Opinion – Pablo Acosta: Railways in Brazil: from guarantee to liberalization

Brazil had its first railroad inaugurated in 1834, even before the Republic was established, through a concession from the Imperial Government to the entrepreneur Irineu Evangelista de Sousa, the Barão de Mauá, for the implementation of the Petrópolis Railroad. In order to attract investors and encourage the development of the railway network, the Emperor Dom Pedro II instituted the Interest Guarantee Law, which established the payment, with public resources, of 5% of the capital employed in the construction of the railway. The law also brought other incentives, such as the prohibition of any other railway within a radius of five leagues and the exemption from taxes on imports of railway materials. On the other hand, penalties would be applied in case of non-compliance with the implementation schedule, leading to the expiry of the contract in case of recurrence. Despite having boosted Brazil’s development in the 19th century, these mechanisms proved unsustainable given the budgetary pressure created by paying interest to the private sector. The government was then forced to reduce benefits, which cooled investments in the sector and motivated its nationalization.

After an extensive period of state predominance in the railways, marked by the low competitiveness of the modal and prioritization of investments in highways, the private sector returned to play a leading role during privatization in the 1990s. The transfer to the private sector took place in the form of concessions, according to the Law 8,987/95, in a vertically integrated manner. In this model —adopted by countries such as the United States, Canada and Mexico—, the same incumbent is responsible for managing the railway infrastructure and operating the trains.

The contracts signed during the wave of concessions in the 1990s had a term of up to 30 years, renewable for an equal period, included payment of grants and investment obligations, in addition to the reversibility of assets to the Government. Concessionaires should also achieve annual production and accident reduction targets and ensure the sharing of infrastructure under their responsibility, in order to avoid abuse of market power. As a result, in 2001 the ANTT (National Land Transport Agency) was created, which has been operating since then to regulate compliance with contractual rules and mediate conflicts between market participants.

The concessions brought obvious benefits to the country. According to records from the ANTF (Associação Nacional dos Transportes Ferroviários), 489 million tons were transported on rails in 2020, of which 75% correspond to iron ore, and the productivity of the railways, measured in tons per useful kilometer (TKU), jumped. from 137 billion in 1997 to 365 billion in 2020 — a growth of 166%. In the same period, the locomotive fleet grew 186%, from 1,154 in 2007 to 3,298 in 2020, and the number of accidents reached the lowest rate in the historical series, with a reduction of 86.41%.

In the international scenario, Brazil occupies a prominent position among Latin American peers, both in terms of transported volume and operational efficiency. A study published by the Inter-American Development Bank points out that among the ten railways with the highest volume of transport in Latin America, six are in Brazil, especially the Carajás Railroad and the Vitória-Minas Railroad, which occupy the first and second position in the ranking, respectively. In a broader perspective, Brazil still shows a gap when compared to countries of similar territorial extension, such as the United States, Australia and China. According to the World Economic Forum, Brazil ranks 78 out of 141 countries in terms of rail network density. Of the current 30,000 kilometers of railways, approximately one third are abandoned, in addition to having low interoperability of active sections due to the lack of infrastructure standardization. Furthermore, the vertically integrated model of concessions resulted in strong market concentration, and around 90% of all transported volume is concentrated in just four major players.

In 2021, a new framework for the railway sector was approved (Law 14,273), which brought to light a new format for private railway operation, the authorization regime. The format is influenced by the sectoral reform that liberalized the North American railroads in 1980 (Stagger Rail Act) and allows the private sector to implement and operate railroads at their own risk with less intervention by the Government and ANTT. The concessions model, however, was not extinguished. In its final form, the authorization regime covers railways of any nature, including proposals that coincide or interact with each other and with government projects. In the first six months, more than 75 authorization requests were submitted to the Ministry of Infrastructure, totaling investments of around R$ 240 billion in 20 thousand kilometers of new railways.

It is not known, for sure, which part of this figure will translate into new tracks —since the submission of authorization requests does not require detailed projects and execution guarantees— nor the results of liberalization in a market dominated by operators that transport mostly goods exploited by the economic group to which they belong. In any case, the materialization of these projects, even if partial, could bring significant gains in logistical efficiency, increase rail participation in the transport matrix and put the country on the trails of decarbonization.

This column was written in collaboration with World Bank colleagues Edpo Covalciuk Silva, Transport Specialist and Rodrigo Bomfim de Andrade, Economist