Rolling toward renewal: Brazilian railroads gearing up for the future

Brazilian rail equipment manufacturers are optimistic about the future of the sector thanks to the infrastructure program to be announced by the federal government and the growing pressure, particularly from mining companies, to replace existing train fleets to reduce emissions. 

President Luiz Inácio Lula da Silva's administration is expected to announce its new PAC infrastructure program this month and that could trigger annual investments worth some 60bn reais (US$12.7bn), with a large portion of those in the rail sector, a government official recently told BNamericas.

Meanwhile, the sector is looking to address growing demand, particularly from mining companies, for trains that generate less greenhouse emissions, which could produce new opportunities to introduce hybrid technology.

Vicente Abate, president of national rail equipment manufacturers' association Abifer, talks with BNamericas about the outlook for the sector, including the aims of the transport ministry to abolish the ICMS tax for rail projects.

BNamericas: What impact could the planned withdrawal of the ICMS tax have on the rail sector?

Abate: It’s a laudable effort by the federal government, which should facilitate and help rail projects advance. The government stated that the withdrawal of the ICMS could produce a 15% reduction in costs, but I would say that's an average estimate, as the ICMS varies from state to state and the reduction could be much larger in some states.

BNamericas: How difficult will it be to convince state governments to withdraw the tax?

Abate: Due to the complicated fiscal situation of the states, I think that task will be quite difficult for the federal government, since nobody wants to lose revenue and it will require some degree of sacrifice from the governments.

Furthermore, it's also true that each state has its own reality, so it's not just a question of the balance of forces, but of the real tax collection needs of each region.

BNamericas: What do you think of the federal government's initiatives with regard to the rail sector so far?

Abate: They've been positive so far. Since March this year, we've had several monthly meetings with various government ministries to advocate for our demands. One of our most important demands that seems to be likely to be met is the issue of accelerated depreciation, which also needs to be assessed by congress.

In the past, when we had the accelerated depreciation mechanism, it helped the materials, wagons and locomotives areas and, if implemented, it would be very positive for the sector again.

Of course, there's still a lot to be done on the government's side, but I'm positive about how the first few months have been.

BNamericas: What are the expectations for the announcement of the federal government program (PAC) for the rail sector?

Abate: We have very high expectations regarding the PAC because this program should provide details of a series of railroad projects by the federal government and the other good news is that we will also have initiatives by state governments included in it.

Idleness levels in the train and wagon industry are quite high and with the advance of the PAC we hope to reduce them. But in addition to the PAC, we've also acted on other fronts to stimulate the sector. 

BNamericas: What are industrial idleness levels currently?

Abate: At present we have 80% idleness for companies that produce trains for the cargo sector, which is high. But this idleness will tend to fall in the coming years due to the increase in demand generated by the PAC and also by a trend of hybrid trains.

As part of that we're trying to promote a five-year extension in the Reporto program [tax incentives for rail projects in port areas], as it ends in December 2023, and we also want to see the Frota Ferroviária Verde program advancing.

[Editor's note: In 2022, the federal government created the Frota Ferroviária Verde program, or green railroad fleet, to encourage investments to reduce greenhouse emissions from rail operations and in alternatives to increase the use of renewable and non-polluting fuels for the operation of the rail freight and passenger transport services]

BNamericas: Talking about the Frota Ferroviária Verde program, do you think Brazil will ever have 100% electric freight rail services?

Abate: Complete electrification of the rail sector in Brazil is difficult. One of the problems is the fact that we have very long railroads and that makes most electrification plans unfeasible.

I believe that part of the rail sector will be electrified, but many of the solutions for decarbonizing rail freight transport will be through hybrid models, with mixed use of biofuels and batteries.

Much is also said about green hydrogen, but it's still too early to make a statement about its application in the railway sector.

But efforts are already underway by companies, mainly mining firms, to reduce greenhouse emissions from their operations, which will generate new demands for the rail industry due to the search for hybrid technologies, but it won't be fully electric.