Reshaping Argentina's Railways Jorge H. Kogan & Louis S. Thompson 1. Background FA (freight, intercity passenger, and stopped, it would have been very diffi- the Buenos Aires City commuter pas- cult to resist the consequent political In early 1989, the Argentine economy senger services). pressure to restore them, or to expect was experiencing hyperinflation and Other symptoms were rolling stock any cooperation from union leaders. virtual fiscal collapse. In August 1989 (unreliable locomotives, and half out Action was imperative. after the change of Government, the Ar- of service), bad track (55% of the track gentine Congress passed the State Re- in less than acceptable condition), and Framework for change form and Public Enterprises Restruc- a high rate (30% to 50%) of fare eva- The comprehensive strategy was turing Law. The law's aim was to re- sion in the Buenos Aires commuter rooted in several principles: (1) The duce the deficit and revitalize the services. Government could no longer fund the economy by encouraging private sector The inevitable result was a chronic fi- huge deficit; (2) FA was unsalvageable operation of major state-owned enter- nancial disaster (US$2 million losses as an enterprise; (3) At least some rail prises. For railways, the largest state daily), combined with increasing freight transport was viable; (4) The enterprise contributing to the deficit, unreliability and unsafe conditions. commuter services in the Buenos private participation was to be imple- There was no further hope for a com- Aires Metropolitan Area, although un- mented through concessions. pany that was mainly a provider of sur- profitable, were so important that they When President Menem took office plus employment and uneconomic ser- had to be continued; and, (5) Existing in July of 1989, Ferrocarriles vices, subject to political pressures, and rail staff levels were far too large, but Argentinos (FA), the state-owned rail- strongly influenced by workers' unions, reducing staffing without a social and road, operated roughly 35,000 kilome- suppliers and local authorities. political consensus would have created ters with 92,000 employees, and was serious problem. losing about US$600 million annually. 2. Strategy for Change The history of the railways' decline Initial strategy and growing dependence on the Trea- There were two options: let the situa- By mid-1990, an integrated restruc- sury is not unique to Argentina. The tion continue until FA collapsed, or do turing program was agreed with the reasons are not difficult to identify, in- something drastic. Collapse would World Bank (IBRD). The initial pro- cluding a production, rather than cus- have transferred rail traffic to roads, gram included several key elements: (1) tomer-oriented culture, competition with higher tariffs and an adverse ef- Concession of four freight networks, from other modes (especially roads), as fect on exports, particularly grains. representing 60% of the total network; well as weak management and inad- This impact would have been aggra- (2) Grouping of all commuter services equate investments. These facts were vated when maintenance of important into a separate unit and establishment reflected in the falling traffic of the sectors of the national road network of a new state-owned commuter passen- three distinct "businesses" operated by was contracted out, since this would ger enterprise; (3) Rationalization of in- have led to highway tolls and vehicle tercity passenger services following a weight and size restrictions which detailed cost analysis in which commer- would have increased road charges and, cial and essential services would be paradoxically, improved the competi- identified; (4) Establishment of a new tive position of rail transport. railway regulatory agency, or agencies; The Argentine suburban passenger (5) Creation of a Buenos Aires Metro- system is among the larger systems in politan Transport Authority with par- the world, generating more traffic than ticipation from the Federal Govern- New York City and in the same league ment, the Province of Buenos Aires and as London and Paris. Discontinuing the City of Buenos Aires; (6) Revision of passenger services in the Buenos Aires operating practices and rules and de- area would have meant road congestion sign of a labor strategy to improve pro- and loss of the only available mode of ductivity and reduce redundant staff; transport for thousands of people. In and, (7) Disposal of excess assets, and addition, if railway services had creation of a railway real estate devel- Note: This article is based on the personal options of the authors, and does not necessarily reflect policies or positions of the World Bank or the Government of Argentina. Copyright © 1994 EJRCF. All rights reserved. Japan Railway & Transport Review / June 1994 23 SPECIAL FEATURE – RESTRUCTURING RAILWAYS 24 Japan Railway & Transport Review / June 1994 Copyright © 1994 EJRCF. All rights reserved. opment unit. Some of these elements ing between 1.0 and 3.6 million tons standard gauge, and 2,500 km of broad became the conditions of an IBRD loan annually. There was a 1-meter gauge, gauge track — do not appear to be eco- of US$300 million that the government one standard gauge (1435mm), and nomically viable, nor do they have traf- has used to fund labor severance pay- four broad gauge (1676 mm) networks. fic of national significance. They have ments. After some study, the prior networks been offered to provincial governments were mostly used as the basis for the in case they have local significance. Objective of reform design of the new concessions. FA re- Those not accepted by the provinces The concession process had four pri- mained temporarily remained (until 10 will be abandoned. mary objectives: March 1993) in operation only to oper- As previous figures show, freight 1. To reduce the railway's financial ate some intercity passenger services traffic on most Argentine railway lines burden on the national budget by pending transfer to the provinces. After is very light (an average of 400,000 elimination subsidy to freight ser- that date, the FA shell served only as a ton-km per track-km compared, for ex- vices and the one viable intercity long-term repository for intercity and ample, with the USA where the aver- passenger corridor, and to focus any freight railway assets, which were to age is over 5 million). Improved and remaining subsidy on those intercity continue to be owned by the State and more reliable operations will increase passenger lines that could be justi- concessioned to the private sector for traffic levels, but the amount of traffic fied on social grounds and on com- operation. likely to be captured back from high- muter lines and, in addition, to refo- The government-designated six rail ways by the rail system is uncertain, a cus the subsidy to metropolitan pas- freight packages (see Map 1) include: risk that concessionaires must take. senger services from operations to 1. The Bahía Blanca-Rosario corridor, Without an increase in traffic, traffic capital improvements; linking the major grain export ports density is so low that operating ex- 2. To improve service to shippers and of Bahía Blanca and Rosario, and penses will have to be kept to an abso- passengers the lines and branch lines of the lute minimum. 3. To rebuild railway facilities by reha- area (5,300 km; broad gauge, The concessions had the following bilitating and renewing plant and formed by portions of the Roca and characteristics: (1) All cargo operations equipment as necessary, and Sarmiento lines; 2 million tons; mi- were to be performed by private-sector 4. To develop a cadre of Argentine pri- nor intercity passenger services); concessions for specific networks - con- vate-sector railway managers. 2. The Urquiza line (2,700 km; stan- cessionaires would pay the government dard gauge; 1.2 million tons; 1.7 a fee ("toll" or "Canon"); (2) The conces- 3. Concessioning million intercity passengers in sion would be for 30 years (plus an op- 1990, when bidding documents tional 10-year extension) and included Freight lines were drawn up); freight-train marketing, operations, Despite years of decline, parts of the 3. The Mitre line (4,800 km; broad rolling-stock maintenance and rehabili- rail freight business were viable given a gauge; 2.5 million tons; 3.0 million tation, and track maintenance and re- radical transformation of existing rail- intercity passengers); habilitation. The concessionaire would way culture and practices. Private, 4. The San Martin line and the re- have exclusive rights to its track, unless long-term concessions (30 years, plus maining portion of the Sarmiento it gave operating consent to others; (3) an optional 10-year term) were adopted line (4,700 km; broad gauge; 3.4 Although freight and intercity passen- as the best approach. However, it was million tons; 1.3 million intercity ger services were initially combined, both politically and economically diffi- passengers); the government subsequently divided cult to concession the entire FA net- 5. The remainder of the Roca system freight from intercity passenger ser- work in a single piece because: (1) The (3,300 km; broad gauge; 1.3 million vices because the obligation to provide financial resources required of the bid- tons; 1.8 million passengers), com- passenger services reduced the ex- der would be considerably greater than prising the Roca lines not included pected financial performance of the if the system were divided into smaller in the Bahía Blanca-Rosario pack- freight franchise. The ensuing freight networks; (2) It would be much more age, serving the area south of franchises required only that the difficult to change working rules and Buenos Aires and carrying cement, freight operator allow intercity passen- operating condition on a national basis; grain, chemical products, salt, and ger operations by FA, the provinces, or and, (3) Competition between networks stone; a third party concessionaire, in return might help promote efficiency (and the 6.