For the banks, “Valec risk” remains

The government has a new and unexpected obstacle to put in practice the railroad concessions to private enterprises. A pool of banks informed the contractors and the Union’s President that they will not release funding to the auction winners without changes allowing for better guarantees given by the Union in futures contracts, reducing the so-called “Valec risk”.

The banks resistance – including BNDES, Banco do Brasil, Caixa Econômica Federal and commercial institutions responsible by the funds transfer – throws an extra problem in the government’s lap, just when it was imagined that the main barriers to the first railroad auctions had been removed.

Today, a small group of contractors already shows interest in entering the auction, which generates relief at the Presidency – months ago, the appetite was minimal or nonexistent. Contractors heard a “no” from the banks, however, when they made preliminary consultations on the financial entities disposition in releasing loans to projects.

The new problem shows that the approval of the Union’s Court of Accounts (TCU) to the first railroad line sections won’t be enough to finally unlock the concessions in this industry sector. The government’s expectation was getting a green light from TCU, during this month, for the first section: the Midwest Integration Railroad (Fico), between Lucas do Rio Verde (Mato Grosso) and Campinorte (Goiás), known as the Soy Railroad. The court adjourned to 2014.

In October, as a way to settle the market’s concerns, President Dilma Rousseff signed a decree that has enlarged these guarantees and even foresaw the use of public debt to honor payment commitments to future concessionaires. With this, the government considered that the discussions around the “Valec risk” had been finally resolved. The assessment of the banks is different. Valor found that they strongly resist in releasing loans for work on railroads – at least in the terms announced by the Union: 70% project coverage, plus 1 percent of TJLP cost. And, without cheap financing, the business will hardly stand.

The banks, including BNDES, require liquidity in guarantees to disburse funds to future concessionaires. They suggest, for example, the opening of a special account in which there is liquid assets, which can be redeemed at once, if necessary. For the financial institutions, the way to protect themselves from an unpaid debt from Valec is very bureaucratic – there is even provision of guarantees on state properties.

In the new model, the government expected to grant 11,000 km (6,836 miles) of railroads, divided into 14 sections. The original schedule predicted the bidding of all these sections until mid-2013. The idea was to buy, through Valec, all the transport capacity of the new railroads. With this, the concessionaires would be free from the risk of demand, in the 35 years of duration of the contracts. The right to use the rails would be resold by the state company in the market.

In the banks simulations, the viability of most projects announced by the government is quite doubtful and will require heavy subsidies from the Union, allowing Valec to retrieve a minority share of the costs created while buying the capacity. The section between Açailândia (Maranhão) and Barcarena (Pará), thought as a pilot project for railroad concessions, they predict that there will be sufficient demand to cover only 20% of investments. That is to say, through Valec, the subsidy would reach up to 80% of the total value of the works.

Faced with this equation, the banks still detect a high political risk of disruption in the Valec payments, fearing that future governments make a negative reading of the current concessions. “These are contracts with more than three decades-long” recalls an executive from the financial sector.

The MP 618, already approved in Congress and converted in law, authorized a contribution of up to R$ 15 billion [BRL] in from Valec’s Treasury to guarantee these payments. The banks, however, estimate that the measure was doubly deficient: the capital increase was not put into effect, being only a legal possibility, and can be reversed later. In addition, the total R$ 15 billion is unable to guarantee payments for more than two or three of the 14 sections of railroads that the government intends to bid now.

Banks also argue “moral risk” to reject the financing to railroad concessions. They remember that many sections projected by the government have billionaire differences between the official estimate of costs and the businesses’ estimate. This raises, from financial entities point of view, the risk that constructors abandon works half way through. Even if it s a remote possibility, it enters the drawing board of the executives responsible for approving or not loans of billions of Brazilian Reais.

To minimize this risk, the government admits to redo feasibility studies and drafts for new railroads, handing responsibility to the private sector. The best studies, after selection by the National Land Transportation Agency (ANTT), would be placed in auction. The information was given to Valor by the Chief of Staff, Gleisi Hoffmann, last week. With this, the government hopes to reduce the gap between its estimates of investment in railways and private estimates.

Gleisi denied, however, having received information from the banks that there is no disposition to fund future concessionaires. “I am unaware of that matter. Never talked with BNDES, or with any other bank about it. This was never brought to the table”, said the Chief of Staff. “It’s surprising to come into question now, a year and a half later. BNDES is not even the only alternative to provide investment funds. Government practically guarantees the payment, is guarantor of the whole process.”

The Chief of Staff has personally committed to resolving the impasse with TCU, who was refusing to approve the railroads model. To the court, despite the concessions format to the private sector, they seemed like public-private partnerships (PPPs) and lacked any legal basis. The presidential decree of October precisely increased the legal support to these concessions and solved this issue. Now, a new challenge arose.