THE launch of Brazil’s National Railway Transport Policy (NRTP) last November represents a major milestone in the modernisation of the country’s institutional framework for the railway sector. Among its most significant innovations is the formal incorporation of the internationally recognised instrument, viability gap funding (VGF), a mechanism widely used to enable infrastructure projects that are economically efficient but face financial viability gaps that prevent their implementation through private capital alone.
The VGF framework designed for Brazilian rail projects is a cooperation model between the public sector and private investors, aimed at bridging the gap between projected revenues and total investment costs through direct capital contributions during the investment phase. Under new railway concession models structured in accordance with the NRTP, the government may provide funding exclusively for the development of reversible capital assets, in the precise amount required to restore financial equilibrium. These contributions do not generate interest, dividends, or any form of financial return to the public sector.
Once project cash flows are balanced, conditions are created for the structuring of long-term project finance with greater predictability and lower risk perception. VGF therefore does not replace private financing, but acts as an enabling instrument, allowing structurally sound projects to reach the level of bankability required by the market.
VGF under the NRTP represents a qualitative shift in concession structuring.
It is important to clarify that this arrangement does not constitute an availability payment or an operating subsidy, nor does it fall under the framework of a traditional public-private partnership (PPP) as defined in Brazilian law. The traditional PPP model adopted in Brazil since 2004 is designed to create ongoing current expenditure, through periodic public payments, intended to subsidise the operation of services that are not financially sustainable based solely on user tariffs. This model is therefore suited to sectors in which service provision structurally depends on permanent public support.
Rail freight transport follows a different logic. Operations are remunerated through tariffs paid by users and are generally economically self-sustaining. The core challenge lies not in operating costs, but in the capital-intensive deployment of infrastructure. Again, VGF can be of assistance. It is not intended to support operations, and does not constitute an availability payment or a subsidy, but is instead a direct transfer of capital dedicated exclusively to railway infrastructure development. At the same time, this capital contribution equalises project cash flows, closing the financial viability gap and enabling the project to be structured as a fully bankable standard concession.
Brazil’s NRTP also incorporates a principle analogous to the golden rule of public finance: total public contributions may not exceed the volume of capital expenditure associated with the project. This ensures that all public support is channelled into gross fixed capital formation, in this case railway infrastructure that, upon termination of the concession, reverts to public ownership, safeguarding fiscal sustainability and the public interest.
From an economic and accounting perspective, restricting public support to capital expenditure qualifies as a permutative accounting event. The public sector exchanges a financial asset (cash) for a real infrastructure asset, without reducing its net equity. The disbursement results in the acquisition of an asset that generates future economic benefits and ultimately returns to public ownership. By structuring VGF in this manner, the NRTP aligns economic rationale, accounting discipline, and fiscal responsibility.
Robust funding
Another core feature of the VGF framework under the NRTP is the flexibility and robustness of its funding sources, which may be public or private, without compromising public oversight or policy alignment.
On the public side, capital contributions may be executed through alignment with government policy. On the private side, funding may originate from resources renegotiated with existing concessionaires, redirected toward cross-investments in strategic railway infrastructure.
Regardless of origin, once transferred, all resources are deposited into segregated escrow accounts, ensuring that funds are applied strictly in accordance with public-sector guidelines.
The use of VGF is well established in countries in Asia.
While awaiting deployment, these resources are remunerated at risk-free rates indexed to Selic, the national benchmark interest rate set by the Central Bank of Brazil (BCB), preserving their value over time and enhancing the effectiveness of the instrument.
This feature introduces a relevant intertemporal dimension to VGF: funds continue to accrue returns while projects mature, allowing greater investment impact with lower fiscal effort, and more efficient use of available funding.
The use of VGF is well established in countries such as India, Indonesia, Vietnam, and China, particularly in contexts requiring large-scale investment in sustainable infrastructure. In these jurisdictions, VGF is an effective tool for reconciling capital-intensive investment with fiscal discipline, limiting public intervention to what is strictly necessary to unlock structurally sound projects.
In Brazil, the formal adoption of VGF under the NRTP represents a qualitative shift in concession structuring. By allowing public capital contributions targeted exclusively at capex, without reclassifying the arrangement as a PPP or creating permanent payment obligations, the instrument enhances project attractiveness, reduces risk, strengthens competition in tenders, and unlocks the government’s railway project pipeline.
