Railways: Authorization Regime

Overview Brazilian Railroad Models – Chronology

The first investments in railroads in Brazil were made to serve the massive production of coffee for exportation between 1854-1905. The need of transport infrastructure to carry out the grains produced for the ports, in particular to Santos, major port in Southeast of São Paulo, started the expansion of the Brazilian rail network. These investments were carried out by the private sector.

The railways maintained their prominence until the 30s, when the current President Getúlio Vargas prioritized the development of the roads. The growth of the road sector reduced the rail market attractiveness for the private sector. As a result, the Government begun a process of nationalization of the rail network to prevent its decline. The following Government, headed by Juscelino Kubitschek, as a way to achieve its promise of rapid economic growth intensified the road expansion, in opposition of the objective of the rail network nationalization, leading to the downgrading of the Brazilian rail infrastructure.

In the end of the 90s the Government, as a way to reduce public costs and to promote investment through the National Privatization Program (PND – Programa Nacional de Desestatização) initiates the process of privatization of the railways under public administration granting sections of the network by concession.

Recently, it came back to discussion an important issue regarding an existing gap in the national’s transport network, especially in the railway sector. The cost of logistics in the country remains high at the same time as the country’s agricultural production is increasing, generating a need for transport infrastructure particularly in the mid-west of Brazil, an important producing area with a lack of outflow options. As the Government doesn’t have the financial capacity to attend all the country’s logistical needs and has the interest in developing the rail network, this financial and operational gap was considered a market opportunity for the private sector to invest. As a result, it was proposed a new method of granting transport infrastructure that takes the risk off the Government and yet still attracts the private sector.

With this new grant model, it gives private sector the permission of the construction of railways, with minimum bureaucracy, similar to the American Rail System. The discussion of this new granting permission dates back to 2018 with PLS nº261, it then evolved to the implementation of Provisional Act N°1065 (Medida Provisória N°1065) in 2021, granting the first permissions, until December 2021 when it was substituted by the Law 14.273.

Figure 1. Timeline of regulatory railroad sector

New Regulatory Framework

In December 2021, it was approved a new Law that regulates the Brazilian Railway System. The major differential of Law 14.273 is the institution of a new format of indirect exploitation of the Brazilian railway network by the private sector, which is called the Authorisation Regime.

The Law not only validates this new granting format, but also describes the guidelines that dictate the application procedure. The main objects of the granting process can be separated in:

  • Criteria used for the granting decision
  • Basic analysis procedure by the regulation agency
  • Extinguishment of the Authorization, in case of desertion or withdraw
  • Conversion of concession into authorization
  • Common rules between the concession and authorization regimes

The motivation for creating this liberal usage of the railway system is to develop the rail network by giving the private sector the permission of owning and operating a private rail line, such as the granting model applied in the railway system of the United States of America.

The Authorization model is considered by the Government to be ideal for the network growth target once is fully compatible with a verticalized system, as it gives freedom to railway companies to organize their operation in the most efficient and cost-effective way. It is understood that operational freedom and the consequent optimization and reduction of costs for the companies are key to comply with the principles established by the Law.

Upsides of the Regime

The institution of the Authorization model can be considered an important regulatory evolution on the Brazilian rail sector for promoting the expansion of the rail network and for bureaucracy reduction of the railway system.

The upsides of the Authorization granting regime can be analyzed differently, depending on the activity of the players concerned. On the Government’s side, this initiative has the purpose to engage the private sector in investing on the development of the country’s transport infrastructure, especially in regions where there is already high demand and inefficient infrastructure to supply it. By allowing private investment in transport infrastructure, the Government transfers the economic and operational risks of the venture to the private sector, while ensuring investment in the national transport network. The expectation is that the growth of the national network will impact on the attractiveness of the rail modal in comparison of the road transport, and as a consequence, it will increase the railway’s share in the freight transport matrix. As an additional element to engage the private sector, the Government aims to promote the establishment of a competitive environment with reduced intervention of the public sector.

For the private sector, on the other side, the new granting model is attractive mainly because of the lack of operational and financial commitment to the Government, as well as the Government assistance in the expropriation process, which facilitates the implementation of the company’s strategy with minimum intervention. According to the Law, the private operator can determine the tariff charged for the freight transport service with no Government intervention, such as the application of maximum and minimum values. On the same line, differently from the concession agreement, the authorized companies do not have any restriction regarding the offer in transport capacity of the owned rail line, leaving to the company the administration and negotiation of the available capacity of the line both for direct clients and third part operators that request the sharing of the railway infrastructure. Concerning the regulatory aspects of the granting model, the Law encourages the application for authorized railways by establishing a contract with large duration, between 25-99 years, with the possibility of renewal. One of the key issues regarding the concession model, besides the contractual obligations, is the property of the rail infrastructure. The companies that operate under concession regime are obliged, under certain conditions, to invest in the asset even though they are not the owners. The Authorization model softens this issue as the companies have the entire property of the infrastructure, once the railway costs were all carried out by the authorized company. By owning the asset, the private sector does not have to handle over to the public administration in case of end of contract, as well as in the case of drop off, which is also permitted by the Law, at any time, without the need of transferring the property and operation to another operator.

Controversial aspects

Regardless of the innovative aspects of the new granting regime, there are some issues still to be tackled. The two principal circumstances are due to regulatory measures and technical adjustments between the concession and the authorization model.

The regulatory freedom granted operationally and financially through the authorization model is considered debatable by some agents of the sector given its effects on the existing railway system. The major issue, that has probably the greatest national impact, is the lack of obligation for the private sector to carry out its commitment to constructing the railway that was granted, as well as the possibility of closing down the railway operation at any time, without the need of transferring the infrastructure and operation to another company. This regulatory opening interferes in the national transport planning as future projects could depend on the operation of the granted railway authorization.

Another important aspect concerns the dynamics between railways under different granting models. The main issues are related to the operational differences between the concession model and the authorization model such as: the non-mandatory shared traffic obligation, the freedom of defining the operational capacity of the railway, the freedom of defining the tariffs on the authorized railways, and the possibility of implantation of authorized railways with few locational restrictions.

These operational differences result in a non-competitive environment, as there is no guarantee that the cargo from a concession railway has access to an authorized railway. Such event can compromise cargo flow and network options. There is fewer legal tools that can protect financially and operationally the clients that depend of the rail modal; and the presence of a competitive parallel rail line with better financial opportunity can impact in the existing operation of the concession railway, especially since a financial rebalancing is not allowed to the companies that operate under the concession granting model.

Despite the controversial aspects, this is an important movement toward the evolution of the railway sector and it can be verified by the number of requested rail lines since the institution of the Provisional Act N°1065 (Medida Provisória N°1065), a total of 78 lines that add almost 21 thousand kilometres in the current rail network. This modal always had potential to be applied in Brazil, especially considering the national geographical aspects. Therefore, is important that the agents involved in the sector take the initiative to participate and contribute to the present discussions regarding the authorization model and Law 14.273, so there can be achieved a more equal system and a boost in the Brazilian rail transportation. Since the institution of Law 14.273, no other authorized rail line was granted and currently the possibility of amendments to the Law is under a public hearing. As a consequence of this regulatory uncertainty there is no expectation that the 78 railways will be constructed. The success of the new granting method will depend on the result of the current public hearing and the decision adopted by the Brazilian transport regulatory Agency ANTT.

Figure 2. Railways under concession and authorization agreements

About the authors
Guilherme Esmanhoto holds a BSc. in Civil Engineering and MBA. Partner at ALG gesmanhoto@alg-global.com
Tamara Gaspar holds a MSc. in Transport Engineering and BSc. in Civil Engineering and is Team Leader at ALG tbgaspar@alg-global.com
Erica Marqués Oliveira holds a MSc. in Civil Engineering and BSc. in Civil Engineering and is Business Analyst at ALG eoliveira@alg-global.com
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