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2008/SOM3/GOS/CONF/009
Competition Promotion in Transport Services: The Case of Railways in Peru
Submitted by: Peru
APEC-IDRC Conference on Competition Policy Issues in Services Sectors
Lima, Peru17 August 2008
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Competition Promotion in Transport Services: The
Case of Railways in Peru
Gonzalo Ruiz D.APEC-IDRC Conference on Competition
Policy Issues in Services SectorsAugust 17, 2008
Lima, Peru
Index1. Characteristics of the Industry2. The vertical integration – competition
DilemmaThe traditional modelThe reform of the industry
3. The Peruvian Experience4. Concluding Remarks
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1. Characteristics ofthe Industry
Characteristics of the RailwayIndustry (1/4)
Upstream (Rails)Downstream
(transport service)
Sunk costs, indivisible investment, scale economies
Natural Monopoly Characteristics
Some scale economies, specificcosts depending on passenger orfreight transport
Potentially competitive market
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Characteristics of the RailwayIndustry (2/4)
TransportService
Infrastructureadministration
Passenger
Cargo Embarktransport anddisembark.
Embark,transport anddisembark.
- Build,Operatemantenance
- Operation andmantainancewagons and tractive
- Complementaryservices(stationssignaling,telecomunication,services, etc )
equipment
Characteristics of the RailwayIndustry (3/4)
¿Is competition possible in this industry?“Multimodal” Competition
Between a road and a railroad (frequent).Between a railway and air or maritime transport (lessfrequent)
Intramodal CompetitionBetween two different rail tracks parallel one eachother (frequent in US)Between two different operators in the same rail (model promoted in UK and New Zealand)
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Characteristics of the RailwayIndustry (4/4)
Given the natural monopoly characteristics ofthe rail infrastructure is broadly accepted thatit should be subject to some type of economicregulation (tariffs, access, etc)
BUT…When railways are subject to competition(intermodal or multimodal), the consensusabout the necessity of economic regulation isnot so clear…
2. The Vertical Integration- Competition Dilemma
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The traditional model
Traditionally, in many countries, the railwayindustry organization –as in other industries-was characterized by the presence of a stateowned company, which vertically integratedthe provision of rails and facilities, with theoperation of transport services.
In a number of contries this structure stillremains.
The reform of therailways industry (1/5)
During the 80s and 90s, the crisis of thetraditional model in industries likeelectricity, gas and telecommunication, in terms of quality of service, financialperformance, efficiency; lead thegovernments to introduce reforms.Although later than in other industries, therailroad market was also subjectto reforms.
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The reform of therailways industry (2/5)
The main reforms introduced were:Promotion of private investment in the sector
In the case of railways, through concession and franchiseschemes
Promotion of competitionIn the case of railways, the promotion of intramodalcompetition
Recognition of the need to introduce economicregulation
Institutional changeSetting tariffs and access conditions
The reform of therailways industry (3/5)
Ordover and Pittman (1994) 1/ distinguishestwo types of reforms:
Those which introduced regulations in order toprotect captive shipers (followed in Europe) through promoting intramodal competition (in thecommon network of tracks); with open accessobligations to the incumbent operator.Those which relies more on vertical integrationand competition between networks (US, Mexicoand Argentina).
1/. Ordover J. and Pittman R. (1994) “Restructuring the Railway for Competition”, Antimonopoly Law
Handbook, December
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The reform of therailways industry (4/5)
OECD (1997) 2/.
“We have examined the experience of thosecountries which have carried out the mostsignificant rail reforms in recent years. Onething is striking. Few of the reforms haveactually had the effect of introducing anymajor increase in competition within the rail sector” p. 22
2/. OECD (1997) Railways: Structure, Regulation and Competition Policy, OECD Policy RoundTables
The reform of therailways industry (5/5)
OECD (1997) Cont..(…) “Attempts to stimulate open accessoperations must so far be deemed a failure. In large part this is no doubt to a lack ofenthusiasm on the part of existing verticallyintegrated railways for generating competitionwith their own services. Their are perceivedas having been slow to respond to request forpaths and for price quotations, anddeliberately obstructive in many cases.” p.22
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The Dilemma (1/3)Is really feasible the promotion of competition oftransport service “within the rail”?
ORIt is better to relie in a vertically integrated model, and promotion of other sources of competition?:
Other rail networks (US)Other transport mode competition (roads)
What to do when there are no other posibilities ofcompetition?
The Dilemma (2/3)Competition “within the rail”
Strenghts- Better incentives to reduce prices (allocative
efficiency)- Avoid the necessity of regulating tariffs in
downstream marketsWeaknesses- Increase transaction costs in planning invesmtents
and setting time tables and slot allocations
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The Dilemma (3/3)Vertically Integrated Model
Strenghts- Reduces transaction costs- Integrated planning of operations
Weaknesses- Lack of pressure for reducing X and
allocative inefficiencies
3. The PeruvianExperience
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- South East Railway- Central Railway
Pasco
HuancayoLima
- South Railway
Arequipa
Puno
Rail RoadConcessions in Peru
Cuzco
The Peruvian Reform (1/3)Until 1999, the Peruvian rail network wasoperated by a state owned companyENAFER.In July 1999, the rail network was franchisedto two different private companies:
Central Railway - Ferrocarril del Centro S.A.South and South East Railway – Ferrocarril Trasandino S.A. (FETRANSA)
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The Peruvian Reform (2/3)In both cases, through a Concession contract, theGovernment awarded the right to build, operate, mantain and refurbish the rails for a 30 year term. The competition factor for the bid was thepercentaje of the revenues taken from the rail business offered to the Government.The Government not only awarded in Concessionthe rail infrastructure but also the tractive equipmentand wagons, used before by ENAFER.
The Peruvian Reform (3/3)In order to ensure the continuity of the provision ofthe service, the Concessionaire was permited to use this equipment and operate in the downstreammarket, but through a separated company.With the aim of promoting competition in thedownstream sector, the contract established that theConcessionaire was obligued to guarantee openaccess to the rail. The access rate and itsadjustment formula was set in the contract.
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Institutional Context
Ministry of Transport andCommunications
Agency of Promotion of Investment
Transport Infrastructure Regulator
The concession process required the creation of newpublic organizations:
Competition Policy Agency
Sources of Competition
The Central Railway faces competition fromthe Central Highway (Carretera Central) which runs almost parallel to the rail.The South Railway faces competition fromthe “Puno Arequipa Maratani” – Highway andfrom the “Ilo-Desaguadero” roadThe South East Railway, specially fromCuzco to Machupichu, does not facemultimodal competition,
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The SouthEast Railway (1/2)
The wonders of Cuzco and Machupichu (one ofthe seven wonders of theWorld), each year attractsmore than 400 thousandof foreign tourists fromdifferent countries.
The Cuzco – Machupichuroute does not face
multimodal competition
The SouthEast Railway (1/2)
The Concessionaire of the South East Rail
The railway operator
Pays a fee for the use of the rail
Pays a rent for the use of the tractiveequipment and wagons
Upstream
Downstream
Majority of FTSA and PeruRail shares belong to the same international enterprise
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Concessionaire obligationsBuild, Mantain and Operate the rail, complying with international servicestandards.Permit the access to the rail ofoperators, paying an access fee on a non discriminatory basisRent the tractive equipment andwagons to operators on a non discriminatory basisMantain the tractive material andwagons which are property of theState.
South and South EastConcession: Main Characteristics
Automatic anual adjustment according to the New York Consumer Price IndexTariff adjustments
Access to the rail(Maximum tariff aplied on a Kilometer-Wagon basis)Regulated Tariffs
Principal Anual Retribution: 37,25% of gross earnings
Special Semestral Retribution: 50% of semestral earnings from the commercialuse of tractive equipment and wagons
Payment to the Government(“Retribution”)
35 years from the signature of the contract: September 1999Duration
Build, operate, mantain and explote rail infrastructureObjective
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The improvements in theperformance of the railway (1/3)
South and South East Railway
Pas
s –
Km/ e
mpl
oyee
s
From the begining of the ConcessionProductivity Indicators increased significantly
The improvements in theperformance of the railway (2/3)
South and South East Railways: Number of Accidents
Security and safety indicators increasedsignificantly with the Concession
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The improvements in theperformance of the railway (3/3)
South and South East Railways: Earnings by Tone - Km
World
BankSource: OSITRAN, Estache and De Rus (2000)
Financial indicators also improvesubstantially
The roles of thecompetition agency
and the regulatorOSITRAN regulates the access to the rail infrastructure and enforces the ConcessionContract.
REMA: Regulation of the Access to the Infrastructure(procedures, access fees, etc)Clause 7.6 of the Concession Contract establishes that theConcessionaire shall not discriminate between transportoperators and shall not implement abuse of dominantposition conducts
INDECOPI applied the Free Competition Law (DL 701*)
Abuse of dominant positionUnjustified refusal to deal
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South East Railway: attempts to get access to the rail
Since 1999, there were three attempts to getaccess to the South East Rail in order toprovide passenger transport service betweenCuzco and Machupichu:
The FERSIMSAC CaseThe Andean Railways CaseThe Inca Rail Case
The FERSIMSAC Case (1/4)
On August, 2004 FERSIMSAC (Ferrocarril Santuario Inka Machupichu) acuse FETRANSA of abuse of dominant position atINDECOPI, Competition Policy Comission.Specifically, the accusation was thatFETRANSA refused to rent to FERSIMSAC the tractive equipment and wagons forproviding passenger transport servicebetween Cuzco and Machupichu.
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The FERSIMSAC Case (2/4)
FETRANSA denied the request arguing thatall the concessioned tractive equipment andwagons was rented to PeruRail.The central controversy in this case wasrelated to
Market definitionDemonstration of the presence of entry barriersThe existence of Dominant Position
The FERSIMSAC Case (3/4)
Market DefinitionThe market definition was stated as the service of rentingtractive equipment and wagons for providing the transportservice in route Machupichu-Cuzco.
Entry barriersTechnological characteristics of the South East rail
Narrow gauge (914 mm or 3 feet wide of the rail). Todaythe use of standard gauge in the world is generalized, beingless frequent the use of narrow gauge.Converting tractive equipment and wagons from standardgauge to narrow gauge may be costly.
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The FERSIMSAC Case (4/4)
Through the Resolution Nº 064-2006-INDECOPI/CLC theFree Competition Commissions declared not founded theaccusation of FERSIMSAC.However, through the Resolution Nº 1122-2007/TDC –INDECOPI, the Tribunal of Indecopi (Second Instance) declared founded the accusation setting a fine of aprox. US$180 thousand and ordering the cease of the conduct: do not refuse to rent the tractive equipment and wagonsconcessioned by the State .This decision was appealed to the Judicial Courts (and its stillpending).FERSIMSAC authorization from the Ministry of Transport toprovide the transport service in this route has already expired.
The AndeanRailways Case
On February 2008, Andean Railways Corp. requested access to the rail for providing transportservice between Urubamba and Machupichu.On May 2008, FETRANS informed to AndeanRailways that given that the timetables requestedwere the same currently used by Perurail, accordingto the Clause 7.6 of the Contract, the mechanism forallocating this timetables shall be a contest (bid).The process has not finished yet. There iscontroversy about the participation of PeruRail in theBid.
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On March 2008, Inca Rail S.A.C. requested accessto the rail for providing transport service betweenOllantaytambo and Machupichu.On May 2008, FETRANS informed to AndeanRailways that given that the timetables requestedwere the same currently used by Perurail, accordingto the Clause 7.6 of the Contract, the mechanism forallocating this timetables shall be a contest (bid).The process has not finished yet. There is a controversy about the participation of PeruRail in theBid.
The Inca Rail Case
4. ConcludingRemarks
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Concluding Remarks (1/3)Must be recognized that during the last yearsthe performance of the Peruvian railwaysector has improved substantially.
Despite that one of the objectives of thePeruvian Reform in the railway sector wasthe promotion of competition; in the case ofSouth East Railway nine years later from theConcession lease, no competitor other thanthe incumbent, could get access to the rail.
Concluding Remarks (2/3)Still remains the problem of dealing with themarket power of the incumbent operator: claims of local population and tourists abouthigh prices.Is competition “within the rail“ posible? Thisquestion probably will be answered after theprocess followed by Andean Railways andInca Rail.
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Concluding Remarks (3/3)The Peruvian experience seems tocorroborate OECD conclusions about thelimits of promoting competition in the railwayssector.
Thank You
