International Business : Rail Privatization in Argentina Helps Fuel Economic Recovery

ISSUE: Argentina provides an object lesson in the costs and rewards of privatization. Since President Carlos Saul Menem assumed power in 1990, the Argentine government has transferred many state-owned businesses to the private sector.

Though painful in causing thousands of layoffs, the privatizations--and the elimination of huge government subsidies of the respective industries--have been major contributors to Argentina’s economic recovery. Inflation, for example, has dropped from an annual rate of 5,000% in 1989 to 3.5%.

The privatization of Argentina’s rail system provides a striking example of the sacrifices and rewards for the government. It also shows the opportunities for foreigners to participate.

BACKGROUND: When the Menem government took power, the railroad system--nationalized in 1947 by dictator Juan Peron--was a shambles.

Roberto Pia, Argentina’s national railroad commission president, said recently that the system deteriorated steadily over the years because of a lack of maintenance and investment, and in 1989 only one of every two locomotives worked and more than half the track was deemed unsafe.

With about 210,000 employees, the railroad had more than twice as many employees as it needed to operate efficiently.

“The railroad had become a highly politicized make-work institution that was viewed more as a source of employment than a means of transportation,” said John A. Kirchner, professor of geography and transportation at California State University, Los Angeles.

Losing about $2 million a day in 1989, “the railroad system was on the point of collapse,” Pia said.

The turning point came in 1989 when the Argentine legislature agreed to allow the government to grant concessions to private companies to operate various government-controlled operations, without selling them outright.

Soon thereafter, Argentina’s powerful labor unions also agreed to give up power and jobs as industries were privatized, a sign of how the nation as a whole had become persuaded that the private sector could do a better job offering services than the state could, Pia said.

“At first there was resistance, but later the government convinced people that a phenomenal transformation was the only answer,” Pia said.

The government saves $1 billion a year on the rail system, Pia said, and the privatization process has accelerated since Menem assumed power. The state-run Aerolineas Argentinas airline and the railroads, ports, power companies and telephone utilities have all been, or are in the process, of being privatized.

OUTLOOK: Argentine officials say it may take 30 years for its railroads to achieve full modernization. But savings from huge payroll cuts could help finance improvements. The work force is down to 80,000, Pia said.

Among other immediate impacts of privatization was a reduction in service. About 70% of Argentina’s passenger service has been eliminated since the federal government turned over responsibility for the financing of deficits of all passenger lines to the Argentine provinces.

Still, the Argentine privatization is looked on by many as a model process. Pia recently was invited to Egypt and Albania to consult those governments now considering similar divestitures.

STRATEGY: U.S. companies already participate in the railroad privatization. New private owners of the divided rail system hired operators such as U.S. railroads Conrail, Burlington Northern, Iowa Interstate and Anacostia & Pacific to manage their lines.

But the nation needs massive foreign investment to modernize transportation at a pace equal to its growing economy, said Argentina’s subsecretary for transportation, Raul Ercole.

“We came here to admit we were on the wrong road before but that we have resolved many problems and that we are serious about restructuring our economy,” Pia said.

Continuing economic improvement, analysts say, will provide confidence to foreign investors interested in helping Argentina fulfill its transportation needs, including financing the improvement of seaports and airports.