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Investment Partnerships Program - PPI

QUESTIONS AND ANSWERS: NORTH-SOUTH RAILROAD PROJECT

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18 de julho de 2017

QUESTIONS AND ANSWERS: NORTH-SOUTH RAILROAD PROJECT

NORTH-SOUTH RAILROAD PROJECT

Brazil’s Land Transportation National Agency of (ANTT) began on June 27th the Public Hearing nº 007/2017 to receive contributions about technical studies and public notice drafts and the concession contract for the stretch of North-South Railroad, from Porto Nacional (TO) to Estrela D’Oeste (SP).

The technical studies, the public notice drafts and contract, as well as the contribution submission forms are already available for consultation at ANTT website, click here to access them. The estimated investment is about R$ 2.8 billion and the foreseen minimum grant is of R$ 1.6 billion. The forecast is that the auction happens in the first quarter of 2018.

According to the studies carried out by the regulatory agency, most of the investments to be accomplished by the subconcessionary are associated to the acquisition of undercarriage, corresponding to about 85.2% of what is forecast. The project is the main Federal logistic project of Investment Partnership Program (PPI) portfolio.

Audience – Those interested can send the contributions through electronic form, available here, or to participate in the public sessions that will happen in:

Goiânia (GO) – 07/20;
Palmas (TO) – 07/28;
Uberlândia (MG) – 08/1º;
São Paulo (SP) – 08/3; and
Brasília (DF) -  08/7.

Check out the most frequently asked questions related to the North-South Railroad project:

DEMAND

1. Who are the people in charge of the Demand studies?

The Transportation and Logistics Laboratory (LabTrans) of the Federal University of Santa Catarina worked on demand projections and cargo allocation for the North-South Railroad section between Porto Nacional/TO and Estrela d’Oeste/SP, cooperating with National Land Transportation Agency (ANTT).

2. What was the information source used in the Potential Demand Study?

Several official information sources were used. Among these the main sources are: Foreign Trade Information Analysis System's website (AliceWeb) of the Ministry of Industry, Foreign Trade and Services; Data from the National Integrated Logistics Plan (PNLI); Interregional cargo transport matrices, prepared by the National Planning and Logistics Company (EPL) in conjunction with the Institute for Applied Economic Research (IPEA) and Data from the Brazilian Institute of Geography and Statistics (IBGE).

3. What are the main criteria for calculating the Allocated Demand?

Among the criteria for the logistical improvement process, the following can be highlighted:

  • smallest paths - allow the simulation of a set of OD (Origin - Destination) pairs based on criteria of time, distance or logistic cost reduction, obtaining as a result the best route according to the adopted criterion;
  • supply chain - allows the simulation of a set of OD pairs, belonging to a supply chain, obtaining the best paths to be traveled, for example, from production centers to supply centers;
  • area of influence - allows the simulation from a set of origins to one or more predefined destinations, in order to determine the area of influence caused by each destination in relation to the origins.

Furthermore, aiming at a closer approximation to the flow behavior actually observed, the inversely proportional allocation method was applied, considering that a transport flow represented by an OD pair can use more than one route between its origin and its destination, in view of the time perception, distance and the routes choice can vary among users of the transport infrastructure.

4. Were future connections with the North-South Railroad (FNS) considered in the Demand calculations, as happened in the Midwest Integration Railroad (FICO), West-East Integration Railroad (FIOL) and Transnordestina Railroad?

The Demand Reports presents two possible infrastructure scenarios: the Base Scenario and the Conservative Scenario.

The base Scenario considers all public policies and the Federal Government investment plans related to the transport infrastructure improvement in future time horizons, separated in five time horizons.

The Conservative Scenario essentially considers, flows from existing Railroads, removing from the study the flows of right of way related to the following Railroad sections Açailândia/MA - Barcarena/PA, West-East Integration Railroad (FIOL),

inop/MT - Miritituba/PA (Ferrogrão Railroad), Midwest Integration Railroad (FICO) and North-South Railroad (Estrela d'Oeste/SP - Rio Grande/RS section). This guideline was adopted due to the uncertainties for the implementation of the foreseen scenarios and the need to build an adequate revenue estimate to make the railroad project more attractive to the companies. In this sense, the Conservative Scenario was adopted in subsequent studies for the Porto Nacional/TO-Estrela d'Oeste/SP railroad section.

5. What is the Demand risk approach within the contract?

The demand risk will be assumed by the sub-concessionaire, which shall carry out Demand-Driven Investments consisting of necessary interventions to expand the Railroad capacity, in order to maintain the Railroad Saturation Indicator (ISF), to be determined annually, always below 80%.

OPERATION

1. What is the train type adopted in the studies?

Were defined two types of trains in the Operation and Capability studies, namely:

a. Between Year 1 and Year 4: the agricultural solid bulk cargoes composed by 3 locomotives and 80 HFT loaded wagons (90 tonnes useful); and
b. From Year 5: the agricultural solid bulk cargoes composed by 3 locomotives and 96 HFT loaded wagons.

2. How many twin units were designed for both north and south directions?

The number of twin units varies year by year, due to the demand or volume increase to be transported. Consequently, investments were made foreseeing an increase in capability, avoiding the creation of operational bottlenecks through the comparison between the installed capacity and allocated demand. Table 8 of the Operational and Capability Studies Report shows these calculations, where the number of twin units (in both directions) increase year by year according to the demand.

3. Is the Sub-concessionaire obliged to purchase the entire fleet? Does it have a leasing option?

Sub-concessionaire has the obligation to purchase part of the fleet, as explained in the contractual draft, was included in item "12.3 - Sub-concessionaire's Rights and Duties", as one of the duties of the future sub-concessionaire:

The sub-concessionaire has to have Railroad Rolling Stock to provide railroad transport services, and reach the locomotive and wagons availability indicators, average age of the locomotives fleet, and the average age of the wagons fleet, in the Obligation Notes terms, It has to purchase, at least, 75% (seventy five) of the entire fleet in its behalf;

Thus, the rest of the fleet can be obtained by leasing or any other mechanism that is not an acquisition on its behalf.

4. Is there a standard for the Licensing, Signaling and Telecommunications system?

A standard for the implementation of a Licensing, Signaling and Telecommunications was not defined, however, were defined guidelines, functionalities and prerequisite aiming the acquisition and implementation of this systems, according to the stated below:

A prerequisite was adopted in the first year of sub-concession stating that the signaling and telecommunication systems shall be put into operation, thus ensuring safety, reliability in the Porto Nacional/TO – Estrela d’Oeste/SP section, adherent with the low traffic density, operating with less than 8 twin units per day.

According to the Demand Studies, the forecast for the last sub-concession year, or year 30, is 6.44 twin units/day for the section with higher flow, between Estrela D’Oeste and São Simão.

In this context, ANTT considers that the system will present, in its initial stages, the functionalities described below:

  • License indication in the locomotive cab through the implemented telecommunications network, containing speed limits, authorization limits and other pertinent safety information;
  • Control of vehicles authorization limits, which prevent the entering of vehicles in the entry of vehicles into unauthorized blocking sections;
  • Adaptive speed control considering the rail profile and also the speed limits sent by the control center through the communication network;
  • Indication of presence or absence of a blocked section by a train or service vehicle to the Control Center through the on-board computer.
  • Train integrity control through telemetric equipment at the end of the train;
  • Key Position indication in the train cab through the implemented telecommunications network, without the need of installing field signals;
  • Ensure the proper operation of the systems in the existing weather and physical conditions throughout the entire railroad network.
  • Automatically and instantaneously recognize trains and railroad vehicles.

In short, the proposal made consists of the implementation of a Train Control System through centralized interlocking with safety integrity level and on-board equipment and a safety device for brake control.

INVESTMENTS

1. Which investments should the Sub-concessionaire make?

Investments were classified into the following groups:

I. Investments with a Predefined Term;

II. Demand-Driven Investments; and

III. Investments Associated with Minimum Technical Specifications.

I. Investments with a Predefined Term

Investments with a Predefined Term consists of necessary interventions to the railroad operation. These investments are mandatory and must be fully operational and have all of its functional elements and be concluded within its stipulated deadlines defined in the Obligations Notes, attached to the Contract

Investments with a Predefined Term can be divided in the following groups:

a. Implementation of Level Crossings - PNs;
b. Implementation of Underpasses - PIs;
c. Implementation of milestones; and
d. Relocation of transmission lines;
e. Column protection system of the bridge over Rio Grande;
f. Installation of derailment detectors;
g. Implementation of Estrela d’Oeste's rail yard; and
h. Implementation of the railroad Licensing and Signaling System.

II. Demand-driven investments

Demand-driven investments are the indicative investments that have as a purpose the Railroad's Installed Capacity expansion, in order to maintain the Rail Saturation Level - NSF always below 80%.

To estimate the CAPEX, in order to allow these indicative investments to be considered in the economic-financial modeling, ANTT proposes intervening solutions that ensure the capacity increase, in the required moment and volume, according to the Operational and Demand Studies findings.

Investments classified as demand-driven investments are:

a. Phase 01: Extent expansion of 12 (twelve) level junctions, until the sub-concession's year 4.
b. Phase 02: Implementation of 3 (three) new level junctions in the Ouro Verde de Goiás/GO - Uruaçu/GO section.
c. Phase 03: Implementation of 2 (two) new level junctions, being 1 (one) between the Alvorada/TO and Rio Canabrava/GO rail yards and 1 (one) between Estrela do Norte/GO and Campinorte/GO rail yards.
d. Phase 04: Implementation of 1 (one) new level junction between the Campinorte/GO and Uruaçu/GO section.

III. Investments Associated with Minimum Technical Specifications

In the Obligations Notes, attached to the Contract, are described Minimum Technical Specifications, which consists of technical parameters and indicators to be achieved by the Sub-concessionaire, both for the infrastructure operation and provision of railroad transport services. The Minimum Technical Specifications are classified as follows:

a. Technical Parameters for the operation of railway infrastructure:

  • Railroad Infrastructure Technical Parameters;
  • Railroad Superstructure Technical Parameters;
  • Level Crossings Technical Parameters - PNs; and
  • Support Facilities Technical Parameters.

b. Service provision indicators of the rail transport services:

  • Severe Railroads Accidents Index - IAFG;
  • Average Commercial Speed - VMC;
  • Locomotives Availability - DL;
  • Wagons Availability - DV;
  • Average Age of the Locomotive Fleet - IMFL; and
  • Average Age of the Wagon Fleet - IMFV.

In order to comply with these Minimum Technical Specifications, the sub-concessionaire shall carry out investments.

In the CAPEX estimate, to allow these investments to be considered in the economic-financial modeling, ANTT listed the investments considered necessary to comply with Minimum Technical Specifications.

Indicative investments that were expected to meet the Minimum Technical Specifications are divided in:

a. Purchase of rolling stock and equipment to maintain the railroad and accident handling – this is large equipment to maintain the infrastructure and superstructure, as well as the rolling stock for transportation of materials needed to perform these services;
b. Purchase of an operational fleet – The purchase of an operational fleet is needed to meet the project demand forecast, as well as to ensure the productivity, performance and operational efficiency, thus meeting the market expectations regarding service levels; and
c. Implementation of fixed facilities - Fixed facilities are large-scale buildings necessary to the railroad and to meet the technical parameters and indicators to use the infrastructure and provide railroad transport services. These facilities are: Maintenance Workshop and Supply Station.

2. How is the investment program planned? Is it due to the Demand?

Investments with a Predefined Term can be divided in the following groups:

a. Implementation of Level Crossings - PNs;
b. Implementation of Underpasses - PIs;
c. Implementation of milestones;
d. Relocation of transmission lines;
e. Column protection system of the bridge over Rio Grande;
f. Installation of derailment detectors;
g. Implementation of Estrela d’Oeste's rail Yard; and
h. Implementation of the railroad Licensing and Signaling System.

According to the Obligations Notes, the Sub-concessionaire must carry out within the following deadlines, from the Assumption Date:

a. In up to 12 months: Investments of the a. a d. groups; and
b. In up to 36 months: Investments of the e. a h. groups.

Exceptions to this period are investments in the acquisition of on-board equipment, which make up the Licensing and Signaling Railroad System, which must be purchased simultaneously with the acquisition of locomotives, according to the demand.

Demand-driven Investments are indicative only. Sub-concessionaire shall perform the necessary interventions in order to maintain the Rail Saturation Level - NSF always below 80%.

Investments associated with the Minimum Technical Specifications are also indicative only. The Sub-concessionaire shall carry out the necessary interventions in order to meet the technical parameters for the railroad infrastructure operation and indicators for the provision of rail transport services.

3. What are the figures of the investments planned?

Investments were estimated at R$ 2.76 billion, being R$ 2.35 billion in rolling stock (wagons and locomotives) and R$ 410 million in complementary works and signaling. The table below (a cut from Table 14 of the "Economic-Financial Modeling Report") shows the investments details.

Total Capex In R$ ‘000.000
Total Capex 2.760.5
Equipment and Signaling 81.81
Infrastructure 82.29
Superstructure 33.83
Locomotives 683.47
Wagons 1.669.81
machines and equipment 120.09
Buildings and dependencies 89.25
 

4. Who will be responsible for the construction of the loading and unloading terminals?

Loading and unloading terminals are not included in the Sub-concessionaire's Mandatory Investment Plan. These investments can be carried out by third parties, such as railway customers, for example.

5. What infrastructure level will be delivered to the Sub-concessionaire?

All existing railroad infrastructure, including the existing railroad line and level junctions will be delivered. The entire section will be transferred with the IBAMA's Operating Permits and authorization to open the traffic issued by ANTT.

6. What is the current stage of the railroad construction works and the deadline for its completion?

Central Stretch section, between Porto Nacional/TO and Anápolis/GO, with an extension of 855 km, is suitable for the provision of the contractual object, including the IBAMA's Operating Permits and authorization to open the traffic issued by ANTT.

South extension section, between Ouro Verde de Goiás/GO and Estrela d´Oeste/SP with an extension of 682 km, has almost 92% of its construction works completed. However, VALEC shall transfer the railway infrastructure operation concession until January 1, 2019, including with the Operating Permits and authorization to open the traffic issued by ANTT.

7. How will the engineering risk of construction works carried out by VALEC be treated?

Some clauses were included in the Contract to be signed between the parties that seek to mitigate the engineering risks of the works previously carried out by VALEC.

It will be the duty of the Subcontracting Intervener, in this case, VALEC, to transfer the concession and operation of the railroad infrastructure of the entire section to be sub-conceded, with the respective Operating Permits and authorization to open the traffic issued by ANTT. For the Central Stretch, the transfer term is the Contract signature date and for the South Extension, until January 1, 2019.

Besides that, the transfer of each one of the sections shall be by means of a Provisional Receipt Term, to be signed between ANTT, the Concessionaire and Sub-concessionaire, with the inventory made by the Subcontracting Intervener regarding the assets linked to the Concession to be transferred, also describing its conservation status, operation and technical specifications.

After the signature of the Provisional Receipt Term, a period of 180 (one hundred and eighty) days will be initiated for the Sub-concessionaire to formally complain to ANTT on possible technical non-compliance or hidden defects that affect the Concession Assets.

After the term expiration, the Definitive Receipt Term will be issued, which contains the express and definitive acceptance of the Sub-concessionaire regarding the conservation status description, operation and technical specifications of the assets indicated in the Provisional Receipt Term.

RIGHT-OF-WAY

1. How will the Sub-concessionaire's Right-of-Way be regulated in adjacent railroads?

Right-of-Way will be regulated as of the completion of Addenda to the existing Contracts with the Carajás Railroad, Ferrovia Norte-Sul S.A, Ferrovia Transnordestina Logística S.A, MRS Logística S.A. and Rumo Malha Paulista S.A. These addenda are intended to enforce the sub-concessionaire right to access the ports of Santos and Itaqui through railway sections of the aforementioned concessionaires.

2. Why was the regulatory alternative for the prior execution of these Addenda with the other concessionaires chosen to enforce the Right-of-Way?

This alternative enforces legal certainty to the bidding process participants, since the conclusion of the Addenda to the contracts in force with the concessionaires Carajás Railroad, Ferrovia Norte-Sul S.A, Ferrovia Transnordestina Logística S.A, MRS Logística S.A and Rumo Malha Paulista SA, prior to the FNS bidding process, tends to eliminate the risk of judicialization of the issue, bringing predictability and security necessary for the bidding process to be held.

3. What are the operational conditions established for the enforcement of the Right of Way?

The guidelines used to enforce the Right-of-Way are described in Technical Note No. 9 (exercise_of_the_sharing_of_the_Railroad_Infrascture) and in the annexes of the Addenda proposed to the existing contracts. These guidelines cover two spects: (i) technical: solutions related to equipment and qualification, rolling stock technical parameters , signaling and communications and operational performance; (ii) commercial: number of tracks to be shared, share rate and take-or-pay clause.

4. Why was the take-or-pay clause adopted in the Addenda?

This type of contractual clause obligates the user to pay, regardless the demand for transport, or the availability of transport capacity. This is a relatively common device in the railroad sector, where investments to increase capacity are high. ANTT argues that this type of clause is included in the Specific Operating Contracts to be entered into between the concessionaires and the Sub-concessionaires.

GENERAL

1. What is VALEC's Participation in the process?

VALEC is the Concessionaire of the railroad section, according to the competence assigned to it by the Law No. 11,772/2008, and will sub-concede it, as Subcontracting Intervener, pursuant to the Contract Clause 12. The regulation and supervision of sub-concession are ANTT's duties, according to Law No. 10,233/2001.

2. What is the company's current environmental licensing process status?

In the section between Porto Nacional/TO and Anápolis/GO the railroad has an Operation Permit (LO). From the Ouro Verde de Goiás/GO to Estrela d'Oeste/SP section, the railroad has an Installation Permit (LI). VALEC is obliged to obtain the Operating Permit (LO) to the the Ouro Verde de Goiás/GO to Estrela d'Oeste/SP Railroad Section.

3. What are the conditions for the grant payment?

Sub-concessionaire shall pay, as Grant Amount, 30 (thirty) annual installments, which shall be collected into ANTT's account until the 5th (fifth) day, starting from the month following the Assumption Date.

4. What are the scheduled dates for the publication of the Bid Documents and the actual Auction?

The Technical Studies carried out by ANTT are undergoing a Public Hearing process between June 27, 2017 to August 11, 2017, in order to receive the contributions, through the ANTT website, by post and during the on-site sessions. The Public Hearing on-site sessions will be held in the following municipalities:

a. Goiânia/GO: 7/20/2017;
b. Palmas/TO: 7/28/017;
c. Uberlândia/MG: 8/1/017;
d. São Paulo/SP: 8/3/017; and
e. Brasília/DF: 8/7/2017.

  • Public Hearing Report

A report will be generated from the contributions made by ANTT, which will serve as material for the improvement in the other sub-concession stages of the railroad section between Porto Nacional/TO and Estrela d’Oeste/SP. The final report is expected to be completed by September 2017.

  • Presentation to the Federal Court of Accounts (TCU):

Documents' protocol in the TCU is scheduled for September 2017.

• Judgment of the Federal Court of Accounts:

The analysis of the preparatory studies to the sub-concession results in recommendations and determinations addressed to the involved organs, aiming to improve the sub-concession process. Judgment publication is scheduled for November 2017.

  • Bidding Documents Publication

The instrument by which the bidding will be made public is the bidding document. The forecast for publication of the bidding document is November 2017.

  • Auction

The forecast for the auction is to be held in February 2018.

5. How will the Sub-concessionaire receive income?

Sub-concessionaire will receive income from the receipt of the Transportation Fare, the Mutual Traffic Rate, the Right of Way Tariff, Alternative Activities and Accessory Operations, among other forms of income allowed under the ANTT regulations.

6. What is the estimated grant amount?

Economic-financial modeling result is a grant amount of R$ 1,631.97 million considering the money price as of December 2016.

7. What will be the auction model?

The process must follow an auction model, with international participation, and the bid economic analysis should consider the one with the highest grant amount.

8. What is the sub-concession term?

30 (thirty) years.

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