Railroad management models in Latin America and the Caribbean

By Jorge Kohon.

The historic model

The railroads of Latin America and the Caribbean have performed, until a few decades ago, as vertically integrated railway companies. In other words, as companies that handled not only infrastructure (its maintenance and rehabilitation, as well as traffic control), but also railway operations (train circulation, and incorporation and maintenence of locomotives and wagons). That management model was applied all over the world, from concessions to the private sector or state railway companies, to the more than 500 freight railroads--of different sizes, and with private property and management, including infrastructure--of the United States.   

Vertical integration and competitive access in the new concessions

A few decades ago, the management model chosen for new concessions in the region, with smaller railway companies, continued to predominantly be that of vertical integration, with a single railroad (the concessionaire) holding commercial rights to a conceded territory, allowing it to capture traffic and operate. However, some countries sought initially (Mexico) or introducing changes through renegotiations of the original contracts (Argentina), to increase intra-railway competition, without breaking the vertical integration.

Thus, Mexico determined that its vertically integrated concessionaires, the “holders” of the concessions, would maintain commercial exclusivity except at certain points relevant to freight concentration (large industrial centers, principal ports) of the conceded networks. At these points it was contractually established that a “neighbor” concessionaire would have “commercial transit rights” to access these freight-concentrating centers, circulating on specific and clearly defined railway lines. These commercial transit rights allow them to pick up or drop off freight exclusively in those locations, thus exercising competition with the “holding” concessionaire. The “neighbor” concessionaire with “commercial transit rights” must pay a toll for the use of the holding concessionaire’s infrastructure. The case of Mexico is representative of the management model of vertical integration with competitive access.  

In Argentina, the renegotiation of the freight railway concessionaires’ contracts, also vertically integrated, led to the introduction of the concept of “unsatisfied demand”, nonexistent in the original concession contracts. This foresees that if a freight operator is not served by the railroad that should carry its freight, it can present itself before the regulatory authority and denounce “unsatisfied demand”. The regulatory authority must convene the parties (railroad and freight operator) to reach a satisfactory agreement between the parties and, in the case of being unable to achieve one, it can bring another company (new or preexisting) to operate in the territory of the railroad that does not provide the required service, exclusively serving that “unsatisfied” traffic.

Open Access

A few decades ago a concept emerged, especially in relation to the energy and telecommunications sectors, of "Open Access", meaning that distinct service providers can use one infrastructure by paying a toll to the owner/operator of the facility. Railway Open Access has reached its maximum conceptual and practical development in Europe, where the existence of a single, standard gauge was seen as an opportunity, in the face of sharp declines in freight traffic, to increase the limited railway size of each country, transcending national boundaries and opening the continent to greater activity. State operators of the different countries, as well as new private freight service operators, were summoned to this task. Open Access is spreading, gradually, to long distance passenger services.

In Latin America and the Caribbean, the most explicit case of Open Access is in the so-called Región Sur of Chile’s railroads. The Región Sur extends from Santiago to the south of the country and its principal ports. Its infrastructure, with wide-gauge tracks, belongs to the state railroad company, Empresa de los Ferrocarriles del Estado (EFE). On this same infrastructure, EFE itself operates offering long distance passenger transport services. The freight services concession of the southern network considered that one or more freight operators, paying tolls to EFE, would be added to the infrastructure under the Open Access model. Initially the freight services were conceded to a single operator, and though the regulatory scheme would nominally allow new operators to enter in the future, after having established strong economic barriers to the entry of new operators, the emergence of a second operator was made highly improbable in practice. For fewer than 10 years, the initial concessionaire (Ferrocarriles del Pacífico, Sociedad Anónima, FEPASA) was the only freight railway operator on the EFE tracks. In that moment, and for reasons that still have various interpretations, the state mineral company Codelco decided to take on the payments that would allow the entry of a new freight operator (Transportes Andrés Pirazolli, TRANSAP) to transport its sulphuric acid traffic. The blow for FEPASA was a hard one because the total railway demand of the southern network is reduced, comprising around 10 million tons with average distances that do not exceed 200 kilometers. Now, 12 years after TRANSAP began operations, two differentiated operators cohabit the EFE rails: FEPASA  is a “general operator” with a variety of clients and traffic, while TRANSAP has only added one client, also relevant (the Paper and Cardboard Manufacturing Company), to transport cellulose. Today FEPASA serves just over 70% of the railway tonnage of the southern network, and TRANSAP handles slightly less than the remaining 30%. Railway activity in Chile grew, between 1999 and 2012, around 80%, slightly surpassing the growth of the Chilean economy. The discussion about whether it has been adequate to have more than one operator in a railway market of this small size is not settled. There are some who celebrate the increase in competition, and others who suggest that TRANSAP “skimmed” the market, serving only big clients with a greater capacity to pay, which impeded the consolidation of a single solid and profitable operator which serves all clients and not just the big ones.

Peru created its own management model. It sought to keep, at least in theory, the best of both worlds. It established that the allottees of the call for proposals had to create two separate companies: the first, the concessionaire (of the infrastructure), is in charge of maintenance, rehabilitation, and traffic control; and the second, the operator (under separate accounting) is in charge of the operation of trains. In terms of management models, vertical integration is not “broken” in practice because both companies (the concessionaire and the operator) belong to the same business group. At the same time, greater competition is allowed through Open Access, in the non-monopolizing part of the activity (operations). The only place where more than one operator has entered is in the passenger services of the Cuzco-Machu Picchu line, dedicated principally to high payment capacity and high profit international tourism, where during several years three operators coexisted on the same infrastructure (currently two). Though this scheme demands alertness from the regulator to avoid any attempts by the infrastructure’s concessionaire to discriminate against operators other than its own, the coexistence between operators has been essentially peaceful. At the same time, the small size of the freight railway market (3 million tons annually) didn’t encourage the emergence of another railway operator for these services.

Vertical integration vs. Open Access

The discussion about the convenience of one model or another is not closed: different opinions exist in favor of each. The principal critique of Open Access is that the division between infrastructure and operations does not allow the railway company to be optimized as a whole, and above all, that authorizing the participation of more than one operator can lead to predatory practices between operators, especially in small railway markets, such as the majority of Latin American countries except for Brazil and Mexico.

How does the movie end? Is there more Open Access in the future of Latin America’s railroads? Yes, there is. Where? In Brazil, where to a network of operations in the order of 20,000 kilometers another 10,000 kilometers of lines are being constructed in the next 20 years. But the strategic vision of the railroads that are foreseen there, and their Open Access management model, will be the subject of another article.

Jorge Kohon is a civil engineer specializing in transportation, with over 30 years of experience in the economics, planning, management, operations, and politics of railway transport. He has served as a public official and has worked as a consultant for the railway systems  of 13 countries in Latin America and Asia. Currently he is working as an independent consultant, and is a member of the Transport Institute of the Argentine National Academy of Engineering.