Guatemala Railway Headache

This page originally contained three newspaper articles reproduced below, the first is from the Wall Street Journal following RDC's decision to suspend its rail operation in the country. the second and third from the Los Angeles Times. Matters are now before the international courts and you can use these links for an update to mid-2009:

http://www.rrdc.com/article_11_26_2007_krupp_steam_preserved_TRAINS.pdf

http://www.rrdc.com/news_GUA%20Shareholders%20ltr%202008%20Eng.pdf

http://www.rrdc.com/article_07_17_2009_inv_details_CAFTA_claim_IAR.pdf

This article originally appeared in the Wall Street Journal of 23rd July 2007

Train Wreck in Guatemala
By MARY ANASTASIA O'GRADY

Henry Posner III is an American entrepreneur who has revitalized rail systems in Peru, Argentina, Mozambique and Malawi. He also has been working since 1996 to revive rail service in Guatemala. But now Mr. Posner's Pittsburgh-based company, Railroad Development Corp., is suspending operations in the Central American country, charging that the government has violated RDC's 50-year concession contract and refused to enforce the company's property rights.

"Because of the government's action and the lack of the rule of law in Guatemala, we have no other alternative," Mr. Posner wrote in a letter to customers, investors and employees on July 6.

For Guatemala, the matter is more serious than a simple dispute about a state concession. Mr. Posner, who is chairman of RDC, is taking his beef to international arbitration under the Central America Free Trade Agreement (Cafta) and asking for $65 million in lost revenues and investments. In its complaint to the Cafta panel, the company also charges that there is method to the government's maddening mistreatment of the company: It wants to "redistribute to certain Guatemalan private-sector companies the benefits of the right-of-way, without compensation."

If the American businessman prevails, the case will reinforce the country's traditional image as a banana republic uninterested in equality under the law and ready to trample property rights whenever it is politically expedient. What else are investors to conclude if it turns out that President Oscar Berger's "right-of-center" government, which pays lip service to property rights, has unilaterally abrogated a lawful contract? This would be a blow to all Guatemalans, who need investment in their country if they are to benefit from and compete within Cafta.

Transportation infrastructure is crucial to economic development in any country and Guatemala is no exception. In the early part of the 20th century the country had a national railway that was largely the product of investment by an affiliate of United Fruit. It was nationalized in the 1960s and over three decades run into the ground. By 1996, it was completely defunct.

That left the country's distribution system entirely reliant on a costly, polluting highway system subject to congestion, accidents and rampant hijacking. In 1997 Guatemala held a World Bank-style, sealed-bid tender process for the concession that was to restart the dead railroad. RDC won. In December 1999, Ferrovías Guatemala's first train chugged out of the Atlantic coastal city of Puerto Barrios on its maiden journey to the capital. Mr. Posner says that the concession included the right-of- way on the old rail line that runs out to the Pacific at Puerto Quetzal, north to Mexico and south to El Salvador as well, and that RDC promised "best efforts" to get the Pacific side going.

In 2005 the railroad shipped some 150,000 tons of traffic -- mostly steel, as well as containers -- on the Atlantic route but it was having a lot of trouble with the government. Mr. Posner says the terms of the concession included a government pledge to remove squatters from the railroad right-of-way and to redirect half of the lease payments from railroad-owned assets toward track maintenance and improvements. The squatters were never resettled elsewhere -- photographs support this claim -- and, he says, the lease revenue "disappeared and we had to replace it."

In 2005, RDC tried to get Guatemala to go to binding arbitration as provided for under the concession. But the government refused, arguing that it was not bound to do so. The government also says that the company has not kept up its side of the agreement by investing in the country. While Mr. Posner says his company has invested $15 million in the railroad, President Berger has said that the concessionaires "have not invested one cent." In August 2006, the government declared the concession "harmful" to the interests of Guatemala and moved to confiscate the railroad's rolling stock and equipment. The company says this inflicted further damage on it as investor confidence plummeted and its ability to access credit markets was strained.

Still, Mr. Posner says the railroad could have continued to operate were it not for Guatemala's indifference toward another of its property rights. The company's business plan had included charging for use of the right-of-way for electricity distribution, pipelines, fiber optics and the like. This was stipulated in the concession and would have subsidized rail operations. But while some local companies paid for that use, others began free riding along the right-of-way. When RDC appealed through the Guatemalan legal system for protection in the matter, the courts sided with the commercial squatters. This signaled the market that what is essentially theft would be tolerated, and RDC lost an important source of revenue.

The World Bank hasn't been much help either. It declared Ferrovías Guatemala's property a "category A environmental problem" because of the squatters and refused to lend to it. Mr. Posner says the bank's position was that he had to prove to the satisfaction of the squatters that RDC has done no harm. "That's like handing someone a loaded gun while you open your wallet and negotiating from there," Mr. Posner says. No wonder no one takes the Bank seriously. It lends to Mexican billionaire Carlos Slim but when it comes to defending property rights it runs for cover.

Most troubling in all of this is the charge in RDC's Cafta complaint that in driving the company out of the country, the government seeks to satisfy special interests. There is talk that a cross-country rail system designed to compete with the Panama Canal would be a big money maker as Asia booms. And while Mr. Posner dismisses that idea, he notes that the rail right-of-way is immensely valuable for more than simply hauling freight. Whatever the reason for breaking the concession, it's hard to see how it won't harm Guatemala's image with foreign investors at a time when the country ought to be courting them.

The following article originally appeared in the Los Angeles Times on 10th July 2007

Rail buff's dream rolling to a halt in Guatemala
By Marla Dickerson, Times Staff Writer

It's the end of the line for Henry Posner III.

The Pittsburgh millionaire who spent $15 million to revive Guatemala's once-defunct railroad said Monday that the freight trains would stop rolling Oct. 1.

His company, Railroad Development Corp., is locked in a legal battle with the Central American nation's government, which Posner said has made it impossible to keep operating the money-losing service.

"Enough is enough," Posner said. "It's clear that at every level of Guatemalan society there is, at best, a lack of respect and, at worst, an outright hostility to everything that we have been trying to accomplish."

Posner said the company would continue running trains to the end of September to meet previous commitments to freight customers.

The company will also press ahead, he said, with a legal action seeking $65 million in compensation from the government for allegedly damaging its business. Guatemalan officials did not respond to a request for comment.

Posner, 51, was the subject of a Times profile last month that chronicled his efforts to restore rail service to Guatemala, whose national railroad ceased functioning in 1996.

Posner's railroad firm in 1998 won a 50-year concession to get the freight trains rolling again. It reopened a 200-mile stretch of track running from the capital of Guatemala City to the Atlantic port of Puerto Barrios, a feat hailed by train buffs but which never turned a profit.

Posner has made a career out of salvaging troubled railways in far-flung parts of the globe, including Malawi, Mozambique and Estonia.

But Guatemala has proved a tougher haul than any of them. Scrap metal thieves routinely plunder the tracks. Thousands of squatters have taken up residence in the right of way. Washouts ravage the rails during the rainy season.

But Posner said his biggest stumbling block in Guatemala had been the government. He claims that it failed to honor its agreement to contribute $3 million for track improvement and to evict squatters from the most potentially profitable lines.

When the company pressured the government to live up to its end of the bargain, Posner said, it retaliated with a rare and powerful legal maneuver to repossess its locomotives and rail cars.

That 2006 action is still tied up in court. But Posner said the threat alone scared off customers, sending his firm into a downward spiral.

In its suit against Guatemala, the company is 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. The railroad firm filed a claim in Washington last month before a special international dispute panel. A decision could take two years.

Posner said he finally concluded that nine years of spinning his wheels in Guatemala was enough.

"We can't succeed in a country that doesn't want us there," Posner said.

Some say Guatemala might end up the real loser.

"The implications for foreign investors are not good," said Carlisle Johnson, a political analyst and host of a popular radio program called "Good Morning Guatemala." "Who is going to come in after this fiasco?"

The following article originally appeared in the Los Angeles Times on 14th June 2007

An uphill climb
By Marla Dickerson
Times Staff Writer

Guatemala City — FOR the freight trains rolling through this Central American nation, every journey is a one-way trip to trouble. 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. 

"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." It's hard to imagine now, but Guatemala once boasted one of the world's finest rail systems. In the early 20th century, American banana magnate Minor Keith Cooper, founder of United Fruit Co., stitched together a coast-to-coast network that dominated freight and passenger transport for decades.

But by 1996, rail service had ground to a halt, a victim of competition from highways, a botched government takeover and civil war. Eager to jump-start its economy, Guatemala set about privatizing state-owned industries, including rail. Enter Posner. The 51-year-old entrepreneur has made a career out of salvaging troubled railways in far-flung parts of the world. Where others saw a money pit, he saw opportunity.

Guatemala's highways are choked with traffic. Yet its economy depends on moving heavy exports such as fruit, sugar and textiles to ports on the Atlantic and the Pacific. His Pittsburgh-based company, Railroad Development Corp., was the only bidder for the concession. It won a 50-year contract in 1998 in exchange for giving the government 11.25% of revenue and taking care of most of the maintenance. The engines and freight cars were battered. Stations were crumbling. Storms and thieves had ravaged the old narrow-gauge track. RDC decided to replace what it could and patch the rest until its freight business got rolling. In 1999, it reopened a 200-mile stretch from Guatemala City to the Atlantic port of Puerto Barrios.

"This was Lazarus," said RDC President Bob Pietrandrea. "We raised it from the dead." But a feat that dazzled railroaders hasn't paid RDC's bills. The average speed on the rickety rails remains just 10 mph. Trains derail almost daily. The joke is that Guatemala has gotten itself a bullet train — so slow you want to shoot yourself.

To find out why, just ride a freight train east out of Guatemala City with Daniel Castaneda, Posner's operations chief. A native Guatemalan who worked for a time as an auto mechanic in Modesto, Calif., the burly, amiable Castaneda can overhaul a Volkswagen Beetle or this 1971 General Electric locomotive with equal dexterity. He is also a worrier, which gives him plenty to do on the tracks.

On a recent afternoon, he and two engineers headed for Puerto Barrios hauling a load of aluminum and plastic scrap. The cab of the gunmetal gray "loco," as Castaneda calls the engine, was cramped and showing every day of its 36 years. The cracked windshield was reinforced with tape. The passenger seat tilted at a drunken angle.

As the train crept through the capital, engineer Joel Lopez kept a firm hand on the brake and a gimlet eye on the tracks. He blew the deafening horn with vigor. No one seemed to grasp that the locomotive was a 70-ton moving object. There were no crossing gates at intersections to keep motorists and pedestrians from wandering into the path of the approaching train, which they did with alarming regularity.

An open-air market did a brisk business over the tracks, the one place vendors don't have to pay rent. They languidly moved out of harm's way just moments before impact. The hawkers know precisely how high they can stack their merchandise between the rails so that locomotives don't flatten it. Parallel streets run so close to the tracks that as little as six feet separates trains and motorists. Castaneda said a locomotive rammed a parked school bus full of kids last year. Miraculously no one was killed. He said municipal officials had ignored his pleas to honor the 50-foot right of way on each side of the tracks.

"This isn't a safety culture," he said with a sigh. As junkyards and shanties gave way to green countryside, Castaneda acknowledged that he rarely enjoyed the view. He is too busy scanning for trouble spots on the tracks. He fretted about wheels that are wearing out too fast and crowed over ingenious fixes, such as substituting pistons and rings from a car engine for locomotive air compressor parts that are no longer available.

Wear and tear isn't as maddening as theft. At Milepost 187, the train stopped and 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.

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. Now, the dispute has escalated into an all-out brawl. 

A betting man might not put his money on the rail-thin, bespectacled Posner. With his Orville Redenbacher looks and cerebral manner, he could be mistaken for just another swell with an expensive hobby. But he's a hard-core rail guy. He can't say for sure how he caught the bug. Maybe it's the genes he inherited from his maternal grandfather, who was a signalman on the Pennsylvania Railroad. Or perhaps it was the British rail vacation when he was 8.

Posner studied engineering at Princeton because it had a transportation program — not to mention a commuter train known as the "Dinky" that stops at Princeton Station. He sold Amtrak tickets out of his dorm room. He proofread train schedules for the "The Official Railway Guide." He interned at the now-defunct Rock Island Line. 

While his classmates found jobs on Wall Street or Madison Avenue, Posner headed for a South Bronx train yard, spending nearly a decade at Conrail in operations, marketing and sales. Helped by his family's money — they made their fortune in outdoor advertising — Posner formed Railroad Development Corp. in 1987. At the time, American railroads were restructuring, selling off their short-line routes. RDC's first investment was a Midwestern railroad.

A fluke phone call in the early 1990s got Posner looking farther afield. Some Argentines were seeking partners to help them take a former government railroad private. Posner, who speaks Spanish and had traveled in Latin America, jumped in. That profitable deal led him to invest in half a dozen privatized lines in some tough neighborhoods around the globe. His operators have battled HIV in Malawi, cyclones in Mozambique and landslides in Peru to keep the cargo moving.

Friends and employees say Posner is never more at home than when he's steering one of his locomotives through the frigid Andes or riding a freight train through the African bush. They say he also knows the value of a buck. Posner drives a subcompact Chevy, buys his work boots at a discount den and composts coffee grounds because he can't abide waste. 

"Henry knows how to make money in this business," said RDC's Pietrandrea. "He's tough, he's smart and he's nobody's fool." BUT in Guatemala, Posner might have met his match. In a rare and powerful legal maneuver, Guatemala last year declared the lease of its rolling stock to RDC to be lesivo: against the interest of the state. If a court grants the government's request to recover its engines and rail cars, RDC would be out of business. 

The government claims that RDC 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 RDC 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.

For now the trains are still rolling. But the threat of closure has scared off customers and investors, he said. Castaneda said the theft had gotten considerably worse since the lesivo order. He said scrap-metal bandits took it to mean that the railroad was a goner and they could help themselves to the spoils.

He recalled how "Mr. Henry" — as Posner is known to the 75-member workforce here — flew down from Pittsburgh to reassure employees personally, in their own language, that he was going to fight to save the railroad and their jobs. Posner is spending $100,000 a month out of his own pocket to keep the operation afloat.

"Our biggest fear is when Henry Posner is going to say 'No more,' " Castaneda said. Posner has one potent weapon in his arsenal. RDC 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. RDC 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."