landing types. Therefore large extensions of the present facilities are umadvisable unless they are fully justified by economic studies yet to be made.

Fishing Ports

62. The rationale for providing landings, slipways, and the like for fishing craft is rather vague at present, Tilth no particular locations or numbers snecified. However, we believe that the fishing industry should be given adequate facilities A sum of EB 1,000,000 appears appropriate at this stage for this purpose.

Dredging Plant

63. To meet various dredging needs, the Public Works Department plans to acquire two small cutter-suction dredges, one small sea-going tug, three small barge-maneuvering tugs and four barges, corresponding to an investment of $1,400,000. The dredges would replace two very old ones, and the sea-going tug is needed to avoid costly delays waiting for com- mercial tugs to move dredges from port to port. The new type of dredge - 14 - 13. PORTS would require only two men to operate it while working, compared with about 20 on an old one; therefore, dredging unit costs should be greatly lowered.

64. Continual maintenance dredging is required at Punta Arenas (berths), Valdivia (river), Talcahuano (approaches) and Valparaiso (city drainage siltation). A small amount of periodic maintenance is needed at other ports. Improved depths and widths of waterways are involved for Puerto Montt, Chacabuco, and San Antonio. These require- ments warrant the modest replacement investment to give an improvement in dredging efficiency and costs.

65. Efforts to make the two fairly new bucket-dredges less costly per unit of work should be continued. The intentions to obtain work records and costing data are to be commended and should be pursued.

Miscellaneous

66. The Government program contains a sum of E° 4,500,000 (E° 500,000 a year) for unspecified and unforeseen minor works. Provi- sion for contingencies is advisable, but the amount appears to be high for the first half of the program.

IV. GENERAL COMMENTS RELATED TO THE MISSIONIS RECOMMENDATIONS

67. The alternative program proposed by the mission shcws a total of nearly E° 52 million (equivalent) for investment over the -emaining nine years. This is some E°4.5 million below the Government program. The total for the 10 years, including that which is currently in hand for 1961, would be EO 58 million, according to our recommendations.

68. It will be noted that a new deep-draft port for Valdivia has been omitted by the mission because it is anticipated that the compre- hensive economic and technical study of this problem will show that it is not warranted. If the study shows the project to be warranted, the program will have to be augmented by several million escudos. Other changes are the omission of the Chiloe, Bahia Mansa, and Chacabuco investments, reduction of the Arica project by one berth, and a reduc- tion of the miscellaneous item during the initial years. A variety of other factors that relate to the ports program are worthy of comment.

Handling Equipment

69. The Port Authority's program is notable in that it allows for a large complement of mechanical handling equipment for many of the ports. The amount of equipment scheduled for each port, in relation to berths and predicted traffic, appears to be inconsistent: the provision for some of the smaller ports appears definitely on the high side. Many local factors affect the required material-handling plant, of course, and - 15 -

13. PORTS varying standards have been adopted by different authorities. For this reason, it is suggested that an extensive studyT of the problem be made with the objective of equating material-handling needs with the ability of the stevedoring crews to work the ships; to the likely trends toward prepacked unit loads (more and larger) and special vessels; and to some needed revisions in the estimates of future trade, as to both quantity and class of traffic.

Traffic Predictions

70. Government forecasts indicate a rather optimistic outlook not only for some of the ports, but for some of the major classes of shipping as well.

71. For coastal traffic in general cargo, which in most cases has seriously declined in recent years, the fcrecast for 1970 varies from a 25% to a 200% increase above present day t

72. For the specialized traffic in bulk materials, both coastwise and foreign, the future should be bright; the predicted quantities have a good probability of being realized, particularly in oil, ores and minerals. The exception is coal, which may very well be shipped via rail in increasing tonnages while declining as coastal cargo. Most of the increasing bulk trade is handled through private ports, whereas the fiscal ports are concerned mainly with the diminishing coal and nitrate trades; only one fiscal port hanmdles some of the iron ore. Of course, there are also factors that are difficult to predict: unexpected dis- coveries of minerals and ores, changes in foreign markets, the effects of the Latin American Free Trade Area, for instance.

73. Forecasts of the foreign general cargo trade, i.e., excepting bulk materials, rather than being gi;'en separately are included with the forecast for bulk naterials. Hence it must oe taken that general foreign traffic is expected to increase at the swae rate as for ores and minerals. To be sure, it is difficult to evaluate the trend. On the one hand, imports of general cargo will probably increase only about 60% above 1961 quantities. On the other hand, exports such as agricultural products, timber and timber products (discussed in other chapters of this _ 16 -

13. PORTS report) are expected to increase two to three time over present tonnages by 1970. As far as can be seen, the combined effect should be a sub- stantial increase in foreign general cargo trade.

Readiness of the Program

74. Plans for using scarce local resources or providing for finan- cial resources from abroad are of little value unless the program is technically ready to go forward. In making our recommendations, the mission has taken projects to be "ready" if they are in construction, if they have been planned and estimated to the standards required by most sources of external capital, or if they could be so prepared within a reasonable period and in time for their schedule in the program.

75. Wharf cranes, mobile handling plant, dredges and other equipment, representing some U.S. $16 million, require little time to specify and price; this could be done each year as required by the program. Engineering works such as paving, railtracks, warehouses (new and repaired), etc., amounting to about E 8 million in value, do not involve a great deal of preparation prior to construction and should be ready as required in the schedule. Work in progress would account for E° 5 million. These three groups amount to 60% of the investments yet to be made.

76. In addition, two large proposals for the ports of San Vicente and Puerto Montt amounting to perhaps E° 12 million could be ready within 12 months if consulting engineers are engaged to make them ready -- ,the investigating, planning, and design work -- for the calling of bids.

77. Thus a large proportion of the 10-year program could become projects for financing at the time they would be required on the schedule. On the other hand, a number of projects appear to us to be inadequately planned for early action, or are of such a nature that they should be abandoned.

78. The program suggested by the mission should be sufficient to bring the present ports to a condition in which they could be operated efficiently and up to their respective capacities, as well as fill the need for new ports and the rebuilding of others. Given good management and operation, the ports should then economically cope with the antici- pated volume of cargo as far as can be seen at present.

V. ORGANIZATION FOR PORT DEVELOPMENT

79. If the present responsibilities of the Port Authority are com- pared with the criteria which we suggested in the chapter on transportation policy, it will be seen that a good start has been made, but falling short of what we consider necessary. As currently organized, the Port Authority's activities can be conveniently divided into two parts, which - 17 -

13. PORTS might be called "operations" and "administration."

80. "Operations" means the responsibility for the receipt, transfer, storage, and custody of cargo between shipside and delivery point within the port boundaries -- subject, of course, to the applicable clearance procedures of Customs.

81. "Administration" in this case covers, among other normal activi- ties, carrying out port policy according to principles set forth by the Government; arranging for the planning and execution of capital works; fixing port charges; and raising loan money for capital expenditures.

82. In carrying out these functions, we recommend that the Port Authority conform to our criteria of transportation policy for all types of transport. In particular, this means having considerable autonomy, being financially independent, using commercial management methods, and having to conform to the coordinated development policy for the whole of the transport system.

83. Some of the present inadequacy of the Port Authority can be attributed to the severe inhibitions under which the Authority operates; but some of the inefficiency cannot be attributed to these inhibitions. In both areas, the difficulties should be corrected.

84. Lack of Investment Autonomy. Investment in works must now be in accordance wgith an annual program prepared jointly with the Ports Branch of the Public W;lorks Department. Thus the Authority lacks the autonomy to develop its own investment program in line with overall Government policy on transportation. This necessity to share investment decisions with a regular Government Department stems, of course, from the fact that the Port Authority has jurisdiction over only the major fiscal ports. There are many smaller ports whose maintenance and improve- ment is still the responsibility of the Public Works Department. 'WJe believe that all ports in Chile, other than those which are pul-ely privately owfned and operated, should be brought under tihe jurisdiction of the Port Authority, and that the Authority should also take the responsibility for the navigation of vessels within the harbor limits, their movement, pilotage, allocation of berths, and the care and main- tenance of waterways and navigation aids. It might be premature at this time to entrust all of these functions to a newly organized body, but this should be the aim for the future. The Public Works Department should become a service organization vis-a-vis the Authority.

85. Lack of Separate Budget. Pending the time when it will be feasible, from an administrative point of view., to turn operating and planning responsibility over to the Port Authority (under guidance of the 4iinistry), there should be a clear separation of the budgets of the Port Authority and the Public Works Department. The funds are intended 13. PORTS for, and usually are used for, expenditure in the Port Authority's pro- gram, but the Public W;Jorks Department apparently can divert them to other port works, to other non-connected works, and delay, change, or even cancel, parts of the Authority's program. The mission understands that this has happened on several occasions. It is our firm belief that the Authority should operate on a sound budget and become independent at once.

66. As now constituted, the Port Authority is under no particular constraint to meet its operating expenses (including amortization charges) from current revenues. Up to the present the Authority has been barely meeting its current costs even without meeting such other costs as interest, depreciation, and maintenance. Working expenses alone in 1961 will proba- bly be EO 12 million, or about E0 750,000 more than total revenues. If interest and depreciation were to be covered, it would not be surprising if port charges would have to be increased by 25%. The large program ahead could lead to an increase of E° 5 million in annual costs, but at adequately increased rates this higher annual cost probably could be offset by the larger tonnages that are expected in the future, with no further increase in port charges. It is to be expected that shippers will be prepared to pay higher charges if they can receive efficient service, with a faster turn-around of ships and quicker handling of cargo.

87. Inadequate Staff. Although an adequate staffing and crgf-nAza- tional plan now exists on paper, the actual fact is that the Authority is very much understaffed at present, particularly with senior and specialized officers. At the time of the mission's visit the commercial branch was practically non-existent; we understand it is now being strengthened. Other branches need to be strengthened with appropriate personnel.

88. Perhaps the lack of adequate staff is responsible for the fact that maintenance has been less than satisfactory. Valuable cranes and other mechanical plant, as well as warehouses, buildings, and railtracks have been neglected, and these assets have wasted more rapidly than should be the case. Consequently, handling operations have suffered. To a-void this in the future, a good program of preventive maintenance should be put into effect. The Authority does not have a plant maintenance engineer well experienced in this field; it would be desirable to secure one locally or to obtain the technical services of a foreign engineer for a limited period to organize and train the present staff.

89. Inadequate Working Space. Lack of space, poor physical working conditions, and dispersion of the staff in several buildings make it difficult for the Head Office to operate efficiently. Local port offices in many cases are poorly housed. Larger, modern, and better located buildings are needed. - 19 -

13. PORTS

90. Customs and Labor Relations. There are two correctible diffi- culties over which the Authority has no control. The first has to do with customs procedures. The present methods used in the examination of cargo and the preparation of clearance documents by the Customs Department slow down the rate of movement of goods through the ports; the time required is often five weeks or more. It is highly de- sirable that this time be drastically reduced not only in the interest of better service to users of the ports, but also in the interest of making proper use of scarce storage space.

91. The second difficulty is that the movement of cargo is retarded by the practice of stevedores going slow during normal working hours, in order to ensure a heavy proportion of better-paid overtime work. This problem is being negotiated with the Stevedoring Union by the Maritime Chamber of Valparaiso. If this negotiation is successful in working out a better incentive scheme, then the arrangement should be extended to the other ports as soon as possible. - 1 -

CHAPTER 14

SHIPPING

I. THE PROGRAM

1. The Government 10-year program for the Chilean Merchant Marine involves the purchase of vessels of some 350,000 dead-weight tons (DWT), mainly for coastal trade, but with some vessels intended for foreign trade included. The total investment contemplated amounts to the equivalent of almost $100 million, all in foreign exchange. There are three main groups of proposed purchases, as shown in Table 14-1, together with a summary of the mission's recommendation.

Table 14-1: Proposed Investment in Vessels

Government Mission Category Program Recommendation

Bulk Carriers $78,ooo,ooo $42,000,000 Coastal General Cargo Ships National Lines 4,300,000 Nil Private Lines 4,335,000 4,335,000 Foreign Trading General Cargo Ships 11,850,000 11,850,000

Total $98,485,000 $58,185,000

2. In physical terms, the program calls for 13 new bulk car- riers, mainly for the coastal trade, amounting to 283,000 DWT. For general cargo coastal trade, five ships aggregating 6,800 DWT would be added to the National Line, and eight ships aggregating 21,700 DWT would be added to the private fleet. Five ships totalling nearly 40,000 DWT would be added to the foreign general cargo fleet. The program for the National Line has been revised, and is outlined in the appropriate place in this chapter.

II. ASSESSMENIT OF THE PROGRAM

Bulk Carriers

3. The bulk carriers are principally for the coastal trade. The present fleet, all privately owned, ccrrprises 10 ships aggregating 100,000 bUiT, ranging in size from srall shipe of about 3,000 DUT to as high as 23,000 UTT. Two of the ships are oil tankers, and the rernainder are ore - 2 - 14. SHIPPING carriers. Four of the smaller ships, aggregating only 15,ono DWT, are about due for replacement because of their age. All of the others are 11 years old or less.

4. The accluisiton program of 283,000 DWT tons of bulk carrier shipping would resultin bulk carrying capacity almost four times as large as the present one, allowing for the small tonnage old enough to be replaced. Such an increase in bulk trade is un- likely.

5. Cargo records show that the total coastal bulk trade has increased from 1.6 million tons in 1952 to only 2 million tons in 1960. Bulk movement of oil, which first became significant in 1955, has now grown to the point that in 1960 it accounted for slightly more than half (1.05 million tons) of the bulk coastal trade. Bulk materials, which once reached a peak of 770,000 tons, had dropped to 380,000 in 1960. Movement of coal has fallen continuously from a record of more than 1.2 million tons in 1952 to only 570,000 tons in 1960. Hence the overall modest growth in bulk cargo tonnage since 1952 has been due entirely to the growth of the oil trade.

5. At the present time, not enough is Inown to give a re- liable guide to the size of the fleet that should be programmed. A closer study should be made of the relation between the predicted future tonnages and the number and size of vessels, and the study should be made with the close collaboration of the private ship owners. Pending such a study, we suggest that for programming pur- poses plans should be made for the acquisition of not more than 150,000 DWT of new bulk carriers at a cost of approximately $42 million. This would produce a fleet almost 2 1/2 times the present one by 1970.

Coastal General-Cargo Ships: National Line

7. At present the National Line (owned by the Government) has 12 ships totalling 24,000 DWT, of sizes from 200 tons to 3,500 tons. Four of the ships, aggregating 4,503 DWT, are very old; the others are 10 years old or less. In general, the utilization of the ships of the National Line is considerably lower than that of the private carriers, despite the fact that the National Line serves the same ports and has the same freight rates. In part this is explained by the users' preference for the private carriers; but, in addition, the ships of the National Line are larger than those of the private carriers and are inappropriate for Chilean coastal service. Although the National Line does serve remote places, on unprofitable, low ton- nage runs, this service is now only a small part of the Line's acti- vities. - 3 - 14. SHIPPING

8. It is apparent that the National Line has not been the success it was expected to be. Operating costs are particularly high, mainly because of the large wage bill for crew and associated costs. Adminis- tration is burdened with large numbers of staff and relatively high salaries. Annual amortization charges are high because the newer and bigger ships were bought at the peak of shipbuildLng prices. Cargo handling and stowages on ships is deficient. The net result financially is that the Line's income is at present about half its annual expenses. It is running at a loss of some E° 3 million, which is now met by sub- sidy out of the national budget.

9. It is our understanding that the original purpose of the Na- tional Line was to provide service to remote coastal areas as a means of aiding in the economic development of those areas in the broad in- terest of the nation. If this is true, and if the National Line re- verts to this purpose, Government financial support may be justified on grounds of national policy. However, this payment should be strict- ly on a fee-for-service basis.

10. Every effort should be made to make the operation of the ships now in service as efficient and economical as possible and to stream- line administration. Competition with the private carriers should be curtailed. It is obvious that there is not enough general-cargo coastal trade to utilize fully all the available vessels in both zones north and south of Valparai'so. The National Line should not add excess capacity, as it now does, to routes that can be efficiently served (under the stan- dards prescribed by the proposed Ministry of Transport) by the private fleet.

11. Since the 10-year plan summary was released, the Government has indicated that it proposes to reinforce the activities of the Na- tional Line in serving the sparsely populated areas between Puerto Montt and Punta Arenas to open up these newly developing parts of the country. This will tie in with the program of small port improvement in the same area. As the ships now serving this area are antiquated, insufficient, and uneconomical, the Government proposes to purchase new ships exclu- sively for this project. The acquisition program includes the following:

One ship to be used exclusively for passenger service and mail between Puerto Montt and Puerto Aisen.

Two landing craft to transport cargo in the same region.

Two passenger launches to operate among the islands of the province of Chiloe' and among the small ports along the mainland coast.

One ferry to operate between the mainland near Puerto Montt and the Island of Chiloe to permit highway trucks and busses to reach the small towns of the island. -4- 1h. SHIPPING

One ship or landinig craft to operate between Magallanes and the southern part of Aisen.

One landing craft to operate on the large international Lake General Carrera.

Telecommunications service to connect Puerto liontt and the provinces of Chiloe, Aisen, and Magallanes.

12. To finance these acquisitions, as well as to reduce the losses of the National Line in its other services, the Government proposes to sell at least two large cargo ships of 3,500 DiJT, and to abandon the earlier proposal to acquire five new ships at a total cost of $4,300,000. The mission believes that these proposals are desirable and in line with the general policy recommended above.

Coastal General-Cargo Ships: Private Companies

13. There are now 24 ships operated by private companies in the coastal general-cargo trade. Eleven of these are owned by operators in the Ship Owners Association; they range in size from 750 to 3,650 DVT and aggregate 18,000 DW.iT. Only one ship of 3,500 DWT is old enough to be replaced. The other 13 ships aggregate about 4,000 DWT. They are ownied by non-members of the Ship Owners Association, and no details as to age and condition are known. However, it is obvious that these 13 ships are small ones.

14. The coastal general-cargo trade has been falling off since 1952. In that year the private companies carried 811,000 tons; in 1960 they carried only 550,000 tons. Greater efficiency and speedier methods both on ships and in ports, if combined with better service, will ease this decline and may arrest it, but no hope can be seen for any appre- ciable increase. Considering the increasing competition from roads and from a revitalized railway system, the future of sea transport in this field is not bright, particularly for distances of less than 500 kilometers. At present the coastal cargo ships are typically being used at about 70%1 of normal capacity. It is our opinion that no sig- nificant increase in the fleet tonnage should be contemplated, and replacements should be kept to a minimum.

15. Since there has been much discussion of the ideal size for coastal vessels, the mission offers its opinion on the matter. If any new ships are to be acquired, the most economical and suitable size would be in t.e 1,500-2,500 DlJT class. Records show that cargo out of any one port rarely exceeds 2,500 tons per ship, and vessels under 2,500 IDT4T can have a much smaller crew than vessels above this size. - 5 - 14. SHIPPING 16. At present coastal general-cargo ships do not run to regular and coordinated schedules. Consequently there is much duplication of service, waste space in ships, and lack of regularity. The Ship Owners Association is fully aware of this and has been studying the problem. A timetable of services, not yet available, is scheduled to be put into effect in the near future. One result of scheduled services will be to make three or four ships redundant. It is expected that scheduling will raise the revenues but not rates and provide better service to the public. Another desirable change now being considered is to consolidate the task of booking cargoes with one agency at each port; this task is now handled by a number of separate agencies.

17. The private lines' investment for general-cargo coastal ships, as projected in the program, amounts to only a little more than *4 million over a 10-year period. Also, the projection is based on the plans of individual shipping companies who are prepared to risk their own capital. Therefore, in spite of the. uncertainty as to the future dyvelopment of general-cargo coastal trade, we would not suggest changing the Govern- ment's programmed estimate for investment in the private sector of this field. Our alternative program thus contains the $4,335,000 included in the Government program.

Foreign-Trade General-Cargo Ships

18. The present fleet in this category is all privately owned. It consists of 19 vessels totalling 155,000 DTT, ranging in size from 4,600 to 10,700 DWT. Nine of these ships (68,000 DWT) are 15 years old or more and normally would be replaced within the next 10 years.

19. The foreign trade to and from Chile should increase continuously with the development of the country and with the evolution of the Latin American Free Trade Area. It is difficult, however, to predict the annual tonnage of this trade with any accuracy; and it is impossible for an outside group, such as the mission, to determine what proportion of the trade can, or should, be handled by Chilean flag carriers. It is clear that, whatever the proportion, it will be low in relation to total incoming and outgoing tonnages. Nevertheless, the mission concluded that since the proposal to acquire 40,000 DWT of new ships in this category is a modest one, representing less than a replacement of aging ships in the present fleet, it would suggest no modification in the Government program.

Other Factors

20. Coastal shipping freight rates, both for bulk and general cargo, are regulated by the Government and^have not been changed for many years. A committee representing carriers, users, and the Govern- ment has recommended a 15% increase, principally because of wage in-; creases in-:enterprises where wages account for approximately 60% of - F - 14. SHIPPING

freight costs. So far, this has not been approved. As we pointed out in our discussion of transportation policy (Chapter 9), we do not in general favor the Government'setting of transport charges. It is much better to have charges set by market forces, except under two circum- stances: when a monopoly situation makes it necessary to decree maximum rates, or when state subventions are required for purposes of broad na- tional policy. Except for the probably necessary payment to the National Line for its services to remote areas, neither of these exceptions should apply in the present case. We recommend that the establishment of coastal shipping rates be left to market forces, and that the State withdrawv its regulation.

21. The use of sea trains and barges up and drn the coast as a means of lowering transport costs hap been suggested and a study has been made by a forei-gr. consulItant. We believe that the general cargo trade is too diversified, too small in each category, and the ports arc too numler- ous to provide any encouragement for this type of transport. The move- ment of bulk materials, such as coal and iron ore, appears to be more suitable in quantity and regularity, but the long distances along the exposed coast with few harbors of refuge is a risk that might prohibit tug and barge traffic. However, the cost reducing possibilities are suchi that the matter should be fully explored.

22. Containers -- large and small, pallets, and preslung loads -- provide an obvious means of improving transport in certain fields, and should be adopted to the fullest practicable extent. This is not a mat- ter simply for the shipping companies, but must be worked out between them and the Port Authority.

III. SUIMMARY

23. Whereas the Government's 10-year program calls for a total investment in shipping of approximately $98.5 million, the mission re- commends a considerably smaller program, amounting to approximately $58.2 million. The only difference between the Government's program and the mission's recommendations are (a) a substantial reduction in the expenditure on bulk carriers for the coastal trade and (b) the elimination of new vessels for the National Line.