New Brazilian rail model attracts investors

The package of railroad concessions, whose first bids are planned for the first half, is attracting the attention of companies that currently do not operate in this industry. Willing to add another activity to their business scope, companies like Odebrecht TransPort, CCR, Invepar and JSL have already declared interest in the modal.

Attention is directed to the federal government’s plan to attract investments of $44.97 billion to the railroads of the country in 12 stretches to be granted. Announced in August, the schedule provides for the publication of the first notices to bid in March 2013, bids in April and contract signature until July. This first group of projects, considered more attractive by the market, includes the North and South stretches of Ferroanel of São Paulo; the access to the port of Santos; the stretch between Lucas do Rio Verde (state of Mato Grosso) and Uruaçu (state of Goiás); the northern extension of the North-South, between Açailândia (state of Maranhão) and Vila do Conde (state of Pará); as well as the stretch between Estrela D’Oeste, Panorama (state of São Paulo) and Maracaju (state of Mato Grosso do Sul), which will connect the North-South with the network of América Latina Logística (ALL) to the port of Santos.

For Odebrecht TransPort, acting in railroads is interesting because it is a complement to the port activity – an investment that is among its priorities. “In our view, the railroad must be connected to the port. So we do have interest in studying and evaluating. It would be in ports we have now or we will have in the future”, said the CEO of the company, Paulo Cesena, in an interview to Valor. The company participates in investments in two port assets, in Santos (state of São Paulo) and Vila Velha (state of Espírito Santo).

The interest of the companies is partly explained by the new model to be applied in these concessions, different from that designed to the contracts signed in the 90s. Under the rules of Dilma’s government, after the choice of the concessionaire of the stretch – which will be responsible for investments in works and maintenance of the track – the federal government will purchase from this company all the handling capacity on the railroad. That is, the government will afford all demand risk.

In addition to this type of contract, the companies can choose to be freight carriers on the railroads, after purchasing an equity share in a given stretch. So, are two opportunities to explore the modal: as concessionaire or as freight carrier. Each company must choose only one type of activity, according to the government rules. With this separation, the government intends to eliminate monopolies in the railroads.

Specializing in concessions, CCR has been released by the holdings Andrade Gutierrez, Camargo Corrêa and Soares Penido to study opportunities in railroad, but it sees risks in being the modal concessionaire – since compensation is made by the government. One thing is one having a highway that people pass through and pay toll. Another is people pay all the toll for the government and then the government makes the payment. In our assessment, it strongly increases the risk, said the CEO of CCR, Renato Vale, in a recent interview to Valor. According to the executive, the company will also be studying to be a freight carrier.

Handling freights on the railroads is also an interest of the logistics operator JSL, which currently works primarily on highways. The company can begin work on the railroads as an independent operator. This is something that will depend on a customer that want our services at the railroad, said recently the CEO of JSL, Fernando Simões. He dismisses a possible role as concessionaire.
The president of Invepar, Gustavo Rocha, recently said that, although the company does not have plans to enter this segment, it will study the new industry model. The CEO of Triunfo Participações e Investimentos, Carlo Alberto Bottarelli, also said the company is beginning to analyze the modal.

In companies already operating in the modal, interest also exists. Rumo Logistica, which does not operate its rolling stock, plans to buy handling shares in the new concession model developed by the federal government. A company controlled by the Cosan group and that was created to handle sugar to the port of Santos, Rumo’s goal is to handle traditional agricultural commodities, such as soybeans and wheat, and others that can be classified as industrial products (depending on the company), such as cellulose.

Cosan itself is entering the rail industry. In 2012, it made an offer to buy a controlling stake in ALL, business that is in the final stages.

In the case of ALL, the CFO and Investor Relation Director, Rodrigo Campos, said the company also sees an opportunity to dispute the new bids to enlarge freights.
Government offers purchase warranty of the full capacity

The formula that the government will use to make the concession of railroads is similar to that applicable in road concessions. The proposal of the company that submits the lowest rate to be charged for the freight transport in each stretch will be declared the winner. In practice, the contract that has the most competitive rate of freight toll to the user wins.

The proposal designed by the National Land Transport Agency (ANTT – Agência Nacional de Transportes Terrestres) must strongly attract the private sector, because the government has decided that will ensure the purchase of full capacity of transport for each of the 12 stretches that will be granted. This means the company that will get into the business will not have demand risk. The state-owned company Valec will buy 100% of this capacity in accordance with the prices assumed in the concession auction. Then it will take the responsibility to sell that capacity to the market.

The government’s expectation is that, in part of the stretches, there will be competition between companies interested in using the railroad network to transport freight, which would guarantee a profit to Valec. In a second batch of stretches, however, the government knows that there will not be such a strong demand, at least in the early years of operation. Hence, the purpose of mitigating the investor risk and ensuring capacity procurement, by acting as an inductor of railroads in those regions.

“There is not a purchaser market consolidated in the country, unlike the road industry. The government will need to make an extra effort in order to boost this market, especially on routes that are not export corridors”, evaluates José Eduardo Castello, who led the state-owned company Valec until September last year.

By assuming the full risk of the railroads and their supply to the market, the government wants to end the monopoly that currently prevails in the industry, where the current concessionaires have transport exclusivity in the networks they have assumed. In these circumstances, Valec cannot stay behind a desk waiting for customers that may not exist. It will be necessary that the process of selling capacity is in some cases, for example, coupled to a supply of railroad transport revitalizing equipment, Castello said.

Scholar of the models of railroad concessions used in Europe and the United States, Castello says that there are several equipments to be considered, such as piggyback cars (road semi-trailer transport), double-stack cars (double stacking of containers) and roadrailer cars (able to run on both highways and railroads).

On the concession plan announced by the government in August, the use of a public-private partnership (PPP) model was expected, but according to Bernardo Figueiredo, CEO of the state-owner company Empresa de Planejamento e Logística (EPL), the railroads will have a pure concession model.

The line of credit of railroads, which will be offered by the

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