US embassy cable - 05MADRID953

UNCLAS SECTION 01 OF 02 MADRID 000953 
 
SIPDIS 
 
DEPARTMENT PASS TO EUR/WE, EB/TRA 
 
E.O. 12958: N/A 
TAGS: ELTN, ECON, SP 
SUBJECT: SPAIN: RAILROAD PRIVATIZATION AND HIGH SPEED 
DEVELOPMENT 
 
 
1. SUMMARY The European Commission mandated the privatization 
of Europe's railroad transportation network by the year 2013, 
impelling Spain to take its first steps in this direction. 
The Spanish cargo market is currently open for competition, 
however government restrictions make it likely that only EU 
companies will compete in the near future.  Passenger service 
is expected to be privatized by 2010, although privatization 
delays in other EU countries could cause the GOS to roll back 
its target date.  The GOS plans to increasingly utilize high 
speed service for passengers and cargo, with plans to expand 
a nascent high speed railway network to integrate with the 
rest of Europe. This process may offer interesting 
opportunities to U.S. investors. END SUMMARY 
 
//BACKGROUND// 
2. The Spanish railroad company, La Red Nacional de 
Ferrocarriles (Renfe), was formed in 1941 by the Franco 
government.  Prior to that, the Spanish railroad system was a 
conglomeration of private regional systems utilizing 
different trains, signs and rules.  It has since evolved into 
one of Spain's primary means of transportation.  A high point 
in Renfe's history came in 1992, when it commenced its first 
high speed train service between Madrid and Seville. EU 
Directive 2002/291, which modified the original 1991 railroad 
directive, mandates the privatization of Europe's railway 
network by the year 2013, causing Spain to take its first 
steps towards railway privatization in 64 years. 
 
//NEW ORGANIZATION// 
3. Effective January 1, 2005, the Spanish government 
dissolved Renfe and formed two new companies, both of which 
remain under state control.  The first company, Administrator 
de Infrastructuras Ferroviarias (ADIF), was formed when Renfe 
was merged with Gestor de Infrastructuras Ferroviarias, the 
state-owned company responsible for building and maintaining 
the country's high-speed railroad network.  ADIF will have 
responsibility for the construction and maintenance of 
Spain's entire railway network, both high and low velocity. 
The company retains approximately half of Renfe's 32,000 
original employees, as well as its railway stations, and will 
collect profits by charging operators a fee for the use of 
the railway infrastructure. 
 
4. The second company was spun off from Renfe and is called 
Renfe-Operadora.  It is a combined cargo and passenger 
transportation company that will have to compete with other 
firms in those markets.  Renfe-Operadora received 
approximately EUR 2.3 billion in assets from the old company, 
primarily consisting of rolling stock and repair sheds.  It 
will employ the other half of Renfe's original employees, of 
whom 5,000 will work in the maintenance division.  In this 
spin-off process, the Spanish government assumed 80 percent 
of Renfe's historical debt (EUR 5.5 million out of EUR 7.3 
million). 
 
//FIRST STEPS// 
5. Econoff met with Angel Martinez-Conde Ibanez, Railway 
Transportation Coordinator for the Spanish Ministry of 
Development, to discuss Renfe's privatization. Martinez 
stated that Spain's railroad privatization will take place in 
stages, with the goal of full compliance with the EU 
directive by 2010.  Of note, he stated that ADIF will remain 
under government control even after the privatization process 
in cargo and passenger transportation is concluded.  He 
commented that other EU countries, specifically citing Italy, 
may privatize their infrastructure during this process but 
that the GOS had no such plan. 
 
6. The first stage of privatization, which took effect on 
January 1, allows for private competition in the Spanish 
cargo transportation market.  Martinez stressed that the 
cargo market was more important than the passenger market in 
Spain, as the majority of cargo is moved via railway.  As of 
March 3, the Spanish government had not received any 
applications from potential competitors to operate in the 
cargo market.  Martinez stated that there are seven or eight 
companies interested in applying and he expects to receive 
the first applications within the next 6-7 months. 
 
7.  Martinez stated that the GOS was hoping to achieve full 
privatization of the passenger market by 2010, three years 
before the EU deadline.  However, he stated that Spain can 
not set a firm date because of privatization delays in other 
EU countries.  He stated that Spain would seek to proceed 
with liberalization in conjunction with other EU countries 
and that delays in neighboring countries, naming France 
specifically, could cause the GOS to roll back its target 
date. 
 
//PRIVATE COMPETITION// 
8. Martinez stated that, although the Spanish market will be 
open to competition by foreign companies, there will be 
several restrictions.  First, Martinez stated that the GOS 
utilizes a reciprocity schedule, permitting companies from 
foreign countries to operate within Spain under the same 
rules that the foreign country implements domestically in 
regard to Spanish companies.  He cited China as an example of 
a country that would not be allowed to compete in the Spanish 
market, due to its closed domestic market.  In addition to 
reciprocity, there are restrictions in regard to the use of 
Spanish railways by foreign trains.  He stated that foreign 
trains brought to Spain for use in the domestic market would 
not be allowed to use Spanish railroad tracks until they had 
been inspected and certified as being in compliance with 
Spain's technical interoperability standards (ETI). 
 
9. Martinez stated that companies must obtain two separate 
documents to operate within Spain.  The first document is an 
EU railroad license, which can be obtained from the GOS, good 
for use in any EU country.  The second document is a security 
statement, which is a combination of professional insurance 
and a list of operating conditions to which the holder has 
agreed.  Martinez stated that the security statement must 
have a Spain-specific clause, in addition to the general EU 
portion.  Martinez commented that due to these restrictions, 
foreign investors would benefit from incorporating within 
Europe or entering into joint ventures with European 
companies rather than attempting to enter the market from 
without. 
 
//HIGH SPEED FUTURE// 
10. In February, the GOS received sixteen new high speed 
trains, produced by the consortium Talgo-Bombadier, signaling 
Spain's commitment to the development of this market.  The 
trains will initially travel at 200 km/hr, with speeds 
gradually increasing to 300 km/hr over the summer of 2005. 
The Spanish press reports that the trains can travel at a 
maximum speed of 350 km/hr, but that the Spanish 
infrastructure can not handle that velocity at this time. 
Currently, Spain has only two high speed lines: one 
connecting Madrid and Seville; and a second, recently 
completed, connecting Madrid and Lleida.  The Madrid/Lleida 
line is currently being extended to Barcelona, with 
construction due to be completed in 2007. 
 
11. Martinez stated that high velocity trains are going to be 
given priority development, with the GOS planning to 
construct a nationwide network of high speed passenger lines. 
 This system will be integrated with the rest of Europe, via 
France, utilizing a tunnel to be constructed along the 
eastern coast of Spain, north of Barcelona.  The GOS also 
plans to connect all regional capitals with Madrid.  Martinez 
stated that the GOS is also working on a high speed system 
for cargo, but that it has encountered difficulties resolving 
weight issues and the sharing of high speed lines by both 
passenger and cargo trains.  He further stated that only the 
Madrid-Seville line is ready for the high speed 
transportation of cargo. 
 
//COMMENT// 
12. The privatization of Spain's railway system is unlikely 
to have a serious impact on operations in the near future. 
The slow rate of privatization, combined with somewhat 
restrictive entrance conditions, make it likely that 
Renfe-Operadura will remain the major player in the cargo and 
passenger markets, along the lines of former state-held 
telecommunications monopoly Telefonica.  Ticket prices have 
been rising steadily, but the Socialist government is not 
likely to allow exorbitant increases.  Spain's high speed 
network is clearly the future of Spanish railroad 
transportation and may offer interesting opportunities to 
U.S. investors. 
MANZANARES