With the failings of a once-vaunted privatisation programme now clear to see, the government of Argentina is seeking to create two new state-owned companies to reform the railway sector and carry out much-needed investment.

THE ANNOUNCEMENT by President Kirchner that two new companies are to be formed to manage Argentina's railway infrastructure and train operations (RG 7.07 p404) marks another twist in a 150-year history that has seen the railways pass from private-sector to public ownership, revert to private control, and now come back again. It confirms the government's growing concern that the country's pioneering programme of railway concessioning in the early 1990s has failed to deliver the expected benefits, which can be attributed to a mix of economic, political and financial constraints.

This month the railways of Argentina celebrate their 150th anniversary. What began on August 30 1857 with a short 10 km line financed by Argentinian merchants grew rapidly to become the most important rail network in South America. More than 40 000 track-km was built, mostly by British companies. The 1 676 mm gauge trunk routes were supplemented by a 1 000 mm gauge network financed by the government, which aimed to develop those regions where the private companies could not generate sufficient profits to justify the huge investment needed.

Following what was then almost a worldwide trend, the private companies were nationalised in 1948. Highway construction by the government had contributed to a sharp decline in railway profitability, and the disruption caused by World War II to the activities of the British-owned companies had taken its toll on maintenance.

Although at the beginning the six state-owned railways were able to provide a good standard of passenger and freight service, political factors soon entered the equation and began to prevail over the economic and administrative aspects of the rail business. This was most evident in the way that the payroll was increased as a means of fighting unemployment - by the 1960s Argentine Railways had more than 160 000 employees. Spending on maintenance and to modernise the system was cut back in a dubious attempt to combat an ever-increasing deficit.

The first major cuts to the network and its services took place at the end of the 1950s. From then on, most governments did not attempt to retain a viable network and concentrated on reducing the demand for money from the public purse to keep services running. As a consequence of this, the decay was long and deep and by the beginning of the 1990s the network was in chaos. Only a few freight trains were able to run because the available locomotives were needed to satisfy the demands of passenger services, particularly the need to move millions of passengers every day on the busy Buenos Aires suburban network.

Privatisation no panacea

Not wishing to provide the money required to renew and upgrade the network, this time the government decided to privatise it. With the sole exception of some services transferred to the Province of Buenos Aires, long-distance passenger trains were abruptly withdrawn. At the same time, bids were called from the private sector for concessions to operate suburban passenger and freight services.

The main criteria adopted for awarding the concessions were the level of subsidy required by the suburban bidders and the 'canon' or fee to be paid by the new freight companies for using national railway assets, although the contracts contained provisions stipulating the investment projects to be undertaken to improve service quality.

The signing of the contracts apparently ushered in a new rail renaissance. Through relatively minor investment the private concessionaires were able to rehabilitate locomotives and rolling stock to satisfy relatively low demand, modernising operating practices and abandoning obsolete equipment such as brake vans and an antiquated manual block signalling system. By making widespread use of radio communications and track warrant control, the number of staff on the railways was reduced to under 10 000.

At the start of the concessions these measures were sufficient to greatly improve service quality, and traffic began to grow again.

But as traffic grew and more locomotives and rolling stock were needed, the private companies became increasingly reluctant to make the investment required to increase capacity. Many companies were also reluctant to comply with the more expensive requirements of their respective contracts, especially those related to track renewals and upgrades. Service quality began to decline again.

The worst economic crisis in Argentina's history struck in 2001, causing a sharp decline in traffic which in some ways eased the pressure on the railways but also dealt the final blow to the concession contracts as neither the government nor the private companies could afford to meet their obligations any longer.

The new government that took office in 2003 set itself as a key objective the revival of the national rail network, including the reinstatement of long-distance passenger services between the major cities of this vast country. At the same time, the economy began to grow at a rate of between 8% and 10% a year and national unemployment fell from around 19% to less than 10%.

The economic upturn saw traffic grow again, but not the income needed to improve and add new services. In addition, the government decided to freeze or control most of the prices directly affecting the consumer price index, including utilities and fares on public transport. At the same time, salaries were allowed to increase in line with the government's policy to redistribute income.

This situation still prevails and it has seen the private operators caught between a dramatic rise in operating costs and a slow rise in revenue generated by increased patronage. Very soon the railways were unable to meet their operating costs nor pay the wages bill, and the government introduced a system of subsidies not only for suburban railways but also for other modes of transport and other industries. Subsidy levels have increased, but this policy has proved ineffectual in tackling the decline in the quality of the service offered to the public, many of whom now wonder where this money actually goes. As the gap between costs and revenues increased, private investment dried up and the suburban rail operators are now little more than managers of government contracts rather than true entrepreneurs.

Passengers revolt

Although suburban traffic has not yet returned to its pre-2001 levels, the increase in passenger numbers has been sufficient to impose a growing strain on infrastructure and rolling stock that in most cases has not been well maintained by the private sector. The government has purchased used locomotives, EMUs, DMUs and passenger coaches from Portugal and Spain, but they are only slowly entering service on some routes and this measure has not been able to halt the decline in service quality across the board.

On most lines, late trains, cancellations and asset failures are the daily torture that thousands of passengers must face when commuting. Serious overcrowding has increased the risk of accidents, as most suburban rolling stock has manual doors which are kept open by passengers attempting to ride on the steps. The situation is worse on certain outer-suburban diesel-operated branches, where the track is in such a state of disrepair that derailments occur very often. The sole exception to this sorry picture is probably Ferrovías, operator of the Belgrano Norte line, which renewed all track at the start of its concession and keeps its motive power and rolling stock in good condition, providing a very reliable service.

The first concession to fall apart in 2004 was the San Martín route, operated by Metropolitano, after a series of unfortunate – but predictable - accidents involving passengers falling from moving trains. The main problem was however a lack of reliable motive power, as most units were elderly and poorly-maintained Alco diesels for which spare parts had become difficult to obtain. Operations were provisionally transferred to Ugofe, an emergency management unit formed by the other suburban train operators Ferrovías, Metrovías and Trenes de Buenos Aires. They quickly implemented a programme to rehabilitate the 55·4 km route between Retiro and Pilar, refurbishing stations and rolling stock as well as undertaking emergency track repairs and acquiring ex-Portuguese Railways locomotives. Back in 2004 the government announced plans to electrify the line, but nothing has been done so far.

On May 22 this year President Néstor Kirchner signed a decree stripping Metropolitano of its two remaining concessions, the Roca and Belgrano Sur lines (RG 6.07 p335). This came after passengers rioted at the Plaza Constitución terminus in Buenos Aires, setting fire to this historic landmark that had recently been refurbished, after arriving at the station for their evening journey home to discover that all services had been suspended due to technical difficulties.

This was not the first time that passenger frustration had boiled over into criminal damage – two trains were set on fire at Haedo station on the Sarmiento route last year – but following this latest incident, the government took immediate action by cancelling the Roca and Belgrano Sur concessions and transferring operations to Ugofe. While the relatively small Belgrano Sur operation will be managed by the same unit in charge of the San Martín line, the larger Roca network will need a new operating structure which was due to be implemented at the end of June.

Investment needed

The main problem is the money that the government will have to spend to bring track and rolling stock back up to an acceptable standard. First estimates suggest that US$100m is required to solve the most urgent problems with the track, signalling and telecommunications and rolling stock maintenance on the Roca network. This does not include day-to-day operating and maintenance costs, nor the wages of 4 000 employees who will now be paid by the government, like their counterparts on the San Martín railway. The most optimistic forecasts suggest that operating the Roca will cost around US$11·5m per month until the end of this year.

But probably the most important and long-lasting consequence of this situation is that the federal government has now decided to take direct charge of the railways. To this end, it has sent to Congress a bill that will authorise the creation of two new companies under the umbrella of the Ministry of Federal Planning: an infrastructure company known as AIF and an operating company known as ORF (RG 7.07 p404).

The bill states that the main objective of both companies will be 'to transform the railway into a competitive means of transport'. Based on the model of ADIF in Spain, AIF will manage existing infrastructure and any new routes that may emerge, taking responsibility for safety, maintenance, operational control and the allocation of train paths. ORF will provide passenger and freight services with its own rolling stock.

Although both companies will be state-owned, the bill allows for the existing private operators to retain their concessions if they honour the commitments set out in their contracts, and provides for the creation of public-private partnerships to operate rail services and manage infrastructure.

AIF and ORF would be subject to the oversight of the nation's principal audit bodies in order to ensure that taxpayers' money is well spent, as the present subsidy arrangements have been heavily criticised for their lack of transparency and the meager results obtained so far. Disused railway assets currently administered by national agency Onabe will be transferred to the new companies, although this section of the bill is being questioned by some politicians who would like to see surplus property such as stations and yards transferred to provincial or municipal governments that in many cases are already using these sites for other purposes. Many senators have also expressed their desire to pay special attention to the freight business as they believe that it is crucial to the economic viability of agriculture and industry within the provinces they represent.

What future for freight?

It remains unclear how the new structure will affect the private freight operators. Although freight traffic grew rapidly at the start of the concessions it had levelled off before the 2001 crisis and then abruptly declined. The rapid economic recovery that followed produced only a modest increase in rail tonnage, probably due to the lack of capacity to meet renewed demand caused by an aging locomotive and wagon fleet. While Nuevo Central Argentino and Ferrosur Roca are doing relatively well, ALL and its Mesopotámico and Central operations are facing complaints from Argentinian shippers. They allege that ALL is giving priority to grain movements arriving by river from Bolivia and Paraguay for onward movement to Brazil, while setting high tariffs for domestic customers and not providing an adequate service to get their crops to market.

The northwestern provinces have also been complaining about virtually non-existent freight service provided by Belgrano Cargas. This 1 000 mm gauge network failed to attract the interest of the private sector and so in 1999 control was transferred to Unión Ferroviaria, the union representing most railway staff except drivers. The government promised to provide US$250m for investment over five years, but this never happened and the network fell apart.

The present government invited new bids in 2005, again without success, so the railway was declared to be in a state of emergency and operations were transferred to a consortium including Macri, Sanhe Hopefull of China, Emepa and Roggio (RG 5.06 p244). Other members are Unión Ferroviaria and two other unions representing train drivers and truckers.

The government plans to invest US$180m at Belgrano Cargas in 2007-09 to renew 830 km of track and upgrade 370 km, as well as repairing 21 locomotives by the end of this year and purchasing a further 30 in 2008. In total 1 500 wagons are to be returned to service. Although very few freight trains are running, some progress has been seen with the route to Formosa under repair, service restored between Córdoba and Mendoza and the route from Salta to the Chilean border at Socompa now being upgraded with provincial funding.

There can now be little doubt that rail privatisation in Argentina has not delivered the anticipated results. Will the new structure be able to modernise the rail system and provide an adequate standard of service? At present, this remains an open question, but it seems clear that huge investment will be required and that a development plan setting out clear objectives and priorities must be drawn up as a matter of urgency.