TRANSPORTATION INDUSTRY

This chapter covers solely maritime, harbor, air and railroad transportation,while highway, cargo, passenger, urban and suburban transportation is notincluded here given the broadness of the subject and a tradition of privateparticipation for such services.

With the emergence of the military government and particularly as of1975, the development strategy launched in Chile required a transport systemcapable of facilitating the achievement of economic objectives both domesticallyand on the international level. Given Chile's geographical location andits relative distance from the world's key markets, the debate over internationaltransportation was of particular relevance.

No doubt, the majority of the modifications implemented in the area oftransportation were radical -- particularly those dealing with Chile's portsystem. Nonetheless, it is important to note that, in some cases, certainsegments of the modernization plan were not fully implemented, as was thecase of with the privatization of the operations of port facilities andrailroads. This failure to privatize may have a specific impact on theseindustries in the future given that they have reached operational levelswhere it is impossible to expect increased productivity solely through normativechanges. Today, the challenge is to engage in large-scale investments (whichthe private sector is capable of) and establish a legal framework underwhich these investments can flourish.

Special consideration should be given to modernization of the ports which,although partial, has made it possible to save important quantities of resources.It is important to note that in 1973, Chilean ports were so crowded, thatships had to pay between 60,000 and 80,000 dollars in demurrage. Moreover,consideration was given to building new berths in the Valparaiso - San Antoniocorridor to abate the chronic overcrowding ("bunching"). Nevertheless,with the implementation of the reforms, said ports are today in a positionto move more cargo with fewer berths than those available in 1973 (the earthquakeof 1985 partially or completely destroyed several moorings). In addition,in the case of some products, savings equal to moving Chilean ports significantlycloser to the destination of certain types of merchandise is achieved byfacilitating departure from domestic ports (typical distances for wood areover 10,500 kilometers whereas Chilean fruit products frequently travelsome 3,500 kilometers).

The success of the changes implemented in Chile's ports, both in termsof labor relations and the operation of the state-run port company, wasmade possible thanks to the compensation granted to the workers who hada monopoly over the port activities. As a result, a setting was preparedin which the private sector would take responsibility for port operationsand actions by the government-owned port company would be strongly restricted.

In terms of sea, air transport and port operations, the modificationsintroduced into the legal framework sought to establish an essentially competitivesystem and open the system to the participation of the private sector ineach field of transportation services. Special emphasis should be placedon the application of the principle of reciprocity in international transport(air and maritime), which served as the foundation upon which the juridicalframework for area was built. Moreover, it is important to note that initially,in these two cases, the legal modifications introduced were much more rigorousthan those in force today. In any case, one could say that, on balance,the institutional regulations instituted in each sector safeguarded a highlycompetitive system while providing tools through which Chilean companiescould consistenly compete with foreign enterprises in the fields of maritimeand air transport.

In the development process of the air transport sector, the lack of businessgroups charged with administering existing facilities was evident. Moreover,these facilities continue to be managed by the Central Government througha semi-decentralized institution which answers to the Chilean Air Force.

Important aspects of the modifications introduced as of 1975 were theprivatization process (still unfinished) and the dissolution of firms thatwere state-owned (or nationalized during the Popular Unity government).This process made it possible for the private sector to play a decisiverole in providing transportation services, either through privatized companiesin some cases, or by creating new companies. In addition to the necessaryjuridical framework, assurances needed to be provided to private investorsthat the Government, through its companies, would not compete disloyallywith them, as had been a tradition in Chile in recent decades.

Progress was also made in the railroad industry, where efforts were undertakento "rationalize" organizational structures, focus the state-runcompany's activities (on those most appropriate for such an entity) andseek to identify areas where the firm had comparative advantages. Furthermore,the private sector was introduced -- however incipiently -- into the areaof railways, particularly insofar as maintenance, equipment repair and infrastructurewere concerned. Unlike other transportation industries, no modificationsto the legal framework governing the industry were introduced in order toachieve the goals which had been set. This may well be why the efforts to"rationalize" the firm were relatively successful while the effortsto project an efficient enterprise, with significant private participation(either directly or through railroad operation companies) was less productive.

Lastly, we should note that one of the most important limitations theauthor confronted in preparing this study was the lack of quantitative andqualitative statistical information dealing with the aforementioned objectives.

The origin of commercial domestic air transport dates back to March 5,1929, when the president of the country, General Carlos Ibañez delCampo signed the deed that inaugurated the Santiago-Arica Mail Airline.Three years later, Decree-Law 247 was passed creating the National Air Line(Lan Chile). Commander Arturo Merino Benitez, the project's true architect,served as the company's first Vice President.

In addition, a Civil Aeronautical Board (Junta de Aeronautica Civil,JAC) was created at the initiative of the Chilean Air Force. Thus, on October30, 1941, the Air Counsel, led by Arturo Merino Benitez (who by that timehad been promoted to the rank of General), recommended the creation of acivil organism, charged with organizing, developing and controlling civilianair services. This proposal materialized in 1948 through decree-law No.42. The JAC served an exclusively administrative role through 1953, at whichpoint it placed under the jurisdiction of the Ministry of Defense.

As of 1953, the JAC was empowered to authorize domestic traffic services,so long as Lan Chile was consulted in advance. As one can imagine, fromthis date Lan Chile enjoyed a privileged position that far outstripped thatof any other service. This situation was not rectified until 1978, whenjustifys to domestic traffic service were granted to all Chilean domesticcompanies. Furthermore, in 1979, traffic within Chile was deregulated andforeign operators were authorized to compete on domestic routes (such concessionswere based upon reciprocity justifys).

In any case, Statutory Decree 241 of 1960 established the responsibilitiesand attributes of the Civil Aeronautics Board, tasking the organizationwith the following:

- Develop a general plan for airports, airfields and installations inan effort to facilitate and protect air navigation.

- Distribute and allocate, in accordance with the plan mentioned above,the resources required for the construction, maintenance and modificationof airports and airfields.

- Inform the Ministry of Defense regarding fees and duties to be chargedfor the use of airports and airfields.

- Authorize the establishment of air transport services within Chile'sair space.

- Regulate traffic capacity and approve the frequency of flights of commercialair navigation services.

- Formulate proposals on rates for air transport for review by the nation'sPresident.

The legislation passed in 1960 also called for the administrative oversightof the JAC to be transferred to the Ministry of Economics, Development andReconstruction, through the Under Secretariat of Transportation. Subsequently,law 16,723 of 1967 shifted responsibility for both the Under Secretariatand the JAC to the Ministry of Public Works which was to be known as theMinistry of Public Works and Transportation. In 1974, a separate Ministrywas created to handle transportation issues (decree law 557) and the activitiesperformed by the Under Secretariat and the JAC were shifted to the domainof the newly-formed Ministry of Transportation.

One of the JAC's primary responsibilities is to define and seek to ensureproper implementation of Chile's domestic air traffic policies. Thus, asof its creation, two periods can be identified: the first, from 1948 to1979, was characterized by ample powers for regulating the commercial airmarket; while the second, dating from 1979 to the present, has been characterizedby a restricting of the powers granted to the JAC as increased regulatoryresponsibility has been granted to the marketplace on the basis of supplyand demand.

In terms of international services, from 1948 to 1964 the only internationalroute handled by Lan Chile ran between Santiago and Buenos Aires, Argentina.As a result, individual agreements with foreign companies were signed toprovide such services. During the period 1964 - 1979, Lan Chile increasedits international services and successfully lobbied government officialsinto restricting the operations of foreign carriers, including per-flightquotas for both passengers and cargo.

In 1977, administrative measures were adopted aimed at easing cargo restrictionsaffecting foreign carriers. Subsequently, the JAC took additional administrativesteps to free up Chilean international air travel by adopting a policy ofapproving all new applications for passenger services, unless Lan Chilecould demonstrate conclusively -- within a week -- that such services wouldbe detrimental to the state-run airline. Thus, the framework for the deregulationof Chile's air travel was cast.

A year later, on December 5, 1978, two pieces of legislation were approved(Decree Laws 446 and 459, respectively) which granted complete freedom inestablishing rates for international air cargo and passenger services betweenChile and other countries.

Just six months later, on June 22, 1979, a decree was issued to revisethe regulations on commercial aviation contained in the legislation approvedin 1931 and 1960 noted earlier. The new decree called for restrictions onaccess to the market to be lifted and granted freedom to establish fareschedules. Furthermore, the JAC was empowered -- in accordance with internationallyaccepted norms -- to restrict access to the Chilean market by airlines representingnation's which limited access by Chilean carriers to their airspace (theso-called "principle of reciprocity") and establish tariff schedulesfor those international routes where price freedom was not possible as aresult of the price setting policies of foreign powers.

- Participating in negotiations and the preparation of internationalagreements on commercial aviation.

- Classifying the level of reciprocity awarded to Chilean carriers byforeign countries.

- Establishing international flight time schedules through a processof public bids.

- Establishing and ensuring compliance with insurance requirements forcommercial aircraft.

A subsequent modification to the legislation (Law 18,063 of November23, 1981), sought to strengthen certain elements of the JAC's powers inan effort to enhance the Board's ability to negotiate airspace justifys withthird countries. As of that date, the JAC's attributes have not undergonefurther modification.

It is important to note that a nation's justifys to commercial airspaceare determined by what is known as "freedom of the air." As aresult, individual nations can define the level of access to their airspacegranted to foreign carriers. Chile's new policies sought to open additionalmarkets for the nation's airlines by negotiating bi-lateral reciprocal treatmentagreements.

These policies have led to a steady rise in demand for internationalair transport services in recent years, as can be seen in the followingcharts:

Clearly, the indicators which best represent "production" levelsin the air transport industry -- that is, passengers and tons transportedper kilometer -- are only slightly dependent on GNP (in constant terms)in the years prior to 1979. As of that date, the data indicates a much closerrelationship between GNP and production.

This phenomenon can be explained, at least in part, by the restrictivepolicies in place prior to 1979 which kept Chile's commercial air industryfrom playing an effective role in the nation's development. This situationwas further exacerbated by the economic conditions which prevailed in Chilethrough 1975. Furthermore, the growing trend for a closer relationship betweenGNP and production indicates a process of continual adjustment in both supplyand demand. These adjustments are the result of an overall improvement incompetitive conditions for air transport (in terms of both fares and technology)and the effective use made by customers of available flight offerings.

The burgeoning of new service companies in the marketplace, combinedwith the incorporation of newer, more modern aircraft into the airline'sfleets, has made it possible to meet demand at a lower cost (on average)which in turn has secured and bolstered existing demand for air travel andcargo services.

Chile's international air travel is characterized by long trips and intermediarystops are obviated as much as possible, a additional boon passenger comfort.Moreover, technological developments in commercial aviation around the worldhave brought high-capacity, low cost aircraft on-line whose state-of-the-artengines have made it possible to overcome rising fuel costs, a criticalfactor in air transportation. Another important aspect of the Chilean marketis its reduced size. Thus, the nation serves as a terminal (or "endof the line") for many carriers. Although the advantages of this uniquesituation is quite obvious for users, it does tend to hamper the activitiesof domestic airlines.

These and other market characteristics led the Chilean government toimplement a policy which would allow for competition among airlines. Asa result, flight frequencies have increased, services are provided at alower cost and a multiplicity of routes connecting Chile with the worldhas blossomed. (yes, Peter, that is a "carril" of my very own).

The results of the new policies are clear: in 1964, 14 foreign carriersserviced Chile. By 1991, over 32 companies were offering a wide varietyof regular services and a plethora of tariff schedules for travel betweenChile and other nations.

Decree Law 3 of 1969 (which modified laws 10,645 and 15,334 and repealedDFL 305 of 1960), created a legal framework known as an "Organic Law"for the formation of the Línea Aérea Nacional - Chile (LANChile). This legislation further noted that:

- The government was to act as a broker to ensure air transport betweendifferent points within the country and abroad.

- The nation's yearly budget was to include an allocation aimed at coveringthe operations deficit of LAN's domestic and international routes.

- Prior to the discussion of international agreements on air transportor any other action requiring new permits to be issued or extending existingauthorizations for engaging in commercial air operations within Chile, theopinion of LAN Chile had to be requested.

- Officials from all public, semi-public, administratively autonomousand municipal bureaus were required to purchase their tickets on LAN Chile.This rule was also applied to representatives of other state-owned firms.Furthermore, air cargo belonging to these agencies or individuals was alsorequired to be transported by the national airline.

With time, the company's "organic law" was subjected to politicalmanipulation as a series of administrations further stipulated the servicesLAN was required to offer, regardless of cost, thanks to the government'sability to allocate the necessary resources during budgetary process. Theseconditions, in conjunction with managerial procedures which failed to reflectthe firm's level of efficiency, led LAN to accumulate losses of US$74 million.This drain on the national budget, combined with the lack of managerialflexibility, persuaded the government of the need to formulate a new legalstructure for LAN Chile and completely re-organize the firm.

In 1985, legislation was approved calling for the state-owned autonomousfirm responsible for administering LAN Chile to be transformed into a privatecompany. In December of 1988, further legislation was approved which repealedthe requirement that CORFO retain a 40% share of the company's capital.As a result, the privatization process of Línea Aérea NacionalS.A. was initiated with the sale of 15% of the company's shares to it workers.At present, the State retains a minority share in the company which, inthe view of this author, is wholly unjustified in practical terms.

Furthermore, the end of Lan-Chile's monopoly made it possible for privatecompanies to become active in undeveloped or poorly developed areas. Companiessuch as AERONOR, ASA, AERPAMDOMA. T.A.C., AERO GUAYACAN, AEROVIAS DAP, AEROSANTAwere born and others, such as LADECO, were strengthened. Only those firmsutilizing good business principles and strategies were able to remain inoperation, as was the case with LADECO (Líneas Aéreas delCobre). The evolution of the participation of domestic carriers in air travelover the last 15 years can be seen in the following charts (Charts 5 and6):

In addition, the evolution of the participation of domestic carriersin international traffic is reflected in the charts provided below (Charts7 and 8). As is clear from the data presented here, in recent years therehas been a trend for this participation to level off at between 45% and50% of this rapidly expanding market.

IATA, an organization created under the auspices of the InternationalCivil Aviation Organization (ICAO, a United Nations agency), to assist inthe organization of international air travel has divided the world intothree large traffic zones. Each of these zones is in turn divided into regionsand sub-regions with coordination systems among them. Thus, Traffic Zone1 (The Americas) is divided into four regions, including South America (1D),within which a sub-division has been formed to cover Argentina, Brazil,Chile, Paraguay and Uruguay (known as sub-region 1D2).

The aforementioned agencies have developed a concept of fare schedulesthat calls for the "prices to be charged by the air transport companyor companies [to] be established at reasonable levels, with due considerationbeing given to assessment factors, including costs of development, servicefeatures, commission rates, a reasonable level of profit and fares appliedby other air transport companies".

was to obtain the largest possible number and variety of quality passengerand cargo transport -- both within its territory and among other countries-- at the lowest possible fare. In an effort to achieve this goal, the CommercialAviation Law -- approved in June of 1979 -- called for the complete deregulationof passenger and cargo air transport rates, domestically as well as internationally,and granted carriers the justify to charge the prices they deemed most appropriatefor their services.

Within this competitive framework, there were strong incentives for anincrease in the participation of the private sector in air transport. Forexample, the tremendous distances between Chile and the majority of itstrading partners mean that their is a high demand for seats and tons perkilometer, the two standard measures of air transport "production."

Therefore, the greater the distance, the greater the need for equipment.However, as noted earlier, Chile's location at the end of most carrier routespresents a competitive disadvantage for domestic airlines. This is particularlytrue of European airlines which stop over in Brazil and Argentina or U.S.firms which stop in countries en route (or utilize the U.S. as a transferpoint toward other destinations).

Another important element which affects real costs, and therefore thedevelopment of the participation of a variety of airlines in the internationalmarket, is the direct or indirect support granted by certain foreign legislationin an effort to foster or discourage traffic originating or terminatingin Chile.

As a result, it is particularly illustrative to review the fares recommendedby IATA for coach class travel between Chile and other destinations. Thefares shown in Chart 9 are given in U.S. dollars per kilometer. Naturally,costs are higher for destinations where demand or protectionist policiesmake it possible to charge higher fares. The effects of demand and monopolisticpositions for some North American and European cities are clearly shownin the following chart:

As can be seen, there is a tremendous difference between the per kilometerfares for cities located farthest from Santiago and those located closerby. Clearly, the cost per passenger-kilometer is lower when the distancesare greater. This situation leads to a wide variety of promotions aimedat reducing IATA recommended fares. Whenever such reductions are made, effectivecompetition in the international air transport market ensues.

An analysis of the historical evolution of domestic fares shows a trendtoward monopolies through such elements as fare differentials for the hubsof large domestic carriers as well as their itineraries. For example, thedifference in fares on routes costing between $30,000 and $60,000 pesosis some $100 despite the fact that the itineraries are practically the same.Although it is clear that in a market economy fares and service qualitywill tend to level off, such conditions do not guarantee that "duo-polic"(a monopoly of two companies) situations will not arise (it is particularlydifficult to document and contest these situations). Thus, it is of crucialimportance to seek to ensure expedient access to the market by additionaloperators and to create oversight agencies charged with imputing monopolicabuse.

Chart 10 shows the historical evolution of fares between the cities ofSantiago and Punta Arenas. This route tends to be fairly self-containedfor domestic airlines and therefore reflects real costs better than manyothers.

An illustrative response to the situation presented in Chart 10 was theincorporation of SABA AIRLINES into Chile's domestic marketplace at pricessubstantially lower than those of traditional airlines. On this matter,it is important to note that the argument of early supporters of an openingof Chile's air travel market who noted that, in such a small market witha constant rate of growth, small companies will tend to grow in the mediumterm. As this growth occurs, space will once again be made available forthe emergence of additional small airlines to cover new routes as well asthose abandoned by expanding carriers. Thus, these smaller companies canbe expected to play an important role in regulating the market, particularlywhile they remain small.

Another important feature affecting the industry today is the lack ofbusiness-oriented entities capable of financing, constructing and managingair infrastructure, as well as a noteworthy void in regulations which wouldallow for these responsibilities to be assumed by private industry.

The policies implemented in the air transport industry as of 1974 havebeen highly successful in achieving their goals, namely, providing efficient,low-cost air services to the country, increasing flight frequency and havingthe industry serve as an effective aid for the nation's economic and socialgrowth while ensuring truly efficient growth among domestic carriers.

Nonetheless, international air transport continues to operate under protectionistpolicies implemented by foreign governments in an effort provide benefitsto local carriers. However, the impact of these policies is negative forboth the local and complementary markets (such as Chile's).

In any case, Chile's domestic air policy and regulatory instruments alonedo not provide sufficient protection against the effects of protectionistpolicies applied by other nations in the local marketplace. Therefore, itis important that Chile continue to strive to open additional markets rathercontribute, however unintentionally, to their closing.

As noted in this chapter, the historical evolution of air traffic inChile demonstrates quite clearly the disastrous effects of the participationof a state-run company in the market for air travel, given that such agenciestend become a political instrument for the administration in office at anygiven time. Moreover, the Chilean Air Force -- despite its initial roleas a champion of commercial air navigation -- currently plays an excessivelyactive role in the formulation of regulations on commercial air trafficand in the management of airports (which should justifyly belong to civilauthorities) and competes directly with private industry by providing commercialpassenger and cargo services.

In 1851, twenty five years after the first passenger train in the worldstarted to run between Stockton and Darlington in England, railroad activitycommenced in South America with the inauguration of a train line betweenthe Chilean cities of Caldera and Copiapó. As of that date, constructionof a rail network moved forward quickly, thanks to the initiative and driveof the private sector.

As a result, in 1862 the first regulations were drafted to control railwayuse and called for free access to the industry to be granted so long asminimal safety conditions were met which were compatible with the developmentof rail transport for cargo and passengers.

In 1884, the Chilean State became active in the railroad industry throughthe creation of the Empresa de los Ferrocarriles del Estado (State RailroadCompany). The new entity was charged with the management, operation anddevelopment of Chile's railroad system. At that time, legislation was alsoapproved stipulating that companies providing railroad services would, ingeneral, not be exempted from taxation. However, any such exemptions thatmight be implemented were to be equally applied to all companies, includingthe state-run firm.

Several years later, in 1889, the state company began to benefit -- withwhat would prove to be a spiraling series of government-mandated advantages-- from legislation requiring municipalities receiving funding from thecentral government to provide the State Railroad Company with drinking water,free of charge.

In 1922, duties began to be charged on merchandise imported or exportedby train. However, government merchandise, or that transported by the state-runcompany were expressly exempted from these payments. Furthermore, a processof State intervention commenced with the established of rates for train-relatedservices in an effort to cover the operating expenses of the most inefficientcompany (the state-run firm). Private companies were barred from charginglower rates. Therefore, the combination of duties on transported merchandiseand price setting created a system which openly discriminated against theprivate sector in this industry.

It is also important to note that, from its inception through 1940s,railroad activities in Chile retained a semi-monopolic role in the transportindustry, competing solely over long distances with maritime transportation.Furthermore, Chile's railroads played a crucial role in the settlement ofthe Southern part of the country, in the development of mining and as afundamental means of surface transportation.

In 1937, in an effort to extend services South from the city of PuertoMontt, the State railroad company created the Servicios Marítimosde los Ferrocarriles del Estado (State Railroad Maritime Services), which,in 1953 was transformed into the Empresa Marítima del Estado (StateMaritime Company), known as EMPREMAR. During that same period, Ferrocarrilesdel Estado (FF.CC) built a chain of hotels throughout the country whichlater were passed on to CORFO, creating what was called HONSA.

Following the Second World War, however, the explosive development ofthe automotive industry destroyed the quasi-monopolic privileges of railroadtransport. This trend was particularly strong between 1955 and 1965, atwhich time the Pan American highway was constructed, running parallel tothe railway network and linking the country from North to South.

By the time the use of the automobile became widespread, the State railroadcompany had expanded to enormous proportions and had an organizational structurewhich was quite impossible to sustain under the competitive conditions emergingin the transportation industry. The company ran a consistent and progressivelyhigher deficit, forcing the State to absorb the losses through subsidies.In practical terms, such financing protected the company from outside competitionand made it unthinkable to try to adapt the firm to the new market conditions.

In 1960 legislation was approved which sought to redefine the state-runrailroad's organizational structure, identify its objectives, obligationsand attributes as well as the relationship between the company and the government,including payments to the latter.

From 1960 through 1973, the railroad was considered a public servicecompany and its investments, as well as its operating deficit, were financedby the State. Between 1972 and 1973, the number of railroad employees reachedits historical peak, totaling almost 28,000.

The application of a severe and systematic misconception of the roleof a public service company resulted in a consistent deterioration in thecompany's economic and managerial conditions.

In 1973, the new government initiated a process aimed at rationalizingthe services provided by the state-run company. This process commenced witha drastic reduction in personnel -- the number of employees fell from itall time high of 28,000 to 15,000 by 1978 -- and continued over a periodof several years, culminating with the definitive suspension of governmentsubsidies in late 1978.

The rationalization process produced an immediate improvement in management;employee productivity rose from 178,600 traffic units per worker to 196,500;the management factor (the ratio between total income, excluding governmentcontributions and total expenditures, excluding retirement costs) increasedfrom 0.53 to 0.80, and the operational coefficient (the ratio of incometo expenditures) rose from 0.54 to 0.84.

These advances notwithstanding, the company's level of indebtedness --which had totalled 53.1 million dollars in 1974 and was subsequently reducedto 36.8 million in 1976 -- again expanded for a total of 44.4 million dollarsin 1978.

As noted earlier, the government initiated a drastic program aimed atreducing railroad subsidies and, as of 1979, eliminated these payments completely.

In 1979, a new era commenced for the Empresa de los Ferrocarriles delEstado when, for the first time, the company began operations without governmentcontributions or compensation of any type. Neither its assets nor its liabilities,or its over-sized investments, number of employees and size its network-- which together accounted for a 50 million dollar debt -- were to continueto be financed by the State.

As of that date, the company was forced to operate within the frameworkof a free market economy in which the most efficient allocation of resourceswas achieved through market mechanisms.

In order to facilitate the new operational procedures, the State agreedto eliminate the factors which distorted market-based allocations in thetransportation industry. The most important change in this regard took placein the area of the commercial use of railroads (for cargo and passengertransportation) which, up to that time, had been made available to userspractically free of charge.

Moreover, a variety of employee benefits and taxes, as well as the legalobligation to provide certain services, weighed heavily on the state-runrailroad's ability to operate efficiently.

By eliminating government contributions, an effort was made to forcethe management of the FF.CC. to investigate ways of reducing its size andfocusing its efforts solely on profitable areas and services.

Toward this end, a Master Plan was formulated which established the dimensionsof the new company, determined its operation criteria and made a seriesof recommendations on a variety of aspects of railroad management.

- Transfer to private companies fields of activity which did not pertaindirectly to transportation or which would provide substantial savings tothe company if they were sold off.

The implementation of these procedures established a solid frameworkfor additional measures such as:

- Adjustment of rates and fares to reflect market prices, despite a lackof complete deregulation in this area.

- Elimination of passenger service from the capital to the far Northernreaches of the country (1,800 km. of railroad).

- Creation of services such as the Autotren (trains which transport automobilesas well as passengers) and lounge-cars with small areas for video shows.

Chile's economic boom, from 1979 through 1981, and the measures mentionedabove generated positive results and the operational ratio rose to an averageof 0.91 during those years. However, as of that date, the ratio experienceda decline which bottomed-out at 0.69 in 1985.

By December 31, 1985 the total debt of Empresa de los Ferrocarriles delEstado reached approximately 105 million dollars, derived primarily fromloans obtained to compensate personnel for lay-offs and the operationaldeficit which had accumulated prior to 1979. Another important element ofthe debt was credits extended by suppliers in an effort to help financemodernization plans. This meant that the FF.CC. not only had to make paymentson such installations and equipment -- which by market standards were notalways profitable -- but also cover, at times, excessively high costs forcapital and equipment maintenance.

Railroad transportation policies as of 1979 focused on modifying theconditions and operational policies of the FF.CC. in order to make its managementmore efficient, balance the budget, eliminate the accounting deficit andobtain real benefits from the State's extensive investment in the industry.Moreover, in order to implement the principle of a subsidiary role for state-ownedcompanies and introduce flexible, efficient business management strategiesand criteria, the company had to abandon its policies of self-sufficiencyand transfer the supply of goods and key services to the private sector.

Despite the changes in policy, by 1985 the state-run company was stillfar from achieving the goals established by the Master Plan. It is importantto note that despite erstwhile efforts to organize the company efficiently,the measures taken proved to be insufficient and a cash flow balance wasnever achieved. Furthermore, prices for transportation services were artificiallydepressed as a result of Chile's economic crisis and government subsidiesto the railroad's direct competitors: commercial trucking.

This situation underscored a variety of problems existing at the time(many of which still prevail) such as:

- Low traffic densities resulted in less than optimum use of Chile'srailroad system. This was true even for lines with the heaviest trafficfrequencies and resulted in inordinately high per unit fixed costs.

- A total lack of maintenance of infrastructure and, in many cases, oftractor and rolling equipment seriously restricted service options. Thus,further development of railroad traffic was hampered and in some areas evenbecame unsafe.

- The infrastructure technology, including tracks, signaling controlsand traction energy, dated back to the 1st half the 20th century for themost part of the network. This clearly out-dated equipment restricted servicefeatures, operational efficiency, and to a certain extent, safety.

- Nevertheless, in some areas, investment had been made in installationswhich greatly exceeded historical and current traffic needs. Such investmentrepresented a tremendous potential for increased profitability, althougha clear imbalance existed between overall capacity and the real levels ofcargo and passengers those lines were in a position to handle.

- The company had accumulated a large number of unproductive and extraneousassets.

- As a result of these and other factors, the level of quality of railroadservices -- particularly passenger services -- was severely diminished.It is important to note that such services have never covered their costsand require substantial investment in infrastructure, moveable materialsand a sizeable staff.

- Despite tremendous improvement in the reliability of services duringthis time period -- particularly in the areas of cargo and adapting to users'needs -- a huge gap continued to remain between quality and reliability.Clearly, both elements are required in order to satisfy current demand andcompete successfully in the transportation marketplace.

- As noted earlier, rates for passenger travel and cargo were depressedand were therefore highly unstable. This meant that traffic patterns andrates could not be consolidated and users were alert to the probabilityof frequent changes.

Undoubtedly, the changes resulting from the new transportation policiesenacted as of 1974 took place faster and more markedly in railroad servicesthan in any other transportation field. The State-owned company, which engagedin the lion's share of the industry's activities up to that time, saw Statecontributions plummet from some US$122.8 million in 1974 to zero as of 1980while its personnel was markedly reduced. The operational savings whichmade it possible for the company to get by without government subsidiescame, for the most part, at the expense of salaries and a noteworthy reductionin maintenance costs, achieved through both greater rationalization of expendituresand postponement of non-crucial procedures.

Moreover, it is important to note that the process was not perceivedby government officials as an opportunity to rationalize the company andenhance its financial standing through mechanisms provided by the centralgovernment. Rather, an emphasis was placed on imposing financial restrictionsin an effort to force the company to eliminate unprofitable operations andsell off idle assets to reduce its debt. The savings were then expectedto be reinvested in recuperating the firm's infrastructure and moveablematerials.

Nonetheless, this strategy never failed to clash, in one way or the other,with the restrictive policies imposed by the authorities themselves, withthe lack of legal instruments for executing changes and, frequently, withthe lack of willpower among company executives to implement the reforms.

In addition, an important factor in understanding the status of Chile'srailroads and their evolution over the last few years, is the unequal treatmentthe government gave to different modes of transportation as a result ofa lack of consistency in development policy. The most important dichotomyin this regard was priority of the government of lowering the cost of highwayinfrastructure. This funding in effect provided a subsidy to trucking companieswhich served as a detriment to the railroads. In fact, some studies haveconcluded that the government's actions at the time added some 15 to 20million dollars per annum in losses to the railroads books (today, lowerfigures could be expected due to new fuel taxes established recently). Inan apparent effort to off-set these effect, the railway system is exemptfrom land taxes and it does not pay dividends on the sizeable assets inheritedfrom the government through the privatization process. Nevertheless, theseexemptions -- as well as many others -- are also applicable to road transportationand infrastructure for commercial use.

In terms of private participation, recent traditions seem to have beenthe key factor in the limited success achieved in efforts to increase privateinvestment in railroads. This tradition encompasses the tendency of Chileanrailroads toward self-sufficiency and exclusivity as well as the perceptionthat, in general, neither the company nor the State are reliable partnersor counterparts for mid-term or long-term business deals. The entry of privatecompanies into the railroad business -- the most important component ofthe privatization goals -- requires tremendous institutional stability andclear company policies in order to ensure that the "rules of the game"will remain unaltered. Within the FF.CC. and in the management policiesestablished the government, an emphasis on creating and disseminating thisstability has been lacking. Certainly, the company's financial problemshave posed an important obstacle to such stability.

Furthermore, the rules of the game between company management and thatof the government have not been at all clear. This makes it difficult toconsolidate the operational conditions needed to attract potential investors.

In terms of maintenance and the supply of other materials, however, thereis as stronger tradition of private participation which has led to satisfactory,although still limited, levels of private activity in this area. Nonetheless,such private firms do not consider business coming from the FF.CC. to bestable enough to justify and guarantee large-scale investments. Clearly,if these investments were to be made, the FF.CC.'s service performance wouldbe greatly enhanced.

The analysis of railroad traffic statistics shows, quite obviously, agradual and steady drop in the railroad's share of the transportation market.Nevertheless, an increase has been registered in the use of medium-distancetrips (although the number of passengers has dropped in the last few yearsdue to the introduction of the Metro-Train). These changes indicate thatdespite the loss of its position as compared with other means of transportation,the railroad system is concentrating its efforts on those areas where ithas the greatest comparative advantages.

In 1986, Ferrocarriles del Estado owed US$128 million, its highest debtin history. In 1987, a so-called "Rehabilitation Plan" was introducedand approved by the government in an effort to find a way to salvage thefailing industry. In essence, the plan sought to create affiliate companies(by type of activity), generate an investment plan and formulate a programaimed at consigning nonessential assets. During the plan's first year ofoperation, nonessential assets valued at US$21 million were sold off.

In 1988, the rehabilitation plan continued and expendable assets totallingUS$22 million were sold. On December 30, 1988, commitment to sell was signedbetween the Empresa de los Ferrocarriles del Estado (FF.CC.) and the Empresade Transportes Ferroviarios (Rail Transportation Company or FERRONOR S.A.),a Corfo affiliate, which was implemented once legislation authorizing thesale had been approved. The sale included real estate and other types ofproperty located between the Calera Norte and Iquique stations, includingbranch lines and services, as well as the stretch between Augusta Victoriaand Socompra. This transaction resulted in revenue of US$37 million andan accounting loss of US$232 million.

The sale of the FF.CC.'s assets reduced the company's debt from its all-timehigh of US$128 million in 1986 to US$88 million by 1989. Moreover, the Stateserved as co-signer for the firm's commercial bank loans during that timeperiod.

Nevertheless, by 1990, the company's liabilities had once again increasedto US$94 million as a results of the deterioration suffered by tracks andother equipment and a slowdown in the process of selling off expendableassets. This resulted in government expenditures of US$3.5 million in Januaryof 1990 and subsequent first quarter debt service payments of over US$9million. Given that the company is not in a position to sustain expendituresof this size and that the sale of assets has been suspended by governmentofficials, the FF.CC. will undoubtedly incur additional increases in itsliability in coming years.

As a result of these conditions, legislation is currently under studyin Chile that would seek to resolve the company's most pressing needs. Thebill under review by Congress calls for a reducing the FF.CC.'s liabilitieswith its own resources, such as the sale of assets; incorporation of financialand technological resources through partnerships with private companies;re-locating human resources through compensation payments; definition ofa Strategic Plan every three years; and the identification of common groundfor competing fairly with land transportation. If approved, the projectunder consideration would enable the FF.CC. to retain ownership of existinginfrastructure and will seek to take advantage of cargo services. For passengerservice in suburban Valparaiso, Santiago and Concepcion, subsidiary companiesare to be created in conjunction with Metro S.A. (Santiago's subway).

The efforts undertaken by the previous government to rationalize andorganize railroad operations were important, but insufficient. Nonetheless,it is important to recall that government officials under the previous administrationnever believed that the government should take direct responsibility forsolving the company's financial problems. On the contrary, members of theprevious administration believed quite firmly that such intervention wouldserve as a disincentive for the creation of a development strategy for thecompany which would coincide with the nation's new economic system.

Furthermore, unlike other transportation industries, the legal frameworkgoverning railroad operation was not modernized. This has made it difficultto create a system that would encourage private companies to participatein this field of transportation.

The extensive debt accumulated by Ferrocarriles del Estado and its pooroperational results require that drastic economic and managerial measuresbe taken to rectify the situation. Toward this end, the company should makeevery effort to see that a legal framework is adopted which would allowit to participate actively in a competitive marketplace and authorize thefirm to enter into agreements with private companies or sell off portionsof its operations.

In addition, modifications need to be introduced into the General Lawon Railroads (which dates back to 1925) in order to establish clear rulesaimed at facilitating the emergence of private companies in the railroadindustry.

Lastly, the bill currently under study in Chile may provide an importantinstrument for resolving pending problems within the state-run railroadcompany and for encouraging the private sector to participate in the industry.Nonetheless, in order to achieve these goals and other goals -- such asan overall strengthening of the nation's railroads as part of a domesticdevelopment strategy -- the legislation can be greatly enhanced.

On June 26, 1956, legislation was passed calling for the creation ofa National Merchant Marine (law 12,041). This law, which replaced the so-calledCabotage Reserve Law of 1939, remained in force for 23 years and servedas the legal framework for the development of Chile's maritime transportationindustry.

A series of measures aimed at promoting the activities of Chile's new-foundMerchant Marines were contained in the bill approved in 1956, including:

- Any ship registered in Chilean ports, with Chilean owners, captainand crew was considered to be Chilean.

- Twenty percent of the value of ships, tugboats and docks was allowedto be depreciated annually.

- Shipping companies in charge of tugboats, launches and docks were requiredto allocate a yearly amount of at least 35% of profits toward a special"acquisition fund," which could be utilized solely to acquirebuy ships, tugboats, launches, equipment, machinery and other elements destinedto active maritime business activities. This fund was tax free. Losses sufferedby the companies in any fiscal year could be charged to the savings accumulatedin the special acquisitions fund.

- Establishment or modification of cabotage services had to be authorizedby the president of the country.

- Rates for cabotage as well as international routes were establishedby the Maritime Rates and Transport Commission.

- Fifty percent of maritime transport of imports and exports was reservedfor domestic shipping lines as follows: import and export freight was classifiedseparately according to the type of cargo and country of origin or destination.

- Large-scale, homogeneous import cargo was reserved exclusively fordomestic merchant ships.

- Rates charged by Chilean shipping companies could not be higher thanthose determined by the Liner Conference.

- Ships applying for Chilean registry were required to hold the highestclassification granted by Lloyd's Register of Shipping; moreover, such shipscould be no more than 10 years old.

- Ships with Chilean registry could be sold solely with the express authorizationof the nation's president.

- Half of the capital increments of Chilean companies could be deductedfrom taxable income.

- National shipping companies with services abroad were authorized tosign agreements with foreign companies to reserve or distribute cargo orto divide profits, so long as the cargo percentage belonging to Chileanships by law did not decrease. As a result, shipping companies were forcedto hold the justifys to over 50% of profits.

- Domestic shipping lines were required to carry insurance provided byChilean insurance companies.

- The Sociedad Química y Minera de Chile (Mining and ChemicalAssociation of Chile, SOQUIMICH) was granted special benefits.

- All imports of ships, machinery, spare parts, accessories, equipment,material, and supplies, including fuel and lubricants for use on board wereduty free, as were all incorporation papers.

Furthermore, additional legislation (laws 6,037 and 7,759) comprisingthe so-called Organic Law of the Caja de Prevision of the Marina MercanteNacional (National Merchant Marine Social Security Fund) indicated thatall freight on board domestic and foreign ships was required to pay 0.5%tax directly to said Fund. That percentage was subsequently increased to3%. Additional adjustments were made to the existing legislation throughStatutory Decree 466 of 1974.

Toward the end of the 1970s, Chilean officials initiated a program aimedat deregulating the port and maritime industry (the latter was to be broachedfirst). The idea behind these efforts was that the deregulation of the maritimetransportation would lead to increase competition which would in turn providedstronger incentives for proceeding with the deregulation of the port industry.

The first such modification sought to allow Chilean lines to registertheir ships in foreign countries, thereby avoiding the obligation to useexclusively Chilean crew members. This change alone accounted for savingsin labor costs of up to US$350,000 per ship. Moreover, this shift effectivelydestroyed the monopoly held by Chilean crews and served to reduce costsfor users.

On December 21, 1979, a new decree law (law 3,059) was officially enactedto replace existing regulations with the following:

- 100% of cabotage was reserved for domestic ships. Nonetheless, bidscould be submitted by users with participation in foreign lines for cargoesover 5,000 tons.

- Regulations on the justifys of foreign ships to load Chilean export productswas based on the so-called principle of reciprocity (e.g. the justifys grantedto Chilean vessels in foreign ports). However, shippers objected to thisdefinition, alleging that the measures taken by Chilean authorities didnot adequately compensate for treatment received in foreign ports. For example,when access by Chilean lines to exports in foreign ports was restricted,local authorities reacted by barring the offending nation's ships from transportingChilean exports (rather than adopting "reciprocal" cargo restrictions).

- Resolution 663 of the Under Secretariat of Transportation (dated June20, 1980), determined that access and participation of ships from Argentina,Bolivia, Colombia, Ecuador, Paraguay, Peru, Dominican Republic, Uruguay,Venezuela and Brazil could total up to 50% of Chilean foreign transportationtrade with those nations.

Subsequent legislation (law 18,454 and decree law 3,059 of 1985 and StatutoryDecree 24 of February 1986) once again re-defined the regulations on maritimetransport. These regulations stipulated that:

- Cabotage is reserved for Chilean vessels. Foreign merchant vesselsare authorized to transport cargo volumes over 900 tons (contracted throughan open bidding process called by the user).

- Transportation of foreign trade will be subject to the principle ofreciprocity.

Furthermore, important innovations were adopted in areas such as newregulations on port employees, those on ship board and seafarers in general.

By September 1973, all of Chile's shipping companies were fully or partiallyin the hands of the State. Thus, over 50% of the CompañíaSudamericana de Vapores, 95% of the Compañía Chilena de NavegaciónInteroceánica and through them, 100% of Naviera InteroceangásS.A., and Sociedad Anónima de Navegación Petrolera (the nation'slargest shipping firms) had been acquired by CORFO. For the most part, theseacquisitions had taken place during the Popular Unity government as partof the so-called Social Program. In addition, the Empresa Marítimadel Estado (State Maritime Company) and Transportes Marítimos deChiloé Ltda. (Chiloé Maritime Transport Ltda. - TRANSMARCHI)continued in State hands. By adding to this list the Empresa Portuaria deChile (Chilean Port Company) and the Empresa de Servicios Portuarios (PortService Company -- Enserport), it becomes clear that the entire developmentof Chile's port and maritime sector was fully controlled by the State, eitherthrough purchase or expropriation.

In 1974, a policy aimed at re-privatizing these companies was implemented,including the dissolution of Enserport. Moreover, the situation of TRANSMARCHI-- where private shareholders which accounted for 49% of the company's totalholdings -- was normalized. This was achieved by transferring ownershipto CORFO and extending service to the region of Aysen (as a result, thename was changed to TRANSMARCHILAY).

The modifications to the legal framework and ownership of these shippingcompanies facilitated the rapid incorporation of technology into both vesselsand cargo handling. This, in turn, enabled the companies to introduce substantivechanges in their management systems and compelled them to look for new marketsand renew their fleets. As a result, Chile's shipping lines became a modelemulated world-wide. For example, the Compañía Sudamericanade Vapores (known abroad as the Chilean Shipping Lines) and the Compañíade Navegación Interoceánica have been highly successful indiversifying their cargo and markets and developing new management techniques.Moreover, their innovations in the field of cargo handling technologieshave become one of Chile's most sought-after non-traditional exports.Thesuccess achieved by Chilean companies is shown in Charts 13 and 14.

This company was established as a result of law 18,773 of January 1989which transformed the State Maritime Company into a corporation in whichCORFO held a 99% interest and the government the remaining 1%.

From its creation in 1938 through 1973, the State Maritime Company hadbeen used as a political tool by the government. Moreover, given that Statesubsidies could be counted on to balance the books, the company had neverimplemented accounting procedures capable of ascertaining the firm's reallevel of efficiency.

This situation not only generated huge losses, but also brought an endto cabotage within the country as a result of the rates applied by the company.Furthermore, these subsidies served as the basis of the strong distortionsaffecting domestic transportation on the whole. From 1962 through 1967,the company accumulated a debt of US$ 17 million dollars. In 1962, 53.7%of governmental resources were utilized to cover operational expenses. Thisfigure dropped to 29% in 1966, rising to 39.3% by 1969. It was not until1974 that this situation was rectified and the company showed a profit of1.13 million dollars.

1980	9,370	(Sale of Lagos type ships)
1981	3,610	(Sale of Lagos type ships)
1982	(6,010)
1983	(1,348)
1984	(5.748)
1985	(1,745)
1986	6,199	(Insurance for loss of OBO Valparaiso)
1987	376
1988	174
1989	4,392	(sale of Pdte.Gonzalez V. freighter)
1990	500

In general, the company has not generated important profits except asa product of high non-operational earnings, as in the case of payment ofan insurance claim from the loss of a vessel or the profitable sale of ships.

It is also important to note that for many years Empremar has held atransportation contract with ENAP, the State oil company which has generatedsufficient revenue to off-set many of its other losses. This situation isclearly reflected in the chart showing the companies final balance overa period of 11 years.

On November 27, 1989, EMPREMAR S.A. and Empremar Navigation Service arrangedfor the creation of a subsidiary, EMPREMARSUR S.A., in an effort to utilizeoperating resources generated by the so-called Flota Regional (RegionalFleet) based in the Southern city of Puerto Montt. As a result of lossesgenerated in 1990, the company was liquidated.

In 1973, the Liner Conference had imposed overcharges of up to US$40per ton for Chilean foreign trade cargo. Freighters, in general, paid between60 and 80 thousand dollars for demurrage at Chilean ports and Bolivian cargohad been detoured to Peruvian ports.

In those days, labor unions were particularly powerful within the portsand their influence on the organization of port-related activities was clearlyfelt. This situation frequently led to the hiring of excess personnel andinflated rates and the use of obsolete equipment. Also, rate systems andadministrative practices, for both the State Port Company (Emporchi) aswell as the labor unions, tended to make poor use of existing port infrastructure.

Emporchi's financial statements were three years behind. As of 1974,a rate system was established based on real costs, expressed in U.S. dollars;pending balance sheets were prepared (including the one for 1970); and bythe end of 1974, the company became self-financed, covering an accumulateddeficit of 15.6 million dollars and, for the first time, generating a profit.As of that date, the company has consistently generated positive returnswhich are transferred to the national budget (for the period 1980-1990,said revenue was over 3 billion pesos per annum).

In 1972, as a result of overcrowding in Chilean ports, the governmentsigned a service contract financed by the government of Holland with portexpert Dr. Th. J. Risselada, who, after studying the situation, recommendeda variety of alternative solutions to the problem. Among them, he outlinedthe need to increase the number of berths in Valparaíso and San Antonioand the construction of a port complex in Quinteros bay. That year, thecomplex managed by EMPORCHI moved 2,372,379 tons. In 1990, these same portshandled 5,634,132 tons; fully 39.5% more than the tonnage handled by twelveports managed by the company in 1972.

In 1990, movement in all of Chile's ports and marine terminals totaled64,438,498 tons (of which 31,065,146 were in foreign trade and 16,686,676tons in cabotage). The 10 ports managed by Emporchi handled 13,639,462 tons,whereas between 1960 and 1973, tonnage managed by these same ports failedsurpass 4,500,000 tons per year.

Research conducted to analyze this situation has concluded that the primarycause of the limited movement in Chilean ports prior to the mid 1970s wasthe poor performance of port workers which resulted from the monopoly unionsheld over port employment. Moreover, the monopoly made it impossible toincorporate new technology into the ports aimed at reducing manpower andincreasing efficiency. Moreover, the unions had a similar impact on restrictingthe incorporation of similar technology on Chilean vessels.

As of 1973, a series of small improvements were made which permittedthe incorporation of a larger number of temporary workers and private executivesinto the port system. This was essentially achieved by freezing the hiringsystem, prohibiting EMPORCHI from acquiring new equipment and by organizingthe company's personnel more efficiently.

Nevertheless, the most important modification to the port system wasintroduced through law 18,032 which banned the labor monopoly and openedthe doors of the ports to the entire labor force. The legislation was officiallyenacted on September 25, 1981 and required that compensation payments bemade -- at a total cost of some 40 million dollars -- to workers who hadenjoyed the benefits of such a monopoly. Clearly, these payments servedto legitimize the modifications and stave off discontent among workers which,if it had gone unchecked, might have undermined the entire project.

Another relevant change was the elimination of the separation betweenmaritime and port workers. This facilitated the integration of port operationsand allowed for the creation of companies dedicated to dockside loadingand unloading activities.

A second legal instrument was devised which helped to create conditionspropitious for substantive change in the organization of the port workers.The legislation, law 18,042 (approved on October 15, 1981) called for theformation of a National Port Corporation and provided for each EMPORCHImanagerial sub-division to be transformed into a holding company. Moreover,the legislation called for the elimination of the exclusive justify of Emporchiworkers to perform port and warehouse jobs, as well as ensuring the safekeepingof cargo inside of Chile's ports. Nonetheless, pressure from a variety ofsectors (workers, the Navy and Emporchi itself) kept this legislation frombeing implemented.

In early 1990, legislation was signed (law 18,966) which repealed Emporchi'sauthority to perform transfer-related work. As a result, the Under Secretariatof Transportation drafted Statutory Decree 125 of August 3, 1990 in an effortto resolve the accounting difficulties the new legislation produced. Thedecree created a wharfage fee (charged to the cargo) which in effect wasequivalent to a transference fee, except that use was not made of Emporchi'sequipment or personnel.

As of 1981, Emporchi's rate system was organized more efficiently andwork shifts were increased to three a day to enhance the effective use ofport infrastructure.

According to studies carried out by steamship agents, the savings toforeign trade in 1990, as compared to 1981, totalled almost US$96 millionannually.

An example of these savings was developed by INECOM, a consulting firm,and shows the evolution of the cost of resources used in port operations.

Product	Unit	1970	1975	1980	1986
Fruit	US$/box	0.73	0.72	0.54	0.26
Copper in bars	US$/ton	0.71	9.13	7.01	4.36
Fish meal, bags	US$/ton	16.17	15.32	14.62	8.44
Sawn wood	US$/m3	15.70	15.19	7.80	3.35
Logs	US$/m3	13.28	12.84	6.47	3.11

Another way of analyzing the figures pertaining to the application ofthe new regulations can be seen in the following analysis done by the MaritimeChamber:

1980 yield	:	1,100 boxes per crew
1986 yield	:	1,700 boxes per crew
Freighter lay days in 1980	:	127 hours
Freighter lay days in 1986	:	48 hours
Total cost in 1980	:	US$101,856.00
Total cost in 1986	:	US$ 36,005.00
Cargo	:	200,675 boxes
1980 unit cost	:	US$0.51
1986 unit cost	:	US$0.19

Lay-day savings expressed in the distance a freighter can travel at 12knots (3,420 kilometers.)

1980 yield	:	250 m3/crew
1986 yield	:	350 m3/crew
Freighter lay days in 1980	:	294 hours
Freighter lay days in 1986	:	144 hours
Total cost in 1980	:	US$179,309.00
Total cost in 1986	:	US$ 78,582.00
Cargo	:	34,9143 m3
1980 unit cost	:	US$5,14
1986 unit cost	:	US$2,25

Lay-day savings expressed in the distance a freighter can travel at 12knots (10,683 kilometers).

1980 yield	:	380 tons per shift
1986 yield	:	470 tons per shift
Freighter lay days in 1980	:	37 hours
Freighter lay days in 1986	:	24 hours
1980 total cost	:	US$19,248.00
1986 total cost	:	US$13,791.00
Cargo	:	2,800 tons
1980 unit cost	:	US$6.87
1986 unit cost	:	US$4.93

Lay-day savings expressed in the distance a freighter can travel at 12knots (728 kilometers.)

The general strategy for economic development implemented in Chile requiredstrong growth in foreign trade. In order for this strategy to be successful,the deregulation of the maritime and port industry and the large numberof private companies willing to provide such services was crucially important.

Authorities at that time chose to spearhead such modifications throughthe maritime industry despite existing international agreements aimed atregulating traffic and rates on the grounds that competition arising inthis area would provide an incentive for additional deregulation of theport-related industry.

In terms of international maritime transportation -- the initial focalpoint for reform -- the policies approved were much more radical than thosein place today. Shipping companies were forced to become highly efficient,otherwise, they ran the risk of going out of business. We should also notethat shortly after the new regulations were put into effect, an internationalfinancial crisis erupted which had a substantial impact on Chile's foreigntrade. Moreover, cargo owners began to organize in an effort to negotiatebetter rates with freight forwarders in what proved to be a remarkable reversalof what had once been the freight companies semi-monopolistic position priorto the modifications implemented in maritime transportation regulations.

Although data on the overall volume of cargo transported by Chilean shipowners is not available (only data on vessels flying the Chilean flag canbe secured), informed estimates indicate that when the 50% requirement wasin force, in truth no more than 35% of all cargo was carried by Chileanship owners. Today, that figure is calculated at being around 40%.

In addition, the number of freighters and net tonnage registered by Chileanship builders has increased by approximately 35% since 1979, with the tonnageof dead weight remaining more or less stable.

In analyzing the evolution of the merchant fleet, we should also notethe contribution of increased efficiency in Chilean ports in fostering theavailability of maritime services and reducing waiting time of freightersdue to overcrowding.

Furthermore, the development of cabotage, and cargo in general, has beenseriously affected by the regulations and behavior of state-run companies,making it almost impossible for the private sector to enter this field ofactivity.

Clearly, the presence of a government with both the authority and energyto implement change was crucially important to the success of the measuresimplemented in Chile, particularly since some of the modifications facedstrong resistance (such as law 18,042 which was never fully enforced).

One of the most important factors in ensuring success in achieving thegoals established for the port and maritime industries was the sequentialprogramming of modifications. Thus, actions aimed at preparing the fieldwere undertaken before more substantive changes were enacted. As a result,the gradual incorporation of private companies, the increased number oftemporary workers, the decrease in the government's sphere of action, modificationsto Merchant Marine regulations and rate schedules all form an integral partof a process which should have culminated with the regionalization of portsand operations in the hands of private companies.

Furthermore, it is worth noting that one of the most negative aspectsof the modernization process was the slow pace with which changes took place.As a result, some of the most important tasks, such as the definition ofthe institutional framework governing port infrastructure and the participationof the private sector within Chile's ports, is still unclear. This is becomingincreasingly important as the need to make important investments in portinfrastructure -- which the private sector could very well provided -- grows.In addition, the competitive experience between Emporchi and private portsin Southern Chile (VIII Region) has been marred by efforts by the state-runagency to run its operations in those areas below cost. Naturally, thisserves as a disincentive for the creation of truly competitive port facilities.Instead, investments and improvements have only been made within existingprivate and publicly-owned ports in that area.

1. Regulation and Deregulation in Chile. September 1973 to September1983 - Daniel Wisecarver - Centro de Estudios Publicos.

2. Distribution Chain and the Competitiveness of Latin American Exports.The Rationalization of Ports in Chile. Economic Commission for Latin America.

4. Institution and Economic Analysis of Commercial Air Navigation Industryin Chile. Carlos Williamson and Gert Wagner - Universidad Católicade Chile - Dec. 1988.

5. Alternative Port Rates - Daniel Wisecarver and Ernesto Fontaine -Universidad Catolica de Chile - October 1988.

6. Economic and Social Indicators, 1960 - 1985 and 1980 - 1989, BancoCentral de Chile.