Brazil's $2.5 Billion Railroad To The Future

For nearly four decades, government contracts and subsidies were the way to get rich fast in Brazil, and billionaire Olacyr de Moraes was one of the big winners. He led the construction of Sao Paulo's subway, international airport, and main bus terminal. And he took advantage of low-interest government loans and tax breaks in the 1970s and 1980s to carve huge farms out of the wilderness in western Brazil. Today, his construction company is Brazil's most profitable, and his 300,000 tons of soybean and corn output per year make him one of the world's top producers.

Lean, leathery-faced, and taciturn, de Moraes fits the traditional roles of builder and farmer. But in his 14th-floor office in Sao Paulo, he says Brazil's shift toward a free-market economy requires changes in his Itamarati Group, a conglomerate of 33 companies from banks to railroads with $1 billion in annual revenues (table). It can no longer depend on government largesse. So de Moraes, who owns 99% of Itamarati, is opening the tightly held group to outsiders and seeking new areas of expansion. The biggest test of his strategy is a 1,100-kilometer railroad he plans to build through western Brazil with private funds at a cost of $2.5 billion. As Itamarati diversifies, it's also outgrowing de Moraes' hands-on management. "We're looking to professionalize our companies," he says.

One new partner is Rothschild Asset Management Ltd., with which de Moraes formed a joint venture last July to manage offshore investments by Brazilian pension funds. One client is the central bank's pension fund. The venture is also looking ahead to privatized pensions as a future growth business in Brazil, as in other Latin American countries.

De Moraes' newest foreign partner is New Orleans-based energy conglomerate Entergy Corp. Itamarati and Entergy are each putting $100 million into a joint venture, Entercel, set up this month to invest in electric power, a sector that's opening to private enterprise in Brazil after decades of state control. Entergy already has investments in Argentina and Peru. It seeks local partners for such ventures, says an Entergy spokesman, that have "credibility and recognition in the industry."

Itamarati is only one of many family-controlled Brazilian groups that is having to adapt to the freer market. Odebrecht, a construction giant controlled by the Odebrecht family, depended heavily in the past on public-works contracts. Now, it is diversifying into businesses such as plastics manufacturing at home and overseas construction contracts from Florida to Angola. ItaPound sa, a conglomerate that is controlled by the Villela and Setubal families, is also diversifying. Its Banco Itau, Brazil's No.2 privately owned bank, recently formed an investment banking partnership with Bankers Trust Co. of the U.S.

KING OF SOY. But no tycoon is placing as big a bet as de Moraes on the prospects for private enterprise in what has traditionally been the public sector. His privately financed railroad aims to unlock the agricultural potential of Mato Grosso, a western Brazilian frontier state. It will carry farm products to world markets from the region, including crops from soybeans to cotton that de Moraes himself is growing on 250,000 hectares of subtropical scrubland that he is converting into farms. At present, Mato Grosso farmers must move grain by truck over poor roads, paying $70 a ton to get their soybeans to port. De Moraes, known in Brazil as the "Soy King," says his railroad will cut those costs in half.

So far, de Moraes has invested $300 million to build roadbed for one-quarter of the line under a 90-year concession granted by the federal government seven years ago. Currently, the project is delayed by the slowness of FEPASA, the Sao Paulo state railroad system, in completing a 2.6-kilometer bridge over the Parana River to link de Moraes' "grain train" to the port of Santos. FEPASA says it hopes to get financing this month to finish the bridge within 18 months.

Even de Moraes' estimated $2 billion fortune won't be enough to finance the railroad, however. His aim is to attract private investors to own 70% of the line, which will eventually cost $2.5 billion. He is pitching it mostly to Brazilian pension fund managers.

The project has its skeptics, despite de Moraes' track record of business success. "To make it feasible, I think he would need some state involvement or guarantees to attract private investors," says Jacques Cellier, a World Bank transport economist based in Washington. One fund manager who is interested, though, is Jose Valdir Ribeiro dos Reis, president of the pension fund for Banco do Brasil, the country's biggest bank. He expects a decision by the fund within a few months on whether to invest in the project.

The railroad is the biggest and riskiest venture so far for de Moraes, 64, a Sao Paulo native who dropped out of high school to go to work for his father's three-truck delivery company. After his father's death, he went into the construction business and later farming. He also acquired Banco Itamarati, a bank with assets of $1.4 billion, and diversified into other businesses from leasing to quarrying. De Moraes "can move quickly," says Fernando Martins, head of corporate finance at Banco Real, a leading Brazilian bank. That agility "will serve him well," Martins adds, in adjusting to Brazil's new economy."

Currently, Itamarati Group is completing two hydroelectric plants in Mato Grosso with total capacity of 126 megawatts to supply customers in the region. Among potential investment prospects for Itamarati and partner Entergy are 40-odd unfinished hydro- and thermal-power plants the federal government plans to auction off.

SON AND HEIR. For Constran, de Moraes' construction company, private projects such as the Mato Grosso plants only partly make up for the steep decline in public-works projects. One such is the big Ayrton Senna urban traffic tunnel that Constran is currently completing in Sao Paulo. But the company's payroll, down to just just 3,000 from 20,000 five years ago, reflects the shrinkage in public spending. For the Itamarati group, the construction slump has been partly offset by rising revenues from agribusiness.

Now, after spending his adult life working six to seven days a week, de Moraes is grooming his son, Marcos, 29, vice-president of Grupo Itamarati, as his successor. But his idea of a vacation is still a long weekend at one of his soy plantations. This low-key style belies de Moraes' grand vision of opening the frontier. To keep growing, Brazil now needs private investments in such projects--and entrepreneurs like de Moraes willing to take the risks.

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