POLITECNICO DI MILANO
School of Industrial and Information Engineering Master’s Degree in Management Engineering
Analysis of the Brazilian Railway for West-East Integration (FIOL)
Supervisor: Alessandro Perego
Degree thesis by: Leandro Bastos de Araújo 848952
3 If
If you can keep your head when all about you Are losing theirs and blaming it on you, If you can trust yourself when all men doubt you,
But make allowance for their doubting too; If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating, And yet don’t look too good, nor talk too wise
If you can dream—and not make dreams your master; If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster And treat those two impostors just the same;
…
5
Acknowledgements
First, I must express my profound gratitude to my dear brothers Ygor Bastos de Araújo and Felipe Bastos Wagner, my grandparents Antônio Fialho and Marlene Ferreira, my lovely great grandmother Edelvita Barreto Ramos and my parents, Patricia Barreto Bastos and Rogerio Wagner for all the support throughout my years of study and through the process of research and production of this thesis.
I would like to thank Chiara Scotoni for the patience, helpful insights and discussions throughout the thesis production and development. Your help and support were incredibly important for the entire process.
I would also like to thank my interviewees Guilherme Quintella, CEO of EDLP, provided, Julio Fontana, CEO of Rumo Logística, Fernando Sanches, Business Development Manager at EDLP and Sergio Lobo, VALEC’s director, for the time disposition and insights provided in our interactions.
Finally, I would also like to thank professors Alessandro Perego and Telmo Giolito Porto for the kind support provided and assistance throughout the thesis development.
6
Abstract
This work analyzes the current situation of the Brazilian railway for West-East integration (FIOL – “Ferrovia de Itengração Oeste-Leste”), one of the PAC (“Programa de Aceleração do Crescimento” – growth acceleration program) investments. The railway benefits the iron ore production in the region surrounding Caetité (BA), and other goods that nowadays face the burden of high freight rates imposed by roads transportation. The current scenario is characterized by a precarious transportation network, fragmented and highly dependent on the road modal thus, it is of vital importance for the country economic growth, to invest in its infrastructure system. In this context the work describes in detail the role railways have in Brazil and the reasons behind the current precariousness. After setting the stage, an analysis that assess the potential economic costs and benefits of this specific investment is performed in this study, with emphasis on the case of iron-ore given the significance of this product for the railway. The study concludes how indispensable it is for the Latin American country to overcome its structural hurdles through the investments in its transportation network, with emphasis on the railway modal.
7
Abstract
Questo studio analizza l'attuale situazione della ferrovia brasiliana per l'integrazione ad est-ovest (FIOL - "Ferrovia de Itengração Oeste-Leste"), uno degli investimenti dei PAC (Programa de Aceleração do Crescimento). Questo progetto beneficia la produzione di minerali di ferro nella regione di Caetité (BA) e di numerose altre merci che oggi affrontano l'onere dei tassi di trasporto elevati, imposti dal trasporto di strade. Lo scenario attuale presenta una rete di trasporto precaria, frammentata e fortemente dipendente dal trasporto stradale, pertanto, è di vitale importanza per la crescita economica del paese investire nel proprio sistema infrastrutturale. In questo contesto il lavoro descrive in dettaglio il ruolo che le ferrovie hanno in Brasile e le ragioni che stanno dietro l'attuale precarietà. Dopo avere spiegato il contesto, in questo studio viene eseguita un'analisi che valuta i potenziali costi e benefici economici di questo investimento specifico, con enfasi sul caso di minerale di ferro dato il significato di questo prodotto per la ferrovia. Lo studio conclude com’è indispensabile per il paese dell'America latina superare i suoi ostacoli strutturali attraverso gli investimenti nella sua rete di trasporto, con l'accento sul modo ferroviario.
8
Foreword
At the light of current events in Brazil, the ongoing political and economic crisis, this project is intended to demonstrate the country’s potential. In this case, represented by the economic gains and infrastructure development due to investments in rail sector.
This thesis has been produced by the leading author with supervision from professors Alessandro Perego and Telmo Porto. This project is presented as Master of Science Thesis for the Management Engineering course at the Politecnico di Milano.
9 LIST OF TABLES
Table 1 - Top 5 exports in Brazil's economy for 2016 ... 16
Table 2 - Brazil's exports by trade partner ... 17
Table 3 - FIOL operational characteristics ... 39
Table 4 - FIOL current costs segmented by section ... 44
Table 5 - FIOL's unit costs ... 45
Table 6 - Exchange rates in national currency units divided by U.S. dollars ... 47
Table 7 - Average unit costs in U.S. dollars terms comparison ... 47
Table 8 - Tunnel and bridge costs estimative by Baumgartner method in Brazilian reais ... 47
Table 9 - Current costs situation segmented in already paid and payables accounts ... 48
Table 10 - Future demand for goods transportation in FIOL in tons ... 50
Table 11 - Future demand for goods transportation in FIOL in tkm ... 51
10
Table of Figures
Figure 1 - Brazil's commodities as % of total exports in economic terms ... 15
Figure 2 - Bloomberg Commodity Index 2013-17 ... 16
Figure 3 - Brazil GDP 1977-2016 ... 18
Figure 4 - Transportation composition – ratio network extension/country area (left) and % of total freight (right) ... 19
Figure 5 - Investments RFFSA (1980 -1994) in R$ Million ... 23
Figure 6 - Railway network extension (1854 - 2012) in thousand kilometers ... 24
Figure 7 - Brazilian railway map ... 25
Figure 8 - Load transported by rail transportation in Brazil in tons 2010-2016 ... 27
Figure 9 - Top importing countries - iron ore ... 29
Figure 10 - Top exporting countries for iron ore ... 30
Figure 11 - Exports from Australia, Brazil and India – 2008 ... 30
Figure 12 - Imports to China, Asia (ex-China) and European Union – 2008 ... 31
Figure 13 - Main maritime iron ore routes ... 31
Figure 14 - Iron ore price evolution in US$ per dmt ... 32
Figure 15 - Iron ore spot freight prices for two routes in US$ (West Australia to Qingdao and Tubarão to Qingdao) ... 33
Figure 16 - FIOL layout in a country perspective ... 34
Figure 17- FIOL layout in Bahia and Tocantins states ... 35
11 Figure 19 - Ferrovia Centro Atlântica layout ... 37
Figure 20 - Logistics compound representation ... 38
12
Table of Contents
1. Introduction ... 13
2. Objective ... 14
3. Literature review ... 15
3.1. Brazil: Economic overview ... 15
3.2. Brazilian railways ... 18
3.3. Railway transportation in Brazil ... 21
3.4. Iron ore international market ... 28
3.5. FIOL (Railway for West-East Integration) ... 34
4. Methodological review ... 40 4.1. Costs ... 40 4.2. Benefits ... 42 4.3. Interviews ... 43 5. Case Study ... 44 5.1. Costs analysis ... 44 5.2. Risks ... 49 5.3. Benefits ... 50
6. Conclusions and further studies ... 56
7. References ... 59
13
1. Introduction
Brazil has a precarious transportation system with roads in poor conditions and a very scarce railway network. The country currently faces big infrastructural challenges and, in the middle of ongoing political and economic crisis, tries to find its path towards a more prosperous future.
The Brazilian railway system has approximately 30,576 km (ANTT - Agência Nacional dos Transportes Terrestres, 2017) while countries of same magnitude, in terms of area and economy, such as Russia and China have, 85,500 km and 120,000 km respectively. The differences do not summarize merely to the railway structure’s size; its efficiency and outdated communication systems are also important setbacks: while China invests billions per year in state-of-the-art high-speed railways reaching speeds beyond 100km/h the Brazilian railways, with its 20th century structures with different gauges and layouts 30% longer than roadways, generate an average speed of 23km/h (Choi, 2015).
The railway history in Brazil starts in 1854 with the “Estrada de Ferro Mauá” and continues its growth throughout the years. In the 50’s, with the set of a national policies that privileged of roads transportation in detriment of railways, the investments in the trail tracks modal slowed its pace. It was only in the 90’s, when another government policy, trying to increase the private participation in the sector, set the stage for new opportunities in the industry. The policies adopted in the end of the XX century consisted of a privatization plan which introduced once again private capital and increased dramatically the sector productivity (despite figures still beyond the reported by its international peers).
Efficiency and productivity gains in the rail transportation network would dramatically affect Brazilian exports and the economy. The toll imposed in strategic goods by logistics costs nowadays make competition in the world market difficult: most of these goods are commodities and compete based on price rather than in competitive differentiation. In the best-case scenario, high freight cost translates into margin losses for producers and in the worst, makes trade unfeasible. Annually 390 million tons are transported inside the country: iron ore and coal accounting for 66% of the total; soybean 6%, steel products 4%, agricultural products other than soybean 1%, and other products 23%.
14 In the Northeast region of the country, production of iron ore, grains, soybean and other commodities would be directly affected by the construction of FIOL. The decrease in the cost per ton, given the high capacity of wagons and the cheaper freight compared to road transportation, would directly reduce the final goods cost and place Brazilian products in a better competitive position.
Given the described scenario, a more detailed study of Brazilian railway network and the discussion of new constructions effects are an important source of value creation for the country.
2. Objective
This work’s purpose is to assess the gains and costs incurred in the FIOL (Ferrovia de Integração Oeste-Leste) rail project. The main rational is to analyze the economic impact that the rail project can have in the Brazilian economy through the case study of FIOL and the iron ore exports from the city of Caetité in the state of Bahia, comparing it with the costs imposed by the physical construction.
15 3.
Literature review
3.1. Brazil: Economic overview
Brazil is a country with continental proportions; constituted by more than 8.5 million km² (IBGE, 2016) it is the world 5th in this metric. With its monumental geographic area and the developing country and member of the BRICS group (alongside with Russia, China, India and South Africa) status, its economy still deeply relies on commodities1 exports and primary goods
Currently commodities exports represent more than 35% of the total value of exports of goods and services. This same metric reached more than 50% some years in the past as figure 1 below demonstrates, thus revealing the importance of those types of goods in the country’s international trade role.
Figure 1 - Brazil's commodities as % of total exports in economic terms Source: World Bank, 2016
1 Commodity is the market term used as reference to goods with none, or very low, differentiation in a primary state, with barely none aggregated value. Iron ore, soybean, oil and meat can be cited as the main ones)
0% 10% 20% 30% 40% 50% 60% 70%
16 Brazil's Exports (2016) - US$ Billions
Soybeans 19,3
Cane or beet sugar 10,4
Iron ores and concentrates 13,3
Petroleum oils, crude 10,0
Meat 6,1
Table 1 - Top 5 exports in Brazil's economy for 2016 Source: WTO, 2017
Table 1 presents the most significant products exported by the Latin American country in the last two years. The relevant insights drawn from the numbers are: first, all the goods are commodities; second, the importance, and consequent country dependency, on the first four goods compared to the fifth (and all the subsequent others). Indeed, the country has the profile of a primary goods exporter nation and highly dependent on four clusters of products.
The dependency on commodities is one of the many reasons behind the economic crisis in 2015-2016: as the general commodities prices fell sharply in the middle of 2014, the country found itself in a difficult current account position (the fall in commodities prices can be seen in the Bloomberg commodities index chart below) and the budget deficit increased rapidly.
Figure 2 - Bloomberg Commodity Index 2013-17 Source: Bloomberg.com
17 As a major exporter of primary goods and a regional force, Brazil is deeply linked with major international importers and neighbor countries with considerable economies, such as Argentina. Table 2 bellow reflects the main trade partners and the value of exports for the referred years.
Table 2 - Brazil's exports by trade partner Source: (World Bank, 2016) and author
The table reveals how strongly China demand was absorbed by Brazil’s economy and how dependent the latter became after 10 years of trade. The percentage of total exports with the Asian country as destiny went from 5,8% in 2005 of the total to almost 20%. In 2015 Consequence of China’s gain in importance, the United States reduced its proportional significance for the Latin American economy from 19% in 2005 to 13% in 2015. Also, is important to notice that Argentina, which has always figured amongst the top importers, reduced its importance in the last decade given the internal problems of the country and the growth of United States’ and China’s roles in nominal terms.
In the last two years, with and ongoing political and economic crisis, the country suffered significant and disastrous losses. In only two years, GDP fell by more than 25%, going from US$ 2,4 Trillion to US$ 1,8 Trillion. Figure 3 illustrates the fast pace of 2000’s growth and the incredible economy downfall in the last couple of years due to both internal and external conditions.
US$ Bi l l i ons % of total US$ Bi l l i ons % of total US$ Bi l l i ons % of total
China 6,8 6% 30,8 16% 35,6 19% United States 22,8 19% 19,2 10% 24,2 13% Argentina 9,9 8% 18,4 9% 12,8 7% Netherlands 5,3 4% 10,2 5% 10,0 5% Germany 5,0 4% 8,1 4% 5,2 3% 2005 2010 2015
18
Figure 3 - Brazil GDP 1977-2016 Source: (World Bank, 2016) and author
Given the international position of an exporter country, still highly dependent on commodities, it becomes a necessity to develop an extensive and efficient transportation network. The gains provided by the unit costs reduction can boost the domestic economy and restore the confident emerging economy of the years prior to the ongoing crisis.
3.2. Brazilian railways
Currently, the Brazilian transportation structure is composed primarily by road with 61% of total freight carried by this modal. Railways come in second with 21% and water in third with 14% (air transportation is not relevant in numeric terms). Considering the passenger freight, numbers are even more impressive with 96% of the movement done through roads transportation (CNT, 2015) with 4% shared across all the other modals. This structure is the result of national policies adopted from the middle 50’s privileging roads constructions instead of a balanced progressive development. In a numerical example, from 1995 to 2000, more than 70% of logistics investments made were designated to roads transportation.
0.0 0.5 1.0 1.5 2.0 2.5 3.0 US$ Trillions
Brazil's GDP
19 Despite investing considerable amounts in roads, Brazil inefficiency and infrastructure problems are still present in the category. For instance, in the Northeast region, 82% of the roads were ranked as “regular or worst”, while in the entire country 47% of the kilometers were considered in poor conditions with 29% in the worst possible category in the track geometry assessment (CNT, 2015).
Comparing Brazil’s transportation structure with its international peers it is notable that the Latin American country infrastructural gaps, mainly due to the low presence of transportation methods for low value added and high-volume products, namely rail transportation.
In the graph below, the study presents two measures: the first is the rail supply, one of the many measures to assess the railway performance calculated as the total rail network extension divided by the country area; the second is the railway percentage of total transportation matrix in terms of transported freight.
Figure 4 - Transportation composition – ratio network extension/country area (left) and % of total freight (right)
Sources: (Lang, 2007) and (CIA Factbook, 2016)
It can be seen from figure 4 that Brazil has low railways utilization rates, close to those of European countries that have much smaller distances to be overcome. Generally, in the
20 European case the low utilization is due to the utilization of more convenient transportation methods for short distances such as roads, while in Brazil it is almost an imposed condition given the low penetration of the rail network shown in the rail supply chart (left image). Comparing it with the countries of comparable measures, Brazil presents a lower supply rate: it is less than 50% of China’s and Canada’s, 33% smaller than Russia’s and represents only 15% of the USA’s total. All this put together should provide a hint of the logistics hurdles faced by Brazilian actors.
It is well accepted that rail transportation becomes economically interesting for long-distances where there is need for low freight costs. However, in Brazil, railways have been used mainly for short-medium distances where its advantages are not significative. It is important to recognize that for long-distances the modal has the lowest participation between all other modals in the country as pointed by (Pires, 2017).
Another manner of comparing Brazil’s logistic net with other countries is through the World Bank’s Logistic Performance Index a measure that takes into consideration several factors as bureaucracy, physical assets and specific knowledge in the country. In 2016 Brazil appeared in 55th place in a list of 160, behind smaller Latin American economies such as Chile (46th) and Mexico (54th), BRICS countries China (27th) and South Africa (20th), and developed economies such as the United States (10th) and Germany (1st).
Given the described scenario, with infrastructure problems deeply rooted in the country logistic system, freight costs become more and more relevant for goods harming competitiveness in the market. It is then vital for the nation development to invest and create better transportation conditions, increasing the number of modal options and the flexibility resulting from intermodality, prioritizing the more efficient options that suits best each problem. The right policies and conditions would certainly benefit national producers, leveraging exports, boosting the economy and placing the country in the reference position it should have.
21 3.3. Railway transportation in Brazil
Since the Regency period the Brazilian government reasoned that a national railway system was a strategic necessity for the country’s development given the growing demand for products nationally produced in the world market - at that time coffee was the most important good for exports. In 1835, a law was enacted by Regent Feijó, allowing private investors to participate in railway constructions by gaining the concessions rights up to 40 years. The idea was to connect Rio de Janeiro (the empire capital at the period) with other Brazilian provinces.
Despite government efforts at that time, not many investors were interested in the proposal given the high investments and the low guarantees provided by the Brazilian administration. In 1852 the scenario changed, with the promulgation of the Interests Guarantee Law, an act that gave fiscal benefits and the guarantee of interest repayment over the invested capital for private investor willing to develop railway projects. The idea of constructing and possessing the concessional rights of the national railway system was embraced by Irineu Evangelista de Souza, more known as Baron of Mauá whom, in 1854, inaugurated the first railway with 14,5 km of extension connecting Petrópolis (RJ) with the Rio de Janeiro (RJ).
However, (Lang, 2007) highlights the failure of this investment. According to the author it was not a strategic railway: not politically important nor economically profitable. This combined with the project’s lack of planning gave a hint of how the railways development in Brazil would be in the upcoming years. The concessional rights were given without any criteria and regulation, being distributed by will and social influence. In 1872 however, the São Paulo elites, enriched by coffee exports, constructed a xsuccessful railway linking two countryside cities, Jundiaí (SP) and Campinas (SP).
From then on, the railway system grew rapidly: in the following 35 years, 9,500 km were constructed, with the government owning 34% of the total (this growth occasionated by increases in federal investments after the revocation of benefits provided by the 1852 law after 21 years in 1873). It was an impressive expansion given the financial constraints of the period but, despite the fast pace and the federal incentive programs, the lack of regulations culminated in some unpleasant results that characterize, until today, the Brazilian railway system such as: great variety of gauges (as there was no centralized plan nor guidelines the owners could choose
22 the gauge’s size used) – harming connections between different railways, rail lines extremely long and sinuous, and a geographical dispersity.
The rail industry reached its peak in the 30/40’s with the Getúlio Vargas’ administration, in which the “Companhia Vale do Rio Doce”, a mining firm, was created. The company absorbed one railway constructed in 1903 implementing modern technology and enhancing the capacity constraint of wagons for the heavy weight that would be transported.
In the 50’s, Brazilian national government unified the administration of 18 national railways, that until then were individually managed, through the inauguration of the RFFSA (Rede Ferroviária Federal S.A. – National Rail Network), responsible for 30.000 km of the 37.000 km of railways in Brazil. With the ongoing growth and the needed investments, the government started to burden a heavy debt imposed by the railways construction, operations and inefficiencies: according to (Castro, 2000), by 1957 the Brazilian railways corresponded to 90% of the government budget deficit.
Starting in 1959, the decline of railways and the shift towards road transportation was becoming clearer. Kubitschek’s administration was incentivizing the automobile industry, investing more in highways throughout the country and inaugurating short-distances air routes (such as the most important one between São Paulo and Rio de Janeiro); those were all alarming signs to the old rail industry. This was all happening in a moment of financial fragility to rail companies and growing government deficit. With the stage set, both federal and state governments devoted resources to investment in roads and railways, with their non-efficient layout, obsolete equipment, excess manpower and other many administrative problems were completely abandoned (Schoppa, 1982). Figure 5 presents the descendent trajectory of investments made by the RFFSA between 1980 and 1994.
23
Figure 5 - Investments RFFSA (1980 -1994) in R$ Million Source: Marques (1996)
Until 1984 the RFFSA operated with funds originated from taxes imposed on fuels. Despite the constant resources inflows, it was never able to get rid of the high debt acquired. The company could not sustain the high leverage and thus could not invest in new assets. Already existent, technical and operational failures, combined with the lack of investments resulted in a loss of market share to the uprising modal, roads. Government shifted responsibility for passenger transportation to another state-owned enterprise called CBTU - Companhia Brasileira de Transporte Urbano - which alleviated at some level the operational constraints of the old RFFSA. It was an important change but not the structural one needed. Alongside with the internal problems, the international panorama did not help: the ongoing Latin American credit crisis made it difficult for the RFSA to raise funds willing to finance the new projects.
In the 80’s, the government decided that it could no longer sustain the disbursement needed and in 1992, Cardoso’s administration included the RFFSA in the national privatization program (in Portuguese PND – Programa Nacional de Desestatização – Decree Nº 473/92). In 1995, it was decided that this program would come in the form of concessions for railways, where the most basic policy objective was the competent and efficient provision of products and services at a reasonable price (Brown, 2012). The rights were given by public auctions organized by the federal authorities. The transition to the private initiative lasted until 1999
24 with almost 26.000 km being privatized and rights granted to the construction of new planned railways such as the North-South and the FERROESTE.
A few years later Lula’s administration introduced an expansionary fiscal program called PAC (Programa de Aceleração do Crescimento – Growth Acceleration Program) with the goal of boosting investments in social, urban, logistics and infrastructure areas in Brazil. The guideline for investments in transports was the National Plan for logistics and transports (PNLT – Plano Nacional de Logística e Transportes). In 2011, the following government - Roussef’s administration - launched PAC 2, a continuation program following the same structure of its predecessor. For railways, this meant the construction of lines such as the Transnordestina (Trans-Northeast), the railway for West-East integration (FIOL) and investments in the North-South railway.
The Brazilian network evolution in terms of length from 1854 to 2012 is presented in figure 6 followed by the map of the current network in figure 7.
Figure 6 - Railway network extension (1854 - 2012) in thousand kilometers Source: ANTT, 2010
25
Figure 7 - Brazilian railway map2 Source: ANTT, 2010
The consequences of policies adopted in the past lasts until today in Brazil and the infrastructure, when compared to first world and BRIC countries, is still lagging. Precariousness and planning failures left their marks on the country’s network. One of the direct impacts of these acts is the awkward balance in the transportation division: on every thousand square kilometers of surface, there is 17.3 kilometers of paved roadway and only 3.3 kilometers of railway – of which only one third is explored in its full capacity as pointed by (Choi, 2015).
26 As pointed earlier in the text, one of the main challenges for the development of the country network is the existing difference between the gauges among the several railways. Currently there are 5 different gauge sizes in use in the country with two of them as the most common ones: the 1,6 m and the 1,0 m. The 1,60 m concentrates in the region of São Paulo, Minas Gerais and Rio de Janeiro, at the Southeast portion of Brazil while the 1,0 m covers the most part of national territory despite suffering a discontinuity between São Paulo and Rio de Janeiro, where all the North-South rail connection crosses the mixed gauge stretch of ALL (the concessionaire responsible for a rail segment) The others are the 1,435 m gauge - commonly used in the USA e most of Europe - the 0,76 m - currently used only for touristic purpose - and the 0,6 m - used in small railways but nowadays inactive. (Filomeno, 2008).
One solution for the gauge size problem could be implementing a third rail track in the 1,6m gauge allowing trains of the 1,0m to use the railways. This would be the least costly solution, but it is unlikely given the low incentives for the concessionaires of 1,6 m - invest in something that would only allow 1,0m locomotives to access their tracks. The opposite solution, of turning 1,0m into 1,6 m, is far costlier given the needs of infrastructural changes on the railway sleeper. In this dead-lock situation, the only actor that could change the situation is the government, either investing or creating incentives for companies to do so.
In the analysis of the goods transported by railways in Brazil it is notable that the logistic operators have two cluster of goods as its most significant loads: the first are iron ore and its composites and the second are agricultural products which, respectively, represents 70% and 10% of the total according to ANTT. Figure 8 demonstrates the volume of goods transported in brazil from 2010 to 2016 and reveals the importance of the iron ore industry for the railway sector in Brazil.
27
Figure 8 - Load transported by rail transportation in Brazil in tons 2010-2016 Source: (ANTT - Agência Nacional dos Transportes Terrestres, 2017) and author
It is also important to highlight that, although investment costs for railways are substantially higher than for roads (usually 7 to 1), the cargo capacity and, consequently, price per ton are much lower on railways (currently in Brazil it can reduce up to six times, what could be even further reduced with a more efficient network). It is hence, difficult to imagine a country with continental proportions and high production of low value-added products that does not possess a well-established railway network.
Given the presented panorama there is clear room for improvement in the country’s transportation network. It should become priority for the country to invest in more extensive railway network, with more flexible freight options mainly with inter-modal connections that would align the flexibility of roads with the low-cost/high-volume characteristics of railways and the low cost of international water transportation.
100 200 300 400 500 600 2010 2011 2012 2013 2014 2015 2016 Tr ansported quan tity (tu ) Soy Agricultural Production Iron ore Steel Industry Cement and Civil Industry Mineral Bulks Vegetal extraction and pulp
Conteiner Fuel and oil derivates Cement Coal Others Fertilizers
28 3.4. Iron ore international market
The international iron ore market has always been a very interesting and dynamic area. In the last century it has always been in the economic scene, consequence of the gain in importance of the steel structures and technology development. More recently, in the 2000’s, the market experienced a boom in demand led by the extraordinary growth in the Chinese economy and its huge commodity consumption.
The iron ore business represents a capital-intensive activity, with high investment demands, expenditures in royalties, governmental fees and in the operations maintenance. The large-scale production becomes a necessity for companies in this segment with very low margins and big competitors. Indeed, that is the overall situation: in 2012 only three companies (Vale, BHP and Rio Tinto) detained 50% of the world’s exploration. In this scenario of high competitiveness and low value-added, product freight costs become an important variable of the equation.
Another important characteristic of the international iron ore market is the chemical attributes of goods, namely the iron ore concentration. The higher the concentration the more valuable is the good, as it can be used for industrial production with lower manufacturing costs, and lower operational extraction costs, once substracts will not need to be submitted to the beneficiation process (using techniques to improve the concentration of the ore and remove impurities). Decades ago the concentration levels traded were up to 67%, and indexes used to indicate this type of substrate as reference but currently, market indexes are presented in a large variety of concentrations. The most commonly used is the 62% Fe (indexes such as the Metal Bulletin, The Steel Index and the CFR Tianjin port).
Summed with the freight costs and the iron concentration considerations for the supplier selection, market players also analyze other basic variables in the decision process as listed by (Gaggiato, 2010):
• Iron ore availability for suppliers located in other regions that operate with lower freight costs;
29 • Long-term commitment with suppliers – independent of freight fees fluctuations
in the contract time frame;
• Offer prices, which depending on its variation can counterbalance the freight cost; • Natural availability of the goods given the quality requirements for the industry
process.
The demand for steel, and consequently iron ore, has change it central actor many times over the last century: in the 50’s and 60’s the US and EU together consumed 80% of all world production; in the 70’s Japan started its expansion and consumed 40% of the world’s volume; from 2000 on China appeared as the main consumer increasing demand at a fast pace. Figure 9 represent how fast Chinese imports growth was and figure 10 demonstrates how Brazil and Australia, the second more aggressively, could capture these demand with an increase in its exports.
Figure 9 - Top importing countries - iron ore
Source: (Market Analysis and Research, International Trade Centre (ITC), 2016) and author
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bil lions of ton
Iron ore Imports
30
Figure 10 - Top exporting countries for iron ore
Source: Market Analysis and Research, International Trade Centre (ITC), 2016 and author
Analyzing individually the breakdown of the origin/destination of goods for three most influential importing regions (Europe, Asia and China – figure 11) and exporting regions (Australia, Brazil and India – figure 12) it is possible to see how physical distances affect the international iron ore market: countries closer geographically tend to trade more among themselves due freight rate prices constraints.
Figure 11 - Exports from Australia, Brazil and India – 2008 Source: (Gaggiato, 2010) 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bil lions of ton
Iron ore exports
31
Figure 12 - Imports to China, Asia (ex-China) and European Union – 2008 Source: (Gaggiato, 2010)
Figure 13 presents the world map with the most important iron ore routes highlighted.
Figure 13 - Main maritime iron ore routes Source: Maritime Studies South Africa, 2017
A. Seven Islands (Canada) B. Ponto do Madeira (Brazil) C. Tubarão (Brazil)
D. Saldanha Bay (South Africa) E. Port Hedland (Australia)
32 It is interesting to notice the difference in distance and its relationship with the trade origins and destinations. As an example, Australia and China are much closer geographically than Brazil-China thus the interaction among the first two should be more intense than in the second case as indeed is according to the charts on figures 9 and 10.
Until the 70’s, in the international market the iron ore prices were not established in a free-market through indexes as they currently are. Then, companies led by the Japanese and German firms, started to sign long time periods contracts that established a single price to be put in place for the entire time horizon. By reaching a better deal for both parties, buyers and sellers, one-year contracts were the standard practice. A few decades later, in 2009, the market players created indexes through which buyers could follow prices on-demand and at real time in stock exchange quotes. After China’s impressive demand growth, the iron ore prices soared from 2005 on, as figure 14 demonstrates.
Figure 14 - Iron ore price evolution in US$ per dmt1 Source: Market Index, 2017
1 Dmt – Dry metric tons the internationally agreed-upon unit of measure for iron ore pricing. It has the same mass value as a metric ton, but the material has been dried to decrease the moisture level. A dry metric ton unit consists of 1% of iron (Fe) contained in a ton of ore, excluding moisture. The price per ton of a certain quantity of iron ore is calculated by multiplying the cents/dmt price by the percentage of iron content (Source: Index Mundi)
0 50 100 150 200
33 With the increase in price volatility brought by the new mechanism of spot rates, financial institutions started to offer hedges and other derivative instruments related to iron ore index quotes.
As previously stated, geographical distances do influence the trade flow of iron ore, mainly because of the high burden imposed by freight rates on the final cost: rail and ship freight costs can represent 2/3 of the final price as show by (Schmitz & Galdón-Sánchez, 2002). Such costs reduction becomes one of the key factors controlled by companies and every decrease turns into a valuable source of competitive advantage. VALE, for instance, invested in bigger vessels to overcome the long distances to China ports: with the increase in units transported the company reduced the unit freight costs and the CO2 emissions per trip, becoming competitive internationally with Australia. Figure 15 represents the “spot” freight rates for two routes, the red line represents the rates from West Australia to the Qingdao port in China and the yellow represents the rates for Tubarao, in Brazil, also to Qingdao in China. It is possible to notice the clear advantage possessed by Australian rates over Brazilian ones, simply consequence of the distance traveled by the goods.
Figure 15 - Iron ore spot freight prices for two routes in US$ (West Australia to Qingdao and Tubarão to Qingdao)
34 3.5. FIOL (Railway for West-East Integration)
The Railway for West-East Integration, known as FIOL (“Ferrovia de Integração Oeste-Leste”) is a project of 1527 km to connect the Western portion of Bahia’s state with the port on the state coast. It also functions as an intersection between North and North-East regions passing through the states of Bahia and Tocantins. The railway layout, currently in construction, is shown on figure 16 and in figure 17 in more detail.
Figure 16 - FIOL layout in a country perspective Source: (VALEC Engenharia, Construções e Ferrovias, 2017)
35
Figure 17- FIOL layout in Bahia and Tocantins states Source: (VALEC Engenharia, Construções e Ferrovias, 2017)
The construction creates a corridor for exports, mainly for iron ore, Caetité region in Bahia state, and grains produced in the West portion of the same state. It connects with the North-South railway in Figueirópolis (TO) creating an alternative route through the connection.
In the city Bom Jesus da Lapa (BA) an intersection point is planned between the railway and the São Francisco waterway. This connection becomes an important point to leverage inter-modality in Brazil’s transportation one of the current logistic hurdles in the country. The São Francisco river has 1579 navigable kilometers increasing the transportation network capillarity as figure 18 demonstrates.
36
Figure 18 - São Francisco waterway (HSF in the map) Source: (Júnior, 2015)
Continuing downstream, in the seaside direction, there is another important intersection in the railway layout. In the city of Brumado (BA) FIOL connects with the Ferrovia Centro Atlântica - FCA (Center Atlantic Railway) an old railroad from 1945, of low efficiency and low capacity, but still representing another connection point that increases the national network integration. The FCA layout and its connection with FIOL in the city of Brumado (BA) is represented in figure 19.
37
Figure 19 - Ferrovia Centro Atlântica layout Source: Adapted from ANTT (2017)
Reaching the coast, there is the connection with Porto Sul logistics compound in the city of Ilhéus (BA) represented in figure 20. The complex should be constructed to absorb the railway goods flow and it consists of 4 areas as presented by (Júnior, 2015):
• Public Port: storage and movement of goods, administrative area and operations • Zona de Apoio Logístico (ZAL – Zone for Logistic Support): storage sites;
• Terminal de Uso Privativo (TUP – Private usage terminal) da BAMIN: terminal reserved to the iron ore extraction by BAMIN;
• Port terminal: piers on an offshore region that will be connected to the onshore portion of the port by a 3,9 km bridge, where goods will be carried through conveyor belts and trucks to load ships on the port.
38
Figure 20 - Logistics compound representation Source: Júnior (2015)
The railway is divided in 3 main segments with only the first two in construction:
• FIOL I – Ilhéus (BA) to Caetité (BA)
The most advanced part, currently with 71,3% of completion. It connects the Caetité region, producer of iron ore, with Ilhéus a city on the Brazilian shore. The completion is expected for 2018 second semester.
• FIOL II – Caetité (BA) to Barreiras (BA)
Currently under construction, with 18,4% of completion. Connects Bahia’s west portion where goods such as soybeans, corn, cotton, beans and mandioca are produced. The completion is expected for 2019 second semester.
• Barreiras (BA) to Figueirópolis (TO)
It connects FIOL with the North-South railway forming an important corridor for the flow of goods across the country. This part of the railway is still in the process of analysis by the environmental authorities and thus, not yet in construction.
FIOL 1 and FIOL 2 were divided in nine lots, that were auctioned amongst several builders. The lots are presented in figure 21.
39
Figure 21 - FIOL I and FIOL II 9 lots divided in 7 segments Source: (VALEC Engenharia, Construções e Ferrovias, 2017)
Operational Characteristics:
Characteristics Measure
Gauge 1,6 m
Tracks TR-57 (57 Kg per m of trail)
Maximum slope 1,45%
Maximum speed
60 km/h (Export direction TO-BA) 65km/h (Import direction BA-TO) Maximum capacity 32 tons per rail
Wagons length 19,10 m
Minimum radius 350m
Table 3 - FIOL operational characteristics Source: (VALEC, 2008)
FIOL presents itself as a logistic solution for commodities produced and exported in Bahia state such as iron ore, soybean, sugar cane and others. In the expected future scenario, the iron ore mines in Caetité (BA) would be the mainly beneficiated good by the railway construction, given its expected transported volume compared to others and the dependence of the mine’s viability on the rail’s operation. With the implementation, it is expected that the attractiveness of an efficient transportation system increase freight demands for more goods such as sugar-cane, sugar, cotton and others
40
4. Methodological review
In this section, the needed investments in the railway construction will be presented followed by a study of the benefits generated from the railway operations. This study will present both qualitative and quantitative analysis.
4.1. Costs
The costs implied in the railway construction will be divided into lots in which the construction is already segmented. The current construction costs, provided by a federal government report from August/2017, alongside with the length data, provided in VALEC’s operational studies, will be used to calculate the cost per kilometer of each section according to equation 1:
Eq. 1 𝐶𝑜𝑠𝑡/𝑘𝑚𝑖 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑠𝑒𝑐𝑡𝑖𝑜𝑛 𝑖
𝐿𝑒𝑛𝑔𝑡ℎ 𝑜𝑓 𝑆𝑒𝑐𝑡𝑖𝑜𝑛 𝑖
Where:
• Total Cost section i – is the total cost at a time i given by VALEC’s presentation; • 𝐶𝑜𝑠𝑡/𝑘𝑚𝑖 – is the cost per kilometer of lot i
Figures retrieved from this analysis will be compared with the initial budget provided by the federal company to assess the quality of the governmental executive project and the increases throughout the years of delay. Comparisons with the guidelines provided by Brazilian federal authority DNIT (Departamento Nacional de Infraestrutura de Transportes – National Department of Transports Infrastructure) and the study by (Baumgartner, 2001) – “Prices and Costs in the Railway Sector” will be addressed to benchmark FIOL’s most recent figures with the national average and its international equivalents to better understand how this Brazilian rail project figures compare with its peers.
The data provided in articles and guidelines might be outdated so, in order to update the numbers, the study will use the cumulative inflation for the period between the data publication and the present date to correct these distortions. The value of cumulative inflation will be
41 retrieved from two different sources: For Brazil, the Brazilian Central Bank – citizen calculator web page will be used: in this website, one can set the initial and the end date of the desired period to assess the value of cumulative inflation for the set time frame. The chosen reference index is the IPCA – Índice de preços ao consumidor amplo – because of its acceptance in the Brazilian economy as general index for business. For Europe, the statistics website StatBureau will be used. In the same way as the Brazilian central bank it uses a set time frame to calculate the cumulative inflation of the period for the eurozone through the HICP (Harmonized Index of Consumer Prices) from EUs countries.
The European figures from Baumgartner study will also need to be converted in order to be compared with the brazilian industry. This conversion will be performed as explained bellow:
• The values corrected by cumulative inflation will be translated to US dollars through the usage of the average yearly exchange rate between Euro and U.S. dollars and Brazilian Real and U.S. dollars
Furthermore, risks that can influence the final total cost of the investment in the future will be discussed based on the interviews and research performed. A succinct description and classification of these risks will be done according to the two following categories:
• The probability of the event: high, medium and low probability; • The level of impact to FIOL’s project: high, medium and low impact.
42 4.2. Benefits
The benefits related to a railway construction can be analyzed in two perspectives. The first refers to a macro view, where the consequences are perceived in a broader picture and its effects are put in a national optic. In FIOL’s case the direct macro effects would be gains in exports volume and GDP, increase in infrastructure network density and increase of trade between regions for instance. On the other hand, the micro perspective, is the optic through which gains are analyzed for smaller size actors such as individuals and firms. In this case FIOL’s benefits would be profits, direct externalities, job creation and so on. This study will focus on the first, assessing economic gains for the country and understanding the effect of the exports increase focused on the iron ore market.
Continuing with the macro perspective, the benefits assessment can be divided in two separate parts that are distinctively different: a quantitative analysis and a qualitative analysis.
In the quantitative part, the increase in volume of iron ore exports, relative to the current national figures, and the economic gains streaming from this flow will be estimated. For the first, figures of expected annual exploration of iron ore, provided by Bamin (Bahia Mineração - the owner of Caetité mines and responsible for the substract extraction) on VALEC’s operational study, will be used to calculate the good annual exports and their impact on the current Brazilian trade position, as nominal and percentage values. Further on, the impact on the national and state economy will be calculated assuming that exports experience the current international price of iron ore, thus the economic gains will simply be achieved by the multiplication of dry metric ton produced by the average unit price of October/2017 and compared with the Gross domestic product data for both, Brazil and Bahia state, retrieved from IBGE (the national statistical research institute) website.
The second part consists in a qualitative analysis on the impact of the railway for the country network and transportation infrastructure. The increase in capillarity and the constraints related to the logistics hurdles faced in Brazil, the reduction in logistics burden on goods produced in the region and other benefits will be discussed. Through interviews performed with important actors of the Brazilian railway sector, some of them directly related to FIOL case, different perspectives will be exposed, and insights will be drawn trying to further explore and elucidate the benefits beyond economic terms.
43 4.3. Interviews
To better develop the case study, interviews were conducted with personnel whom work directly with the FIOL case or with railways in the Brazilian context. The appendix presents the questionnaires used in the interviews in Portuguese and its translation to English.
The questionnaires were prepared to better understand the current scenario through the eyes of active actors in the Brazilian context. They were sent via email or conducted as interviews at the interviewees’ offices. From the contacted personnel, four of them responded positively providing material for this works completion, they were:
• Guilherme Quintella: CEO at EDLP and board-member at the UIC (The worldwide railway organization). Currently working with “Ferrogrão”, a R$ 12 billion railway construction, and the development of the “intercity train - TIC” for the São Paulo state.
• Julio Fontana Neto: President at Rumo-ALL Logística S.A and former presidente at MRS Logistics.
• Sérgio Lobo: Director at ANTT and Director at VALEC current supervisor of the FIOL project
• Fernando Sanches: Business Develop Manager at EDLP. Currently working with “Ferrogrão”, a R$ 12 billion railway construction, and the development of the “intercity train - TIC” for the São Paulo state.
44
5. Case Study
In this section, FIOL’s case study will be analyzed on the topics described in the methodological section.
For the quantitative part, the first and second section of the railway, from Ilhéus (BA) to Caetité (BA) and from Caetité (BA) to Barreiras (BA) respectively, will be analyzed given the status of those segments and their importance relatively to the third section from Barreiras (BA) to Figueirópolis (TO) (that has not yet been submitted to approval by federal authorities and with an uncertain future). For the qualitative part, assessments on the entire railway layout and its effects will be considered.
5.1. Costs analysis
Consulting the Brazilian Senate’s website in August of 2017, in a presentation by VALEC’s Projects Superintendent Mario Mondolfo, the updated costs in their current value were acquired and reorganized in the table 4.
Table 4 - FIOL current costs segmented by section
Source: (VALEC Engenharia, Construções e Ferrovias S.A, 2017)
Using the length of each section provided in FIOL’s studies, the current cost per kilometer of railway is calculated and the figures are presented in table 5.
(Values in million R$)
Segment Section Current Cost 1 820,1 2 962,4 2 - a 62,6 3 586,6 4 817,5 5 1.069,8 5 - a 176,6 6 741,0 7 727,7 5.964,2 FIOL I FIOL II Total
45
Table 5 - FIOL's unit costs
Source: (VALEC Engenharia, Construções e Ferrovias S.A, 2017)
It is noteworthy that sections “2.a” and “5.a” have extremely high unit costs. This happens due to their different natures: the first one refers to a bridge and the second to a tunnel: different types of construction, other than just the simple railway layout, and thus, different unit costs.
The current total unit cost for the railway is R$ 5,8 million per kilometer, which corresponds to US$ 1,8 million in October/2017 average exchange rate of 3,2 BRL/USD. The differences perceived across sections are consequence of a series of variables that distort prices in a railway layout, such as: different geological factors across areas, different costs for terrain acquisition, different compensation for expropriations in urban and countryside areas, different earthmoving requirements and different responsible companies. Also, as the completion level will demonstrate latter, some of the sections costs are estimates while others have already been realized.
The initial cost estimative provided by VALEC, retrieved from their economic assessment document, R$ 4,3 billion, was surpassed by R$ 1,7 billion due to delays and contract reviews. In a unit measure, the initial estimative resulted in an average cost of R$ 4,2 million per kilometer. Comparing the current value of R$ 5,8 million per kilometer with the initial estimative there is an increase of 28% in unit costs.
(Values in million R$)
Segment Section Current Cost Length (km) Cost/Km 1 820,1 125,0 6,6 2 962,4 118,0 8,2 2 - a 62,6 0,8 78,3 3 586,6 115,0 5,1 4 817,5 178,0 4,6 5 1.069,8 162,0 6,6 5 - a 176,6 2,9 60,9 6 741,0 159,0 4,7 7 727,7 161,0 4,5 5.964,2 1.021,7 5,8 FIOL I FIOL II Total
46 For the assessment of the railway’s final cost some facts need to be highlighted given their influence in the construction total costs:
• Section 1 is currently without a contract give the termination of the previous and the delay of a new bidding process. In the provided data, VALEC uses the old contract cost.
• Section 4 is in a contractual suspension given the absence of resources to pay the contracted company.
Beyond these two most relevant facts, it is possible to also highlight the difficulty that current works are experiencing due to the turbulent political and economic scenario in Brazil. With fiscal contraction and a recent severe recession in the country, federal transfers are becoming scarcer every year, as highlighted by Mario Mondolfo in its presentation for the Brazilian Senate. The supervisor also commented that, in its current budget the company is prioritizing FIOL I termination for the next year.
With the considerations made above, there is high probability that the railway costs will be higher than the ones presented by table 5. VALEC inclusively indicates that the current construction costs are at R$ 6,4 billion, leading to unit costs of R$ 6,3 million per kilometer.
Comparing FIOL’s figures with other references one discovers that for a countryside scenario, like most of the studied case, the national department for transportation infrastructure – DNIT calculated in 2009 the average unit cost for railway constructions in the range from R$ 4,1 million to R$ 5,2 million per kilometer. Converting this numbers through the usage of cumulative inflation (58,86% - retrieved from the Brazilian Central Bank website using IPCA as reference index) we achieve the current range of R$ 6,5 million to R$ 8,2 million per kilometer.
Retrieving data from an European source (Baumgartner, 2001), where the author tries to give an order of magnitude for the construction of 100 km/h maximum speed railways, single track railways infrastructure costs range from EUR 1 million to EUR 3 million per kilometer, which corrected to current value through the cumulative inflation (32,5% rate for the eurozone using StatBureau website) translates to a range of EUR 1,32 million to EUR 3,9 million per kilometer. To transform these figures into comparable numbers, both need to be put into the same monetary unit, thus we use the yearly average exchange rate for the Euro and for Brazil
47 to convert them to U.S. dollars. Table 6 presents the figures retrieved from databases to convert the possessed number and table 7 presents the adjusted results.
Table 6 - Exchange rates in national currency units divided by U.S. dollars Source: OECD and author
Table 7 - Average unit costs in U.S. dollars terms comparison
Source: Author
In table 7, FIOL’s costs, despite their increases throughout the years of delay, are still inside the range proposed by both studies, and always figuring closer to the bottom limits established. But is also important to recover that Baumgartner estimates are found for a 100 km/h railway while FIOL’s maximum speed is announced at 65 km/h.
Baumgartner’s study goes further, proposing costs for tunnels and bridges in railways construction. Applying the same rationale of the above table the results are presented in table 8.
Table 8 - Tunnel and bridge costs estimative by Baumgartner method in Brazilian reais Source: (Baumgartner, 2001) and author
It is notable that FIOL’s costs of R$ 78,3 million and R$ 60,9 million, for the tunnel and for the bridge respectively, are inside the range proposed by Baumgartner. However, it is also noteworthy that the ranges presented in the author’s work are conservative and try to comprehend most scenarios, thus not a good proxy for effectiveness or good capital
EU BRA
Exchange Rate (to USD) 0,904 3,490
(Values in million units per kilometer) FIOL
USD (FX) 1,7 1,5 4,3 1,9 2,3
Baumgartner DNIT
(Values in million R$ per kilometer)
mi n ma x
Tunnel 51,0 255,1 Bridge 51,0 102,0 Exchange rate
48 management. Despite the conservatism characteristic the figures still serve its purpose of comparative measures.
Table 9 - Current costs situation segmented in already paid and payables accounts Source: (VALEC Engenharia, Construções e Ferrovias S.A, 2017) and author
Table 9 above demonstrates the already paid amounts and the payable investments to the works completion. As the number demonstrate, “FIOL I” is more advanced than “FIOL II”, with an aggregate completion level of 72% while the latter is at only 18%. The third section has not yet been approved by governmental authorities.
In the faced situation, with R$ 2,1 billion already invested in the first part and R$ 1,1 billion missing, “FIOL I” is the segment that should be prioritized in the next years, while “FIOL II”, with R$ 0,5 billion invested and R$ 2,1 billion to be spent, should be considered and studied with more caution. The studies concerning its future demands estimations and the impact on the agricultural production in the Western part of Bahia should be performed with more depth given the high needed capital expenditures.
(Values in million R$)
Segment Section Already Paid Payable Compl etion Level (June/17) 1 213,2 606,9 36% 2 772,9 189,5 81% 2 - a 62,6 - 0,0 100% 3 523,4 63,2 91% 4 538,4 279,1 77% 5 271,7 798,0 21% 5 - a 122,2 54,4 67% 6 34,7 706,4 5% 7 91,2 636,5 15% 2.630,2 3.333,9 49% Total FIOL I FIOL II
49 5.2. Risks
In this qualitative assessment of the risks incurred in FIOL’s construction the study highlights the main discussed in the interviews with Guilherme Quintella (CEO of EDLP and Latin American Chairman of the UIC - International Union of Railways) and Fernando Sanches (Business Develop Manager at EDLP), two active actors of the current Brazilian railway. For this specific case of a public investment that serves as solution for one good exploration the interviewees highlighted the following risks:
• Demand risk – Medium probability and high impact
The risk of low demand refers to the characteristics of Caetité’s iron ore quality and the risk of the non-establishment of operations. As the mine is still waiting for the railway to be constructed there is still the risk of a bad quality ore and, even worse, of the non-extraction. Beyond the iron ore demand, both commented on the risk of poor demand for other goods, transforming the public investment in an exclusive channel for the iron ore.
• Political Risk – Low probability and medium impact
As FIOL is a public investment there is always the risk of political scenario changes. With the upcoming election in the end 2018, the changes in governmental positioning can interfere in the project’s funding. Despite the possibility, structural changes are not expected given that the railway is already in construction and in a advanced completion stage.
• Financing Risk – Medium probability and high impact
The financing risks are directly linked with demand risk and political risk.
Firstly, if demand exists and it is proven to be economically interesting, financing would not be a problem for the construction. But once demand is found to be scarce or non-economically attractive, there would be low incentives by the government or private investor to dedicate resources to the project.
The second point, related to the political risks is that: With fiscal difficulties, national authorities must select cautiously the investments in which it will dedicate
50 resources. FIOL investment can be ranked in a non-priority position that would make fiscal transfers uncertain, or at least, insufficient.
• Regulatory Risk – Medium probability and high Impact
The railway regulatory system in Brazil is one of the most complexes in the country. The complexity could not only interfere in the current works but also increase difficulty and bureaucracy level to future concessions.
• Port risk – High Probability and High Impact
The viability of the current project depends on the expansion of the Ilhéus south port in Bahia state. If such expansion does not occur, the logistics corridor thought for the iron ore exportation, through rail and ocean freights, becomes economically inefficient. The current situation is represented by a poor infrastructure that, with a non-sufficient draught, cannot support bigger vessels used in iron ore exports.
5.3. Benefits
i) Quantitative Analysis
For the quantitative analysis, the level of products flow presented in VALEC’s operational study for a 30-year timeframe in FIOL operation is presented in table 10 and table 11. Both will be used throughout the study.
Table 10 - Future demand for goods transportation in FIOL in tons Source: (VALEC Engenharia, Construções e Ferrovias S.A, 2017) and author
Goods 2018 2025 2035 2045 Grains 2.361 8.039 9.329 10.305 Alcohol 123 3.104 2.602 3.979 Sugar 38 656 761 841 Cotton 51 110 127 141 Iron Ore 35.000 45.000 47.295 52.244 Others 212 962 1.117 1.233 FIOL Total 37.785 57.871 61.231 68.743 Flow streaming from FNS 298 1.768 2.052 2.266
51 Table 11 - Future demand for goods transportation in FIOL in tkm1
Source: (VALEC Engenharia, Construções e Ferrovias S.A, 2017) and author
It is noteworthy in tables 10 and 11 the difference in the demand expected for iron ore and all the other goods. It is also important to highlight that the only values in which there are studies and a supportive intention letter to support them, are the iron ore figures. All the other numbers were estimated by VALEC assuming a linear growth to an initial market share of the produced goods in the state, a strong assumption that, does not seem realistic given the business inertia and the needed investments producers would have to incur to change their entire logistic network.
Once again using table 10 and the data from Figure 10 the impact of FIOL’s operation in the national railway system can be assessed. As estimations for the future transportation of the entire rail system are not available the study simply considers 2018 as equal to 2016 and calculate the impact FIOL will have in its first year.
In 2016, the last data available, the Brazilian railway system carried 397 million tons of iron ore. If FIOL in its first year achieve its operational estimative it will be responsible for the flow of an extra 35 million of tons in iron ore and almost 38 million in total. This results in an impact of 9% increase in the transportation of iron ore in the system and 7% in total volume carried by the national railways.
1 Unit of measure of freight transport which represents the transport of one ton of goods (including packaging and tare weights of intermodal transport units) by a given transport mode (road, rail, air, sea, inland waterways, pipeline etc.) over a distance of one kilometer.
(va l ues i n tkm 10³) Goods 2018 2025 2035 2045 Grains 2.580 8.739 10.141 11.202 Alcohol 182 3.740 4.340 4.794 Sugar 68 798 926 1.023 Cotton 54 114 132 146 Iron Ore 19.973 19.973 20.992 23.188 Others 191 951 1.104 1.219 FIOL Total 23.048 34.315 37.635 41.572 Flow streaming from FNS 315 2.680 3.109 3.435
