Railways in Peru - On the track of a monopoly

The battle to reach Machu Picchu

Apr 22nd 2010 | LIMA | From The Economist print edition

EARLIER this month the railway link to Machu Picchu, the ruined Inca citadel that is Peru’s foremost tourist attraction, reopened after a two-month gap caused by floods that washed away stretches of the line in January. For the moment just 900 passengers a day—less than a third of the normal number—can be carried, and they are bused from Cusco, travelling only the last stretch by train. PeruRail, the operator, hopes to restore normal service next month. But repairing the line is not its only problem.
The railway involves a natural monopoly: the only other way of getting to the ruins is a four-day hike along the Inca Trail. When it privatised the line in 1999, the government of President Alberto Fujimori was eager to attract foreign investment. It granted a 30-year concession to PeruRail, which is managed and half-owned by Orient-Express Hotels, a Bermuda-based company.
PeruRail invested in new trains, but even so its monopoly has been highly lucrative. It carries 1.1m passengers a year and fares for the 110km (70 miles) journey from Cusco start at $96. Orient Express owns luxury hotels and trains around the world. It lost $69m last year, but made a profit of $12.8m from PeruRail and four hotels in Peru. One is a formerly state-owned hotel overlooking the ruins at Machu Picchu where rooms now start at $825 a night.
Three other companies would like to run train services on the line to Machu Picchu, but they have been thwarted by a string of lawsuits from PeruRail. One of the newcomers, Inca Rail, a Peruvian company, finally began offering services in November; another, Andean Railways, a Peruvian-American venture, plans to start soon.
They got a boost last month when a preliminary report from Indecopi, Peru’s competition watchdog, accused PeruRail and two related firms of a “predatory strategy” involving sham litigation to force rivals out of business, and recommended they be fined $10.8m. PeruRail says it will fight the recommendation, which it claims is without merit.
A final ruling from Indecopi’s antitrust tribunal will not come for another year. Since capacity at the ruins is limited, so is the scope for more services to Machu Picchu itself. But competition might well lower fares and bring more tourists to the valleys on either side.
The Economist