Companies lack capital for railroad projects

Marcello Costa — Foto: Divulgação
Marcello Costa — Foto: Divulgação

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

Paraná seeks investors for ambitious railroad project


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

Rumo to sign agreement for new railroad in Mato Grosso

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Cosan group’s logistics company Rumo and the Mato Grosso state government are expected to sign an agreement this Monday to build a new railroad in the state, the Olacyr de Moraes Authorized Transportation Railroad (Fato). Mr. Moraes was the agribusiness entrepreneur who conceived and built Ferronorte, a railroad later renamed Malha Norte.

The new 730-kilometer railroad will be an extension of the current corridor operated by Rumo, which connects Rondonópolis, Mato Grosso, to the Port of Santos. Two new branches will be built: one to the capital city Cuiabá and the other to Lucas do Rio Verde, in the north of the state, where the region’s agricultural cargo is concentrated.

“The railroad will be key for the expansion and competitiveness of agribusiness. Besides this, it will also be a corridor for the industry. We will connect the state to the main consumption centers in the Southeast region,” Governor Mauro Mendes (Democrats, DEM) said.

The necessary environmental permits are expected to be granted in up to six months, the governor said. The construction is expected to start between the end of 2022 and the beginning of 2023.

The railroad’s executive project is still being finalized. The project is expected to require investments of R$9 billion to R$11 billion, Rumo’s CEO Beto Abreu said. The project is expected to be finished between 2028 and 2030, but operation will start in stages. The first one could begin in 2025, after one or two terminals are finished 200 kilometers north of Rondonópolis, Mr. Abreu said.

This is a pioneer project for two reasons. First, because it is a state railroad, not a federal one. In addition, it will be built under an authorization regime, instead of a concession, which is the model used for the other railroads in the country. The difference is that, under the new model, the project is in private hands. Rumo will invest and operate on its own, without sharing risks or receiving injections from the state, which is left with the role of overseeing the construction works and safety standards.

Fato’s regulation will be put together by Mato Grosso’s public services regulator Ager, Governor Mendes said.

The railroad network extension in Mato Grosso is an old project of Rumo. The company negotiated at some point with the Ministry of Infrastructure to have the project included in its federal concession, but disagreements held up the plan. In backrooms, some say the federal government wanted to move forward first with another railroad, Ferrogrão, and had been slowing down Rumo’s project as a result. On the other hand, some say it would be unfeasible to approve such a high investment without a call for bids.

There was an impasse until July, when the Mato Grosso state government announced a public call for tenders to carry out the construction independently of the federal government. The state had been preparing for that since 2020, and had already approved and regulated its own legislation enabling local railroad projects through the authorization regime.

When the project was announced, several analysts in the infrastructure sector raised doubts about its legal security. Since then, the federal government itself has put forward federal legislation for the construction of railroads through authorization amid pressure from several similar efforts put in place by state governments.

Rumo’s CEO said there is no longer any prospect of transferring the project to the federal sphere. “The path has been decided. I see the federal effort as progress, though. Brazil needs this. It is another initiative that, of course, needs to go through the whole process and make its way in the Senate and in the Chamber of Deputies to receive amendments and be adjusted. Then it also has to be regulated. It still has a way to go,” he said.

Asked if a federal project would bring more legal security to the work, the executive said he sees no difference. “We have a very clear, regulated law [in the state]. It was an opportunity. The railroad runs within the state and [local legislation] was more advanced. But this is a project for Brazil.”

As for demand risk, which will be Rumo’s responsibility, the executive says he is confident, even with other railroad projects planned in the state, which may compete for shipments. “The supply is expected to keep growing. There will be a lot of volume. The group has drawn the most diverse scenarios and none of them discourages us.”

To make the multi-billion investments in the new venture, Rumo plans to use its current capital structure without exceeding its leverage limits, which are about 2.6 times the net debt-to-EBITDA ratio. “Investments will be made over the years. Our current capital structure and the expectation of cash generation allow us to absorb this project,” Mr. Abreu said.

He highlights that as the terminals are finished, there will be revenue generation. Besides, not all the funds will come from Cosan’s logistics company. Rumo plans to find partners to build the terminals the same way it did with other railroads it operates.

“It is a disruptive project, which impacts a gigantic value chain. With the railroad, corn ethanol plants, fertilizer blenders, soybean crushers will be built,” he said.

Source: Valor international

Rumo opens main stretch of railroad in Goiás

American Railroads Are Already in Recession With No End in Sight |  Transport Topics

Cosan’s logistics company Rumo starts operating the most important stretch of Norte-Sul Railroad this Tuesday. In March, the company had already opened the track between Estrela D’Oeste, in São Paulo, and São Simão, in Goiás. Now, the company set up its terminal in Rio Verde, Goiás, which considerably expands the volume hauled.

“The Rio Verde terminal is 200 kilometers far from São Simão. It is closer to the producers in the southwest of Goiás. Besides, it will be able to receive cargo from the East of Mato Grosso,” Pedro Palma, Rumo’s commercial vice-president, said. The R$400 million terminal can handle 11 million tonnes of grain per year.

Rumo took over the concession for the central section of the Norte-Sul railroad in July 2019 and committed to complete the construction works and finally get off the drawing board the corridor designed to be Brazil’s logistics “backbone.” Rumo’s railroad links Estrela D’Oeste with Porto Nacional, in Tocantins. Going south, the track connects to the Malha Paulista, another rail concession operated by Rumo that ends in the Port of Santos. Going north, it is connected with the VLI and Vale railroads, which end in the port of Itaqui, in Maranhão.

Until now, Rumo’s investments in the Norte-Sul railroad have been focused in the southern stretch, to make possible an export way ending in Santos fully operated by the company.

The company has yet to finish the railroad. At the beginning of the year, the company expected to do so later this year. Currently, it wants to finish it “in the first half of 2022,” Mr. Palma said. The last stretch of around 290 kilometers still has to be delivered, between Rio Verde and Ouro Verde de Goiás. The next stretch, which ends in Tocantins, is also already in operation.

When the entire railroad is completed, it will also be possible to attract agricultural cargo from the North of Goiás and the South of Tocantins to the Port of Santos. In addition, the idea is to take containers from Maranhão to the Southeast region, Mr. Palma said.

However, the assessment is that the largest volume will be concentrated “from Rio Verde downwards.” “There is firm demand in the South and Southwest of Goiás. We believe that the arrival of the logistics infrastructure will encourage producers in the other regions served, but these are longer-term processes,” he said.

At the moment, the railroad’s focus is on transporting grains, such as soybeans, corn and soy meal. But there is potential for other cargoes. In Rio Verde, a fertilizer terminal is already under construction in partnership with Andali (a joint venture with the American cooperative CHS), where there will be structure for cargo transshipment and fertilizer mixing. The plant is expected to be ready by the first half of 2022.

A fuel facility should also be built to receive gasoline and diesel from the Paulínia refinery (Replan) and biofuel from the region’s agricultural producers. “We are in the final stages of detailing the project and selecting the right partner,” Mr. Palma said. The company expected to start operations in the second half of 2022 or early 2023, he said.

Despite investments shared with strategic partners, the executive says terminals can serve other companies.

Besides Norte-Sul, Rumo will be able to consolidate its position in the agricultural export route with another project announced last week: the extension of Malha Norte, in Mato Grosso. The railroad, which currently goes as far as Rondonópolis, is expected to reach Lucas do Rio Verde, taking cargo to Santos.

The extension of the railroad had been negotiated with the federal government, but as talks did not advance, it ended up being done through a project of the Mato Grosso government. The contracting will still have to go through call for tenders, but Rumo is highly likely to win. In Mr. Palma’s view, it makes no difference whether the work will be done via the federal or state government, as long as it materializes.

In the market, one question mark is the legal security of the state project, based on a law approved earlier this year to authorize railroad works without concession – in other words, private-sector projects, executed without bidding or direct participation of the state. Rumo’s executive denies any uncertainty. “The government did it in a very diligent way, with transparency. We expect the project to move forward without problems.”

Source: Valor international

Infrastructure is now the hot Story in Brazilian Commodities

The man in charge of Brazilian sugar giant Cosan Ltd. has little interest in talking about the sweetener. These days, he’s all about railways, writes Bloomberg in its latest report. Cosan is controlled by 69-year-old Rubens Ometto, one of the sixty most powerful men in Brazil.

The business that gave life to Cosan — the world’s biggest sugar-cane operation — has been stuck in the doldrums following years of depressed global prices and government policies that curbed the expansion of cane ethanol in Brazil. In stark contrast, the commodity powerhouse is ready to invest “tens of billions” in a plan that will reshape how the nation’s crops get transported, Chief Executive Officer Marcos Lutz said.

“Brazil infrastructure is now the hot story in commodities,” the 49-year-old executive said in an interview with Bloomberg at Cosan’s headquarters in São Paulo.

The South American nation — with its vast swaths of arable land along with abundant water resources and ample sunshine — is already the world’s biggest exporter of agricultural goods from beef to soybeans, and expansion is likely to continue, Lutz said.

That means even more pressure on infrastructure and logistics that have seen chronic problems under the weight of the farm boom. “We see a clear opportunity that derives from a long winter of under-investment,” he said.

Railroad that will Connect Port Terminals in the Northern and Southern Regions.

Cosan has been at the center of Brazil’s push for investments in train transportation. President Jair Bolsonaro’s government is seeking to double the country’s railway capacity through concessions that will demand about R$25 billion (US$6.3 billion) in capital expenditures over the next few years.

Last month, Cosan-owned Rumo SA won a first auction to complete and operate 955 miles (1,537 kilometers) of railroad that will connect port terminals in the northern and southern regions. The railway is planned to be the eventual spine in a network of lines sprawling across key crop-producing states.

Rumo is also in the final stages of a concession renewal process. The terms include more than doubling the annual capacity of the railway known as Malha Paulista, which connects Brazil’s largest port to the nation’s agricultural heartland. Rumo will spend as much as R$ 15 billion in CapEx through 2023, while “several” other investment opportunities are being considered, Lutz said.

“We’re talking about investments of a magnitude that have never been seen in Brazil’s railway sector,” he said.

The bet has won over investors. Rumo’s market value has jumped fourfold since April 2016 to about $7 billion, the most among global peers. The rail operator is now worth more than Cosan SA, the Sao Paulo-listed company that controls the group’s energy businesses, and its bonds trade above par. Both units are under Cosan Ltd., which is listed in New York.


Source: The Rio Times