The First Transcontinental Railroad in South America: Still Just a Pipe Dream?

Some years ago, a project known as the “Transcontinental Brazil-Peru, Atlantic-Pacific Railroad” (FETAB in Spanish) seemed to be one of the most enormous and utopian proposals ever announced for achieving cooperation in regional trade. Today, the initiative is arousing renewed interest on the part of foreign investors and authorities, giving new impetus to its long-awaited realization.

Its ambitious goal is to link the Atlantic and Pacific coasts with a rail line that would traverse Peruvian and Brazilian territory, facilitating the transportation of raw materials. The new railroad would primarily be used to transport phosphates from the port of Bayóvar in the northern Peruvian province of Piura to Brazil, thus enabling Brazilian soy to be exported to the Asian market through Peruvian ports.

Given its complexities and costs, the project is considered a historic undertaking when it comes to building railways in Latin America. Involving an initial investment estimated at $10 billion, it would take five years of labor to construct the 4,544-kilometer (2,800-mile) rail line.

Fetab is not actually a new initiative. As early as 2000, several investors expressed interest in carrying it out, but it took several years for the design and the technical proposal to mature. Now, several groups of international investors have appeared on the scene and expressed interest in the initiative. According to the local press, these companies include Italy’s Impregilo group, the largest construction firm in its local market, and General Electric, a leading worldwide producer of locomotives.

In addition to funding the project, these investors are clearly seeking specific opportunities to conduct business. According to Ian Thomson, former head of the Transport Unit of ECLAC (Economic Commission for Latin America and the Caribbean), an agency of the U.N., and founder of the Chilean Society of Transport Engineering, "It is very likely that Impregilo is trying to sign construction contracts [for FETAB], while General Electric is interested in selling its locomotives.”

The First Transcontinental Railroad

The project is now at a point where it is being studied in earnest. If the plan manages to go forward, it will not only become the main transcontinental railroad in South America, but a great opportunity to speed up and minimize the costs for transporting products across Peru and Brazil, notes Mario Tello, professor of economics at the Pontifical Catholic University of Peru. “Just look at the extremely high costs of currently transporting goods, by land or by sea, from Bayóvar in Peru to Manaus in Brazil, and you realize why FETAB is a much more competitive alternative.” Clearly, he adds, FETAB would increase the profitability of all current and future businesses in those locations through which the railroad is expected to pass.

Among various other possibilities that will open up, he says, are new business opportunities for Peruvian companies to take advantage of the size of the neighboring Brazilian market, says Efraín González, professor of economics at the Pontifical Catholic University of Peru. "We can’t ignore the fact that Brazil is aiming to import raw materials that it doesn’t currently have access to, but which are available in Peru, such as copper, cadmium and zinc." In addition, he notes, trade in products such as soy, iron, steel, footwear and sugar from Brazil to the Asia-Pacific region has increased significantly in recent years, "so having an effective outlet to the Pacific coast is now a priority for Brazil."

Undeniably, FETAB would be playing a role in integrating the border between Peru and Brazil — reducing transportation costs and facilitating trade between the two countries and other global markets. Nevertheless, "the project faces a barrier that is huge and complex," warns Thomson. That barrier is the Andes mountain range, which rises to 4,000 meters above sea level.

Natural and Economic Barriers

Although rail transportation is cheaper than road transportation, notes González, rail is not more economical in those cases when it has to climb to as high as 4,000 meters above sea level, and then descend on the other side of the Andes. “This disadvantage could be minimized by constructing a tunnel at low altitude, but that would wind up being very expensive.” For example, Thomson says, the new Trans-Andean Railway between Mendoza in Argentina and the Chilean city of Los Andes, with its 52-kilometer (31-mile) long tunnel, would supposedly cost about US$3 billion, “but global experience with such initiatives demonstrates that the actual cost ends up being greater than what is budgeted.”

According to existing technical studies, Thomson adds, FETAB is intended to connect with the existing Central Railroad of Peru, “which is a spectacular work of engineering but has clear limitations as a means of transportation.” This is because there are zigs and zags when the train rises from zero meters above sea level to a considerable height, “and these zigs and zags limit what railroad transportation can accomplish.”

Experts worry also about FETAB’s technical feasibility because of the complex geography that connects the Atlantic to the Pacific. The route that the railroad follows in Peru creates uncertainties, say knowledgeable local sources. What’s more, this issue might even “spark disputes among the various [geographical] regions in the Andean nation [Peru]," warns González.

Thomson notes that there are two railroads in Peru that terminate in the Amazon rainforest, and they would both connect up with FETAB: the train coming from the south, where the port of embarkation is Matarani in Peru, and the train coming from the center, which departs from the port of Callao, the most important seaport in Peru. "I presume that [the Peruvians] will have to choose the path that is economically more profitable, which could cause some conflict between these regions."

Another obstacle involves obtaining permits from the respective owners of property and land where authorities plan to build the new railway track, says Tello.

Thomson is also concerned about financing the project, which will cost an estimated US$10 billion. That figure is too high, he says. A thorough evaluation will be required "to compare the benefits [of its construction] with its costs, while watching out to see that each of the investors contributes according to the net benefits" that it expects to obtain from the project. However, he acknowledges that this goal is very difficult to achieve "because everyone will want to profit at the expense of other people.”

Nevertheless, this approach “is an essential condition if the FETAB is to prosper,” he notes, because a basic agreement will need to be reached about several key points, such as the rates that they are going to charge along each stretch of the railway.

The Costs of not Building FETAB

This project is titanic — not just from a technical and engineering viewpoint, but because it also involves significant challenges when it comes to reaching a consensus about costs of construction and the rates that will be charged to users. Given all these obstacles, what would be the impact on Peru, Brazil and the rest of the region if FETAB were not constructed?

According to Tello, given the likelihood that developing the new railway infrastructure would increase economic growth in both countries  — Peru and Brazil —  if the project were discarded, that would not necessarily impose an economic cost, but only mean a "lost opportunity." In Peru, González adds, from the viewpoint of public opinion, any failure to implement the project would not have greater repercussions on a regional or local level, because "it’s only in a very limited technical and financial circle that people know about the proposal" at the moment.

Thomson also suggests that although there is a lack of connectivity between the countries of South America, and FETAB would help eliminate this deficiency, "it is easy to exaggerate the opportunities generated by this initiative." There are other, less costly projects that could be undertaken in order to achieve greater connectivity, he notes, "such as to unite the various railroad networks of Bolivia, which are in the west and east of that Andean country." Bolivia is located halfway between Peru and Brazil.

A railroad line built in Bolivia, says Thomson, would extend for only about 400 km (240 miles), depending on the route that would be adopted. Because the surface of the land in that stretch of Bolivia undulates a great deal, this proposal would not wind up being cheap to construct, Thomson admits. “However, in no case would its cost exceed the US$10 billion that FETAB requires." Bolivia already has a network of railways that could be easily connected to the new railroad, and the Atlantic and Pacific coasts could finally be connected by passing through the country, according to Thomson. "Don’t forget that Bolivia is a country that has a railway network that connects several locations in the east, west, north and the south," he notes. That rail system might well be studied in greater depth before designing transportation that would facilitate commercial interaction between Peru and Brazil.

An Over-sized Project?

According to Thomson, the great interest awakened by FETAB is unfounded and "may even be wrong" — namely, that the new rail line could be used for exporting large quantities of products "such as soybeans from the center of South America to Asia, through the respective rail lines and Peruvian ports on the Pacific coast…. Even if there were a FETAB, the vast majority of exports from Brazil, Paraguay, Uruguay, Bolivia, along with most exports from Argentina to Asia, would continue to be shipped via the Atlantic." He points out that there are no mountain ranges along the Atlantic, and it is possible to use the existing railroads and river waterways, which facilitate maritime transportation of products to markets such as India, Thailand and Singapore.

The scenario Thomson outlines may be applicable in the future for exchanging goods between the Latin American economies and the Asian market. However, it’s clear that there is only a low volume of commercial interchange of commodities and services between Peru and Brazil, says González. This situation could change as a result of the construction of the huge FETAB rail project.

"The greatest limitation or weakness of the countries that border Brazil, such as Peru, is the limited supply of exports to the Brazilian market,” he says. And "although the existing communications network is available, they are unable to exploit it entirely.  Only some sectors — such as mining, agriculture and tourism – are benefitting from it today", he adds.

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