Railways: Brazil seeks to break through the frontiers of stagnation

Uncertainties and questioning by Brazil’s Federal Court of Audit cool the interest of private investors in the new rail concessions that the Federal Government has planned

This still won’t be the year that Brazil gets its railway network significantly expanded. After studies and the development of projects by the country’s ‘Agência Nacional de Transporte Terrestres’ (ANTT - National Surface Transportation Agency) and the formulation of a bidding model that did not stand up to scrutiny by the ‘Tribunal de Contas da União’ (TCU - Federal Court of Audit), the government promises to regulate the tender bidding model in the area by passing a ‘Medida Provisória’ (MP - Interim Executive Measure) or a bill of law.

Despite government intentions to hold an auction later this year, the investor market shows signs that it is reticent on this agenda, especially after the results of the first round of tender bidding on the government’s ‘Programa de Concessões Rodoviárias’ (Highway Concession Program). Of the two auctions for the concession of highways chosen to inaugurate the program, one - the stretch of the BR-262 (MG-ES) - did not attract investors. It came out “empty” in the jargon of local investors. On the other hand, the auction of BR-050 was successful and got eight bids.

If on the one hand the federal government demonstrates flexibility to adapt its program of concessions to market conditions, on the other these changes in rules cast doubts and uneasiness among certain investors who shun risk, according to experts.

According to the original schedule announced over a year ago, the 10,000 kilometers of railway lines should already have been auctioned off and the planned investments of R$ 99.6 billion (US$ 45.3 billion) could already have been in progress. But an assessment by the Federal Court of Audit (TCU) indicated the need to formalize clearer rules for the operation of the concession, going against the objections of the market. Together, the TCU and the market gave the government a good reason to retrace the path, trying to adjust the points that can mean obstacles to the success not only of the model of railway concessions, but also indicating the need to reformulate the models of concessions in other sectors such as seaports, airports and highways.

The new regulations to be proposed by the government in the interim executive measure that it will submit to Congress should establish, among other things, that the concessionaire will be responsible for the construction and operation of the railway line, which means a substantial change from the model previously developed that separated, for the purpose of granting concession, the construction and maintenance of the permanent way of railway operation itself. The state-owned Valec company should be replaced by the yet to be created ‘Empresa Brasileira de Ferrovias’ (EBF -Brazilian Railway Company) which will handle the purchase and resale of the entire capacity of the line. This attribution should be included in the new regulations. The model seeks to clearly establish how concessionaires will be remunerated. To accomplish this, the nation’s Treasury will invest R$ 15 billion (US$ 6.82 billion) in the government-owned company in charge of managing the concessions (Valec/EBF).

It is expected that such adjustments should dispel the doubts and indifference of the market which has rejected the original format of the bid on the grounds of uncertainty as to the strength of Valec in the process - a condition that is referred to as the “Valec risk”. The question that arises now is how to reconcile these reformulations and the tight timeline, since the federal government is set on auctioning, at least one stretch of railway by the end of this very year, according to Brazil’s Minister of Transports, César Borges.

“Our expectation is that we can auction off at least one stretch of railway this year,” said the minister. “We will do all we can in 2013, but we need a solid process,” he said. According to the minister, there is in fact no such thing as “Valec risk” because, in his view, the new public company will have the security and assurance of the Brazilian Treasury to honor its commitments. “R$ 15 billion have been put into Valec and EBF will pay to railway concessionaires ‘receivables’ guaranteed by the Treasury, which are securities that can be accepted by banks. We are going to give the market this assurance,” he said.

But in certain segments, the perception is that the law may impose changes in the model, with a risk of revision of technical studies that are already ready as well as in the ‘format’ of the auction itself. If the estimates of the TCU President Augusto Nardes are right, the government's proposal for new legislation should be presented by the end of November - on the eve of the Congressional recess. In view of upcoming election year, many expect that the first call for tender bidding on railways, originally scheduled for October and postponed to November, will actually occur in the next administration.

To the president of the ‘Associação Brasileira da Indústria Ferroviária’ (Abifer - Brazilian Railway Industry Association ), Vicente Abate, Valec must be made to “exit” to give credibility to government management of the concessions. He admits that the market needs to have an additional guarantee of revenue throughout the entire contract period. “It is a necessary restructuring to erase a name that had not been doing well in the market.” To him, the delay resulting from the process does not sound like time wasted because the model under construction for the stretch between Açailândia and Barcarena will serve as a model for others. “What happened between a year ago and now is not a waste of time - it is the time required for improvement so that, when terms of the call for tender are announced, there aren’t so many questions or doubt,” concludes Abate who remains optimistic: “Brazil in 2014 will be one big job site.”

R$ 99,6 billion (US$ 45.3 billion) in investments

Brazil’s ‘Program for Investment in Logistics’, introduced in August of last year, represents one of the greatest inflows of investment in the area of logistics ever foreseen in the country. The program includes a set of projects and provides for the establishment of partnerships in logistics projects that will integrate the nation’s networks of roads, railways, seaports and airports. According to the program, the railway sector is one of the top priorities of government with an expected volume of investment of approximately R$ 99.6 billion (US$ 45.3 billion), in construction and/or improvements, along 11,000 km of railway lines. The plan establishes that most of the amount, or about R$ 58 billion (US$ 26.36 billion), should be put to use in the first five years and the concessions should be in effect for 35 years.

The program included, in its original form, a model of concession in which concessionaires would be responsible for the infrastructure, signage and signaling, and control of the circulation of trains. The concession granted for a period of 35 years provides for broad gauge railways (of 1,600 mm) with a high load capacity and track layout geometry that is optimized to allow higher speeds (80 km/h).

The bidding model that was elaborated (but that was not approved by the TCU) should undergo changes through the proposal of a bill of law. The model established, among other things, that: the concessionaire would hold the rights to exploitation of the railroad; Valec would buy the full capacity of the railroad compensating the concessionaire through the payment of a fee/toll (‘Tarifa pela Disponibilidade da Capacidade Operacional’ - Fee/Toll for the Availability of Operational Capacity); Valec would sub-let, for payment in consideration thereof,  parts of the ‘Rights of Use’ to users; the concessionaire would render operating services directly to users who pay the concessionaire another fee/toll (‘Tarifa de Fruição’ - Fruition Fee) as they make use of the railroad.

In order to reduce risk to the investor, Valec - a government-owned company - would also be responsible for the annual purchase of the railroad’s full operational capacity making public offerings of acquired capacity, guaranteeing the rights of passage in the movement of trains throughout the network. The capacity would then be offered to shippers, independent rail operators and to railway concessionaires (provided they operate other railway segments). The model predicted a large inflow of investments to be made during the first five years of the contract, with Brazilian public banks accounting for financing of up to 70% of the amount of investment at an interest rate of 1.0% p.a. plus the TJLP (‘Taxa de Juros de Longo Prazo’ - Long Term Interest Rate).

According to information provided by government, Valec would anticipate revenues derived from ‘availability of operational capacity’ during the construction period at an amount equal to 15% of the total referential CAPEX - to be deducted linearly during the years of operation with regular remuneration, provided the concessionaire complies with the schedule for physical implementation.

The government program initially marked the following segments for bidding, covering the country’s main logistics corridors (logistics routes):

North Region is a concentrator of demand

The first segment to be tendered,  whose call for tender was scheduled to go out by October, is the segment from Açailândia (MA) to Barcarena (PA) where the ‘Porto de Vila do Conde’ is located. The tender for this segment will serve as a benchmark for the following tenders that are scheduled for the segments between ‘Lucas do Rio Verde (MT) and Uruaçu (GO, and between Estrela d’Oeste (SP) and Maracaju (MS).

After signing the concession grant contract, the concessionaire will have four years to complete its implementation. The railway, which will cover a stretch of 457 kilometers, will receive investments of R$ 3.25 billion (US$ 1.48 billion). The project was conceived for the purpose of expanding and integrating the national railway system and establishing its connection to the ‘Complexo Portuário de Vila do Conde’ (Vila do Conde Seaport Complex), which is strategically positioned in relation to the ports of Europe and the eastern seaboard of North America. The implementation of this new segment will provide new transport logistics for iron ore and for the development of exploration of other minerals.

The project will enable a new alternative for moving cargo in general, oil and petroleum products, as well as the production of sugar, corn, ethanol, soybean and the grain’s by-products, such as soy meal and oil. In the future, this railway will operate as an extension of the Norte-Sul (North-South) railway enabling the connection of the country’s North Region to the seaports of Rio Grande (RS), Santos (SP) and Itaguaí (RJ), running through the interior of Brazil. The railway will cross the municipalities of Açailândia (MA), Itinga (MA), Dom Eliseu (PA), Ulianópolis (PA), Paragominas (PA), Ipixuna do Pará (PA), Tomé-Açu (PA), Acará (PA), Moju (PA) and Abaetetuba (PA) until it arrives at ‘Porto de Vila do Conde’ in the municipality of Barcarena (PA). “The ‘Norte-Sul’ railway will be a great ‘backbone’ to move cargoes from Brazil’s Center-West region, especially the soybean harvest, so that it can be shipped from ‘Porto de Vila do Conde’ located near the equator and, therefore, with a great competitive advantage to reach the consumer markets of Europe and Asia since it is near the Panama Canal and the U.S. market as well,” says Minister César Borges.