The Bolsonaro administration has celebrated a wave of multi-billion investments in railroads since the creation of a new legal framework for the sector, but part of the projects are led by companies with share capital apparently incompatible with the size of the announced projects.

A research carried out by Valor suggests that at least five large projects already authorized or under analysis by the Ministry of Infrastructure – with 3,200 kilometers in length and almost R$50 billion in promised investments – were registered by companies with less than R$1 million in capital.

One is Macro Desenvolvimento Ltda., founded in November 2020, which has signed contracts for two new railroad sections: one linking Presidente Kennedy (Espírito Santo) to Sete Lagoas (Minas Gerais) and other linking Sete Lagoas to Anápolis (Goiás). Together, they total 1,326 kilometers and are expected to cost R$29.6 billion, but the company has equity inversely proportional to the boldness of the project: only R$10,000.

Regardless of the apparent contradiction in values, the estimates of multi-billion investments around the new railroads have been used in official events and on social media to expand the list of achievements of President Jair Bolsonaro, who will run for reelection in October.

These projects are based on Law 14.273, passed by Congress in December last year and signed into law by Mr. Bolsonaro, which allows new railroads under the authorization regime.

Under this model, investors are exempted from entering an auction and competing for a public concession. At their own risk, they can simply present a project to the government, which signs an “adhesion contract” with the entrepreneur. The compatibility between the equity and the size of the project is not among the preconditions.

According to market executives interviewed by Valor, who prefer not to be named, this has led to the proliferation of the so-called “paper railroads.” In practice, they are just a kind of title given by the government – the concession – which gives companies the right to build a certain railroad. Without enough capital to make the authorized project viable, they run after investors – usually abroad – who are willing to inject funds and assume the risk.

Given the uncertainties, the chances of “mortality” increase for a good part of the projects authorized or about to be authorized. Despite this, the government boasts that the new legislation is transforming the sector. The law was preceded by a provisional measure (MP 1.065), published in August, which created legal support for the presentation of projects.

As soon as it was published, the provisional measure of railway authorizations soon became part of the showcase of actions of the federal government. In early September, the Planalto Palace held a ceremony with Mr. Bolsonaro to launch the Pro Trilhos program, directed to the projects of the new contracting regime.

In February, the Special Secretariat of Communication (Secom) tweeted that the Pro Trilhos program foresaw R$240.8 billion in investments, with 79 requests from the private sector for the creation of new railroads and the expectation of generating 2.6 million jobs.

The post provoked immediate reaction from government supporters. Among praise for Mr. Bolsonaro and the then Minister of Infrastructure, Tarcísio Gomes de Freitas (Republicans), one post talks about accelerating the sector’s plans of “100 years in three.” Another post classifies the initiative as “incredible!” and mentions that the ministry’s budget is only R$8 billion. “Now, imagine R$240 billion of investments in railroads,” it commented.

Macro Desenvolvimento, which vows to build the two 1,326-kilometer railroads, presents itself as a “project and business solutions developer” with experience in initiatives such as a liquefied natural gas (LNG) regasification terminal and thermoelectric plants.

It also acts as a “strategic partner” for Porto Central, a project that already has the necessary permits and would be the point of arrival of the first railroad. The partner responsible for Macro, Fabrício Freitas, said that the company will receive new injections and foresees that the company will build the stretches in up to 12 years.

“The development of a new project, from its first cost, must be within a structured investment and accounting process,” Mr. Freitas said. “We signed the authorization contracts in December and, from then on, all the funds for the project are being injected into Macro. The accounting process, including capital increases and contributions, is just beginning.”

“The corporate model for the investment is being validated by the shareholders and investors based on the legal guidance we are receiving from specialized law firms, hired for this purpose. We started the project in the simple model of a limited liability company, with fewer costs, and we will continue with the contributions and adjustments as we move forward,” he said.

The other companies with share capital under R$ 1 million did not reply to requests for comment. One of them, Grão-Pará Multimodal, is heading a project valued at R$5.2 billion between Açailândia and Alcântara, in Maranhão. The route would connect Ferrovia Norte-Sul to a port where construction has not yet begun. The company was registered with equity of R$200,000.

Marcello Costa, secretary for Land Transport of the Ministry of Infrastructure, says that the new legal framework for railroads may still be adjusted and does not rule out defining some prerequisites for companies interested in big-ticket projects in the sector.

One possibility is to require a minimum amount of equity per kilometer of authorized railroads or the deposit of amounts proportional to the studies (economic, environmental, engineering) in an account linked to the project. “We may have a new provisional measure, a bill, or even a decree to regulate that which has been left loose or has not been sufficiently studied,” he said.

Mr. Costa evaluates that it is necessary, however, to ponder some differences between the model of concessions and that of authorizations for railroads. “When it is a concession, there is a partnership relationship and the government is looking for a partner. The logic of authorization is completely different,” he said.

First point: the authorization regime allows the emergence of another type of agent in the sector – the “railway developer.” As in real estate, the developer can act in the facilitation, in the solution of the deal. It can bring in investors, cargo owners, and even independent rail operators (who own the trains and take responsibility for transporting goods).

“This new business model allows not-to-big companies to operate and bring in partners. In fact, we are starting to see the emergence of new players in the sector. Several projects presented have a very high level of maturity,” he said.

Second aspect: there have already been 76 requests for authorization, totaling R$224 billion, submitted to the Ministry of Infrastructure. In the worst-case scenario, if only two or three actually get off the ground, the balance will already be positive, Mr. Costa said. Because the counterfactual, not having this legal framework, would be zero investment. The government loses nothing by allowing the authorizations, the secretary said.

“Before it was an impossibility. Without this, the option we had was to work with taxpayer money. We only have R$300 million a year for the Ferrovia de Integração Oeste-Leste [West-East Integration Railroad, known as Fiol], in Bahia, which is the only work in progress.”

Third point: the moment in December, according to Mr. Costa, was to pass the measure. The provisional measure 1,065 was about to lose its validity. The bill which originated the new law had been dragging on for years. “But, as with every new law, it needs some regulation and probably some kind of adjustment, which can be done calmly,” he said.

In this sense, there may be prerequisites for companies interested in large-scale projects. He has only one caveat: “What we cannot create is a selection of private-sector groups by the government ourselves.”

Source: Valor International

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