Reshaping Argentina's RailwaysJorge H. Kogan & Louis S. Thompson
1. BackgroundIn early 1989, the Argentine economy
was experiencing hyperinflation andvirtual fiscal collapse. In August 1989after the change of Government, the Ar-gentine Congress passed the State Re-form and Public Enterprises Restruc-turing Law. The law's aim was to re-duce the deficit and revitalize theeconomy by encouraging private sectoroperation of major state-owned enter-prises. For railways, the largest stateenterprise contributing to the deficit,private participation was to be imple-mented through concessions.
When President Menem took officein July of 1989, Ferrocarri lesArgentinos (FA), the state-owned rail-road, operated roughly 35,000 kilome-ters with 92,000 employees, and waslosing about US$600 million annually.The history of the railways' declineand growing dependence on the Trea-sury is not unique to Argentina. Thereasons are not difficult to identify, in-cluding a production, rather than cus-tomer-oriented culture, competitionfrom other modes (especially roads), aswell as weak management and inad-equate investments. These facts werereflected in the falling traffic of thethree distinct "businesses" operated by
FA (freight, intercity passenger, andthe Buenos Aires City commuter pas-senger services).
Other symptoms were rolling stock(unreliable locomotives, and half outof service), bad track (55% of the trackin less than acceptable condition), anda high rate (30% to 50%) of fare eva-sion in the Buenos Aires commuterservices.
The inevitable result was a chronic fi-nancial disaster (US$2 million lossesdaily), combined with increasingunreliability and unsafe conditions.There was no further hope for a com-pany that was mainly a provider of sur-plus employment and uneconomic ser-vices, subject to political pressures, andstrongly influenced by workers' unions,suppliers and local authorities.
2. Strategy for ChangeThere were two options: let the situa-
tion continue until FA collapsed, or dosomething drastic. Collapse wouldhave transferred rail traffic to roads,with higher tariffs and an adverse ef-fect on exports, particularly grains.This impact would have been aggra-vated when maintenance of importantsectors of the national road networkwas contracted out, since this wouldhave led to highway tolls and vehicleweight and size restrictions whichwould have increased road charges and,paradoxically, improved the competi-tive position of rail transport.
The Argentine suburban passengersystem is among the larger systems inthe world, generating more traffic thanNew York City and in the same leagueas London and Paris. Discontinuingpassenger services in the Buenos Airesarea would have meant road congestionand loss of the only available mode oftransport for thousands of people. Inaddition, if railway services had
stopped, it would have been very diffi-cult to resist the consequent politicalpressure to restore them, or to expectany cooperation from union leaders.Action was imperative.
Framework for changeThe comprehensive strategy was
rooted in several principles: (1) TheGovernment could no longer fund thehuge deficit; (2) FA was unsalvageableas an enterprise; (3) At least some railfreight transport was viable; (4) Thecommuter services in the BuenosAires Metropolitan Area, although un-profitable, were so important that theyhad to be continued; and, (5) Existingrail staff levels were far too large, butreducing staffing without a social andpolitical consensus would have createdserious problem.
Initial strategyBy mid-1990, an integrated restruc-
turing program was agreed with theWorld Bank (IBRD). The initial pro-gram included several key elements: (1)Concession of four freight networks,representing 60% of the total network;(2) Grouping of all commuter servicesinto a separate unit and establishmentof a new state-owned commuter passen-ger enterprise; (3) Rationalization of in-tercity passenger services following adetailed cost analysis in which commer-cial and essential services would beidentified; (4) Establishment of a newrailway regulatory agency, or agencies;(5) Creation of a Buenos Aires Metro-politan Transport Authority with par-ticipation from the Federal Govern-ment, the Province of Buenos Aires andthe City of Buenos Aires; (6) Revision ofoperating practices and rules and de-sign of a labor strategy to improve pro-ductivity and reduce redundant staff;and, (7) Disposal of excess assets, andcreation of a railway real estate devel-
Note: This article is based on the personal options of the authors, anddoes not necessarily reflect policies or positions of the World Bankor the Government of Argentina.
opment unit. Some of these elementsbecame the conditions of an IBRD loanof US$300 million that the governmenthas used to fund labor severance pay-ments.
Objective of reformThe concession process had four pri-
mary objectives:1. To reduce the railway's financial
burden on the national budget byelimination subsidy to freight ser-vices and the one viable intercitypassenger corridor, and to focus anyremaining subsidy on those intercitypassenger lines that could be justi-fied on social grounds and on com-muter lines and, in addition, to refo-cus the subsidy to metropolitan pas-senger services from operations tocapital improvements;
2. To improve service to shippers andpassengers
3. To rebuild railway facilities by reha-bilitating and renewing plant andequipment as necessary, and
4. To develop a cadre of Argentine pri-vate-sector railway managers.
3. ConcessioningFreight lines
Despite years of decline, parts of therail freight business were viable given aradical transformation of existing rail-way culture and practices. Private,long-term concessions (30 years, plusan optional 10-year term) were adoptedas the best approach. However, it wasboth politically and economically diffi-cult to concession the entire FA net-work in a single piece because: (1) Thefinancial resources required of the bid-der would be considerably greater thanif the system were divided into smallernetworks; (2) It would be much moredifficult to change working rules andoperating condition on a national basis;and, (3) Competition between networksmight help promote efficiency (and thefirst network could become a leadingmodel for later concessions).
The state-owned railway corporationwas created in the late 1940s after thenationalization and merger of morethan 15 private railways into six rela-tively-independent railway companieswith track networks ranging between2,700 and 10,700 km, and traffic vary-
ing between 1.0 and 3.6 million tonsannually. There was a 1-meter gauge,one standard gauge (1435mm), andfour broad gauge (1676 mm) networks.After some study, the prior networkswere mostly used as the basis for thedesign of the new concessions. FA re-mained temporarily remained (until 10March 1993) in operation only to oper-ate some intercity passenger servicespending transfer to the provinces. Afterthat date, the FA shell served only as along-term repository for intercity andfreight railway assets, which were tocontinue to be owned by the State andconcessioned to the private sector foroperation.
The government-designated six railfreight packages (see Map 1) include:1. The Bahía Blanca-Rosario corridor,
linking the major grain export portsof Bahía Blanca and Rosario, andthe lines and branch lines of thearea (5,300 km; broad gauge,formed by portions of the Roca andSarmiento lines; 2 million tons; mi-nor intercity passenger services);
2. The Urquiza line (2,700 km; stan-dard gauge; 1.2 million tons; 1.7million intercity passengers in1990, when bidding documentswere drawn up);
3. The Mitre line (4,800 km; broadgauge; 2.5 million tons; 3.0 millionintercity passengers);
4. The San Martin line and the re-maining portion of the Sarmientoline (4,700 km; broad gauge; 3.4million tons; 1.3 million intercitypassengers);
5. The remainder of the Roca system(3,300 km; broad gauge; 1.3 milliontons; 1.8 million passengers), com-prising the Roca lines not includedin the Bahía Blanca-Rosario pack-age, serving the area south ofBuenos Aires and carrying cement,grain, chemical products, salt, andstone;
6. The Belgrano line (6,400 km; metergauge; 1.5 million tons; 450,000passengers) serving the north andcentral parts of Argentina and car-rying international traffic to Boliviaand Chile, as well as grain, soybeanby-products, sugar, and containers.
The remaining 8,000 km of the cargosystem — including approximately5,000 km of meter gauge, 500 km of
standard gauge, and 2,500 km of broadgauge track — do not appear to be eco-nomically viable, nor do they have traf-fic of national significance. They havebeen offered to provincial governmentsin case they have local significance.Those not accepted by the provinceswill be abandoned.
As previous figures show, freighttraffic on most Argentine railway linesis very light (an average of 400,000ton-km per track-km compared, for ex-ample, with the USA where the aver-age is over 5 million). Improved andmore reliable operations will increasetraffic levels, but the amount of trafficlikely to be captured back from high-ways by the rail system is uncertain, arisk that concessionaires must take.Without an increase in traffic, trafficdensity is so low that operating ex-penses will have to be kept to an abso-lute minimum.
The concessions had the followingcharacteristics: (1) All cargo operationswere to be performed by private-sectorconcessions for specific networks - con-cessionaires would pay the governmenta fee ("toll" or "Canon"); (2) The conces-sion would be for 30 years (plus an op-tional 10-year extension) and includedfreight-train marketing, operations,rolling-stock maintenance and rehabili-tation, and track maintenance and re-habilitation. The concessionaire wouldhave exclusive rights to its track, unlessit gave operating consent to others; (3)Although freight and intercity passen-ger services were initially combined,the government subsequently dividedfreight from intercity passenger ser-vices because the obligation to providepassenger services reduced the ex-pected financial performance of thefreight franchise. The ensuing freightfranchises required only that thefreight operator allow intercity passen-ger operations by FA, the provinces, ora third party concessionaire, in returnfor payment of a compensatory trackrights fee ("peaje"). The proposed levelof that toll was among the items consid-ered for awarding cargo franchise bids;(4) Concessionaires were to hire onlyFA employees at the outset, but onlythose required by the working practicesand operational needs which the con-cessionaire negotiated directly with theunions, with the Government not being
involved except for safety reasons. Per-sonnel not hired by concessionaireswould receive severance payment fromFA. In practice, the ratio between priorFA staffing levels and concessionairehiring has been around 4 to 1; (5) Al-though rail freight rates were effec-tively deregulated, present legislationrequires that every railway operatorfile its maximum rates by commoditywith the Secretary of Transportation.
Progress to date (Table 1)So far, the following steps have been
accomplished:1. The Bahía Blanca-Rosario conces-
sion (two bidders) started operationson 1 November 1991. The consor-tium (FEPSA) was led by a majorArgentine construction and indus-trial holding company (Techint)which chose Iowa Interstate Rail-road, from the USA, as its operatingpartner;
2. The old Urquiza line concession( n o w c a l l e d F e r r o c a r r i lMesopotamico Gral. Urquiza) wasawarded to the sole bidder, a majorArgentine metallurgical company,which chose the Railroad Develop-ment Corp. (supported by Conrail)from the USA as its operating part-ners. Operations started in Octo-ber, 1993;
3. The Mitre line concession (NuevoCentral Argentino — NCA) had two
Table 1 Results of Freight Concession Bidding (as of March 1994)
bidders, and was awarded to a groupled by an Argentine grain and veg-etable oil shipper, the major shipperon the line. Montana Rail Link/Anacostia & Pacific/RBC, from theUSA, is the railway operator for theconsortium. Operations started inDecember, 1992;
4. The concession (two bidders) for theSan Martín line (now called theBuenos Aires al Pacifico — BAP) wasawarded to the same group that wonthe Urquiza line. Operations startedin August, 1993;
5. The former Roca system wasawarded to the sole bidder (FerrosurRoca), a group led by the largest ce-ment producer in Argentina, andmain shipper of the line. Its operatoris CANAC (the consulting arm of theCanadian National Railway), andoperations started in March, 1993;
6. No bids were submitted for theBelgrano line. In October 1993, theGovernment created a new state-owned corporation to continue op-erations and transfer the line to theprivate sector after improving the
system, and making it more attrac-tive.
Freight concession bids followed atwo-envelope system. Envelope 1 con-tained technical and financial qualifica-tion documents. Envelope 2 included:the present value of investments pro-posed by the bidder for improvementsto railway equipment, facilities, andright-of-way, during the first 15 fran-chise years; the bidder's business planand a description of its previous railwayoperating experience; the presentvalue of additional investments to bemade by the bidder during the first 15franchise years in non-railway prop-erty, such as intermodal facilities,storage silos and port facilities; thepresent value of the "canon", or fran-chise fee, that would be paid to thegovernment for the exclusive freightuse of the right-of-way and certainequipment and facilities; the level of"toll" or payment that the cargo fran-chisee would require for the operationof intercity passenger services on itslines; the number of current FA em-ployees to be hired; and, the interest
held in the group by Argentine firms.The point system used for freight
franchises changed very slightly fromthe first concession to the later ones; forthe later one ones it was:• 30 points for the basic investment
plan• 5 points for additional investments
promised• 25 points for the organizational plan• 8 points for the maintenance plan• 12 points for the "canon"• 5 points for level of payments re-
quired for passenger operations• 15 points for the number of former
FA personnel to be hired.The formula placed the greatest em-
phasis on investment followed by thequality of the proposed operational andinvestment plans. Points awarded on thebasis of employment of FA personnelclearly reflect a political compromise, aswell as the fact that the money for sever-ance payments to surplus employees waslimited. In addition, although the train-ing or development of a managementcadre was not explicitly recognized, it wasconsidered as part of the business planevaluation. Table 1 shows the final re-sults of the bidding process.
Intercity Passenger ServicesA detailed train-by-train cost study
was undertaken at the end of 1991. Itspurpose was to distinguish betweencommercially-viable services (coveringavoidable costs), commercially non-vi-able services, and essential services(non viable but serving communitieswith no alternative form of publictransport).
The study found only one service,Buenos Aires-Mar del Plata (formerlypart of the Roca system), that had thepotential to be financially viable. TheBuenos Aires-Mar del Plata line, whichlinks Buenos Aires with its most impor-tant beach resort, is 400-km long andcarries 1.8 million passengers per year
(nearly 20% of FA's total 1991 passen-ger-km since most passengers ride thefull distance). It is the most heavily-travelled passenger line on the networkand carries a significant number of pas-sengers willing to pay premium fares.This service was offered using a biddingprocess similar to that developed forfreight franchises, and four bidderssubmitted offers in May 1992.
On May 20, 1992, the governmentannounced that all services other thanBuenos Aires - Mar del Plata would bediscontinued on 1 January 1993, unlessprovincial authorities funded the lossesof services they selected to continue.Local governments had to state theirinterest and start funding half of thelosses commencing 1 August 1992.Other services were to be closed on 1September. Provinces wanting to con-tinue railway operations would havethe service transferred for their own di-rect operation or for operations to beperformed by private concessionairesthey selected.
Although the initial provincial reac-tion was cool, a few provinces eventu-ally tried to continue services, but mostcould not afford the required subsidy.After postponing the deadline from 1August to 10 March 1993, to allow moretime, nearly 70% of the services werediscontinued. The remaining serviceswere transferred to the four provincesthat required them, including theBuenos Aires - Mar del Plata line aftersuspension of its bidding process.These provinces have announced plansto concession their services in the nearfuture.
Buenos Aires Metropolitancommuter services
The government started from theprinciple that, unlike the previously-fragmented FA operations, only an in-tegrated oversight agency could prop-erly control the intense, peak, short dis-tance railway services around BuenosAires. Step one in the restructuringwas the establishment, in December1989, of the Suburban Railways Ad-ministration, initially as part of FA.Step two was more ambitious; in March1991, Ferrocarriles Metropolitanos S.A.(FEMESA), was separated from FA andestablished as a new and independentstate-owned corporation. This was un-
derstood at the time to be an interme-diate stage towards an even more am-bitious goal — private-sector opera-tion of suburban services under con-cessions.
FEMESA oversees a network whichincludes 899 km of lines, 267 stations,and 1800 trains carrying over one mil-lion passengers each business day. TheGovernment divided the FEMESAlines into seven packages, to be offeredas franchises together with the under-ground system (SUBTE), whose 44 kmof lines serving 76 stations and moving140 million passengers per year werepreviously operated by a corporationowned by the Municipality of BuenosAires (see Map 2 and Map 3).
FA's financial losses on commuterservices were never accurately calcu-lated because joint and common costswere shared with other FA railway ser-vices, but rough estimates showed asuburban deficit of about US$150 to250 million per year. Unfortunately,the day-to-day operating deficit was solarge that nothing was left for equip-ment, plant, and facilities rehabilita-tion, resulting in service deterioration.
Within the framework of theFEMESA and SUBTE concessions, thegovernment will continue to own theright-of-way, equipment, stations, andfacilities. All property not required forservice operation, including the largedowntown terminals, will be sold orfranchised separately to real-estate de-velopers. Government revenues fromthat development will be used to sup-port metropolitan service subsidies.
Concessions are being awardedthrough an international competitive
bidding process for a period of 10 years(20 years for SUBTE), which may be in-definitely extended for additional 10-year terms. Unlike freight and intercitypassenger franchises, metropolitanrailway concessions require public fi-nancial support, so the concession looksto minimum government outlay, notmaximum income.
Bidding documents defined the mini-mum service (coaches per hour, fre-quency, travel time, punctuality) andthe specific capital program required.Also, maximum fares for standard ser-vice and fare increases as a premiumfor performance were established. Con-cessionaires will be responsible for thecommercial and technical developmentof lines, including fare collection, andmust execute at least the capital invest-ment program identified by the govern-ment. Among bidders found to have ac-ceptable credentials and plans, the bid-der requiring the lowest subsidy inpresent value terms for the first 10years was awarded the franchise.
A three-envelope bidding process wasused. Envelope 1, common to all pack-ages, contained information concerningbidder identity and qualifications, withemphasis on the railway or technicaloperator's experience in conductingmetropolitan railway operations. In En-velope 2A, specific to each line, biddersprovided a detailed business and oper-ating plan for the franchise; last, in En-velope 2B, also specific to each line, bid-ders submitted a financial proposal forthe franchise, including their subsidyrequirement.
After an initial Envelope 1, the gov-ernment asked all groups for addi-
Table 2 Results of Suburban/Metropolitan Concession Bidding
* Indicates that the bidder expects an operating surplus of this amount overthe period of the concession.
Mr Louis S. Thompson was born in 1941 in Florida. After graduating with an MBA from Harvard
University, he worked as a consultant engineer and economist in Cambridge, MA, and Washing-
ton DC. He has also worked for a number of years at various posts within the US Department of
Transportation. He has been Railway Adviser to the World Bank since 1986 where his responsi-
bilities include consultation about all the Bank's railway lending activities and developing reports
and policy positions. He has published articles on railways statistics and restructuring and is
researching energy use in transport.
tional information as part of an "Im-proved Envelope 1". This information,together with Envelope 2, was submit-ted on 5 June 1992, for the Sarmiento,Mitre and SUBTE/Urquiza packages.The proposal for the Roca and SanMartin lines was submitted on 14 Au-gust, and, for the Belgrano North andBelgrano South lines, on 5 September1992.
The benefit of awarding solely on thebasis of the lowest bid, as the govern-ment is doing for the metropolitanlines, is that the award process is directand transparent. Any bidder complet-ing the Envelope 1 and 2A process wasfully acceptable, and the governmentwas free to select the lowest bidder. Allseven packages were awarded at theend of 1992, and contract discussionsthen got well under way. Negotiationswith one of the groups have been com-pleted, and the subway and one com-muter line operations were transferredin January 1994. San Martin andBelgrano North were transferred an 1April and Belgrano South on 1 May.Table 2 shows the outcome of the bid-ding process.
4. ConclusionBy mid-1994, there will be at least 10
private railway operations. At the be-ginning of this process, FA was losingover US$600 million per year, withmetropolitan, intercity passenger, andcargo services being liable for about35%, 25%, and 40% of that amount, re-spectively. As a result of concessioning,government outlays will fall belowUS$150 million annually.
What has been learned from the ex-perience so far? There are a number ofconclusions:1. Under reasonable circumstances,
concessioning works. Acknowledg-ing that this has been a pioneeringeffort and much had to be learned,expectations are good, though stillcautious. The response of domesticand foreign private companies dem-onstrates that the private sectoragrees that there is an opportunityto be exploited, although the risks ofthe traffic projections and financialprojections are only now emerging.Government risks, such as failure ofconcessions, and service deteriora-
tion or discontinuance, are also rec-ognized. This said, there are fewwho would turn back the clock al-though the transition has not beentroublefree;
2. Concessioning is inherently complexand can never be perfect. It is pos-sible to construct evaluation formu-lae wherein a series of diverse, evenconflicting factors are included, butthe price for doing so is delay, alongwith results that are hard for gov-ernment to evaluate and for biddersto understand. Formulae dependingmore heavily on a pre-qualificationprocess followed by a single financialoutcome can potentially be fasterand more defensible. The choice de-pends on circumstances.
3. Advance preparation goes a long waytoward determining the outcome.Bids can never be better than thequality of the request for proposals.Further, as was demonstrated in Ar-gentina (and elsewhere, as in theConrail restructuring in the USA),planning and evaluation formulaethat reward optimism on the part ofbidders will elicit just that. Railwayconcessions are always difficult tovalue correctly. Unclear or conflict-ing criteria encourage unrealistic re-quirements and engender miscalcu-lations on the part of bidders. If thesuccessful bids are too unrealistic,there may well be a second round ofprivatisation. These processes arenot necessarily one-shot operations.Not all private-sector ventures suc-ceed, even under the best of circum-
stances.4. Those managing concessioning
must balance a desire to explore ev-ery aspect of the process and con-struct elaborate bidding mecha-nisms, with the need to maintainmomentum and avoid discouragingbidders. Another high price of de-lay is the damage done by indiffer-ent management and employees inthe interim after the changes havebeen announced but before thetransfer has taken place. In somecases, winning bidders are con-fronted with properties and patron-age less valuable than they had bidfor because of this delay;
5. Railway privatisation requires pa-tient education and consensusbuilding among the various stake-holders (managers, employees, us-ers, political leaders). This processtook several years in Argentinaand, in fact, may actually be rootedin planning and analysis that beganyears before. It has taken at leastas long elsewhere.
By far the most important factor inthe success of the process so far, is thepolitical will and clearly-expressedgoals of the government. As is truethroughout the government ' sprivatisation program, the political andeconomic stakes are high; it has beenabsolutely crucial that the governmentbe willing to retain its commitmentthrough the hard as well as the popularsteps to be taken. Countries undertak-ing a similar process must have thesame continuity of effort. �
Jorge H. Kogan
Mr Jorge H. Kogan was born in Buenos Aries in 1946. After graduating with an MSc. from the
University of London, he joined the Federal Ministry of Transport for 7 years as Director for
National Transport Planning. He also served as Chairman of the Prices and Tariff Committee of
the Ministry of Public Works and Services. He was Director of Aerolineas Argentinas for 5 years
before becoming President of Dytecna, a consulting firm to the Government of Argentina man-
aging the Railway Restructuring Unit. His responsibilities include developing the general strat-
egy for restructuring the Argentine railways, rationalizing railway operations, and privatising the
