Paraná seeks investors for ambitious railroad project

QUESTIONS AND ANSWERS: NORTH-SOUTH RAILROAD PROJECT - Programa de Parcerias  de Investimentos

Paraná state government is preparing to launch a very ambitious project: Nova Ferroeste, a R$30 billion railroad between Maracaju (Mato Grosso do Sul) and the Port of Paranaguá (Paraná). It is not yet clear whether there is an investor willing to finance such a high amount. Paraná expects to draw a foreign group, even in an election year. In the market, however, there is little confidence that the plan will get off of the drawing board at this moment.

Feasibility studies recently concluded indicated an internal rate of return of 11% and a 17-year payback period, within a 70-year contract. “The study indicates that the railway is highly viable in all aspects: operational, environmental and financial,” said Luiz Henrique Fagundes, CEO at Ferroeste, a state-owned company that operates a federal concession, from Cascavel to Guarapuava (both in Paraná). The railroad is already in operation, but it is restricted. The idea now is to expand it, reform the current structure and transfer everything to a private-sector company.

Nova Ferroeste would be 1,304 km long, from Maracaju to Paranaguá, with a branch to Foz do Iguaçu (Paraná). The investment includes R$24.3 billion for construction, R$4.3 billion in rolling stock and R$800 million in environmental compensation. There is also a plan for another branch to Chapecó (Santa Catarina), but that was not included in the recently completed study.

The goal is to hold the auction by mid-2022. The state government plans to conduct market surveys in December and open public consultations. The first version of the call for bids is expected for February 2022.

However, there are still things to be defined, which go beyond attracting an investor. There are at least two question marks. The first is legal modeling, which has not been decided. At first, the idea is to carry out the project under an authorization regime, says Mr. Fagundes.

Ferroeste has even made requests to the federal government to build the additional stretches (outside the concession) by authorization — a new regime in which the entrepreneur is fully responsible for the undertaking, without risk sharing or financial support from the government.

However, the arrangement is complex. There are doubts about how the state-owned company would tender the entire corridor, since part would be done under the authorization regime and the other part is already an existing concession, in which the federal government transferred the operation to Ferroeste. “I don’t know to what extent we are going to be able to evade the concession. One possibility is to sell the concession. By the laws being considered in Congress, we could transform everything into authorization.”

Another issue is that there is still no definitive federal law that allows the authorization model, although there is a Provisional Measure (MP) in effect. In parallel, there is also a bill on the matter. When contacted, the Ministry of Infrastructure said that authorizations granted during the validity of the MP are perfected legal acts and, if the project is approved, there will be legal certainty.

Ferroeste works with the scenario that by the end of 2021, before the public consultation, the final standard will be approved. Mr. Fagundes says there is a plan B: carrying out the entire project as a sub-concession.

The second factor still pending is environmental licensing. Ferroeste has sought to speed up the process — the studies have already been completed and, in the next few days, they will be forwarded to federal environmental agency Ibama. The government wants to have a prior permit before the auction to provide more security.

In the market, there are doubts about the project’s feasibility, especially via authorization — without public funds or support. One source recalls that building a large-scale railroad is difficult even with taxpayer money, let alone without it. Another person, who also spoke on condition of anonymity, says that the authorization model tends to work more when the investor is the owner of the cargo or a operator already established in the country – but these would not be interested in the project.

For Bernardo Figueiredo, a former general director of ANTT (National Land Transport Agency), it is a good project, but one unlikely to materialize without taxpayer money. “It’s a necessary connection, which makes the greatest economic sense. My question is whether it will stand as a purely private-sector investment.” He observes that, in addition to financing, there is an enormous execution challenge in the work to descend from the mountains to the port. “It is a heavy, risky investment. It would need some government participation.”

Asked about the difficulty in attracting investors under these conditions, Mr. Fagundes says that he has had a positive return so far. “Investors go for what is good, the market knows how to identify opportunities. In some cultures, the issue of concession, of having reversible assets [returned to the government at the end of the contract], of rebalancing, is a trauma. The American, the Chinese don’t understand that. The authorization gives great comfort.”

The plan is for Nova Ferroeste to start being built by the mountain slope to the port of Paranaguá, so that revenue can already begin to be generated — in the first year of operation, 38 million tonnes are expected to be moved through it. With the railroad already mature, the perspective is that the capacity will reach 85 million tonnes per year. The main cargoes transported would be soy and corn, followed by soybean meal and animal protein.

Source: Valor international

https://valorinternational.globo.com/