Brazil's ambitious plans for freight railways

The Brazilian government is preparing a major plan to unlock investments in freight rail projects with the participation of public and private sector funds.

President Luiz Inácio Lula da Silva's administration will roll out the plan after the October municipal elections. "We will start auctioning contracts in the sector next year," transport minister Renan Filho told BNamericas.

"If we look at the highway project pipeline, through the ongoing concessions agenda, currently we have investments of around 300 billion reais [US$55bn]. In the case of railways, I believe we will have a pipeline of around 150bn reais in projects," added the minister.

The federal government plans to invest resources in railways from agreements it is currently negotiating with private sector companies.  

The government is discussing with companies how to optimize contracts signed under the previous administration for the early extension of rail concessions. In 2020, under then-president Jair Bolsonaro, the government renewed various rail concession contracts that were due to expire in 2027.

However, after Lula came back to power in January 2023, the government began reviewing the agreements, as it considered the pledged investments to be too low.

The main issue is with mining giant Vale regarding the early renewal of its Carajás and Vitória-Minas rail concessions. The government expects to raise around 20bn reais in the negotiations with Vale.

"In the next few days we will announce an agreement with Vale," said Renan Filho. 

The minister said the government has already reached agreements with logistics firms MRS and Rumo.

"Our idea is to use all the resources raised from these agreements in railway projects. We’re in talks with the presidential chief of staff’s office and the finance ministry to come up with the best model," said the minister.

According to Renan Filho, initially it is possible that part of the resources will go to the general budget of the federal government and then be gradually transferred to the railway segment.

"As we receive resources from the companies, we will not immediately start projects in the railway sector, so in order for this money not to go unused, part of the resources may go to the government's general budget and then, over time, be allocated to railways," he said.

Details of the plan are expected to be announced over the next few months, and from 2025 onward, the federal government will begin offering the so-called sponsored concession format contracts to private sector participants.

"For railways, we will have an auction model slightly different from what happens in the road sector, where we offer concession contracts and the companies assume all the necessary investments. For railways, the government will directly inject a portion of the resources, and then the private sector will assume a larger part," said Renan Filho.

"This is not a PPP; it’s a little different, a sponsored concession, where the auction format will follow this as an example: We offer the concession contract for a certain railway section and inform the market participants that the government agrees to invest up to 2.5bn reais in that section. From there, we go to the auction and the company that demands the lowest counterpart from the government, a value lower than the 2.5bn we initially indicated in that contract, will win," he added.

The minister highlighted that Brazil's railway agenda is expected to attract the interest of international investors, including sovereign funds from Saudi Arabia and Singapore. 

Asked about the risks of a very ambitious agenda for railways generating input bottlenecks, the minister downplayed such concerns. "The railway sector's supply chain is an internationalized chain, so there will be no difficulties in purchasing parts that we don’t produce in Brazil, such as rails, for example. These can be purchased from industries in China, Germany." 

ROADS 

Meanwhile, the federal government plans to continue with an ambitious auction agenda for highway concession contracts next year.

"Next year, we want to hold at least 10 more highway concession auctions. In the first half of the year alone there will be at least five, this is practically a guaranteed schedule, remembering that even this year we have five more auctions planned. The idea is that during the four years of President Lula's administration, we have 35 highway contracts auctioned," said Renan Filho.

The government is welcoming the interest of new participants in the auctions, including international companies and investment funds. 

On Thursday, French group Vinci won the auction for a concession contract involving investment of 13bn reais in the Rota dos Cristais federal highway. It will be the first federal highway contract assumed by the firm, which already operates in the segment via a controlling stake in Entrevias, a highway concession in São Paulo state.

Vinci defeated three bids in Thursday’s auction from Brazilian asset manager 4UM, investment bank BTG Pactual, and infrastructure concessionaire CCR.

"The participation of international investors is very positive. Just as the federal government doesn’t have the money to invest everything it needs in highways, local companies are also unable to invest in all the highway contracts. That is why there’s a lot of room for our infrastructure to attract more international investors," the minister added.