Brazil: Railways back on track
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Brazil: Railways back on track

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The auction of the Norte Sul railway (FNS), on March 28, marks the end of a long hiatus for railway concessions. The last one had taken place in 2007, more than 10 years ago.

Of the various Brazilian logistic sectors, rail transport faces the greatest challenges. It presents risks related to demand, construction, expropriation, the environment, and issues related to third-party access to the existing network.

All these issues result in a substantial deficit. Brazilian railways rank 88th in the global competitiveness ranking, which evaluates 101 countries on efficiency and development, among other things.

The auctioned portion of the FNS presents a specific challenge: the railway has no direct link to seaports. It depends on access through sections operated by other concessionaires to take its cargo to maritime exits.

According to the existing regulation, access must be negotiated between the concessionaires, and formalised through a specific operational contract. If the parties cannot reach an agreement, the matter is submitted to arbitration before the Transportation Regulatory Agency (ANTT). The ANTT's decision can be further challenged in court.

However, third-party access is only mandatory if there is idle capacity. It is precisely there that conflicts occur. It is reported that parts of the network are already reaching the maximum capacity. If there is no idle capacity, the third party can build an expansion, at its own risk. This solution represents substantial costs and is not always feasible within the concessionaire's business plan.

Seeking to mitigate this risk, the ANTT entered into agreements with existing concessionaires before the bidding process, establishing a reserve of capacity for the initial five years of operation of the FNS and capped rates for access. This was an innovation in the Brazilian railway sector.

Nonetheless, only the concessionaires within the boundaries of the FNS participated in the auction. Brazilian logistics company VLI has access to the Itaqui port, along the northern section of the railway, and through the Ferro Carajás railway; and another of Brazil's logistics companies, Rumo, has an exit from the Port of Santos through the southeast railway.

The rail industry, due to its complex and capital-intensive nature, would ordinarily attract a relatively small number of competitors, and the third-party access issue may have further reduced potential interest. Future rail concessions, which have access to their own exit channels – the FIOL railway has an exit from the port of Ilhéus, and the Ferrogrão railway has an exit from the port of Miritibuba – should attract more players. It is expected, also, that the renewal of the existing concessions – with new investment obligations – will increase the capacity of the existing network.

All factors considered, a positive balance was achieved. Two proponents were sufficient for effective competition with high premiums (VLI offered BRL2.06 billion – $538.5 million – and Rumo offered BRL 2.72 billion, representing respectively, 52.60% and 100.92% over the minimum offer of BRL1.35 billion). Most importantly, the auction represents the initial and decisive step to resume the railway concessions; essential for putting the country back on track for development.





Anita Reis

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