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July 04, 2011

Brazil: a privatisation model that works

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THERE is little doubt that South America’s rail network would be a lot smaller than it is today had several governments not taken the bold step to privatise their railways in the 1990s. Years of under-investment coupled with a failure to restructure national networks from bloated bureaucracies into commercial enterprises had taken their toll and put much of the continent’s railway on the road to oblivion.

The model adopted was to break the national networks up into smaller units either to serve a particular region or according to track gauge. These were auctioned as long concessions - typically for 30 years renewable for a similar term - with bidders invited to pay an initial fee, followed by annual fees and an agreement to invest.
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It is interesting to compare the result of rail privatisation in South America's two largest countries, Argentina and Brazil, both of which are currently enjoying very strong economic growth. In Argentina the concessionaires have tended to concentrate their efforts on the easy pickings and have allowed many lines to fall into disuse. So much so, that the government has set up an agency to try to revive some of these lines. Some observers believe the government should have been a lot stronger in regulating the concessionaires to ensure they abided by their concession agreements, particularly regarding investment. The government is now paying a high price for its failure to do so.

It is a very different story in Brazil, where concessionaires have put a lot of effort and money into reviving their networks. Both the concessionaires and the government are reaping the rewards in terms of higher revenues and traffic volumes.

Even so, there is a belief that the concessionaires could be doing even better, and that rail's current market share of about 20% should be much higher. So the government is considering ways for rail to gain a bigger slice of the national freight market. This includes removing barriers to winning more traffic such as expanding the rolling stock fleet, improving access to the ports, building new lines, and removing financial constraints on growth. On the other hand, consideration is being given to allowing other operators access to the network to use spare capacity.

Concessions for government-built new lines will no longer be offered exclusively to one company. Instead one concessionaire will be responsible for the track and train control, while a number of operators will be invited to run trains.

Concessioning is also being applied to some urban rail networks in Brazil with considerable success. In Rio de Janeiro, both the commuter rail network and the metro have been privatised. The former has been in private hands since 1998. Prior to privatisation, the once bustling suburban system had fallen into a spiral of decay resulting in a huge reduction in traffic and mounting losses. But the system has been renovated and traffic is now growing strongly. The state government has shown its confidence in SuperVia by awarding it a new 38-year concession and agreeing to a joint investment programme.

A 20-year concession renewable for another 20 years was awarded for the Rio metro in December 2007 with a bid $US 300m above the minimum specified. However, the contract was renegotiated and the term extended to 2038. The metro's $US 100m deficit has now been eliminated and the metro now has a cost coverage rate of 1.6. While the network has expanded from 25.3km to 40.9km, traffic has more than doubled from 308,000 passengers/day to 650,000.

Investment has increased dramatically from around Reais 20m ($US 12m) a year to Reais 363.1m in 2009, and Reais 250.7m last year. This has enabled Metro Rio to dramatically improve train reliability and availability. Before privatisation, 14% of the fleet was out of service and only 60.5% was available for service during the morning peak. Today, all trains are operational and 98.9% of the fleet is available during the morning peak.

"A lot of the parameters are set in the contract, with escalating penalties leading to the loss of the concession if we fail to meet them," explains Mr Joubert Fortes Flores Filho, director of Metro Rio.

São Paulo has let a 30-year concession to Via Quatro to equip, operate and maintain the new Line 4. Via Quatro is not responsible for revenue, but is paid on the basis of the number of passengers using the line adjusted according to economic indicators. The concessionaire is allowed to develop other sources of revenue such as advertising. "It is a very sophisticated contract," concedes Mr Jorge Secall of Via Quatro. "The concession is working very well, but it is a learning process on both sides."

So what are the ingredients for a successful concession? First, the awarding authority must have a clear idea of what the concession should achieve. Targets in the contract must be set out clearly and be achievable. It is vital to get the balance right in monitoring the performance of the concessionaire and its adherence to what has been agreed. The concessionaire must be given the freedom to innovate while at the same time not allowing it to flout its commitments. Two final thoughts: the private sector cannot work miracles, so don't expect the impossible, and there is nothing wrong with a well-performing publicly-run railway.

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