See this IRJ web site for the full technical report on Brazil’s stalled rail strategic plans as of early June 2015.
Here are a few of what I believe are fundamental due diligence issues that potential rail investors need to consider in Brazil under a tightened Brazilian economy.
A new objective of the Brazil givernment reforms is to reduce the level of financing for new projects from Brazil’s National Bank for Economic and Social Development (BNDES). The government wants to ease the reliance on state-subsidised loans amidst rising concerns over public debt levels. This is evident in parallel recent news reports by Bloomberg and Reuters.
In the now stalled rail plans, up to 70% of the Reais 99.6bn of funding for the 11,000km of new Brazilian proposed railways would come from BNDES. However, with rating agencies indicating that current debt levels could result in a sovereign downgrade, What now will be the role for BNDES?
BNDES’ reduced role in future infrastructure lending is driven by declining federal subsidies – the treasury will not provide additional loans in 2015 as part of the government’s fiscal tightening efforts…
The international credit agency Fitch argues that operations must bring in more revenue, which could result in higher tariffs than initially envisaged. “This effectively transfers the project’s cost to those who directly benefit from the infrastructure rather than through the general tax base,”claims Fitch.
Meanwhile, China’s reported interest in the West East Integration Railway project (Fiol) and North-South Railway is offering some encouragement to the Brazil government. But the Chinese money is NOT private capital, is it.
Existing projects show the pattern of financing delay. “Overcoming this funding conundrum is critical for the viability of Brazil’s ambitious long-term railway infrastructure development agenda.” …”difficulties also appear to be emerging with existing schemes.”
Contractors working on Fiol, the 1022km line from Barreiras to Ilhéus, are reducing the pace of construction following late payments from Valec”…
“In April Galvão Engineering laid off 700 employees working on the 100km section between Manuel Vitorino and Aiquarara in Bahia and is now employing 148 workers compared with 1500 at the end of 2014.”
Valec acknowledges the cash flow problems and says that while it is in the process of settling the payments, it is waiting for the Ministry of Finance to set out its 2015 budget including its limits of expenditure and disbursement schedule.
Yes, there are clearly project risk. Someone has to present sound feasibility numbers to the prospective private investors for these rail projects. Otherwise, they will likely remain firmly “on the drawing board” rather than moving into execution.
one new policy twist is that the open access economic rail model appears to now be dead in Brazil.