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Cablegate: Brazil's Port Legislation and Santos Case Study

VZCZCXRO2590
RR RUEHRG
DE RUEHSO #0612/01 3220936
ZNR UUUUU ZZH
R 170936Z NOV 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8704
INFO RUEHBR/AMEMBASSY BRASILIA 9866
RUEHRG/AMCONSUL RECIFE 4242
RUEHRI/AMCONSUL RIO DE JANEIRO 8919
RUEHBU/AMEMBASSY BUENOS AIRES 3319
RUEHAC/AMEMBASSY ASUNCION 3566
RUEHMN/AMEMBASSY MONTEVIDEO 2806
RUEHSG/AMEMBASSY SANTIAGO 2566
RUEHLP/AMEMBASSY LA PAZ 3975
RUCPDOC/USDOC WASHDC 3204
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000612

SIPDIS
SENSITIVE

STATE FOR WHA, EEB
STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
STATE PASS USTDA FOR NYOUNGE and GMANDEL
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: BRAZIL'S PORT LEGISLATION AND SANTOS CASE STUDY

SENSITIVE BUT UNCLASSIFIED

1. (SBU) Summary: Port bottlenecks have historically been a major
cost of doing business in Brazil. The GOB is hoping the new
Brazilian ports decree, made effective on October 29 allowing
private ports concessions and simplifying the regulatory framework
regulating the construction and modernization of Brazilian ports,
will help improve infrastructure deficiencies. The private sector's
support for the new rules has been mixed. The Minister of Ports
expects USD 9.5 billion in new investments over the next five years.
Current port infrastructure challenges include the lack of physical
capacity, long wait times at port, and long delays to obtain
environmental licenses for port dredging and expansion. The port of
Santos, South America's largest, is an example where all three of
these issues have created significant backlogs. The Santos Port
Authority (CODESP) has two large projects in the pipeline, Embraport
and the Barnabe-Bagres project, which they hope will help meet this
demand and streamline the process. While increasing Brazil's trade
flows greatly depends on the country's ability to improve its port
infrastructure and reduce the additional costs of doing business in
Brazil, the global financial crisis could limit financing for these
projects, as well as diminish demand in the short term. End
Summary.

New Legislation
---------------

2. (U) President Lula signed a decree on October 29 creating new
regulations for Brazilian port development and modernization. The
decree broadens the ability of firms to operate separate elements of
port facilities, allows for private port concessions via a
competitive bidding process, requires operators to publicize and
charge reasonable tariffs, and unifies the regulatory framework.
The new decree likewise ends a regulatory conflict that undermined
private sector investments into the sector. The previous
legislation defined two modalities for private sector ports: public
use ports via concessions for providing services to third parties
and private use terminals to manage a company's own cargo. To
reduce idle capacity, private terminal operators developed a
"mixed-use" concept. However, companies were required to prove
their own cargo was sufficient to justify the private investment,
which dissuaded large companies from investing. The new decree
requires private investors only to prove that they move their own or
third party cargo.

3. (U) The GOB stated that the new model would not deter the
private sector and likened it to reform of the electricity sector.
However, some potential investors are concerned over interpretations
of the new port decree that indicate the possibility of eminent
domain taking away an owner's property if the owner proposes to
build a port on his land and loses the bidding process. Eike
Batista suspended plans for a USD two billion private port project
in Peruibe, in the state of Sao Paulo, for just this threat of
expropriation. If this rule does indeed apply, it could both stifle
new port development and/or lead to increased corruption with
officials seeking to make certain that the concession comes out the
"right way". The Special Minister of Ports Pedro Brito underscored
that previously submitted private sector proposals worth USD 9.5
billion over the next five years meet the new requirements, but it
remains to be seen whether other private investors will endorse the
new legislation.

Ports Inefficiencies
--------------------

4. (SBU) The growth in Brazilian exports, especially manufactured
goods, has greatly increased the importance of container port
terminals in Brazil. Between 2002 and 2007, the South American
Eastern seaboard container volume doubled, while ports only grew on
average by 14 percent. As ships become larger, Brazil needs longer
berths and deeper channels to accommodate the increase in volume.
Jose Antonio Cristovao Balau, Director of Alianca Navegacao e
Logistica outlined the bottlenecks of several Brazilian ports at a
recent Latin Finance conference. The container volume at the Port

SAO PAULO 00000612 002 OF 003


of Santos, for example, increased 135 percent, from 714,000
containers in 2001 to 1.68 million in 2007. The city of Santos
would like to offer the port authorities more space but has none to
offer, a problem that Balau noted existed for all Brazilian ports
with the exception of Suape and Pecem (both in Northeastern Brazil).


5. (SBU) Similarly, Balau highlighted that wait time is a critical
metric to be improved. He explained that at Santos 31 percent of
ships wait up to three hours, 15 percent from three to six hours, 19
percent from six to 12 hours, and 20 percent from 12 to 24 hours.
Alianca expected container capacity in Brazil to be 8.6 million
containers in 2012, which would require an additional capacity of
5.4 million square meters within four years. Without improved port
efficiency, these wait time and concurrent costs will simply rise,
undermining Brazil's ability to compete in the world market.

6. (SBU) Finally, as with many infrastructure projects in Brazil,
environmental permits were often cited for delays. Balau said the
three projects Alianca is developing all waited a minimum of six
years to secure environmental permits. Its Embraport project
(Santos, should be operational in 2010) was approved in 1999, but
did not get an environmental license until 2006. The Portonave
project (Itajai) was approved in 1997, received its environmental
permit in 2005, and began operating in 2007. Itapoa should be
operational next year, more than 10 years after its approval in 1997
and environmental permit in 2003. Note: New Minister of the
Environment, Celso Minc, has made public his desire for quicker
environmental permitting in Brazil and there has been some movement
in that direction. End Note.

A Case Study: Port of Santos
----------------------------

7. (U) The port of Santos is located in a protected region in the
Bay of Santos, approximately 40 miles from Sao Paulo. The busiest
port in the Southern Hemisphere, Santos has the largest container
terminal in Latin America. More than 35 percent of Brazil's
maritime cargo and half of all container movement passed through
Santos in 2007. The focal point of regional transport networks,
including highways, railways, oil pipelines, and inland waterways,
Santos is the main port for trade flows from Sao Paulo State, Minas
Gerais, Mato Grosso, Mato Grosso do Sul, Goias, Parana, and the
Federal District of Brasilia. These states accounted for more than
half of Brazil's GDP and foreign trade worth USD 71 billion in 2007.
Santos liberalized some port operations in 1995 and has developed
private terminals. A private firm manages all of Santos' passenger
and goods movements. The number of permanent employees fell from
16,000 in 1993 to 1,400 in 2007 and productivity per employee
increased from 4,000 tons to 57,250 tons per year in that same
timeframe.

8. (SBU) Despite these efforts, the infrastructure at Santos does
not meet current demand. The Santos Port Authority (CODESP)
recently launched efforts to improve infrastructure, build new
berths, extend the quays, and increase storage and warehouse
capacity. CODESP estimates that Santos should move 110 million tons
per year when the construction of the Guaruja Bulk Terminal (TGG) is
completed. Despite these efforts, CODESP estimates that Santos
would need additional capacity by 2014. CODESP Marketing and
Business Development Executive, Fabio Oliari told Econoff that they
are evaluating the medium and long term actions required to absorb
the additional demand. Over the short-term, CODESP is also
reviewing ways to improve access to the port, as well as speed up
the movement of goods.

New Terminals to Increase Capacity
----------------------------------

9. (U) Alianca Navegacao e Logistica is building Embraport, a new
terminal at Santos, at an estimated cost of USD 700 million which
should be operational by 2010. Embraport would be Brazil's largest
private port terminal. Embraport's pier for bulk liquid cargo would
facilitate Brazil's ethanol exports. The state of Sao Paulo

SAO PAULO 00000612 003 OF 003


produces nearly 65 percent of national ethanol exports. The
terminal would increase container traffic, reduce wait times and
handling and storage fees, and increase specialization among the
existing terminals.

10. (SBU) CODESP also plans to develop another terminal as a
public-private partnership (PPP) in tandem with the federal
government at an estimated cost of USD five billion. Feasibility
studies for the Barnabe-Bagres project are underway to then obtain
the environmental license. The project would increase capacity by
more than 120 million tons, add 45 new berths, new storage
facilities, and the latest generation equipment. Fabio Oliari told
Econoff that Barnabe-Bagres expansion project would double current
cargo movement capacity at the port, and generate nearly 20,000 new
jobs as well as some 15,000 jobs during the construction phase.

Comment
-------

11. Brazil's economic and social development is dependent on the
country's ability to move goods and services. Much of the so-called
"Custo-Brazil-cost of doing business in Brazil" results from poor
infrastructure and high transportation costs. While the new
legislation is a step in the right direction to correct the
regulatory inconsistencies, the GOB may not have resolved all the
investment concerns to get private sector buy-in. The comparison to
electricity reform will not go unnoticed because private investors
have been dissatisfied with the GOB's reforms made in 2003 to that
sector. Likewise, the global credit crunch could delay financing
for infrastructure projects. Three port projects under construction
for a total of USD 1.7 billion remain unfinanced. The global
economic downturn would likely reduce port traffic, but capacity
shortfalls are expected regardless. End Comment.

12. This cable was coordinated/cleared by Embassy Brasilia.

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