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. 
 
WHITE