Railroad Concessions: Off Track from the Start

September 25, 2007

Argentina began an international railroad privatization trend in 1991, when its Rosario to Bahía Blanca line was turned over to a private concession, and its example had been followed in at least 13 other nations by the end of the decade. Seven of those countries—Bolivia, Brazil, Chile, Costa Rica, Guatemala, Mexico and Peru—are in Latin America.

The World Bank has driven Latin America’s railroad privatization via “concessioning”—the granting of long-term contracts under which private companies run the rail services and, in some cases, also take responsibility for track maintenance and renewal. Ownership of the fixed infrastructure normally remains with the state while the countries retain ownership rights over the rails and other infrastructure. According to one of the Bank’s major publications on the subject, “Historically, this is a logical development. After all, many railways in Latin America were originally built as private sector concessions and have only been under public sector control since the end of World War II.” [1]

Indeed, Latin America’s railroads were built in the late 19th century to facilitate the cheap and quick export of its natural resources within a global economic order managed by imperial power. Brazil’s railroad, for instance, was built with state finance by private, mainly British and French, concession companies and designed to facilitate export of primary products like coffee, sugar, cotton and cocoa. “The resulting transportation system did not link the country into a more unified [national] market,” [2] however, and the Brazilian government was financially burdened by having to guarantee returns to the foreign owners. Thus, in 1901, the Brazilian government contracted a large loan in order to nationalize some of the railroads, a process that continued until the 1950s. Other Latin American nations also nationalized their rail systems in the first half of the last century.

This is not the place to explore the inter-related reasons—including lack of investment, corrupt governments, external debt, budget deficits, World Bank Structural Adjustment Programs and more—for the eventual failure of state-owned railroads. But fail they did: the wage bill alone of Argentina’s Ferrocarriles Argentinos exceeded its total revenues for 15 straight years until, in 1991, the Rosario to Bahía Blanca line was turned over to a private concession to kick-start the privatization trend. The rest of Argentina’s railroad was soon to follow, along with those of seven other Latin American countries.

The World Bank’s Private Participation in Infrastructure database shows that the eight Latin American countries had awarded a total of 26 railroad contracts to private companies by 2000, and this amounts to more than 80 percent of the global total. “One reason for Latin America’s dominance in private railway projects is the region’s positive experience with private participation in other infrastructure sectors,” says the Bank [3], although, as other contributors to this issue document, the extent to which privatization of water and electricity supply has been a positive experience is certainly debatable.

A World Bank study has suggested that the advantage of the concession arrangement is that it enables government regulation more effectively than do other privatization approaches. “Concession contracts allow the cushioning of some of the negative effects that may arise from the private company’s actions,” it states. “Thus, establishing maximum prices and minimum service levels, so that impact on equity can be minimized, is habitual.” [4]

A closer look at rail privativation in Latin America shows instead that it has resulted in soaring transport costs and drastic cuts in service in areas not of direct interest to concessioners, as well as in massive layoffs of railroad workers. All the same, it has become the norm for concession contracts to be renegotiated at the companies’ insistence two or three years into what are typically 30-year deals. The results of such renegotiations have included transferring more of the burden of financing rail infrastructure development and services from the private concessions back to the state.

Privatization of Brazil’s network has been on the largest scale, because its rail system carried around six times more freight than the rest of Latin America’s railroads put together by the time it was privatized between 1995 and 1997. The Brazilian Federal Railway (RFFSA) was broken up into eight regional private monopolies. The leading interest in the Brazilian system’s major cargo—CVRD, itself a product of privatization, and the world’s largest iron ore producer—has emerged as the dominant player in Brazil’s privatized railroad.

Brazil’s privatization followed the example and largely replicated the effects of the Argentine approach. If the impact of these and the other railroad privatizations on the region’s small and medium-sized businesses producing for local markets can only be surmised, it is clearer that the impact on rail workers has been catastrophic. Both effects are products of the concession companies’ concentration on large scale, export-oriented freight services, using new technology to reduce labor costs and reduce transport times.

According to the International Labor Organization (ILO): “Railway restructuring has had a severe impact on the level of staffing of the companies involved … For example, following the concessioning of Argentine Railways, employment declined from 94,800 in 1989 to approximately 17,000 in 1997.” [5] The impact has been felt particularly harshly in freight, according to an Argentine rail union, which has described the wider social impact in vivid terms: “Many railway workers and other settlers have had to migrate to the major cities because the places they used to live in revolved around the railway lines. They have therefore become ghost towns, with closed schools, banks, shops, etc.” [6]

The scale of job loss associated with concessions in Argentina, enormous though it has been, is not atypical. In Chile, where there had already been a cut of 75 percent in the railroad labor force between the seizure of power by the Pinochet military junta in 1973 and 1990, the number was halved again in the course of privatization from 1990 to 1995.

The scale of job loss in Brazil has been of the same order. RFFSA employed 42,000 people at the beginning of the process—down from 160,000 at its peak in the 1960s—and this was roughly halved during the mid-1990s in preparation for privatization. Employment in FEPASA, the other Brazilian railroad organization, which served the port of Santos, was cut from 8,000 to 5,000 over the same period. Of the more than 21,000 who left RFFSA, only 4,000 were accounted for by voluntary layoff, despite relatively generous terms. The rest were pushed.

It had been in Argentina that the World Bank first provided financial assistance overtly for labor force reductions, but the ILO has reported: “Employment programs for workers leaving the public sector did exist in Argentina but they were not always applied promptly. It was also true that there were some very imaginative solutions, particularly in rail transport where groups of workers were given repair workshops to repair machines. It was a way of outsourcing which started the autonomous workers off in a productive project.” [7]

However, enabling former public employees to set themselves up as private contractors to bid for what had been their own jobs, while it is presented as a way of cushioning the impact of retrenchment, can be seen from another point of view as a way of undermining employment security, deregulating terms and conditions and weakening union power. Moreover, the skills and attitudes needed to run a small business are not the typical product of many years of formal public employment, and the new entrants to the informal sector were under-capitalized into the bargain.

In Argentina, the predictable results have been described by the union Sindicato La Fraternidad: “The great majority first set themselves up in mini-undertakings which were unsuccessful because they were geared closely to the railways. This great majority is now unemployed. The state has never set up training programs for workers who had been employed in the industry for 15 or 20 years.”

The World Bank attempted to learn from the deficiencies of its labor reduction program in the Argentine railroad when Brazil’s turn came around. The Bank financed a project that had three declared aims: to cut the workforce, to increase labor productivity towards the levels in Chile and Argentina, and to minimize the social cost of the job losses. A Bank study carried out in preparation for the Brazilian project revealed that of the largely male workforce, the average worker was aged 41 with 18 years service and had low educational qualifications and either few or highly specified skills. This meant that their chances of finding new jobs were low.

It was recognized that the statutory maximums for severance pay would be inadequate, and so a scheme was developed to soften the blow. Early retirement was made available to those over 50, while others were entitled to severance payments of between four and 12 months pay, in addition to what the law required, depending on length of service. According to a World Bank report: “The privatization team recognized that these targeted reductions in labor force were by no means final. Once all the regional areas had been privatized, the organization of each system would probably change and would likely lead to additional reductions in staff, changes in skills mixes and improved productivity.” [8]

So it proved. The workforce was halved again, to a total of around 11,000, within a year of the concessions beginning, meaning that since the beginning of the privatization process around 75 percent of the jobs had been cut.

Unlike in Argentina, a central element of the World Bank staff reduction program in Brazil was the provision of retraining for laidoff workers. But the Bank admits that only a small minority actually received the promised training, and that in one case the program from which laidoff workers were supposed to benefit did not even start until 18 months after they had been dismissed. The delay in beginning the training programs is seen as one of the major reasons for their lack of success, but the delays in themselves could be seen as an expression of the limited commitment to the programs by all concerned (including workers themselves, whose applications for retraining were lower in number than anticipated, perhaps reflecting their scepticism as to its practical value).

The impact on the workload of the remaining workforce is causing concern. The Novoeste concession (which was not initially among those won by iron and steel producers CVRD, but came under its control later—acquisitions leading to concentration of ownership is another feature of the privatization experience) is reported to have dismissed more than 1,000 workers since privatization. The union says this has greatly increased workload among those remaining, especially wagon loaders, and Novoeste has been officially warned by the Ministry of Labor about the excessive hours being worked by its employees. Other Latin American rail workers’ unions also claim that their members’ health and safety has been jeopardized. According to testimony at an ILO symposium in 1999, drivers in Argentina were working longer hours for lower real wages and their fatigue was leading to accidents. [9]

Argentine unions also claim a relationship between increased use of contractors and deterioration in safety. In response to a questionnaire sent out to its affiliates by the International Transport Workers’ Federation (ITF), one union replied that its members were reporting an increased number of workplace accidents because of inadequate training. It pointed also to lack of company health and safety policies, and claimed that the supervisory authority, which had recently stated that 89 percent of companies were not complying with current legislation in this area, is “largely powerless” to enforce standards. [10]

A World Bank account of the Argentine experience admits that results have differed somewhat from originally stated intentions. “The most immediate and painful change for the system as a whole was the reduction in employment from 92,000 workers to about 17,000 in 1998,” it states. “Politically, this is still proving to be a tough sell mainly because the fiscal goals have not really been achieved as expected. In spite of the privatization and reduction of the required public expenditures in the sector, the government is still spending US$400 million/year in subsidies, in addition to a commitment to pay for US$6 billion in investment over the next 20 years.” [11]

In addition, the concession companies, having failed to meet their modest financial obligations to government under the original deals, have successfully demanded renegotiation of most of the contracts for passenger services, according to the same World Bank account. “Private operators are asking for an increase in the current subsidy levels for the [Buenos Aires] subway to cover operating expenses and some investment,” it states, adding: “From a financial point of view, private passenger services operations are having a clear impact. The burden of the costs is shifting from the government to the passengers.” [12]

The effect is that—even before more recent developments in the country made a disastrous economic situation catastrophic—it was projected that Argentina’s metropolitan passengers would be paying around three times more for the same journey ten years into privatization as they were paying when privatization began. As the World Bank drily notes: “The process is hotly debated in Argentina and for the users exposed to the higher initial tariffs, the increase is likely to represent an increase in monthly travel costs significant enough to raise some concern.” [13]

In freight too, the incentives built into the concessions mean that, unless subject to government subsidy, unprofitable services are abandoned. In the case of Mexico, all less than full wagon-load freight services were eliminated, as were entire routes with low volumes. The reduction in passenger numbers carried in Mexico has been even more dramatic, as money-losing routes disappeared: passenger numbers fell by 80 percent in the first year.

The priority of Mexico’s privatized freight concessions, like those elsewhere in Latin America, has been to provide more efficient integrated transport facilities for large industrial customers. For example, the US-Mexican consortium TFM claims to have increased daily capacity at an intermodal yard (one that links rail with shipping and road transport) by more than double, and to have reduced transit times. The other major consortium in that country has made similar claims about the improvements its investments will achieve.

What remains less clear is the impact this reorientation of investment priorities is having on small producers, but the signs are no better than might be expected. In Brazil, there has certainly been investment in new rolling stock to carry the iron ore that is the principal interest of the company now dominating the rail sector. But the Ministry of Transport website stated, before the recent presidential election there, that investment in other infrastructure had decreased, and that it was considering funding investments on one line itself because of the concession’s failure to deliver as contracted.

The Argentine union Sindicato la Fraternidad has explained many of the problems of its railroad in terms of the colonial circumstances of its origin. “As can be imagined,” the union has pointed out, “those British and French railways in Argentina, originally created as extractors of agricultural riches to be transferred to the markets of Europe, were structured from the port to the interior. The design of this industry never reflected the need for tracks to connect, unite and integrate the country’s vast national production areas.” [14]

Failures of state management by corrupt Latin American governments, compounded by the budget cuts of World Bank Structural Adjustment Programs in the 1980s, made a bad situation worse. But privatization has not made it better. Even allowing for the particular interests that might inform a union’s judgment, and for the failure of its evaluation to take account of investment and expansion in export-oriented bulk freight services in at least some Latin American countries, Argentina’s Sindicato La Fraternidad would seem to have a point when it insists:

“The transfer of the railway companies to the private sector has not generated employment; has not transformed industries with investment and technology; has not reduced high accident rates; has not met transport market expectations and needs; has not expanded the networks sold off; has not maintained its fixed infrastructures, nor its engine and rolling stock (except those incorporated with state capital arising from subsidies). But, by abolishing branch lines, it has reduced the areas of influence and territorial integration of the regional productive economies.” [15]

© Brendan Martin, 2002

Brendan Martin is the author of the recently reprinted book In the Public Interest? Privatization and Public Sector Reform (Zed Books, 1993). He is director of Public World , a London-based organization specializing in policy, research and consultancy about the labor and social dimensions of privatization and public service reform. The information in this article is drawn largely from a 2001 report by Public World for the International Transport Workers' Federation (ITF), Railway Privatization through Concessions: The origins and effects of the experience in Latin America.

1. Ron Kipicki and Louis S. Thompson, Best Methods
of Railway Restructuring and Privatization, World
Bank, 1995.
2. Werner Baer, The Brazilian Economy: Growth and
Development, Praeger, 1989, p. 15,19.
3. Nicola Tynan, “Private Participation in the Rail
Sector – Recent Trends,” in Public Policy for the
Private Sector, World Bank, Washington, D.C.,
1999, p. 5.
4. Javier Campos and Pedro Cantos, “Railways,” in
Privatization and Regulation of Transport
Infrastructure: Guidelines for Policymakers and
Regulators, Antonio Estache and Gins de Rus,
World Bank Institute, World Bank, Washington,
D.C., 2000, p. 192. The study adds that conces-
sions have been the favored form of restructuring
because it allows the government to retain ultimate
control over the assets, while the private sector car-
ries out day-to-day operations according to pre-
specified rules devised in a contract, which trans-
forms the problems associated with traditional reg-
ulation into issues of contract enforcement, p. 193.
5. Symposium on the Social and Labor Consequences
of Technological Developments, Deregulation and
Privatization of Transport, Background Paper, ILO,
Geneva, 1999, p. 15.
6. Consequences for La Fraternidad Workers of the
Process of Concessioning the Railways, Sindicato La
Fraternidad evidence to ITF, May 2001.
7. Symposium on the Social and Labor Consequences,
ILO, pp. 20-21.
8. Antonio Estache, Jose Antonio Schmitt de Azevedo
and Evelyn Sydenstricker, Labor Redundancy,
Retraining and Outplacement during Privatization:
the Experience of Brazil’s Federal Railway, World
Bank research paper, 2000.
9. Symposium on the Social and Labor Consequences,
10. Sindicato La Fraternidad evidence to ITF,
Consequences for La Fraternidad Workers of the
Process of Concessioning the Railways, May 2001.
11. Antonio Estache and Jos C. Carbajo, Argentina’s
Transport Privatization and Reregulation: Ups and
Downs of a Daring Decade-long Experience, World
Bank, 2000, pp. 9-10.
12. Estache and Carbajo, Argentina’s
Transport Privatization and Reregulation, p. 11.
13. Estache and Carbajo, Argentina’s
Transport Privatization and Reregulation, p. 12.
14. Consequences for La Fraternidad Workers.
15. Consequences for La Fraternidad Workers.

Tags: railroads, privatization, transportation, labor rights, neoliberalism

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