Government ‘hunts’ investor for railroad bidding

Without having aroused enthusiasm among large contractors, the federal government seeks to seduce agribusiness giants and financial investors for the auction of the Açailândia (state of Maranhão) – Vila do Conde (state of Pará) railroad, scheduled for October.

This is the first out of 12 stretches, totaling ten thousand kilometers of new railroads under the big concession program announced by President Dilma Rousseff. The chief of staff of Brazil Gleisi Hoffmann and Transport Minister César Borges are personally committed to ensuring the success of the auction, and spent the last two days trying to persuade companies to enter the contest.

On Wednesday, Gleisi and Borges received presidents of agribusiness groups, led by the trading companies – Cargill, Louis Dreyfus and Caramuru – and Cosan. They also met with managers of important funds, such as Vinci Partners and Pátria Investimentos, at the Palácio do Planalto. Yesterday it was time for a round of talks with major banks. The purpose of the meetings, according to a major source from the government, was to motivate them to get into the concessions of railroads and prove that this is an opportunity to get double-digit returns on invested capital.

In an attempt to avoid at all costs an auction without applicants, the Federal Government stimulated the agribusiness companies and banks to join in consortia.

Privately, large contractors allege several reasons to justify the lack of interest in the first auction of railroads. One is the increased focus on the concessions of highways and airports, which are considered more mature business, with less risk. Another critical point, according to them, is that the investment required for the Açailândia-Vila do Conde stretch is underestimated. On the feasibility studies, the government estimates investments of $1.28 billion, but the construction companies talk about something closer to $2.07 billion, because it is a stretch that cuts through the Amazon and it is expected to be challenging in terms of engineering.

Mistrust in the so-called Valec risk was also not beaten. In the new model, the state-owned rail company purchase all transport capacity of the granted stretches, to resell then the right the use of the infrastructure to potential customers. When the program was launched, the idea was that it would ease investors, because the mechanism removes the risk of demand from the future concessionaires. But there is still uncertainty about the ability to pay of Valec.

Contractors remember that the concession period is long, 35 years, and nobody knows what will be the treatment that other governments will give to the subject. In June, a provisional measure has allowed the Treasury to capitalize the state-owned company up to $6.22 billion, with government bonds. It was a mechanism to dispel fears.

The rate of return for the Açailândia-Vila do Conde stretch was set at 8.5% per year. According to the government, excluding the financing portion, the return to companies’ equity would reach 16% or 17%. Critics say these numbers can hardly be achieved because the investment premises are wrong.

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