14.6.07

TRANSCONTINENTAL TROUBLES. Professor Shugart suggests a story about the perils of railway privatization.

Scrap-metal pirates plunder the tracks. Purloined spikes cause derailments. Seasonal rains bring washouts. Squatters build homes in the right of way. The track supervisor packs a 9--millimeter pistol. Just in case.

Engineers carry shovels to scoop garbage off the line in Sanarate, whose residents use it as a municipal dump. The tracks double as a parking lot in the narcotics hotbed of Morales. Locomotive drivers wait there patiently for the owners of shiny sport utility vehicles to move them off the rails. "We don't bulldoze the cars because you never know which drug lord's car it might be," said Henry Posner III, a bow-tie-wearing, Ivy League-educated millionaire from Pittsburgh.

For nine years, the rail buff has been pouring time and money — $15 million so far — into a quest to get Guatemala's railways back on track. Now, he's facing the biggest obstacle of all: Guatemala has soured on the deal it cut with him. It wants its trains back. The feud may cost Posner his investment and get him run out of the country on the proverbial rail. He vows he won't go easily.

The article has a Henry Rearden moment.
"My desire is to give Guatemala a railroad even if they don't appreciate it," Posner said. "Because in the long run, someone will appreciate it."
Or is that the lament of policy wonks everywhere? I'll give you health care. Or a liberated Iraq. Or prohibition. What's that line about never trusting somebody who says "it's for your own good?"

The railroad Mr Posner is attempting to rebuild is the old International Railways of Central America, a United Fruit property nationalized as part of the "nonaligned nations" push for economic independence. It's a transcontinental railroad, although it doesn't have Union Pacific's budget for concrete ties, which would end one problem the railroad faces.

Wear and tear isn't as maddening as theft. At Milepost 187, the train stopped and [superintendent of transportation Daniel] Castaneda clambered down to talk to Richard Cooper, the lean, grizzled track supervisor who was already on the scene. Cooper, a former Beverly Hills divorce lawyer who arrived in Guatemala 14 years ago after his marriage cracked up, was wearing his customary 9mm and a resigned expression. The ends of several wooden railroad ties were smoldering. That's the calling card of bandits who set fire to the ties to loosen the steel spikes and plates anchored in the wood. Cooper's men used shovels and dirt to stop the burning. Experience told Cooper that the thieves were here two hours earlier and planned to return to claim their prize.

Scrap dealers pay about $1.20 for two plates and four spikes. It costs Posner's company about $30 to replace the hardware and one tie. They lose hundreds of ties monthly.

I can empathize with Mr Cooper. After a career dealing plastic people ending their marriages of convenience, track thieves might be easier to contend with.

The railroad company's biggest problem appears to be property-rights that are ill-defined.

The continuing thefts and other problems frustrate Posner.

He says he has lived up to his end of the bargain to restart freight service to the Atlantic, but the key to profitability is reviving trains to the Pacific, which sugar growers use to export most of their cargo. For that, he needs the government's help.

Thousands of squatters have built homes, businesses and even churches over the rail bed, determined to control a patch of turf in a nation where a wealthy minority own most of the land.

The government, Posner contends, hasn't honored its obligation to relocate them and has failed to turn over about $3 million in lease money from tenants on railroad property — money that was supposed to go toward track improvements.

In 2005 his firm invoked a clause in its contract to force officials into binding arbitration to settle the beefs. The government claimed arbitration wasn't warranted and moved to block it.

Furthermore, there's a nasty Latin American variant of eminent domain at work.

In a rare and powerful legal maneuver, Guatemala last year declared the lease of its rolling stock to [the operator] to be lesivo: against the interest of the state.

If a court grants the government's request to recover its engines and rail cars, [it] would be out of business. The government claims that [it] is paying too little and that the lease contains no safeguards to protect its "historic" equipment, which is of "incalculable value" to the people of Guatemala, according to the order.

"It's cultural patrimony," said Mario Estuardo Gordillo Galindo, Guatemala's prosecutor general.

Posner, a connoisseur of antique trains, hoots at the idea that the jury-rigged machinery is a national treasure. Top officials simply aren't interested in a railroad deal negotiated by a previous administration and are furious at his efforts to force them to fulfill contract obligations, he said.

He said they wanted to hand over the railroad's real estate to cronies without compensating him. A private utility has already erected transmission lines along the tracks without paying [it] for the rights. Sugar barons have built roads on railroad land.

"The railroad is worth more to them dead than alive," Posner said of the government.

Reminds me of what some people said about the North Shore Line. The problem in Guatemala, however, is ultimately about developing the institutions that support prosperity.

Posner has one potent weapon in his arsenal. [His company] is suing Guatemala for damages, invoking an investor protection clause in the Central American Free Trade Agreement, which includes the U.S. and Guatemala. That pact forbids governments from expropriating assets of foreign investors.

If the gambit works, Posner stands to win as much as $65 million — his investment plus $50 million he is claiming in lost revenue. Failure to pay could subject Guatemala to U.S. trade sanctions. [The company] is expected to file its claim today in Washington before a special international dispute panel. A decision could take two years.

Some say the Americans were naive, arrogant and never came up with a workable business plan. And now they're seizing on CAFTA to score a fat payday. "I think they just want out," said Freddie Perez, director general of Expogranel, a sugar exporter.

Others are quietly cheering Posner's grit. Guatemala has a history of crony capitalism and backroom dealing, said Carolina Castellanos, executive director of the American Chamber of Commerce in Guatemala. She said Posner's refusal to roll over and his willingness to escalate the fight into an international trade dispute might help the business climate over the long haul.

Posner says all he wants to do is run a railroad. Others think it's something more.

"If you look at it from a business standpoint, he probably should have cut his losses a long time ago," Castaneda said. "But for Henry, it's not just about the money…. It's principle."

Sure, but wouldn't the Guatemalans have to want to change their political climate and their ways of doing business in order for the changes to happen? "It's for your own good" doesn't always convince.

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