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January 05, 2022

New Legal Framework for Railways: key highlights

On December 23, 2021, the Brazilian President approved the bill introducing the long-awaited new legal framework for railway transport (Federal Law No. 14,273, of December 23, 2021).

According to the Brazilian Federal Government, the new legislation seeks to facilitate private investments in the construction of railways, in the use of idle stretches of railways and in the provision of railway service, through the reduction of bureaucracy currently applicable to the sector.

Federal Law No. 14,273/2021 will enter into force 45 days after its publication in the Official Gazette, which occurred on December 23, 2021.

Major innovations of the New Legal Framework for Railways 

We list below the main innovations of the New Legal Framework for Railways:

Authorization Regime: The most disruptive innovation refers to the possibility of using the authorization regime for (i) construction of new railways and exploitation of unimplemented or idle portions of railways; or (ii) exploitation of railways that are in process of restitution or deactivation. This regime differs greatly from current concessions, which are public structures conceded to private exploitation, and depend on prior bidding and modeling by the government. It is a regime that allows private companies to propose private projects to the Federal Government in a less bureaucratic way;

Transport services without infrastructure exploitation: Simplification of the procedure for provision of transport service that does not involve infrastructure operation, through simple registration with the railway regulator;

Investor User and Associate Investor: The new framework creates the “Investor User”, who may enter into an investment contract with the railway operator to increase capacity, improve or adapt the railway infrastructure granted; and the “Associate Investor”, who may invest to enable the provision or improve the profitability of services associated with the railway (not directly linked to the transport itself). Such investors may enter into contracts with concessionaires without the need for prior authorization or bureaucratic procedure before the regulatory body;

Self-regulation: Possibility of creation of a self-regulatory entity by railway operators, which will establish technical-operational standards without government interference, except for regulation of safety issues and specific situations;

Conversion of concessions to authorizations: The current concessionaires affected by the operation of authorized railways may migrate to the new legal authorization regime. The conversion may occur if the authorization has been granted to a (i) competitor, generating a competitive logistics market; or (ii) legal entity that is part of the same economic group of the concessionaire. Among other requirements, there is an obligation to maintain financial commitments to the Union and investments in the railway. The law provides for a hybrid scheme for this hypothesis, with characteristics of the two models (authorization and concession). This coexistence of regimes will have an important challenge of implementation (e.g., existence of reversible and non-reversible assets).

Prospects for the future of the sector

Although Federal Law No. 14,273/2021 is not yet in force, it is already possible to require authorization from the Federal Government based on Provisional Measure No. 1,065/2021, in force since August 30.

Until December 24, 2021, 64 requirements were filed with the Federal Government for the implementation of new railways, of which 60 requirements related to the installation of railway lines and 4 requirements related to railway yards. 

Requirements must be filed with the Ministry of Infrastructure and observe the following procedures:

1. Analysis of documentation and consistency with the national network of railways by the Brazilian National Land Transport Secretariat (Secretaria Nacional de Transportes Terrestres – SNTT) and  Brazilian National Land Transport Agency (Agência Nacional de Transportes Terrestres – ANTT);

2. Analysis by SNTT of whether the proposal meets the guidelines of national transport policies and the railway sector; 

3. Granting of authorization by the Brazilian Federal Government.

So far, the Brazilian Federal Government has granted authorization for six business groups to carry out the construction and operation of nine railways. In total, these authorizations have the potential to add 3,506.79 kilometers of new railways to the existing railway network in the country and mobilize R$ 50.36 billion in investments. Details of the approved projects are available on the Brazilian Federal Government's website.

TozziniFreire’s Infrastructure team closely monitors this and other infrastructure sectors in Brazil, and is available to discuss any point about this opportunity.

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