Photo courtesy Marcio Vieira / Tocantins Government
The north-south railway line in Tocantins (pictured) is among 11,000 km of Brazil rail scheduled for improvement under the proposed concession program.

Two years after the Brazilian government announced a huge package of concessions to stimulate investments in infrastructure, construction projects for the railway industry remain on the shelf. The delays have resulted from regulatory risks, which were identified by investors, and failed projects.

Officials hope for a break in the impasse once the Program of Investments in Logistics, chartered in August 2012, releases R$99.6 billion (U.S. $41.6 billion) in investments in construction and improvements on 11,000 kilometers of railways.

The big knot is in the government-devised concession model, wherein the right to transport cargo remains with the state company Valec. The company is obliged to secure 100% of the future operators' carrying capacity and will reverse the right of use of the tracks. However, investors are questioning the viability of the plan. They see risks in the state-run company's ability to manage payments. Valec's reputation over the years has been remarkable for bad management, delays at jobsites, excessive debts and corruption. 

Potential investors refer to the “Valec risk” to indicate their dissatisfaction with the model. To ameliorate the situation, the government announced in June that it will present, five years in advance, guaranties of payment, backed by titles of the National Treasure and deposited in specific accounts.

Loans will have a 30-year term and involve the Brazilian Development Bank, Caixa Econômica Federal and Banco do Brasil. Also in June, the National Agency of Land Transportation published a resolution that charges the Independent Railway Operator to define the role of  concessionnaires, which are going to operate the railways without owning the infrastructure.

The Independent Railway Operator regulation was the necessary step to make feasible tenders for the 12 stretches included in the program and two added later. The calls to present complementary studies referring to six of them already have been published: Açailândia-Barcarena, Anápolis-Corinto, Estrela D’Oeste-Dourados, Belo Horizonte-Guanambi, Sinop-Miritituba and Sapezal-Porto Velho.

The most probable scenario is that the tenders will be pushed to 2015 or later. The first project to have a tender should be the Railway of Center-West Integration, 883 km long and essential to drain grain production. However, no date has been scheduled yet.

Recently, the National Confederation of Industries (CNI) sent the leading presidential candidates a document requesting changes in the railway industry's tender model. For entrepreneurs, the separation between infrastructure manager and operator can create difficulties among several companies using the same rail line. So far, improved efficiencies have not materialized. CNI also fears that, in the future, the federal government could void the guaranteed paymments to the concessionnaires.

The guaranties proposed by the government to mitigate the “Valec risk” may work out in the end, says Hostílio Ratton, associate professor of the Program of Transportation Engineering of the Coppe Institute. However, as he sees it, the structure of the tenders is fundamentally. The tender criterion stipulates that the winner will offer the lowest price for the use of the offered traffic capacity. Ratton believes that this standard makes no sense because returns from railway traffic are predictable under terms of the program. There is little margin for additional gains, unlike roadway capacity.

“For me, the most logical proposal should be changing the tender model, exchanging the capacity’s lowest price for the right to operation’s highest price. Should operators be free to negotiate fares with train operators, the government would not have to buy the whole capacity of the tracks, just those the operator would be able to sell,” states Ratton. “In this case, the impediment to negotiate directly the price to be charged with each one of the train operators would make no sense anymore, and the track operator would be able to have more interesting margins in sales of rush hours.”