Brazilian Freight Rail Concessions Overview: Current Outcomes and Perspectives

The formerly public owned Brazilian Freight Rail System was under pressure in the middle nineties, mainly due to the revenue insufficiency, resulting from the government rate control policy and the inherent lack of investments, as well as the increasing funding requirements from the public budget. In this context, the system has been denationalized in the mid nineties, following a corridor format, with 11 regionalized concessions, with 30 year term contracts, running under a price-cap rate regime. The denationalization model has set contractual production and safety targets, which ultimately have indirectly set the required investments to comply with the contractual targets. The post denationalization scenario has allowed the rehabilitation of the former freight rail installed capacity, as a result of private investments on both rail network and rolling stock. The acknowledged freight rail system installed capacity recovery, followed by a profit guided management, have fostered the improvement of freight rail system’s performance, which ultimately have been translated into system’s production and safety enhancements. Albeit the huge advances observed during the first half of contract terms, there were some hurdles to be addressed, mainly the low interoperability/interchange rates, as well as the lack of greenfield investments, required for the necessary expansion of the Brazilian rail network. In this context, the regulatory authority has issued, in 2011, a rail regulatory package reform, focused on: i) interoperability improvement; ii) a widespread service coverage along the rail network (stretches production targets) and iii) a compilation of rail stakeholders (shippers and carriers) rights and obligations. The so called 2011 rail regulatory package has brought more transparency and equilibrium among shippers and carriers relationship, but has not addressed the lack of greenfield required rail investments, necessary to expand the freight rail share on Brazilian transport matrix. In this context, the Brazilian Government has proposed in 2012 the Freight Rail System Unbundling (Open Access Model), in which infrastructure managers would be in charge of providing rail capacity (with the guarantee of the demand risk covered by the Brazilian government) and granted rail operators allowed to operate on the network under a fee payment. However, the unbundled freight rail proposal has not evolved, mainly due to the lack of funding required to guarantee rail infrastructure managers return on investments, resulted from a strong fiscal crisis. Currently, the Brazilian Rail Regulatoy Authority is working on a proposal to extend the current (bundled) freight rail contracts, conditioned to contractual adjustments, focused on the imposition of mandatory investments for capacity improvement and interoperability enhancement. This work is supposed to present an overview of Brazilian Freight Rail System’s performance evolution since the denationalization process, followed by an assessment of the 2011 Rail Regulatory Reform, the 2012 Rail Unbunbled initiative attempt and the perspectives associated with the current freight rail bundled contract term extension proposal.