Reaching tipping point

May 2013 will likely be remembered as a tipping point in Brazil’s port business: intense political debate mid-month turned existing port legislation on its head to approve highly publicised reforms.

But the approval was not a given. The so-called Provisional Measure 95 (MP595) proved highly controversial when it was debated in the Chamber of Deputies on May 8, 2013 and resulted in heated exchanges between political representatives. The opposition accused the governing coalition of favouritism, while those in the government conceded they had conflicting opinions on the proposed changes. The speaker eventually abandoned the debate, labelling it “not one of the Chamber’s finest hours”, following vicious name calling on all sides.

A new vote was scheduled, with the government having until May 16, 2013 to effectively get approval to pass the draft legislation; should it have failed to do so, the measures it contained would have been dropped. Against all odds, the final text of the legislation was approved by the Chamber of Deputies at the last possible moment, having been subject to the longest ever voting session – more than 40 hours over two days. The bill then went to the Senate, which approved it in its shortest ever session.

The government won all voting sessions with a strong majority. Before it had ever been put to the vote, however, MP595 had already proved itself to be one of Brazil’s most polemical pieces of legislation ever. More than six hundred amendments were tabled, which was interpreted by local analysts and the press as a sign that agreement for the changes was far from unanimous.

Thumbs up

According to Marcelo Garcia D’Antona, business development director at leading Brazilian terminal operating company, Santos Brasil, the draft legislation has “a lot of positive aspects to it” and should go a long way towards promoting new investment and increasing competition.

“Both existing facilities and also any new ones will be made more efficient. Furthermore, by increasing capacity and boosting efficiency, there will be benefits for both domestic producers and industry, which may help boost their effectiveness in international trade. Additionally, it will allow for more goods to be distributed using coastal vessels instead of long distance trucks.

“MP595 should therefore result in a step change in the rate of throughput growth at our ports,” he says.

Nevertheless, unionised labour remains to be convinced, since its power will effectively be reduced. Companies will henceforth be able to set up new terminals beyond the influence of public ports, which is where strict regulations are already in place governing the use of labour. To offset some of the union opposition, MP595 improves retirement plans and employment guarantees for port workers.

“Such palliative measures do have the potential for increasing labour costs and these will ultimately have to be borne by terminal operators at public ports, as they will be obliged to continue hiring port workers from the labour pool management company (OGMO),” says Mr D’Antona.

Old ties

Much of the existing legislation on ports dates back to a law passed in 1993, some of whose clauses are nowadays viewed as having held back development of the industry.

For example, while it permits existing concessions to be renewed, this is limited to a maximum period of 50 years, with just a single extension permitted. However, any renewal is subject to the agreement of both parties, implying an effective renegotiation of the concession terms and conditions.

Mr D’Antona explains that the existing Santos Brasil concession is for 25 years (renewable following renegotiation for a further 25 years). But under measures laid out in MP595, any renegotiation would have to involve investment in capacity expansion, but without altering the financial balance of the original contract.

“We consider that this is a positive move, because it sets out an objective series of parameters for any discussion linked to the concession,” he says.

MP595 will also make it possible for more private terminals to be set up.

New take

Under the existing law, two distinct types of port terminal are allowed: those operated by private companies in public ports as concessions and those built and managed by the private companies entirely outside the public sector. Public ports are defined as those that belonged to the federal government prior to 1993.

Terminals in public ports operate under the landlord model, whereby the port authority runs the port and the private terminals handle cargo. Each terminal pays the port authority for the right to use its terminal area, having previously been granted the concession at part of an open tender, whose terms and conditions invariably encompass criteria relating to minimum traffic, a minimum concession fee and maximum tariffs to be charged.

Crucially, all these terminals are obligated to hire temporary workers – mostly stevedores and tally men – from the port unions via OGMO.

Non-public terminals are allowed and require no public tender to be issued. These have no landlord authority over them, can charge whatever tariffs the market will sustain and there is no obligation on them to hire unionised labour. Nevertheless, the majority of the cargo they can handle has to be generated by their own company, although some third party provision is also allowed, with the caveat that it is of a similar nature and can make use of the existing facilities. In reality, though, only bulk or neo-bulk terminals have been granted these sorts of licenses.

“A few container terminal projects have also been authorised under this type of arrangement. The reasoning behind this is questionable to say the least and has resulted in a polarisation of opinions, albeit with strong arguments on both sides,” says Mr D’Antona.

Third party

As part of MP595, new and existing terminals operating outside the public port network will be able to handle third-party traffic without any limitations. This, he says, is raising concerns about asymmetrical competition with those terminals forced to continue operating at public ports, with all the limitations that implies.

It is easy to understand why port unions have not publicly supported MP595, since they are worried by the possible migration of cargo from public ports – where they effectively wield considerable power – to non-unionised terminals operating outside the public domain.

Mr D’Antona says that Santos Brasil believes that supply and demand will dictate how the market eventually responds to measures contained within MP595 and that is how it should be.

“If a given cluster of terminals reaches its capacity, new terminals will be built around it and those will get a share of the market. And it will be the economic feasibility of each project that will dictate whether it will be a facility operating within a public port – where part of the investment may even come from the government – or a green field project set up outside. However, vertical businesses, such as those handling ore, oil, grain and so on, will continue to require dedicated facilities to move their own cargo,” he says.

The new law will also allow more blurring of definitions, thereby permitting mixes of private and public funding to bankroll developments. In areas where there is a strong market, it is expected that the private sector will fund new greenfield developments. In other regions, the government may well fund part or all of the infrastructure in public ports, since the landlord model better enables the sharing of infrastructure among various terminals, such as the maintenance of the navigation channel and the provision of access roads.