CHILE'S TRANSANTIAGO: IN STORMY WATERS

UNCLAS SANTIAGO 000812

STATE FOR WHA/BSC-LCATO, WHA/EPSC-FCORNEILLE, EEB/TRA/OTP, AND
EEB/IFD/ODF
TREASURY FOR MATT MALLOY

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: OVIP EAID ECON EFIN EINV ELTN PGOV PREL CI

SUBJECT: CHILE'S TRANSANTIAGO: IN STORMY WATERS


1. (SBU) SUMMARY: Treasury A/S Lowery, DAS O'Neill, and Ambassador
Simons received a readout on Transantiago from Transportation
Minister Cortazar and Finance Minister Velasco September 1. The
public transport system is a thorn in the side of the Bachelet
Administration, and its woes have increased in recent days. On
September 2, the Constitutional Tribunal declared unconstitutional
the GOC's guarantee of two loans to Transantiago (one from the
Inter-American Development Bank). The IDB reportedly considers this
an event of default, and a Vice President was in Santiago, September
3-4, to discuss next steps. The GOC declared, September 4, it will
use emergency powers to cover Transantiago's costs and will try to
pass a law allowing it to subsidize the system. The opposition is
taking full advantage of the GOC's latest embarrassment. Former top
Aylwin minister, Enrique Correa told Ambassador Simons the GOC had
to work with the opposition to restructure the system. Transantiago
is "in stormy waters," which may prove costly for the Concertacion.
END SUMMARY.

A System Plagued with Problems
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2. (U) Transantiago was supposed to be a state-of-the-art
transportation system, replacing the city's old network of competing
buses. It was designed by the Lagos Administration and implemented
by the Bachelet Administration. Since the system's introduction,
the public has criticized overcrowding, increased wait and transit
times, and general lack of functionality. Transantiago is running
an operating deficit due to fixed fares and rampant fare evasion,
expensive technology, and rising fuel prices. The GOC proposed a
law that would subsidize the system to cover the cost increases.
The draft law passed in Congress' lower house by one vote, and is
pending in the upper house.


3. (U) To cover the system's deficit, the GOC arranged and
guaranteed two loans to Transantiago: $10 million from state-owned
Banco Estado and $400 million from the IDB. The Controller General
(which assesses the legality of government policies) approved the
loans. However, the Constitutional Tribunal's verdict (which it
will explain in detail in the coming weeks) effectively cancels the
loans, meaning the GOC will probably have to repay them. The GOC
has decided to use discretionary funds equivalent to 2% of the
budget (estimated at $800 million) set aside by the Constitution in
the event of a national emergency. The decision is likely intended
to: cover Transantiago's operating costs in the near term, give the
GOC breathing room to make arrangements on the loan repayments, and
negotiate an agreement with the opposition to fund Transantiago.

Transantiago Works But It's A Political Football
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4. (SBU) Transportation Minister Cortazar and Finance Minister
Velasco reviewed GOC thinking on Transantiago in separate meetings,
September 1, with Treasury A/S Lowery, DAS O'Neill, and Ambassador
Simons. Cortazar and Velasco were surprised by the rumored adverse
verdict from the Tribunal. Both ministers admitted Transantiago's
design had been flawed, but cited data that showed waiting times
were down, transit times had decreased, and new filters had
drastically reduced bus pollution. Given time, they believed the
GOC could fix the system.


5. (SBU) Cortazar acknowledged the public held a dismal view of
Transantiago. (Note: A recent poll found 63% of those surveyed
wanted a complete overhaul of the system. End note.) Velasco said
Transantiago was a "political football," and noted the opposition
was calling for it to be rebuilt from the ground up and scoring many
political points in the process. According to Velasco, likely
presidential candidate, Senator Sebastian Pinera (Renovacion
Nacional),was trying to be "the man of the hour" by pushing the GOC
to accept his plan to reform Transantiago. Cortazar complained the
opposition was eager for the Government to use the 2% emergency
funds (used mostly in response to floods in the past),because they
could further embarrass the GOC by calling Transantiago a national
disaster. Even former President Eduardo Frei issued his own plan to
fix the system.

The Key Will Be Financing the System
--------------


6. (SBU) Ministers Cortazar and Velasco both acknowledged
Transantiago was operating at a loss because of inflation, high oil
prices, and keeping fares at a fixed level until improvements to the
system were complete. Both were also firmly convinced of the
constitutionality of the loan guarantees to Banco Estado and the
IDB, but confirmed the GOC would abide by the Tribunal's decision.
Cortazar explained that IDB had released three tranches of its loan
already, but further disbursements were unlikely now. The GOC had
given the IDB a comfort letter, declaring its commitment to use all
means at its disposal to ensure repayment of the loan, and both
Cortazar and Velasco stood by this commitment.


7. (SBU) In the event the loan guarantees were found
unconstitutional, Cortazar and Velasco thought it unwise for the IDB
to accelerate the loan (i.e., ask for immediate repayment including
principal and interest). Minister Velasco emphasized that if the
GOC were forced to repay the IDB, the key would be arranging an
"orderly unwinding" of the loan to avoid precipitous measures. He
said there was no question the GOC would live up to its commitment,
but it was critical to balance the financial concerns of the IDB
with those of the GOC. IDB VP Puig was in Santiago September 3-4 to
discuss next steps with the GOC. Though no results from his
meetings were released, the IDB reportedly considered the Tribunal's
decision an event of default, which could lead to acceleration of
the loan.

Enrique Correa: Fundamental Change is Necessary
-------------- ---


8. (SBU) In a September 2 meeting with Ambassador Simons, Enrique
Correa, a former top minister in the Aylwin Administration, opined
that the GOC remains in denial over the poor performance of
Transantiago. Minister Cortazar is only tinkering around the edges
of the system, rather than instituting the necessary fundamental
changes. Former President Lagos' efforts to avoid responsibility
will not wash with public opinion and will only anger the Bachelet
Administration. Lagos needs to apologize and take some of the
blame. Correa underlined that the Concertacion must come to a
political agreement with the opposition to restructure the system.
It is not in the opposition's interest to grind the country to a
halt over the issue as Chilean voters will not be comfortable with
this degree of controversy. A restructured system could hopefully
be achieved before the 2009 presidential election. Despite low poll
numbers, the Concertacion was still well placed for the 2009
balloting, but continuing inflation and Transantiago could prove to
be major stumbling blocks.

Transantiago Is Hurting the Concertacion
--------------


9. (SBU). COMMENT: Minister Cortazar aptly noted that Transantiago
is currently "in stormy waters." The GOC is scrambling to ensure
public transportation continues to function and it meets its IDB and
Banco Estado commitments. However, the damage is done. The
Constitutional Tribunal's decision has made Transantiago a political
disaster for the GOC and the Concertacion. The Government will
likely have to negotiate with the opposition to find a new way to
fund Transantiago, which will involve some restructuring of the
system. The opposition will continue to ride this issue all the way
through the municipal elections, at some considerable cost,
financially for the GOC, and politically for the Concertacion.

SIMONS