South America: Invest in an open and loss-making European model or a profitable American intermodal model?
10/1/2024
By Jorge de Mendonca, president, and Federico Ignacio Weinhold, treasurer, of the Asociacion Intermodal de America del Sur
The railroad concessions in Argentina have expired and current administration of President Javier Milei created new legal security for large investments.
The current problem for Argentine railways (and much of Latin America) is the idea of ??open access railways, in which the state has to subsidize infrastructure and part of the operation. In Argentina's case, only 20% of the railway network could remain.
Instead, the model that will be useful for our entire region, so that railroads become a very large and very good business, is the North American model, which has been successful for four decades.
South America should study and learn how to adopt the North American model, which also manages capacity standards specific to our geography, for mining, agriculture, commodities and general cargo logistics — always in alliance with the capital of the truck and regional shipping companies.
If rebuilt in standard gauge (1,435 mm) and intermodally integrated with trucks and North-South internal flows for all types of cargo and destinations, Corredor Capricornio would have a surplus of US$3 billion over the same period (in addition to all the profitability of each business associated with intermodality). Photo courtesy of the Jorge de Mendonca CollectionWith an American railway economic model, Peru, Bolivia, Chile, Argentina, Paraguay, Brazil and Uruguay collectively would generate a varied amount of good and profitable railway businesses.
On the other hand, if the South American region continues opting for European open access, plus its low productivity standards, it will only have loss-making projects and a network that will continue to shrink.
For example, the 17,500 kilometers of railroad that still remain in Argentina are more than enough for a prompt, strong start of low short-term investments with great effect, and long-term investments starting from the second year of integrated management.
The simple ordering of attitude, commercial and maintenance could quintuple general cargo and almost double bulk cargo.
We understand that a comprehensive, unifying vision is needed for one year and, perhaps, that the same railroad firm with extensive North American model experience, after the one-year trial, would become the long-term concessionaire.
The company that takes such an initiative will have the door open to neighboring countries, both because of the rail connections and the local experience in Argentine they will soon be able to prove.
The current government offers advantages for investments greater than US$200 million (and reduction or elimination of taxes, full availability of profits from the third year, and many others).
Seven countries with a disconnected network
The South American network is 58,599 kilometers long, down considerably the from 91,405 kilometers it used to be: 87% of the reduction occurred in Argentina, dropping from 46,300 kilometers to 17,500.
The open access plan suggests reducing argentine network to 9,900 kilometers.
Argentina never completed its part of the Southern Trans-Andean railroad with Chile; abandoned the Central Trasandino; and abandoned the two connections with Bolivia. Also, they weakened the services that connected with Paraguay and Brazil, and never launched any serious business for the connection with Uruguay.
The last connection — Lithium, Borax and Copper with Chile, the Northern Trasandino — operates 60 times fewer services than in 1985. Brazil, Paraguay, Bolivia (and Argentina) need that trunk to connect with the Pacific Ocean.
If Argentina were to migrate to an intermodally integrated railroad model with serious profitability objectives, it would have to rebuild 22,500 kilometers of track that would achieve 100 million tons between mining, agribusiness and, especially, intermodal operations — all of which would benefit the railroads of the country's five direct neighbors and add even more merchandise to transport.
In summary: Based on the Economy of Intermodal Transport and technical standards specific to this continent, the return to profitability of the Argentine railway would impact new infrastructure, intermodal and railway services businesses in at least 60,000 kilometers of the network of the seven countries, which would justify growing to 70,000, as a minimum.
Note: Trucks carry cargo in Chile between Patagonia and the rest of the country, crossing Argentina for 2,000 kilometers, because Chilean territory is interrupted by fjords.
If Argentina were to propose the transpatagonian railway corridor from Pilcaniyeu in Río Negro and Punta Arenas in Chile, it would be a case worth studying. It has mining, tourist, domestic and regional cargo, and bioceanic connections that cross it. Cases like this are repeated throughout the subcontinent.
Half the American continent also needs rail and intermodal
While the logistics of intermodal made it possible for Mexico to be the main commercial ally of the United States, and for that country to climb to the group of the 12 largest economies, Europe subsidizes the railroad and its "open access" with 100 billion euros annually and once again closes 2023 with the balance sheet of DB Cargo (its best freight train) with 500 million in losses.
Since 1980, intermodal has been the engine of American railroads, and railroads are the backbone of the American economy: We are convinced that, by uniting the experience of North American railroad companies and intermodalism, South America will no longer be just 23.3% of the continental economy, which will benefit 66% of the inhabitants, who are in 50% of the territory of the American continent.
Including Brazil, the railroads of the rest of the American continent need the participation of the railroad and intermodal experience of the North — but from that American North and not from the other side of the ocean.
Long corridors
One of the railway routes in the bioceanic strip called the "Capricorn Corridor" between Antofagasta (Chile) and Santos (Brazil), 4,500 kilometers, if rebuilt in metric gauge (1,000 mm), for open access and only bulk and some containers to the ports, will require a subsidy of US$16 billion spread over 30 years, but if rebuilt in standard gauge (1,435 mm) and intermodally integrated with trucks and North-South internal flows for all types of cargo and destinations, it will have a surplus of US$3 billion over the same period (in addition to all the profitability of each business associated with intermodality).
LATAM: American countries and cities that think transportation the way Europeans do
Except for freight railroads and trucks in Mexico, and to an extent in Brazil, all planning, regulations, concepts and even the philosophy of technicians, businessmen and politicians is based on especially unproductive European models of mobility and logistics.
Of course, consultancies, equipment and technology are mostly provided by European industries or licensees or subsidiaries.
Note: In 2019, a port in Argentina together with AIMAS (Intermodal Association of South America) invited a delegation from a U.S.-branded technology and rail-car supplier that had a subsidiary in Brazil (with commercial and technical executives also from Brazil). They could not believe that trucking businessmen could be interested in working with the railroad by acquiring rail cars and investing in intermodal. What's more, none of the visitors to that American firm from its headquarters in Brazil were aware the company they worked for had owned one of the largest rail-car fleets in the United States for 30 years.
“Houston, we have a problem: Neither the technicians nor the salespeople in the U.S. understand that Latin America does not buy from them or associate in transportation because they do not understand that, in order for them to buy and associate, we must expand North America's intermodal criteria in railroads and trucks.”
Argentina, between the railroad opportunity and the punishment to his neighbors
According to AIMAS studies, Argentina's railways urgently require internal cultural recovery before investments:
• Loaded wagons that take 240 hours between donor and receiver, while the train takes 96 hours with a manual that indicates that it has to take 62 hours
• Mountain train that runs every 45 days transporting 7 internal service wagons and 7 commercial cargo wagons instead of 32 wagons in each train at least 3 times a day, indicate that there is a problem of organization and commercial culture rather than a technical or economic one.
With better operating practices, it should be able to haul twice as many daily trains as it did in 1984. And if it were integrated into all the logistics chains of five countries, it would be able to rebuild itself to new standards and profitable businesses.
Profitability
A corridor-by-corridor analysis of Argentina's railroads, only serving bulk from agribusiness, mining and a bit of foreign trade containers, shows only a few branches with opportunity to grow and underscores a great need for subsidy from the state (More kilometers of track would be eliminated, leaving a maximum of 10,000 km in branches that are not commercially connected to each other. Thus, only 20% of Argentina's original railway network would remain.)
At this point, we need to express a great difference in the concept of territorial logistics and in the role of the railway in it, as a good profitable business. Contrary to everything that is taught in railway matters (long distances, large shippers, block trains), we have observed that the diversity and variety of loads and businesses that motor transport companies can attract to the railway with intermodalism will be much more business volume than if the railway only dedicates itself to "passing by" and "serving a few very large ones."
For this to be a good business, we have evaluated the conditions that the railway should meet, and they seem to be those of our grandparents: 1) only if the networks are connected to each other; 2) only if each site is served by low and high load; 3) only if there is early progress towards the standardization of heights for double stack and, as soon as possible, to the standardization of gauge widths and maximization of weight per axle; 4) and only if it is demonstrated in a year of management advising and guiding the Argentine railway by reorganizing cultures in which it truly assumes its role as a company, leaving behind the comfort of subsidies and salaries at the end of the month, and, especially, abandoning the business comfort of carrying the same load for the same few clients every year.
To this we must add the following: Bulk cargo and large clients (from point A to point B) are not enough to make the Argentine railway business profitable and stable, but the sum of specific businesses with trucks, third-party transfer centers, third-party wagon fleets, etc., would add sufficient volume and continuous scale to the entire railway network.
This is how we will be able to reach 100 million tons (50% bulk, 50% intermodal) with 22,500 kilometers of track.
The proposed case to be applied — urgently — in Argentina, is extendable to all of South America, where only Brazil works at high standards and expanding its network, while the rest of the countries repeat "small" exercises in isolated or almost isolated sections. That is, a model for only large customers and bulk cargo would be deficient and require state money, but one that serves the entire economy of the territory would be profitable.
Considerations and credibility
It seems strange that a railroad could almost double its total movements in one year just by applying good practices, but it is that simple.
It is enough to observe the inefficiencies that have nothing to do with technology or the state of materials, but with the lack of commercial vision (both of public and private concessionaires).
Due to the Argentine current crisis, trucking and logistics companies can make intermodal decisions because they have capital, and they need to reduce costs and risk — which they can do with the railroad if there is a strong alliance.
Private concessions received 27,000 kilometers of road between 1991 and 1994 and dismantled or abandoned 10,000 kilometers due to lack of maintenance.
They have many fewer clients and sectors than they served before the privatizations.
Technically, the private railroads did not fail — they never had a commercial plan for clients, just for loads from the concession owner.
If one or more of the major Class I groups in North America, for example, were thinking of investing in South America, the time is now, especially in Argentina.
If they travel to Argentina today, they will be able to offer a trial run (a management directly advised by those willing to invest later).
If the Argentine railway culture reacts and wakes up, then it will be worthwhile to opt for proposing large investments.
If, on the other hand, there is no way to mobilize it, then the interested entrepreneurs would not have lost money.
We trust that the majority of Argentine railway workers will react favorably to the leadership and the possibility of railway growth. This is what they expect, but have never experienced.
We trust that the alliance of this renewed railway leadership (culture), together with the intermodal alliance with truck transporters and logistics companies will be the key to success in the short term.
It will be the beginning of the path to continental success.