EDITORIAL COMMENT: Transcontinental railroad still a long shot

Thursday, April 15, 2004

Judging by local press, Bolivia is still sore at losing its coastline 125 years ago, but the passions the topic arouses are forcing the government to redefine the role of Bolivia in Latin America. With the encouragement of Brazil's President Luiz Inacio Lula da Silva, Bolivia is transforming itself into a transport corridor to facilitate the interregional flow of goods, a right of way providing a link between the two oceans, which is an important development for products produced in the center of the continent. President Lula has his own motives, but his sponsorship of interregional transport infrastructure means Bolivia can tap a natural resource - its lynchpin location.

Bolivia has for several years plowed, and will continue to plow, money into improving its highway network to integrate the country, both internally and with its neighbors. The government is now turning its attention to the rail network, creating the paradox of the poorest country in Latin America looking further to develop arguably the most expensive transportation method.

President Lula wants a 4,269km transoceanic highway-rail corridor connecting Sao Paulo's Port of Santos to Chile's Port of Antofagasta and is putting up his country's money to pay for it.

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Will this just be an expensive white elephant or is there real substance to the project? Railroad development is only viable when there are assured medium to long-term cargo flows to pay for it, no matter how much concessional finance you receive to build it. Ore and mineral concentrate transportation is the bread and butter of much of the region's railroads.

Bolivia has its fair share of this market as evidenced by an US$18mn, 70km line Ferroviaria Andina (FCA) is planning to use to transport silver and zinc concentrates from the San Cristóbal mine in Potosí department to the Pacific, and the Puerto Busch development to transport iron ore from Mutun. However, it is the shipment of agricultural products - in particular soy - that could turn Bolivia into a conduit for Brazilian goods heading west and provide the regular, bankable traffic flows that a railroad demands.

The key for Bolivia is to link its eastern and western railroads, operated by concessionaires FCA and Ferrovia Oriental respectively. Eduardo MacLean, general manager of FCA, says there are two routes to achieve this, both of which will eventually be developed.

First is likely to be the southern Sucre-Santa Cruz via Aiquile route costing US$150mn, which would allow shipment of agricultural products to Antofagasta. This would only require the construction of a 150km rail link and feasibility studies are due in 12-18 months. Once in place, FCA could increase its soy shipments from 50,000t towards 300,000t/y.

The second route is a 350km northern route costing US$400mn that could provide a Pacific exit for 4Mt/y and potentially 20Mt/y of Brazilian soy exports from Mato Grosso state.

So far so good, but the situation is not so straightforward. Private investors in Brazil are developing a railroad to take Mato Grosso soy to the Atlantic. Earlier this month, Brazilian rail company Brasil Ferrovias signed an agreement with Mato Grosso do Sul state government to rehabilitate a 1,304km section of the Novoeste railroad from Corumba - near the frontier with Bolivia - to Bauru in Sao Paulo state at a cost of US$27mn.

Bolivia is also developing a competing project in the shape of the Puerto Busch riverport project, which is a national priority, according to Bolivian President Carlos Mesa. Although principally for iron ore transportation, it will also be able to carry soy. The 150km rail link between Puerto Suarez and Puerto Busch included in this project would compete with any transcontinental link passing through southeast Bolivia.

Ian Thomson, of the transport unit of the UN's Economic Commission for Latin America and the Caribbean (Eclac), thinks that going with the flow of the geography and placing cargo on the river makes a lot more sense than taking it 5,000m up and over the Andean cordillera.

There are several potential winners of the rail link idea. Brazil would benefit from getting its products to market, the railroad concessionaires would gain from the freight rates they can charge and Chile's ports would benefit from the extra cargo handled - but what is in it for Bolivia? With its two railroads concessioned, Bolivia's government has no legal say in, or claim on, the railroad rates. Thomson says the government prefers higher rates in any case as these help pay pension contributions in the country.

Financing could give the government leverage. Bolivia's rail concessionaires do not want to stump up the cash to build the link. MacLean at FCA said he wants the government to take out World Bank or Inter-American Development Bank loans to finance the link, as the private rail companies cannot take on the debt involved and remain profitable over the 20-30-year loan term. With Bolivia up to its credit limits with both these organizations, that may not be possible, but concessional finance from Brazil may be.

Resources are one of the main stumbling blocks, but President Lula could continue to offer concessional credit terms via Proex and national development bank BNDES, as he has done for Bolivian highway developments. If the government funds the link it can establish the conditions for its use such that it gets a return, although if this is too high it could price the link out of the supply/demand curve.

President Lula wants to ship soy to China, but a landmark move in ocean freight rates could prevent this indefinitely as shipping capacity is devoted to products than can pay more, such as the iron ore and steel that China is relentlessly sucking in. This will not stop, and India could join the consumption party sooner rather than later.

Assuming a link can be financed and built, what will be the Pacific terminus of choice? Chile's Antofagasta port may be leading the early running, but just to the north, Mejillones port has a good shout as well. FCA is associated with Chilean railroad Ferroviaria de Antofagasta-Bolivia (FCAB), running from Ollague on the frontier with Bolivia to Antofagasta, and would want to funnel traffic this way.

This has the advantage of being the best transandean route by gradient (3%), but it also has a questionable amount of spare capacity due to the amount of copper and sulfuric acid it ships. This affects both ports. The La Paz-Arica route has a 6% gradient that adds to costs. Add to this that much of the track between Cochabamba and the Pacific has capacity limited to 16t per axle and the numbers quickly become uneconomic. Railroad developments east of Cochabamba are rated at 25t per axle, which means either the system is not optimized or an expensive upgrade program will need to be undertaken.

Peru is not an outlet option in the medium to long term because there is no rail connection with Bolivia and the countries use different track gauges. To get a train from Bolivia to Peru would need the construction of track around the southern side of Lake Titicaca to link Guaiqui in Bolivia with Puno in Peru or involve transporting the railcars by ferry across the lake.

If all the above can be advantageously resolved, the success of this proposal for Bolivia will still depend upon elements beyond its control - the condition, operating efficiency and financial stability of transportation infrastructure of its neighbors, and the political objectives of those parts of the chain managed by its neighbors. The strike at Peru's Callao port shows the potential for disruption.

Although integration initiatives such as IIRSA are improving regional relationships, it would be premature to preface this with "harmonious." Underlying national differences will be a factor. Bolivia will feed traffic into Chile yet continue with rancorous disputes about the Silila waters and port access. Argentina has partially cut off the gas supply to Chile to meet its internal needs and Chile could do the same to Bolivia with its railways.

A prudent man would weigh all these factors and conclude that it is probably better to leave such a development alone. However, governments are not always prudent and so development of this link may remain on the drawing board for a long time to come.