Fall Bulletin # 137

FAL BULLETIN - FACILITATION OF TRADE AND TRANSPORT IN LATIN AMERICA AND THE CARIBBEAN

An ECLAC document to be published in the near future examines a subject that has become a frequent topic of discussion in recent years, particularly in the Southern Cone of Latin America (Argentina, Bolivia, Brazil, Chile, Paraguay, Peru and Uruguay), where the greatest volume of land transport in South America is concentrated. Against a background of economic liberalization and integration in the region, and at a time when the development of regional transport infrastructures is growing in importance, the ECLAC Transport Unit analyses the Southern Cone Agreement on International Land Transport (Valparaíso, 1989) in an effort to give it fresh relevance and to determine whether its provisions can cope with the new challenges thrown up by more open international transport markets and management. Comments, suggestions or further information on this subject should be addressed to José María Rubiato, Email: jrubiato@eclac.cl

The central thesis of the document is that far-reaching changes could be made in the production patterns of the international land transport services market without altering the market's institutional structure, and that the introduction of the fifth freedom would not disrupt the equilibria of bilateral traffic flows but would rather enhance them by eliminating some of the imbalances due to a lack of return consignments.

This argument is developed in three stages, starting with a discussion of the concept, purpose and function of the fifth freedom, and how it relates to the concept of nationality. Next, the provisions of the Southern Cone Agreement on International Land Transport are analysed to see whether they permit the introduction of the fifth freedom. Lastly, on the basis of two hypothetical cases, the possible effects and consequences of the application of the fifth freedom in the region are examined.

Just as the expression "cargo preference" comes from maritime transport and "traction capacity" is normally applied to rail transport, so the expression "the fifth freedom", which was formally defined in the Convention on International Civil Aviation (Chicago, 1944), is borrowed from air transport, although in fact the term applies to all forms of transport. The fifth freedom is basically the right to take on passengers, freight or mail consignments in a country other than the transporter's country of nationality, for transport to a country other than the transporter's country of nationality. Thus, in terms of land transport, a Uruguayan road transporter may carry freight or passengers from Argentina to Chile, or a Bolivian rail company may operate between Brazil and Peru carrying freight or passengers from either of those countries.

Traffic of this kind is routine in maritime transport, whose services are normally available for use by any nationality, and in air transport, through prior agreements between air traffic authorities. However, it does not occur in land transport, simply because the agreement regulating international land transport in the Southern Cone makes no mention of such operations. That, at any rate, is the general impression both the transport companies and the sector authorities have had up to now. The ECLAC study on the subject shows that this need not continue to be the case.

The fifth freedom concerns the right of nationals of third countries to offer land transport services in markets traditionally reserved for nationals of the countries of origin and of destination, and this is what distinguishes it from other modes of operation. The granting of this right is highly controversial, and calls to oppose the fifth freedom, or at least exercise caution in its introduction, are made on the grounds of protecting the domestic transport sector.

The world is changing, however, and economic liberalization has given fresh impetus to international commerce and transport. It is a process which requires the defence of free competition by mechanisms running counter to the old systems of trade protection and restriction of access to markets. The new economic realities governing the world of international commerce and transport have little place for nationality as a factor restricting the provision of international transport services.

In its preamble, the Southern Cone Agreement establishes three basic principles: that international land transport is a public service; that the relationship between the contracting States is one of reciprocity; and that transport is an efficient means of integrating the countries of the region, given their individual needs and geographical characteristics. These principles, together with the overall aim of promoting integration, constitute the spirit of the Agreement, while its operational basis is a multilateral framework that takes the form of bilateral agreements between pairs of countries.

Insofar as the fifth freedom seeks to make better use of the various means of transport, it is in keeping with the principle of the efficiency of international land transport. Since agreement must be reached before mutual fifth-freedom rights can be granted, it is in keeping with the principle of reciprocity under bilateral agreements between signatories to the Agreement. The exercise of the fifth freedom as a means of opening up markets is in keeping with the aim of any process of economic or commercial integration. Lastly, the public service nature of international land transport is independent of the operator’s nationality, and there is no reason to believe that its nature in this respect should be adversely affected by the introduction of the fifth freedom.

As to the text of the Agreement, the ECLAC study makes a functional analysis of the text, in order to determine whether the introduction of the fifth freedom contravenes any of its provisions. The analysis is done in the full knowledge that the exercise of the fifth freedom --that is, the operation of traffic originating in and bound for countries other than the transporter's country of nationality-- is not explicitly regulated by the Agreement. Thus the study frequently relies on a double-negative reading of the text, on the grounds that whatever is not prohibited is permissible and does not contravene the letter of the Agreement.

Since it is not clear, either from the text of the Agreement or from the information available on the drafting process, whether the legislator was in favour of the fifth freedom or not, it can legitimately be the subject of an analysis of the regulations, as suggested in the ECLAC document. It may, however, not be legitimate to interpret the text and the spirit of the Agreement as permitting the establishment of fifth-freedom traffic operations simply because they do not prohibit it.

Strictly speaking, it is up to the committee established under article 16 of the Agreement to provide a definitive interpretation of the text on this issue and to determine the legitimacy of one interpretation or the other.

Lastly, the promotion of the fifth freedom in the Southern Cone should be the result of a joint decision on the part of all the members of the Agreement rather than an initiative taken by a certain group, partly for the reasons discussed in the following section, but also --and principally— out of respect for the spirit of consensus that has always guided the negotiation of agreements in the Southern Cone.

The consequences of implementing fifth-freedom schemes in the Southern Cone depends largely on the geographical scope of the schemes and the degree of liberalization involved. The study presents two scenarios, one based on a generalized introduction of the fifth freedom and one in which some countries implement it while others do not, and reaches some surprising conclusions.

Implementing the fifth freedom on an open, generalized basis would benefit regional transport in at least three ways: 1) the competitiveness of international multimodal transport would be enhanced; 2) vehicles could be used more efficiently for return consignments, and consequently 3) the total number of trips in the region could be reduced. However, a regionwide introduction could also have undesirable effects, which, while none of them would be directly attributable to the exercise of the fifth freedom, per se, could exacerbate existing situations and therefore affect the award of transport rights. The most important of these effects are: 1) an increase in the inequity between modes of transport; 2) a widening of existing disparities; and 3) a geographical concentration of traffic.

If the fifth freedom was introduced in only some countries of the region, both providers and users of international land transport services in those countries would gain an advantage over their counterparts in the other countries (see table below).

Competitiveness	Rates per ton-km and per pax-km higher for traffic from A to B and B to A, between B and CDE and between A and CDE. Rates within CDE lower owing to greater competition in supply.
Subsidization	In certain circumstances, companies from CDE operating to and from AB can subsidize operations in CDE with the higher margins obtained from traffic with AB, where rates are determined by competition with companies located in AB.
Distortion of competition	Companies in CDE have advantage in competition with companies from AB: cost structure in AB less favourable owing to more restricted choice of traffic.
Economies and diseconomies of scale	Companies in CDE obtain higher overall traffic volumes and economies of scale by making use of return trip. Companies in AB have slower turnaround owing to wait for return consignment or because their passenger trips are less frequent; or they are liable to travel empty (diseconomies of scale).
Traffic displacement	Companies in CDE tend to plan operations with AB via storage/distribution centres in their own territory so as to take advantage of benefits of intra-CDE operations.
Differentials in externalities	Countries A and B receive more traffic than necessary because of empty trips, and suffer from deteriorating infrastructure, environmental impact and accident risk, without benefiting from transport of freight or passengers.
Cost and price differentials	Companies in AB are at a cost disadvantage relative to those in CDE; users at a price disadvantage.
Investment diversion	Companies in AB tend to invest in setting up in CDE so as to be able to compete on equal terms with companies in CDE.

The aim of the ECLAC document is not to suggest any given course of action as regards the implementation of the fifth freedom in the Southern Cone, but to contribute to the debate by pointing out that, under one interpretation at least, this controversial and much-discussed mechanism is already implicitly recognized in the region's regulatory framework and that its introduction awaits only the decision of the competent authorities, in consultation with those sectors that may be affected.

Even so, given the outcome of the discussion thus far, it would seem reasonable for the reader, whether government decision-maker, trade union leader or business executive, to ask more questions and seek further guidance as regards such a course of action. In any case, it would be premature to opt for either course without giving due consideration to the following points.

Introduction under the terms of the Agreement: It is true that the fifth freedom does not contravene either the spirit or the text of the Southern Cone Agreement on International Land Transport, but why is the concept not explicitly mentioned in the text, even under some other name? Would it not be more appropriate to go beyond the text and spirit of the Agreement and consider the legislator's intent? Did the fifth freedom figure in that intent? If not, that may have been because it was not a propitious moment for historical reasons, but in that case would it be appropriate to incorporate it at this stage --even through interpretation— into a text which, while not expressly prohibiting such operations, was not drafted with the fifth freedom in mind? Is it legitimate to adopt a course of action that makes it unnecessary to even consider reforming or modifying the regulations?

Extra-sectoral regulations and factors: As the ECLAC document notes, the fifth freedom could aggravate the transport sector's existing asymmetries, which arise mainly from exogenous events or circumstances, that is, from factors unconnected with the ability of operators to develop their business and compete on the international market. Is it then appropriate to implement, simply because the regulations allow it, a mechanism to enhance transparency and business efficiency in a market where external competition-distorting factors continue to place constraints on some while leaving others unaffected? To turn the question round, would this not be a good opportunity to bring such distortions into the open in order to force a resolution by the agencies concerned? In other words, is it not time to expose the market's shortcomings and correct deficiencies due to factors external to the sector, which may be masking other, internal flaws?

The regulatory framework and integration: The discovery of a hitherto unsuspected means of resolving an inconclusive debate should not delude us into believing that the discussion and its causes will suddenly go away. The Agreement on International Land Transport was drafted in other times and under different circumstances, and it may not meet today's regional integration needs or those likely to arise in the future. The fifth freedom is simply a mechanism for overcoming the limitations of bilateralism. In a multilateral framework allowing free movement of goods and passengers there is no need for such an arrangement, as shown by the NAFTA and European Union free-traffic agreements. Even before those two agreements existed, international maritime cargo preferences had already been lifted in the region. In this light, and looking to the region's future, would it not be as well to consider a thorough reform of the institutional and regulatory framework of international land transport in the Southern Cone to bring it into line with economic integration and globalization requirements?

The following bibliographical information gives details of some ECLAC's documents on rail and urban transport in the Transport Unit's specialized library.

Interested parties can access this library by e-mail, Ms. Bárbara Donoso: bdonoso@eclac.cl, telephone: 56-2-2102217, Transport Unit, ECLAC, Santiago, Chile.

United Nations. ECLAC. Transport Unit. Reestructuración y privatización de los ferrocarriles: resultados de un simposio. Santiago: ECLAC, 1993. 308 p. LC/L.727

El cobro de la infraestructura cuando se separa la gestión de la vía de la prestación de los servicios ferroviarios. p.41-50

Mejoras de la gestión conducentes a la supervivencia de las empresas de ferrocarriles en América Latina. p.51-62

La reestructuración de los ferrocarriles y la incorporación de capital privado: la experiencia argentina. p.63-84

La reestructuración de los ferrocarriles y la incorporación de capital privado: la experiencia colombiana. p.101-112

La reestructuración de los ferrocarriles y la incorporación de capital privado: otras experiencias en América Latina. p.113-120

Participación del capital privado en los ferrocarriles: la experiencia alemana. p.121-132

La separación entre la propiedad de la infraestructura y la operación del transporte ferroviario: la experiencia sueca. p.133-153

Metodología para determinar los costos evitables y la relación contractual de Amtrak con las empresas ferroviarias. p.157-176

La gestión de la infraestructura y su vinculación con la calidad de los servicios ferroviarios: aspectos metodológicos. p.177-194

La competencia en las vías férreas: aspectos metodológicos relacionados con la desreglamentación de las operaciones ferroviarias. p.195-200

La variabilidad de los costos de conservación de la vía frente a las variaciones del tráfico. p.201-208

La participación del gobierno y de los trabajadores cuando se incorpora capital privado en los ferrocarriles. p.209-248

La metodología de la tarificación del uso de la infraestructura y la eficacia del sistema de transporte nacional. p.249-298

Appendix: European Council Directive No. 91/440 dated 29 July 1991, on the development of rail transport within the EU. p.299-308

La tarificación del transporte ferroviario de cargas y la eficiencia del sistema nacional de transportes. Santiago: ECLAC, 1994. 11p.

Summary: The infrastructure administration of Chile’s State Railway Corporation (EFE) charges train operators a fee for the use of the track. A new rail freight transport company is being formed, which will use the EFE track in the south central area of the country, and from which EFE will also collect a fee. The fee will be reduced through a subsidy per ton(net)-km, paid by the Government to EFE in compensation for the fact that the costs of the road infrastructure used by the rail system’s competitors are not fully covered by the taxes and other payments trucking companies make. Another purpose of subsidies of this kind is to optimize, in national economic terms, the split between rail and road transport. This study suggests a mechanism for optimizing the partition of the freight transport market along modal lines and a method of eliminating the rail deficit with minimal economic damage.

Diagnóstico del sector transporte colectivo en Santiago de Chile: los efectos de la desreglamentación. Santiago: ECLAC, 1990. 75p. LC/R.900

Summary: Since 1979, transport policy in Santiago, Chile, has been characterized by a high degree of deregulation, in the form of free access to the market, freedom to set quotas, frequencies and routes, and freedom to set prices. Complementary to deregulation is the predominance of private operators: the State declines to run surface collective urban transport systems but retains control of the Metro.

The role of the bicycle in Latin America: a critique of arguments advocating its use. Santiago: CEPAL, 1991. 8p.

Seminar on bicycles in Santiago, Santiago, Chile, 13-14 June 1991. LC/IN.117 <TRANSPORTE URBANO> <BICICLETAS>

Summary: Although in many rural areas of Latin America the bicycle is a fairly common means of transport, there are very few cities where it is used to any great extent (for example some small cities in southern Brazil). Compared with other cities in less developed regions of Asia or Africa, and a number in the developed world, such as Amsterdam (the Netherlands), Cambridge (the United Kingdom) or Bonn (Germany), the use of the bicycle is not very widespread in Latin America.

Informe del Seminario Regional sobre Aspectos Institucionales del Transporte Colectivo en las Ciudades Latinoamericanas. Santiago: ECLAC, 1992. 9p.

Regional seminar on institutional aspects of collective transport in Latin American cities, Santiago, Chile, 13-15 November 1991. LC/L.671

Summary: The regional seminar on institutional aspects of collective transport in Latin American cities was held at ECLAC headquarters, in Santiago, Chile, from 13 to 15 November 1991. The aim of the seminar was to review a draft report on the impacts of subsidies, regulation and different forms of ownership on the service quality and operational efficiency of urban bus systems in Latin America, to exchange opinions and experiences on the subject, and to formulate conclusions and recommendations that could be taken into account by the Governments of the region when implementing policies and measures to guide the development of urban public transport.

92.003 (2729) AR BO BR CL CO CU EC MX PE United Nations. ECLAC. Transport and Communications Division

The impacts of subsidies, regulation and different forms of ownership on the service quality and operational efficiency of urban bus systems in Latin America. Santiago, ECLAC, 1992, 122p. LC/L.675

Summary: The project on the impacts of subsidies and different forms of regulation and organization of urban bus systems in Latin America, the main findings of which are presented in this report, was carried out by the ECLAC Transport and Communications Division between November 1988 and December 1991. It took into account some previous work in the same area, particularly a questionnaire survey of public transport in Latin American and Caribbean cities, carried out in 1988.

La economía de bienestar de los metros: algunas observaciones, varias interrogantes y pocas respuestas. Santiago: ECLAC, 1992. 21p.

La desreglamentación del transporte autobusero urbano e interurbano: cómo funciona y cómo podría funcionar mejor. Santiago: ECLAC, 1993. 26p. LC/R.1300/Rev.1

Summary: This study begins by summarizing, on the basis of actual cases, the process of deregulating urban and interurban transport and its consequences. It then analyses whether the markets are perfectly competitive and concludes that, while some of them may be, the level of external costs is such --particularly in the case of urban transport-- that they do not always tend towards the optimum in social terms. In addition, the number of operators in these markets is not usually sufficient for perfect competition. They could, on the other hand, be described as "contestable" markets, although the study, on examining the level of contestability of urban and interurban transport markets, concludes that there are a number of factors which may prevent them from being "perfectly" contestable. These factors include: i) the threat of dumping of various kinds on the part of established operators and ii) a lack of information for users. The study also examines the influence of external costs on the market. Each of these problems is analysed separately, and the study concludes that, in the case of urban transport, finding solutions would require consideration of both social and technical factors, while in the case of interurban transport the problems could be solved through the introduction of rules prohibiting anticompetitive practices, although in practical terms it could prove very difficult to monitor their implementation.

The development of urban public transport in Latin America and the world. Santiago: ECLAC, 1994. 72p. LC/G.1817

Summary: According to present-day sources, urban public transport originated in several European cities in the seventeenth century, but there were probably earlier informal services about which historical records are silent. Until the mid-nineteenth century, the only available means was the horse-drawn carriage. Then the animal-powered tram appeared in North American and European cities, arriving in Latin America some 20 years later. However, horse-drawn carriages and trams coexisted until both disappeared as a significant means of transport in the second decade of the twentieth century, displaced by the electric tram and the gasoline-powered bus, which together emerged victorious in a very interesting competition with other now nearly forgotten technological options.

El transporte público en las ciudades grandes: las opciones tecnológicas y su financiamiento. Santiago: ECLAC, 1994. 17p.

Summary: According to conventional wisdom, a big city cannot function without a metro. Reality is different, however. While it is true that the most populous cities cannot function efficiently without a metro or some other similar rail transport system, other big --but less populous-- cities can obviate the need to build a metro through intelligent planning. Such planning may involve a variety of policies and measures, the most important of which are those that aim to give priority to bus traffic by providing exclusive bus corridors or lanes and incorporating special signals into traffic light systems.

La tarificación vial urbana: su historia y perspectivas. Santiago: ECLAC, 1994. 12p. LC/R.1478

Summary: The possibility of levying tolls in order to shift the real costs of urban road use onto road users has been seriously studied for 30 years. At first, the notion of tolls on urban roads was considered no more than an academic curiosity, since few people believed it to be practicable. However, as a result of research carried out chiefly in the United Kingdom, people have come to believe that it might be applicable in the real world, initially using simple manual methods and later using electronic technology.

Una evaluación crítica de algunos aspectos del desarrollo del sistema de transporte urbano de Santiago de Chile. Santiago, ECLAC, 1995. 29p. LC/R.1529

Summary: The changes that have taken place in recent decades in Santiago, Chile, have greatly affected the city’s transport system. The pressure on the available capacity has built up dramatically as a result of the growth not only of the population but also of average earnings, one consequence of which has been an enormous expansion in the stock of automobiles. Such changes were predicted, but in fact neither the population nor the stock of automobiles has grown as much as was expected 30 years ago. However, the steps taken to accommodate the expansion have been inadequate and too supply-oriented, paying insufficient attention to the need to alter the patterns of transport demand in order to prevent journeys from exceeding available capacity.