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Cablegate: Brazil's Port Dredging Challenge

VZCZCXRO8768
RR RUEHRG
DE RUEHBR #1617/01 3521730
ZNR UUUUU ZZH
R 171730Z DEC 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3116
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6995
RUEHSO/AMCONSUL SAO PAULO 3211
RUEHRG/AMCONSUL RECIFE 8811

UNCLAS SECTION 01 OF 02 BRASILIA 001617

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC
STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
STATE PASS USTDA FOR NYOUNGE, GMANDEL
STATE PASS USDOC FOR ADRISCOLL, LFUSSELL


E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV BR
SUBJECT: BRAZIL'S PORT DREDGING CHALLENGE

REF: SAO PAULO 0612

SENSITIVE BUT UNCLASSIFIED

1. (U) Summary: Brazil recently unveiled updated plans to dredge
over 75 thousand cubic meters at an estimated cost of R$ 1.4 billion
(USD580 million) in 16 of its largest commercial maritime ports as
part of President Lula's Accelerated Growth Program (PAC). The plan,
entitled the National Program of Dredging (PND), was presented by
Fabrizio Pierdomenico, the Undersecretary of Planning and Port
Development of the Special Secretary of the Ports of Brazil (SEP)
during a seminar at the Brazilian Ministry of Foreign Relations that
celebrated 200 years of Brazilian international maritime
cooperation. Public announcements of SEP's work plan and bidding
procedures have already been published for the ports of Recife, Rio
Grande, Santos, Aratu, Salvador and Itagua and the remaining port
announcements will be completed by March of 2009. Under the PND,
Pierdomenico underscored several aspects of Dredging Law 11.610/07
(DL11) that underpins the efforts of PND to address maritime
infrastructure concerns and commercial trade challenges. End
Summary.

DREDGING LEGISLATION
--------------------

2. (U) Pierdomenico stated that DL11, which was signed by Lula in
December of 2007, is the main vehicle in effectively carrying out
the stated mandates of the PND. DL11 requires that prior to
dredging, specific parameters of depth and width be established. SEP
has collaborated with the Brazilian army corps of engineers
(CENTRAN) to determine the dredging requirements of the 16 PND
ports. Pierdomenico explained that this new concept demanding
specificity in dredging requirements has added credibility to the
work and clarified contractual negotiations. Pierdomenico added that
DL11 now gives specific oversight of dredging operations to SEP and
charges SEP with contractual authority.

3. (U) Pierdomenico pointed to key provisions in DL11 that address
inefficiencies in past PND activities. DL11 allows for foreign
business participation in the dredging operations; something never
before possible and according to Pierdomenico, frees SEP to consider
vendors with more efficient methods, lower costs and advanced
technologies. Under DL11, contracts were expanded to 5 years with a
1 year extension option. DL11 also allows for one vendor to work 3
dredging operations simultaneously and incorporates language that
requires vendors to perform maintenance dredging for least 2 cycles,
post-depth dredging, at ports where applicable. Pierdomenico argued
that these provisions would significantly enhance SEP's negotiating
position and would result in more motivated and satisfied vendors.

PORT INFRASTRUCTURE CHALLENGES
------------------------------
4. (U) In defining dredging as a critical impediment to trade
growth, Pierdomenico spoke to Brazil's port infrastructure
challenges. Currently, Brazilian ports can accommodate only 4th
generation container cargo ships, or cargo capacities of 5,000
twenty foot equivalent container units (TEUS) due to Brazilian port
drafting restrictions, limited size terminals and limited reach of
gantry cranes. Pierdomenico explained that over 85% of the global
container vessel fleet is comprised of 5th generation, or Post
Panama Plus vessels (PPP) with capacities of 6,000 to 8,000 TEUS,
meaning Brazil is marginally participating in the ocean
transportation of global maritime trade due to this trade barrier.
Pierdomenico argued that dredging is an important first step in
addressing Brazil's port infrastructure shortcomings and that
attracting PPP vessels would accelerate other needed port
infrastructure improvements, adding that such GOB expenditures would
attract more private port investment under recently passed port
reform measures (reftel).
COMMERCIAL IMPACT
-----------------
5. (U) In addition to impacting port operations, the PND would also
have far reaching effects on Brazil's commercial trade. Given the
problems of Brazil's port infrastructure in keeping pace with
expected volume growth (reftel), Pierdomenico argued that the
introduction of PPP size vessels would address this and provide
needed benefits to Brazilian importers and exporters. Pierdomenico
reasoned that PPP vessels would reduce port congestion and allow for
more timely delivery of imports to the Brazilian market and reduce
demurrage costs that importers and exporters pay to terminal
operators while waiting for vessels to dock. Pierdomenico asserted
that because PPP vessels primarily ply routes directly to major

BRASILIA 00001617 002 OF 002


markets, Brazilian exporters would have greater market access with
faster transit times. PPP vessels would also provide critically
needed costs savings to both the Brazilian importer and exporter
through their inherent economies of scale and the abilities of
exporters and importers to negotiate lower ocean freight rates and
marine cargo insurance based on a PPP ship owner's operating costs
divided among 6,000- 8,000 revenue contributing units. Pierdomenico
mentioned the latter factor as especially important for Brazilian
exporters given the recent economic downturn and resulting commodity
price declines. For commercial transactions conducted in USD,
Pierdomenico cited cost savings for Brazilian importers given the
recent depreciation of the Brazilian real.

6. (SBU) Comment: DL11 adds clarity and commercial flexibility to
dredging contracts. Brazil hopes the new PND will spur needed
upgrades to port infrastructure to accommodate PPP vessels. PND and
future port infrastructure improvements are critical to accelerating
Brazil's growth potential, with increased urgency given the global
economic slowdown. Cheaper imports would continue to fuel the
domestic purchasing power of the middle class and expanded, more
efficient access to major markets, at reduced landed costs, would
feed Brazil's export engine. END COMMENT
SOBEL

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