SPAIN: RAILROAD PRIVATIZATION AND HIGH SPEED

UNCLAS SECTION 01 OF 02 MADRID 000953

SIPDIS

DEPARTMENT PASS TO EUR/WE, EB/TRA

E.O. 12958: N/A
TAGS: ELTN ECON SP
SUBJECT: SPAIN: RAILROAD PRIVATIZATION AND HIGH SPEED
DEVELOPMENT



1. SUMMARY The European Commission mandated the privatization
of Europe's railroad transportation network by the year 2013,
impelling Spain to take its first steps in this direction.
The Spanish cargo market is currently open for competition,
however government restrictions make it likely that only EU
companies will compete in the near future. Passenger service
is expected to be privatized by 2010, although privatization
delays in other EU countries could cause the GOS to roll back
its target date. The GOS plans to increasingly utilize high
speed service for passengers and cargo, with plans to expand
a nascent high speed railway network to integrate with the
rest of Europe. This process may offer interesting
opportunities to U.S. investors. END SUMMARY

//BACKGROUND//

2. The Spanish railroad company, La Red Nacional de
Ferrocarriles (Renfe),was formed in 1941 by the Franco
government. Prior to that, the Spanish railroad system was a
conglomeration of private regional systems utilizing
different trains, signs and rules. It has since evolved into
one of Spain's primary means of transportation. A high point
in Renfe's history came in 1992, when it commenced its first
high speed train service between Madrid and Seville. EU
Directive 2002/291, which modified the original 1991 railroad
directive, mandates the privatization of Europe's railway
network by the year 2013, causing Spain to take its first
steps towards railway privatization in 64 years.

//NEW ORGANIZATION//

3. Effective January 1, 2005, the Spanish government
dissolved Renfe and formed two new companies, both of which
remain under state control. The first company, Administrator
de Infrastructuras Ferroviarias (ADIF),was formed when Renfe
was merged with Gestor de Infrastructuras Ferroviarias, the
state-owned company responsible for building and maintaining
the country's high-speed railroad network. ADIF will have
responsibility for the construction and maintenance of
Spain's entire railway network, both high and low velocity.
The company retains approximately half of Renfe's 32,000
original employees, as well as its railway stations, and will
collect profits by charging operators a fee for the use of
the railway infrastructure.


4. The second company was spun off from Renfe and is called
Renfe-Operadora. It is a combined cargo and passenger
transportation company that will have to compete with other
firms in those markets. Renfe-Operadora received
approximately EUR 2.3 billion in assets from the old company,
primarily consisting of rolling stock and repair sheds. It
will employ the other half of Renfe's original employees, of
whom 5,000 will work in the maintenance division. In this
spin-off process, the Spanish government assumed 80 percent
of Renfe's historical debt (EUR 5.5 million out of EUR 7.3
million).

//FIRST STEPS//

5. Econoff met with Angel Martinez-Conde Ibanez, Railway
Transportation Coordinator for the Spanish Ministry of
Development, to discuss Renfe's privatization. Martinez
stated that Spain's railroad privatization will take place in
stages, with the goal of full compliance with the EU
directive by 2010. Of note, he stated that ADIF will remain
under government control even after the privatization process
in cargo and passenger transportation is concluded. He
commented that other EU countries, specifically citing Italy,
may privatize their infrastructure during this process but
that the GOS had no such plan.


6. The first stage of privatization, which took effect on
January 1, allows for private competition in the Spanish
cargo transportation market. Martinez stressed that the
cargo market was more important than the passenger market in
Spain, as the majority of cargo is moved via railway. As of
March 3, the Spanish government had not received any
applications from potential competitors to operate in the
cargo market. Martinez stated that there are seven or eight
companies interested in applying and he expects to receive
the first applications within the next 6-7 months.


7. Martinez stated that the GOS was hoping to achieve full
privatization of the passenger market by 2010, three years
before the EU deadline. However, he stated that Spain can
not set a firm date because of privatization delays in other
EU countries. He stated that Spain would seek to proceed
with liberalization in conjunction with other EU countries
and that delays in neighboring countries, naming France
specifically, could cause the GOS to roll back its target
date.

//PRIVATE COMPETITION//

8. Martinez stated that, although the Spanish market will be
open to competition by foreign companies, there will be
several restrictions. First, Martinez stated that the GOS
utilizes a reciprocity schedule, permitting companies from
foreign countries to operate within Spain under the same
rules that the foreign country implements domestically in
regard to Spanish companies. He cited China as an example of
a country that would not be allowed to compete in the Spanish
market, due to its closed domestic market. In addition to
reciprocity, there are restrictions in regard to the use of
Spanish railways by foreign trains. He stated that foreign
trains brought to Spain for use in the domestic market would
not be allowed to use Spanish railroad tracks until they had
been inspected and certified as being in compliance with
Spain's technical interoperability standards (ETI).


9. Martinez stated that companies must obtain two separate
documents to operate within Spain. The first document is an
EU railroad license, which can be obtained from the GOS, good
for use in any EU country. The second document is a security
statement, which is a combination of professional insurance
and a list of operating conditions to which the holder has
agreed. Martinez stated that the security statement must
have a Spain-specific clause, in addition to the general EU
portion. Martinez commented that due to these restrictions,
foreign investors would benefit from incorporating within
Europe or entering into joint ventures with European
companies rather than attempting to enter the market from
without.

//HIGH SPEED FUTURE//

10. In February, the GOS received sixteen new high speed
trains, produced by the consortium Talgo-Bombadier, signaling
Spain's commitment to the development of this market. The
trains will initially travel at 200 km/hr, with speeds
gradually increasing to 300 km/hr over the summer of 2005.
The Spanish press reports that the trains can travel at a
maximum speed of 350 km/hr, but that the Spanish
infrastructure can not handle that velocity at this time.
Currently, Spain has only two high speed lines: one
connecting Madrid and Seville; and a second, recently
completed, connecting Madrid and Lleida. The Madrid/Lleida
line is currently being extended to Barcelona, with
construction due to be completed in 2007.


11. Martinez stated that high velocity trains are going to be
given priority development, with the GOS planning to
construct a nationwide network of high speed passenger lines.
This system will be integrated with the rest of Europe, via
France, utilizing a tunnel to be constructed along the
eastern coast of Spain, north of Barcelona. The GOS also
plans to connect all regional capitals with Madrid. Martinez
stated that the GOS is also working on a high speed system
for cargo, but that it has encountered difficulties resolving
weight issues and the sharing of high speed lines by both
passenger and cargo trains. He further stated that only the
Madrid-Seville line is ready for the high speed
transportation of cargo.

//COMMENT//

12. The privatization of Spain's railway system is unlikely
to have a serious impact on operations in the near future.
The slow rate of privatization, combined with somewhat
restrictive entrance conditions, make it likely that
Renfe-Operadura will remain the major player in the cargo and
passenger markets, along the lines of former state-held
telecommunications monopoly Telefonica. Ticket prices have
been rising steadily, but the Socialist government is not
likely to allow exorbitant increases. Spain's high speed
network is clearly the future of Spanish railroad
transportation and may offer interesting opportunities to
U.S. investors.
MANZANARES