September 9, 2013 7:22 pm

Rousseff reform aims to consign Brazil’s clogged ports to history

Brazilian truck drivers often approach Santos port, Latin America’s largest, with mixed feelings.

On the one hand their arrival marks the end of a long and sometimes perilous journey across Brazil’s precarious road network. On the other, it is the beginning of up to five days of waiting to unload in one of the world’s most clogged ports.

Santos’s problems are visible at sea, where ships can wait more than two weeks in the waters outside the port just to berth.

While Santos has become notorious for its delays, it is only the symptom of a much wider problem across the country, says Alberto Zoffmann, head of project finance at investment bank Itaú BBA. “The Santos problem is not a Santos problem, but a Brazil problem – we need to have more alternatives to ship cargo from the north of the country,” he says.

After years of bottlenecks and government infighting about how to ease the congestion, President Dilma Rousseff signed off a R$54.2bn ($22.8bn) reform package for Brazil’s ports in June.

The legislation will increase capacity by granting concessions for the construction of new public ports. It is expected to reduce cargo handling fees in the industry by raising competition between public and private ports. The rules allow existing private ports to begin handling cargo from third parties, meaning that they will directly compete with public ports.

New investment in concessions, leases and private terminals is expected to total R$54.2bn, of which R$31bn is projected to be spent by 2015 and the remainder by 2017, says Itáu BBA. A further R$6.4bn will be spent under the government’s Growth Acceleration Program – known as PAC – to improve port access, including a nationwide dredging plan. On August 9, José Leônidas Cristino, Brazil’s ports minister, announced the beginning of the consultation period for the first round of investments in Santos and five other ports in the northern state of Pará.

“Santos is the biggest port in Latin America and the ports in Pará are part of the government’s strategy to direct cargo and the distribution of fuels in the north and northeast of Brazil,” commented Mr Cristino at the time.

The public auction for the 31 areas on offer, which the government expects to attract investments of R$3bn, is scheduled for November 25 and is expected to increase the industry’s capacity by a total of 48m tonnes per year. Santos alone is expected to attract R$1.4bn in investment, increasing the port’s capacity from 105m tonnes in 2012 to 132m tonnes in up to five years’ time.

In total, the government is expected to auction about 161 areas over four bidding rounds, which will include both new areas and areas where leases have expired.

The reform package appears to be a lifeline to exporters in Brazil, which ranks as one of the top producers of commodities such as iron ore, soya beans, sugar and coffee. By unclogging trade routes, the government hopes the new legislation will help boost the country’s economic growth, which slowed from 7.5 per cent in 2010 to less than 1 per cent last year.

The ports package is expected to benefit scores of local logistics companies, says Mário Bernardes Junior, an analyst at investment company BB Investimentos. Vehicle rental companies such as Localiza and Locamerica expect to see higher demand, while logistics companies such as JSL are looking to take advantage of the new concessions to lease infrastructure and land around ports.

These companies will have to work harder to fend off competitors as other groups look to enter the sector. “In the end though, this competition will be healthy as it will reduce the ‘Brazil cost’ and bring more efficiency and volume to the ports,” says Renato Hallgren at BB Investimentos.

The big test for the reform package will come with the auction in November when it will become clear whether the estimated 7 per cent rate of return is enough to lure a sufficient number of investors.

Given the government will have to introduce the new rules around existing contracts, there is concern over potential legal disputes that could further slow progress on the ground. Dockside unions have also shown some resistance to the government’s plans.

“The new rules are in the right direction but it is still unclear how the companies holding the existing concessions will react,” says Mr Zoffmann. “We are quite sure there will be some disputes over the new legislation and that is a risk for new investors and for the banks that will be financing these investments.”

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