Henry Posner's remarks at PARC, Havana, Cuba 2000

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Today I will present an overview of Railroad Development Corporation (“RDC”) and some of the businesses we are involved in; the railway business in the USA, and in particular the Short Line business, which is the business we are in; railway concessioning as it exists elsewhere in the world; and draw some conclusions. Also to be presented is a Case Study of the current situation in Guatemala.

Background on RDC - General

RDC is a railway investment and management company based in Pittsburgh, Pennsylvania, (USA). Our focus is on “Emerging Corridors in Emerging Markets.” One year ago I would have told you that RDC is a railway investment company; but some of the businesses that we are now involved with include ports. In particular, in Mozambique we are the process of taking over a railway and port; also much of our growth in Peru and Guatemala will come from increased integration with port facilities. We are also looking at opportunities such as fiber optics and pipelines. Therefore I see it becoming more of a corridor business than just a rail transportation business.

In each of the countries that RDC does business, we are in joint ventures with local people. RDC feels it is important to be an expert in the railway business, but it is more important to be integrated into the local culture and the local economy. So in each of these railways is a completely different structure, with a completely different strategy, with completely different investors. I am also very proud that RDC is the only U.S. company investing in Africa, and for us, that is the next Latin America.

Background on RDC - Transactions

Our business in the USA is the Iowa Interstate Railroad, which runs from Chicago to Omaha. It is formed from pieces of an abandoned railroad called the Rock Island, which actually went into liquidation during the worst years of railroad bankruptcies in the USA in 1980. It was restored as a through route in 1984 and RDC became involved in 1991.

1,100 KM of former Rock Island trackage between Chicago and Omaha.
Abandoned as through route from 1980 to 1984; recapitalized in 1991, 1997.
Paralleled by BNSF, CN and UP.
Provider of Train Control Systems to railways in North and South America, Africa.
Joint Venture with Heartland Rail Corporation.

In Argentina, RDC is one of the shareholders of Buenos Aires al Pacifico and Ferrocarril Mesopotamico. These railways are two of the concessions that were referenced in the earlier presentation about Argentina, and together form the backbone of the Mercosur corridor linking Argentina with Brazil, Paraguay, Uruguay and Chile.

BAP = 5,350 KM of former Ferrocarrilles Argentinos between Buenos Aires and Mendoza.
FMGU = 2,740 KM of former Ferrocarrilles Argentinos between Buenos Aires and Uruguay, Brazil and Paraguay.
Both privatized 1993, recapitalized 1999.
Joint Venture with Garantia Partners (Brazil).

An extreme example of a business that RDC is involved with is in Guatemala – Ferrovias Guatemala. The railway was abandoned in 1996 – one of very few countries to abandon its entire railway system. This railway is now running again. You are invited to review the case study at the end of this presentation.

800 KM abandoned 1996; damaged extensively by Hurricane Mitch 1998.
Guatemala City-Atlantic corridor reopened on December 1, 1999.
Subsequent phases include reopening Mexico and El Salvador lines.
Concession includes fiber optics rights, undeveloped ports, etc.
One of 4 non-bank companies traded on Guatemala's Stock Exchange.

In Peru, RDC is one of the shareholders in Ferrocarril Central Andino, the world’s highest railway. This is a transaction that we are very proud of and it is a wonderful piece of engineering. But more important than engineering is the fact that it carries a significant amount of traffic. It’s an important engine of economic growth for the Andean region and we look to double our business in the next five years.

600 KM between Lima/Callao and Cerro de Pasco and Huancayo.
World's Highest Railway (4818 meters).
Privatized September 1999.
Joint Venture with Juan Olaechea & Co.; Minas Buenaventura; Cemento Andino; CDC (UK); Mitsui (Japan).

Central East African Railways – In Africa, as I said before, RDC is the first U.S. investor in African railways and, in fact, we are the first Private Sector railway company to invest in the continent, which we are very proud of as well. Like all of the other businesses that I just described, in this particular case, our shareholders include Mozambicans.

800 KM linking Lilongwe with Blantyre, Malawi, and Mozambique's Nacala Railway.
Privatized December 1999.
First Private Sector rail investment in Africa.
Joint Venture with CFM (Mozambique); ERL (Bermuda); Tertir (Portugal); MANICA (South Africa); and Mozambican private investors.

Again, culture is more important than technology. If we are not being integrated into the local culture and the local economy, we as a company will not succeed. That is why in every case RDC is doing joint ventures; this is NOT “The RDC Show.”

Along the theme of “Emerging Corridors in Emerging Markets” as I’ve discussed, we are in the process of integrating the Nacala Railway and Port in Mozambique with the Malawi Railway. Again, “Emerging Corridors in Emerging Markets.”

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USA Short Line Trends

Why is RDC investing in Latin American railways if the Short Line business is so good in the USA? With the Short Line business in the USA, we are not competing with trucks – we are competing with other buyers. Typically there are many potential buyers and what results is an auction process where the railway ends up being owned by the group that offers the highest price. This is quite often not sustainable; and as a result, it is a business that RDC has not been successful in because we have not been willing to pay prices that are too high. Further, we believe that this is not going to change anytime soon.

Strengths
The Short Line railroads are important and they do have definite strengths that they bring to the rail network, in particular, a retail focus in which a locally managed railway will get much closer to the customer than a railway managed by a Class 1.

Weaknesses
Nonetheless, we see these railways as having less of an advantage in the future. First of the all, the big railroads – the Class 1’s – have reduced their costs. So a low-cost Short Line is not that much better off than a slightly higher cost Class 1 railroad. Secondly, in the USA we are evolving into an era of labor shortages. While in the past one of the ways to finance these deals was by cutting wages, this is no longer possible because we are experiencing a shortage of skilled labor in the U.S. So we have to pay people more to keep them on the job. I also believe that as the big railways continue to consolidate and there are fewer and fewer Class 1’s to connect with, the importance of any one Short Line is much smaller. A Short Line is fixed and if its Class 1 connection doubles in size, that means the Short Line is half as important as it used to be as a feeder of traffic.

The Short Lines in the past were very useful for political support of the mergers and strategies of the Class 1 railroads. The era of consolidation is more or less behind us in the U.S. so that political support is no longer necessary. Again, competition will continue to be very fierce among the many buyers looking to buy the very few lines for sale.

Options
So what are the options that we have for doing transactions in this environment? We can be more aggressive in marketing, except that our competitors are also more aggressive in marketing. We can renegotiate the deal, meaning we can offer a higher price and then withdraw that price before we close the deal, forcing the seller to accept less money. We could buy the line and then go back to the railway that we had just bought it from and renegotiate the commercial arrangements. We could stop maintaining our track and have the local government pick up the cost because it’s infrastructure. We could extend our payables, which is a very nice way of saying, “don’t pay our bills.” Or we could look overseas for better opportunities, which is what RDC has chosen to do.

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RENEGOTIATION OF FREIGHT RAILWAY CONCESSIONS 20th Pan-American Railway Congress Havana, Cuba September 2000	Henry Posner III Chairman