Each country’s geography determines which modes are most efficient for the transportation of goods. In general, the region has a high preference for road transport over other means that could better take advantage of the geographical characteristics of the region, affecting both competitiveness and complementarities among modes of transport. The development of railways has stalled while the existing network has not evolved from its historic coverage as a mode of transport for mines and quarrying. Maritime transport, while actively present for international trade, is practically absent in the domestic transport of passengers and cargo. Waterway transport is also practically non-existent, even though the geographical conditions exist for this mode of transport to be used and to provide multimodal solutions and better territorial connectivity. 

The traditional view states that short-distance railway and maritime transport are only competitive for distances over 500 km (about 300 miles). However, factors other than distance affect the successful use of both rail freight services and short sea shipping, as international evidence has shown. The success of these services is determined not so much by distance as by the concentration of available cargo volumes and the suitability of services offered in terms of frequency, costs and time. 

An inadequate modal partition in Latin America not only increases logistics costs and reduces competitiveness; it also increases negative externalities from transport. In countries with a size relatively comparable to the United States and Canada, there is a preference for the use of road transport for cargo which, in addition to deteriorating roads, weighs considerably on the cost structure of domestic transport (Figure 5.3). The potential of railways and waterways is largely untapped, with road transport having a concentration that is 15 times greater than in the United States.20

Box 5.3

Concession Renegotiation In Latin America

The regulatory and institutional weakness of concessions in Latin America has causedcontinuous renegotiations. In the 1990s close to 50% of transport concessionswere renegotiated in Argentina, Brazil, Chile, Colombia and Mexico. In Chile eachconcession was renegotiated an average of four times between 1993 and 2007, andnearly a quarter of investments in concessions derive from renegotiations.a

Today, according to interviews with regional policy makers, an average of 40% of

concession contracts are renegotiated (vs. 20% in the UK).b Of the 60 road concessionsagreed up to 2010 in Colombia, Chile and Peru, 50 have been renegotiated, generatingadditional fiscal costs of 50% of the initial value of the contracts. A noteworthy caseis Colombia, where 21 concessions have been renegotiated 273 times, resulting inadditional fiscal costs or the extension of the concession period. These renegotiationsare worth 170% of the contracts’ initial worth and represent an average increase of 40% of the concession period; 98% of modifications were carried out bilaterally bythe administration and the concessionaire, and in over 70% of the cases funds fromfuture fiscal periods were used to pay for these renegotiations. In addition, in alltheses cases, the first renegotiation was carried out within the first two years afterthe initiation of the contract.c

Regulatory aspects (such as price cap and tendering processes) as well as institutionaland political aspects (such as quality of the bureaucracy, election cycles, lack ofindependence of regulators and corruption) have been identified as determiningfactors of renegotiations in the region.d The possibility of extending the durationof concessions reduces competition, allowing de-facto monopolies to be formed inroad networks and weakening service provision. The asymmetry of unlimited profitsand limited losses due to their social distribution through renegotiations leads toproblems of adverse selection and moral hazard, which foster high fiscal costs forfuture administrations.

a See Guasch, Laffont and Straub (2008) for Latin America, and Engel, Fischer and Galetovic (2009) for Chile.

b See Gutiérrez and Nieto-Parra (2011) for Latin America, and OECD (2008) for OECD economies.

c See Bitrán, Nieto-Parra and Robledo (2011) for a recent analysis of renegotiations of road concessionsin Colombia, Chile and Peru.

d Guasch, Laffont and Straub (2007; 2008).

Figure 5.3

MERCOSUR & Countries of North & South America

Distribution of Freight by Type of Transport (In Volume), 2007 (Percentages)

Private-sector participation has not necessarily improved the effectiveness of investment in the railway sector. Railway reform started in the 1990's in Argentina, Brazil, Chile, Mexico and Peru. Integrated concessions to operate both the track and the transport of freight were made in most cases. The design of the concession areas in Mexico, with restrictions to horizontal integration and open access requirements, created greater competition than in the other four countries, where there is a tendency towards monopoly access in certain disconnected segments of the network. Private participation significantly improved labour productivity in the sector and reduced the fiscal costs of railway operation, but it has not managed to reverse massive underinvestment and the backlog of deferred maintenance. Due to this, the participation of railways in freight transport has not grown in these countries, maintaining a much lower modal share than found in OECD economies with similar geographical characteristics. Another problem has been the concentration in traditional goods, which has not fulfilled its role of expanding the production frontier by introducing new goods, unlike in the United States and Europe, for instance, and has not contributed to sustainibility to the extent that it could based on its potential. 

Institutional failures explain the low share of fluvial transport. Maritime and fluvial transport have great potential in countries where underutilization is largely due to institutional failures. For example, in Colombia, fluvial transport on the river Magdalena (which carries 80% of the country’s fluvial freight transport, but only 4% of total freight transport and 5% of passenger transport) is planned, regulated and managed by a single entity (Corporación Autónoma Regional del Río Grande de la Magdalena), which, by constitutional mandate, is independent from the Ministry of Transport. Under this scheme there is no integrated policy between the management of transport on the Magdalena and other waterways, nor are there incentives for one.21 

The port system reforms adopted in the region over the last two decades have generally been positive. However, reforms were delayed in several countries, like Costa Rica22 and Peru, affecting external competitiveness and the development of maritime transport in the corresponding corridors. The current challenge is how to expand and renovate concession contracts, respond to demands for vertical and horizontal concentration of industry and provide port terminals with the required infrastructure to cope with commercial activity. Significant works in connectivity to the hinterland and secondary port infrastructures in the hinterland are also required to efficiently solve the interface between port and city without reducing port competitiveness or the quality of life of citizens. In particular, the development of waterways and river ports lags behind and does not receive proper attention from the public sector. The lack of a multimodal planning strategy generating incentives for a better distribution of modes of transport and the use of sustainable, carbon-efficient modes distorts transport-related decisions in the region. This has fostered decisions to investment in roads while ignoring other factors. Institutional fragmentation, with its associated weakness in the allocation of responsibilities and institutional co-operation creates distortions in public investment and subsidies among different modes of transport (Figure 5.4). Latin America’s institutional structure makes the centralised services of transport and public works ministries responsible for investment in roads, affecting the allocation of resources to other modes of transport. 

Figure 5.4

Perception of Policy Makers In The Regions: Obstacles to Co-Ordination of Multimodal Transport

Scale from 1 to 3, where a higher value indicates greater importance.

An inadequate institutional framework that does not clearly assign responsibilities and generate incentives for collaboration between stakeholders limits the effective co-ordination of multimodal transport policy. These failures are especially present in multimodal forms of transport that include ports and railways, as evidenced by the lack of integrated pricing schemes for multimodal transport. In countries such as Colombia, Costa Rica and Mexico, the lack of institutional incentives forco-operation is an important obstacle for the link between primary roads and ports, and between ports and railways. 

The integration of freight transport policies and multimodal planning that allows comparisons between subsidies and investments in different modes of transport are major challenges in the region. The elevated fiscal costs of road transport (due to high public investment and concessions) have generated unfair competition to other forms of transport. The rail and waterway concession model could maintain open access and finance investment through public contributions in cases where environmental externalities are significant. In the long term it would be desirable to adopt effective price signalling (for example, through adjusting fuel taxes and road tolls), thus avoiding the need for investment subsidies in other modes of transport. In addition, this would lead to more efficient and environmentally sustainable modal shares for the different transport modes.