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