Government makes rules more flexible and delays schedule of auctions

With fear of a failure in the first auction of railroads, the federal government decided to make the rules of the concession model more flexible and to postpone the schedule for 2014. The first step for the stretch Açailândia (state of Maranhão)-Vila do Conde (state of Pará) was scheduled for October 18 and analysts understand that there is no time to reschedule the auction in 2013. The expectation is that the 12 auctions happen in the first half due to the election calendar, which prohibits bids from June. The Investment Program in Logistics (PIL) provides the auction of 10,000 km of new railroads with investments of $41.17 billion.

The new model proposed by the government differs radically from the model implemented in the 1990s, during the privatization of RFFSA, in which the concessionaires gained the rights of exploration and operation of the tracks for 30 years. Under the new regulatory framework, the future concessionaires will be responsible for investment in the construction of the stretches in a period of five years and another 30 years for management. After construction is completed, the federal government must purchase all of the railroad capacity, paying the concessionaire with a rate. Following, the government would make a new auction to choose the so-called rail operators, which will also pay the concessionaire for the use of the railroad.

The model looked attractive to the concessionaires, which would receive regardless the usage volume of the track, but it generated uncertainty about the risks allocated (responsibilities for environmental reports and expropriations, mostly) and also in relation to corruption cases involving Valec, whose former president José Francisco das Neves (Juquinha) was arrested on charges of embezzlement of more than $45.24 million from works of the North-South Railroad. To reassure the market, the federal government indicated that it will create the Empresa Brasileira de Ferrovias (EBF), with more technical assignments and capital of $6.78 billion inherited from Valec.

According to Jean Mafra, superintendent of freight railroad infrastructure at the National Land Transport Agency (ANTT – Agência Nacional de Transportes Terrestres), the amendment of the rules sent to the Brazilian Court of Audit (TCU) will fix some imperfections and bring more tranquility to investors. About 85% of the investments should be made in the first five years, which is expected to attract just sized companies such as construction companies and large groups such as banks and funds. Companies with operational expertise should also integrate the consortia. There is still the expectation of the entry of Asian group in the auctions.

Under the new rules, the environmental reports will be borne by the federal government through IBAMA. Expropriations planned should be described in indicative track route; which exceed this will be shared between the concessionaire and the State. It was also agreed that the Brazilian Development Bank (BNDES) will be responsible for up to 85% of work funding. Technical issues were also redesigned. The standard gauge will be 1.60 m (broad gauge). The costs for any mixed gauge stretches (third rail) will be computed in investments.

According to the lawyer Heloisa Uelze, from the law firm Trench, Rossi e Watanabe, the changes are welcome, but the main fear among investors is the role to be played by Valec (or the company that will succeed it). The presence of a public company brings uncertainty for investors, especially in the case of Valec, she says. According to the lawyer, the history of the company and the unprecedented concession model tends to inhibit the presence of foreigners, who may encounter difficulties regarding the risks and issues of compliance.

To Claudia Bonelli, from the law firm TozziniFreire Advogados, the concession model is positive in the sense of bringing more flexibility in the use of the railroad network. But it raises questions, such as the future relationship between the track concessionaire and the operator, which will be set by the government.