BRAZIL'S PORT DREDGING CHALLENGE

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 �A;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