VZCZCXYZ0035
OO RUEHWEB

DE RUEHSG #0812/01 2492101
ZNR UUUUU ZZH
O 052101Z SEP 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3677
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHBO/AMEMBASSY BOGOTA 2081
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS SANTIAGO 000812 
 
STATE FOR WHA/BSC-LCATO, WHA/EPSC-FCORNEILLE, EEB/TRA/OTP, AND 
EEB/IFD/ODF 
TREASURY FOR MATT MALLOY 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OVIP EAID ECON EFIN EINV ELTN PGOV PREL CI
 
SUBJECT:  CHILE'S TRANSANTIAGO:  IN STORMY WATERS 
 
¶1. (SBU) SUMMARY:  Treasury A/S Lowery, DAS O'Neill, and Ambassador 
Simons received a readout on Transantiago from Transportation 
Minister Cortazar and Finance Minister Velasco September 1.  The 
public transport system is a thorn in the side of the Bachelet 
Administration, and its woes have increased in recent days.  On 
September 2, the Constitutional Tribunal declared unconstitutional 
the GOC's guarantee of two loans to Transantiago (one from the 
Inter-American Development Bank).  The IDB reportedly considers this 
an event of default, and a Vice President was in Santiago, September 
3-4, to discuss next steps.  The GOC declared, September 4, it will 
use emergency powers to cover Transantiago's costs and will try to 
pass a law allowing it to subsidize the system.  The opposition is 
taking full advantage of the GOC's latest embarrassment.  Former top 
Aylwin minister, Enrique Correa told Ambassador Simons the GOC had 
to work with the opposition to restructure the system.  Transantiago 
is "in stormy waters," which may prove costly for the Concertacion. 
END SUMMARY. 
 
A System Plagued with Problems 
------------------------------ 
 
¶2. (U) Transantiago was supposed to be a state-of-the-art 
transportation system, replacing the city's old network of competing 
buses.  It was designed by the Lagos Administration and implemented 
by the Bachelet Administration.  Since the system's introduction, 
the public has criticized overcrowding, increased wait and transit 
times, and general lack of functionality.  Transantiago is running 
an operating deficit due to fixed fares and rampant fare evasion, 
expensive technology, and rising fuel prices.  The GOC proposed a 
law that would subsidize the system to cover the cost increases. 
The draft law passed in Congress' lower house by one vote, and is 
pending in the upper house. 
 
¶3. (U) To cover the system's deficit, the GOC arranged and 
guaranteed two loans to Transantiago:  $10 million from state-owned 
Banco Estado and $400 million from the IDB.  The Controller General 
(which assesses the legality of government policies) approved the 
loans.  However, the Constitutional Tribunal's verdict (which it 
will explain in detail in the coming weeks) effectively cancels the 
loans, meaning the GOC will probably have to repay them.  The GOC 
has decided to use discretionary funds equivalent to 2% of the 
budget (estimated at $800 million) set aside by the Constitution in 
the event of a national emergency.  The decision is likely intended 
to: cover Transantiago's operating costs in the near term, give the 
GOC breathing room to make arrangements on the loan repayments, and 
negotiate an agreement with the opposition to fund Transantiago. 
 
Transantiago Works But It's A Political Football 
--------------------------------------------- --- 
 
¶4. (SBU) Transportation Minister Cortazar and Finance Minister 
Velasco reviewed GOC thinking on Transantiago in separate meetings, 
September 1, with Treasury A/S Lowery, DAS O'Neill, and Ambassador 
Simons.  Cortazar and Velasco were surprised by the rumored adverse 
verdict from the Tribunal.  Both ministers admitted Transantiago's 
design had been flawed, but cited data that showed waiting times 
were down, transit times had decreased, and new filters had 
drastically reduced bus pollution.  Given time, they believed the 
GOC could fix the system. 
 
¶5. (SBU) Cortazar acknowledged the public held a dismal view of 
Transantiago. (Note:  A recent poll found 63% of those surveyed 
wanted a complete overhaul of the system.  End note.)  Velasco said 
Transantiago was a "political football," and noted the opposition 
was calling for it to be rebuilt from the ground up and scoring many 
political points in the process.  According to Velasco, likely 
presidential candidate, Senator Sebastian Pinera (Renovacion 
Nacional), was trying to be "the man of the hour" by pushing the GOC 
to accept his plan to reform Transantiago.  Cortazar complained the 
opposition was eager for the Government to use the 2% emergency 
funds (used mostly in response to floods in the past), because they 
could further embarrass the GOC by calling Transantiago a national 
disaster.  Even former President Eduardo Frei issued his own plan to 
fix the system. 
 
The Key Will Be Financing the System 
------------------------------------ 
 
¶6. (SBU) Ministers Cortazar and Velasco both acknowledged 
Transantiago was operating at a loss because of inflation, high oil 
prices, and keeping fares at a fixed level until improvements to the 
system were complete.  Both were also firmly convinced of the 
constitutionality of the loan guarantees to Banco Estado and the 
IDB, but confirmed the GOC would abide by the Tribunal's decision. 
Cortazar explained that IDB had released three tranches of its loan 
already, but further disbursements were unlikely now.  The GOC had 
given the IDB a comfort letter, declaring its commitment to use all 
means at its disposal to ensure repayment of the loan, and both 
Cortazar and Velasco stood by this commitment. 
 
¶7. (SBU) In the event the loan guarantees were found 
unconstitutional, Cortazar and Velasco thought it unwise for the IDB 
to accelerate the loan (i.e., ask for immediate repayment including 
principal and interest).  Minister Velasco emphasized that if the 
GOC were forced to repay the IDB, the key would be arranging an 
"orderly unwinding" of the loan to avoid precipitous measures.  He 
said there was no question the GOC would live up to its commitment, 
but it was critical to balance the financial concerns of the IDB 
with those of the GOC.  IDB VP Puig was in Santiago September 3-4 to 
discuss next steps with the GOC.  Though no results from his 
meetings were released, the IDB reportedly considered the Tribunal's 
decision an event of default, which could lead to acceleration of 
the loan. 
 
Enrique Correa:  Fundamental Change is Necessary 
--------------------------------------------- --- 
 
¶8. (SBU) In a September 2 meeting with Ambassador Simons, Enrique 
Correa, a former top minister in the Aylwin Administration, opined 
that the GOC remains in denial over the poor performance of 
Transantiago.  Minister Cortazar is only tinkering around the edges 
of the system, rather than instituting the necessary fundamental 
changes.  Former President Lagos' efforts to avoid responsibility 
will not wash with public opinion and will only anger the Bachelet 
Administration.  Lagos needs to apologize and take some of the 
blame.  Correa underlined that the Concertacion must come to a 
political agreement with the opposition to restructure the system. 
It is not in the opposition's interest to grind the country to a 
halt over the issue as Chilean voters will not be comfortable with 
this degree of controversy.  A restructured system could hopefully 
be achieved before the 2009 presidential election.  Despite low poll 
numbers, the Concertacion was still well placed for the 2009 
balloting, but continuing inflation and Transantiago could prove to 
be major stumbling blocks. 
 
Transantiago Is Hurting the Concertacion 
---------------------------------------- 
 
¶9. (SBU).  COMMENT:  Minister Cortazar aptly noted that Transantiago 
is currently "in stormy waters."  The GOC is scrambling to ensure 
public transportation continues to function and it meets its IDB and 
Banco Estado commitments.  However, the damage is done.  The 
Constitutional Tribunal's decision has made Transantiago a political 
disaster for the GOC and the Concertacion.  The Government will 
likely have to negotiate with the opposition to find a new way to 
fund Transantiago, which will involve some restructuring of the 
system.  The opposition will continue to ride this issue all the way 
through the municipal elections, at some considerable cost, 
financially for the GOC, and politically for the Concertacion. 
 
SIMONS