| Overseas Trends | |||
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Positive Investing overseas is a positive in that the competition is trucks and not other railways. In Latin America and Africa, there are no parallel railways competing with each other like in the USA. There are cost problems, but that is an opportunity for improvement. For these reasons we believe that railways overseas can be just as profitable as railways in the USA. Negative On the other hand, revenue is much harder to predict, especially when a railway has been abandoned, under-maintained, or badly operated. So the risk of a revenue shortfall, which is the single biggest determinant of value, is much greater. In the cost area, it is especially difficult to obtain financing because in a country where the railways have already been in the government’s hands, there has never been private sector financing of railways. As I mentioned earlier, there needs to be a lot of work on the cultural and logistical areas to make sure that the ideas that come from outside the country are actually put to work and embraced by the workforce. Options In this environment there are many of the same options as in the USA – be more aggressive, renegotiate the deals, etc. But where does that leave us? This is a question of both economics and ethics. Let me now draw some conclusions. |
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Conclusions USA Transactions The market in the USA will continue to be extremely competitive and not be a particularly good place for investment because there will be plenty of buyers pushing the prices up. In fact, the focus will be more on how one manipulates the game than the actual price paid. Overseas Transactions Overseas, since it will be less competitive in a more difficult market, we will be under less pressure to make deals that are fundamentally unhealthy. RDC is doing more investment in the developing world. However, success will continue to focus on as much as understanding the country as understanding the railroad business, and a high tolerance of risk. |
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| At this point I would like to present our activities in Guatemala as a Case Study in which many of the above factors are applicable. | |||
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I would like to end on an optimistic note and actually with a quote that comes from Samora Machel, the first President of independent Mozambique, “A luta continua!” or “The struggle continues!” RDC is optimistic for railways in the developing world as long as we are not alone in the struggle. What that means is – as long as there are countries that are willing to have us, as long as we find can joint venture partners, and as long as we have the cooperation of the railway people – the struggle is worth continuing. |
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| Question-and-Answer
Session |
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Q: |
When the Argentines sold out to the Brazilians, what happened to your participation? | ||
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A: |
We have remained shareholders with the Brazilians. We believe that it was a good business despite the problems and we believe that is a better business integrated with Brazil. The main potential of the railway is integration for international traffic. In the earlier presentation you saw a railway whose track was under water – that was our mainline. We recently completed a detour around the lake, which was just like Hurricane Mitch – it was not in the business plan. But we believe that the reason this is a good business is because international traffic flows that have never moved by rail can be diverted. A great example of this is the Roadrailers that are now running between Sao Paulo and Buenos Aires. | ||
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Q: |
It has been stated that many of the lines privatized in Argentina are now in fact, closed. Can you comment on this? | ||
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A: |
I
cannot respond with a statistical breakdown of the lines that are
being operated, but I can tell you that, for legitimate reasons, it is
true that parts of the network where there is no traffic have not
operated since the early days of privatization.
One excellent example is the line to Malargue, which was one of
our biggest movements – petroleum. However, after the railway was
privatized, YPF built a pipeline across the Andes and that business
now goes to the Pacific. So there are no carloads of petroleum to move
and for that reason the line is closed. In terms of the percent of the network, again there is a significant percentage that is not operating but on those pieces of the network, we have no traffic. We are attempting to develop additional traffic. A good example of that is the line to Rojas that was basically closed. We have opened it as an inland port for imports from Brazil. If the focus is on, “Are you maintaining 100 percent of the network?” my opinion is that would have been a bad allocation of resources, because where there is no business, there is no point in operating trains. The railway is mothballed and, if traffic evolves, it will be reopened. Nobody has accused us of cutting service when there was no business. I believe that is a model that is followed everywhere in the world – where there is no traffic, the railway ceases to operate. The benefit in Argentina, however, of not owning the assets is that the assets are going to stay there. They are not going to be hauled away for scrap. If there is a potential for traffic in the future, then the line will operate. |
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Q: |
How did you analyze the concession in Guatemala? | ||
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A: |
We
approached Guatemala the same we have looked anyplace else. We
identified traffic which was likely to be divertible to rail –
nothing exotic, basically containers, steel, cement, coal and the
traditional businesses that railways handle anywhere in the world. We
developed a revenue projection based on what we thought would be a
reasonable amount of traffic diverted from truck.
We also recognized that we would have to offer a lower price in
order to attract the business. Then we attempted to put a cost
structure together which was sustainable in that environment. That’s
really it. In terms of financing, in Guatemala we have Guatemalan investors who were put together using a local investment bank; in Mozambique we also identified a local investor group. It's a relatively unsophisticated approach, but I think that the key is simply to go to a country and find out how it works, and then try to come up with something that meets their needs. |
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