Large projects promise to heat up market in Brazil

Projects for the expansion of passenger and freight transportation by rail in Brazil will, mandatorily, go through major transformations.

Projects in the passenger transportation segment, which were moving along at a slow pace, now must be sped up for the opening of the Confederations Cup in 2013, the FIFA World Cup in 2014 and the Summer Olympics in 2016. Works that are underway (i.e. implementation of new metro lines, Light Rail Vehicles (LRVs), monorails, regional trains, etc.) and those that are still to come are meant to meet demand that has been pent-up for decades, and further demand that will exist after these sports events.

Likewise in the segment of freight transportation, prospects are encouraging due to the promise of large investments. The ‘Program for Investment in Logistics’ - announced by President Dilma Rousseff on August 15, 2012 - provides for the investment of R$ 133 billion (US$ 66.5 Bn) in nine stretches of highways and twelve segments of railways which will total 10,000 km of new lines. The total amount to be invested was divided into R$ 42 billion (US$ 21 Bn) and R$ 91 billion (US$ 45.5 Bn) to be allocated to each group of projects, respectively.

The goal of the program is to increase the rate of public-private investment in transport infrastructure and promote the integration of highways, railways, seaports and airports, reducing costs and increasing transport capacity, as well as promoting efficiency and increasing the country's competitiveness.

Of the total to be invested, R$ 79.5 billion (US$ 39.75 Bn) will be invested over the next five years and R$ 53.5 billion (US$ 26.75 Bn) within 25 years and allocated as follows: for railways - R$ 56 billion (US$ 28 Bn) will be invested in five years and another R$ 35 billion (US$ 17.5 Bn) in 25 years; for highways - R$ 23.5 billion (US$ 11.75 Bn) will be invested in five years and R$ 18.5 billion (US$ 9.25 Bn) in 20 years. The planning of actions and monitoring of projects will be handled by the ‘Empresa de Planejamento e Logística’ (EPL - Planning and Logistics Company) which was established by the Brazilian federal government to promote logistic integration in Brazil and whose president is Bernardo Figueiredo.

In terms of railway transportation, the proposed model is that of public-private partnerships (PPP) which ensure investments in twelve projects and afford the new possibilities of enabling the dissolution of monopolies in the use of railways and, furthermore, the establishment of mechanisms to encourage reductions in fares/fees. Under this PPP, the federal government will be responsible for contracting the construction, maintenance and operation of the railways.

Under this model, the government-owned company Valec - Engineering, Construction and Railways S.A., which is linked to the Ministry of Transport, buys up the railway’s full transportation capacity and offers that capacity publicly to users who wish to ship their own freight, to independent rail operators and to concessionaires of railway transportation. This model ensures ‘easements’ (rights-of-way) for trains along all the country’s railway networks as a way of reducing fares.

In the case of railroads, investors will have access to a line of credit with interest at the ‘TJLP’ rate (taxa de juros de longo prazo - federal long-term interest rate) plus up to 1.0%, a five-year grace period, and amortization in up to 25 years. Leverage ratio of 65% to 80%.

For the sector of seaports, the EPL - Research and Logistics Company has set late October as the date for the launch of the investment program which is also expected to attract the private sector as a partner of government. The government's intention is to launch a series of initiatives capable of promoting the refurbishing of existing seaports and the installation of new units. The estimated investment is R$ 30 billion (US$ 15 Bn) to R$ 40 billion (US$ 20 Bn).

Regarding the system of airports, the scenario is undefined. After having found that large European and Asian airport operators were disinterested, the Brazilian government - which intended to attract investment in the sector under a minority-stake partnership with Infraero - is studying the possibility of changes in the formatting of the model for concessions of airports. There is a possibility of returning to the format which established that a majority stake in the control of concessions would be granted to private enterprise.

President Dilma Rousseff demonstrates resistance to applying the same format used in the auction that granted, in February of this year, concessions for the airports of Guarulhos (Cumbica), Campinas (Viracopos) and Brasília (JK) and which raised R$ 24.5 billion (US$ 12.25 Bn). She also intends to leave construction companies out of the competition and to limit bidding to foreign airport operators. She also prefers an auction in which the winner is chosen based not on the highest bid but rather on a scoring system which focuses technical criteria as the priority. The goal of the federal government is to attract international airport operators with reputable knowledge in the management of airport terminals, capable of transferring greater know-how to Infraero.

Uncertainties regarding the model of concession that will be adopted are likely to postpone the release of the government’s “package” for airports until at least late October. At that time, the government should also announce a plan for regional aviation, with investments of up to R$ 4 billion (US$ 2 Bn). Government authorities are also expected to publish a decree authorizing the commercial exploitation of new airports catering to business aviation.