Shipping and ports in Brazil

In Brazil, a country with a coastline of approximately 8,000km, 95% of the flow of imports and exports is made through Brazilian ports, which demonstrates the importance of the port sector to the national economy. Moreover, with the discovery of giant reservoirs of petroleum and natural gas in the so-called pre-salt area in 2007, the offshore exploration and production gained further importance. The need for a large number of vessels, from drillships to FPSOs and support vessels, combined with a local content policy, has made the Brazilian naval industry reemerge.

Nevertheless, the infrastructure sector in Brazil is still facing difficulties. Among all the bottlenecks that still hinder Brazilian development, logistics is definitely one of the top concerns for the Brazilian Government and investors and its improvement is considered to be an inevitable step for the achievement of the sharp development targets ahead.

Therefore, it is not without a reason that the shipping sector, especially shipbuilding activities, is the object of comprehensive public policies for the financing and revitalisation of the Brazilian naval industry, with a special focus on supplying vessels for the exploration and production of oil and gas in the pre-salt area. In connection with that effort, Brazil has been undergoing a major public debate since the Federal Government decided to change the regulatory framework for the operation and improvement of ports by means of a Provisional Measure (MP 595) that aims at boosting investments.

The resurgence of the Brazilian naval industry is one of the most outstanding issues in the current infrastructure sector. In 2003, there were 3,000 people working in this industry in the country; today, this number has mounted to 62,000, and an additional 40,000 job positions are expected by 2017, according to the Brazilian Union of the Offshore and Naval Industry (Sinaval).

"This new life in the sector is led by the oil and gas perspectives in the country"

This new life in the sector is led by the oil and gas perspectives in the country. The discovery of giant reserves in the Brazilian territory, with a special emphasis on the pre-salt area, has brought the need for a dramatic increase in the availability of all kinds of vessels required for offshore activities. For example, the Energetic Research Company ('EPE' in the Portuguese acronym), a federal state-owned company responsible for planning studies of the Brazilian energy sector, estimates that Brazil will need 90 FPSOs by 2021. By 2020, Petrobras alone, the company with the most significant budget for offshore heavy industry, is expected to acquire 43 floating production units, 38 drillships and 88 oil tankers through Transpetro, its subsidiary for transport services. To get an idea of the size of this market, there are currently 159 FPSOs worldwide. Furthermore, to meet some of Petrobras' needs, the Federal Government launched the Program for Expansion and Modernization of Transpetro's Fleet – PROMEF, which has as its target the construction of the required vessels with up to 70% of local content, that being precisely one of the reasons for the revitalisation of Brazilian shipyards.

The main challenge is to develop a well-qualified network of national suppliers, as a result of the local content policy implemented by the Federal Government, especially for oil and gas vessels such as oil tankers and floating production units. According to the concession agreements for the exploration and production of oil and gas blocks signed between oil companies and the National Agency of Petroleum, Natural Gas and Biofuels (ANP), all the concessionaires are contractually bound by minimum local content requirements, which reflect directly in the shipbuilding business. As mentioned above, in the case of Petrobras and Transpetro, the national content percentage contractually established with Brazilian shipyards can mount to 70%.

Penalties for the non-compliance with such requirements are considerable, and have become a problem for oil companies and their main suppliers in Brazil. Especially in the shipbuilding industry, a heavy user of high technologies for services and equipment that are not yet available in the national market, the imposition of such fines has not been followed by the development of local suppliers, and sometimes there is no option for shipyards other than going abroad for services and equipment and consequently facing the applicable penalties. Finding the correct balance in this trade-off is the most challenging task for national shipbuilders.

Furthermore, the shipyards must face the tight deadlines required by the operators of the oil industry in view of the pressure to accelerate the production of oil and natural gas in the country.

Another important and time-consuming aspect to be considered is excessive regulation. Red tape is a long-term issue in Brazil and it is no different when it comes to the bureaucracy involved with all the steps for the final achievement of the ready-to-use status of a vessel. The difficulties comprise a significant range of areas.

In terms of regulation, the Brazilian legal system provides for registration in several different public bodies. One of the required registrations is the Construction License, to be requested before an entity especially accredited before the Maritime Court, an organ linked to the Navy Command. The property of the ship for some kind of vessels is registered before the same Maritime Court. In order to enjoy tax benefits for the operation of the ship, another registration before the same Maritime Court is required, called Special Brazilian Register ('REB', in the Portuguese acronym). The REB, in turn, has a previous and optional version allowing the shipyard to derive tax benefits during the construction of a vessel, called Previous Special Brazilian Register ('Pré-REB' in the Portuguese acronym).

The issuing of such registrations demands numerous documents of several natures, and the whole procedure can take months. It is important for investors interested in the Brazilian shipbuilding sector to understand the dynamics so as to avoid unexpected situations and to make sure that all the related contracts provide protection against the red tape factor, especially when considering liabilities and loss of profit.

Labour issues should also be considered carefully. Being a heavy user of labour force, the shipbuilding industry might face considerable labour costs and also difficulties involving unions. According to a recent research by the Brazilian National Confederation of Industries ('CNI' in the Portuguese acronym), the cost of a Brazilian employee can reach an additional 183% cost in relation to the gross salary, besides all the regulatory burdens represented by a substantial amount of information to be provided on a regular basis to the Ministry of Labour.

Still concerning labour, finding qualified personnel is yet another issue to be tackled. The need for work force ranges from highly qualified professionals such as engineers, to others like welders, planners and assemblers. The lack of well-trained people makes the Brazilian industry more costly, less qualified and therefore uncompetitive in light of international standards, which still encourages many companies to acquire or charter vessels abroad (specially in Asia), despite the risk of facing penalties for not meeting local content requirements.

Brazilian shipyards are entitled to important tax benefits, such as exemptions of the Import Tax ('II' in the Portuguese acronym) and Tax on Manufactured Products ('IPI' in the Portuguese acronym), and reduction of tax rates to zero in case of social contributions (PIS and Cofins) whenever they purchase parts and components destined to conservation, modernisation, refurbishment and conversion of vessels that own a REB registration with the Maritime Court. The same benefit can be extended to vessels under construction if they own a Pré-REB registration.

In relation to financing, most of the funding for the naval sector in Brazil comes from public sources. There is a public fund called Merchant Marine Fund ('FMM'), managed by the Brazilian Development Bank ('BNDES') and formed by revenues from a tax collected on domestic or international operation involving freights performed in Brazilian ports. The tax is called Freight Additional for the Renovation of the Merchant Marine ('AFRMM') and it was created to support the development of the Brazilian merchant marine and of the Brazilian naval repairing and construction industry. Most of the shipyards and vessels currently under construction in Brazil are funded by the FMM.

The Brazilian shipping sector is a land of good opportunities. As mentioned earlier, the oil & gas sector is more appealing than ever as a result of the huge investments in offshore infrastructure expected in the next years. The current scarcity opens a market for several different kinds of embarkations, such as FPSOs, FPUs, drillships, tankers, offshore support vessels, and also for services and equipment providers for the naval industry. Companies with local content might have advantages when the client is bound by national content requirements, but such market reserve should not be an obstacle for business in Brazil given the current scarcity of qualified providers, a circumstance that opens a generous market also for products and services from abroad. As an example, according to the Brazilian Agency for Waterway Transportation ('ANTAQ'), the expenses in Brazil with the charter of foreign offshore vessels summed $3 billion in 2012, a 22.8% increase in comparison to the 2011 figure. Due to the slow development of Brazilian shipyards and the urgent need for quick results in terms of exploration and production of oil and natural gas, companies are seeking suppliers elsewhere.

"Another important and time-consuming aspect to be considered is excessive regulation. Red tape is a long-term issue"

The naval sector in Brazil is also expected to grow in regard to coastal navigation due to the currently unsustainable situation of Brazilian roadways, which account for most of the load transportation in Brazil. A change in navigation rules in Brazil is under discussion in the Brazilian National Congress, which currently only allows ships bearing the Brazilian flag to perform coastal navigation (foreign ships are only allowed under a charter agreement for a Brazilian navigation company, in certain situations). This would open the market to international navigation companies and would represent a significant blow to the Brazilian shipping sector.

The port sector is going through a major regulatory change in Brazil. Over the last decade, the country has experienced positive growth and economic stability, which has caused the movement of cargo to double in size. The capacity of the ports, however, has not experienced the same growth and should the current situation persist, by 2015 the capacity of public ports will be completely exhausted.

Driven by the need for changes in this picture and for an increase in private investments, the Federal Government decided to introduce a set of new rules into the regulatory framework by enacting MP 595 so as to guarantee more legal certainty and wider competition in the sector.

Besides, the Federal Government has also announced a program for investments in logistics that embraces all the modals: ports, airports, railways and roadways. Among its core goals, this program aims at ending the barriers to the entry of new investors and encouraging an increase of private investments in the sector. Concerning ports, it comprises an estimate of $30 billion throughout all the regions of the country by 2017, besides special financing facilities at more favorable rates.

Brazil is experiencing important regulatory changes. The former legal framework was entirely revoked by MP 595, which is still subject to approval by the National Congress (though it is already binding). Only after approval and promulgation of the New Ports Law will it be possible to know the definitive rules, how investments shall be made, the rights and obligations of private investors and the risks involved.

Therefore, it is necessary to wait for the final enactment of the new legal framework for a better analysis of eventual investments in this sector in Brazil.

Infrastructure problems also generate opportunities. If one considers the strong need for major improvements in the infrastructure of Brazilian ports due to the current inappropriate situation of their facilities, the new regulation imposed by the Government and yet to be enacted by the Congress has eliminated important barriers to the entry of private capital into the sector.

Before MP 595, owners of private terminals were obliged to manage their own cargo together with that of their clients (they could not focus solely on providing transport services to other companies; they were expected to manage their own goods as well, which meant that they could not have transportation as their sole business purpose). According to the new rules, the difference between a company's own cargo and that pertaining to third parties no longer exists. This is an innovation that allows private terminals the possibility of having the specific purpose of transporting third party goods. This factor is expected to be seen by investors as a positive measure.

Thus, the setup of new private ports with the specific purpose of providing transportation services to the market is also considered to be an outstanding opportunity arising from the new regulation.

About the author
		Claudia Elena Bonelli Head – Administrative Law practice group and Logistics industry group TozziniFreire São Paulo, Brazil Tel: +55 11 5086 5380 Email: cbonelli@tozzinifreire.com.br Web: www.tozzinifreire.com.br Claudia has a deep knowledge of public sector-related matters. She works on issues related to bids, contracts and administrative covenants, public service concessions, public-private partnerships (PPP) and governmental permits, as well as administrative laws and regulations such as the Fiscal Responsibility Act. With a thorough knowledge of public-private relations and broad experience in the infrastructure sector, she has worked on many of Brazil's largest infrastructure projects. Claudia is a graduate of the Law School of Universidade Federal de Santa Catarina and earned an LLM. degree in International Law from the University of Osnabrück, Germany.

About the author
		Pedro Dittrich Head – Oil and Gas practice group TozziniFreire Rio de Janeiro, Brazil Tel: +55 21 3535 2100 Email: pdittrich@tozzinifreire.com.br Web: www.tozzinifreire.com.br Pedro was one of the coordinators of the technical group that drafted the pre-salt bills at the Office of the Chief of Staff of the President of Brazil. In addition to his expertise as a lawyer in the energy, biofuel, and oil and gas sectors, Pedro also worked for seven years for the Brazilian Government, including the Ministry of Mines and Energy, and served as an audit board member at energy companies and as a legal adviser on the drafting of the Regulation of the Gas Sector. Graduated in Law and in Electrical Engineering from Universidade Federal do Rio Grande do Sul, and specialised in International Law from the same university, Pedro has a master's degree in Corporate and Business Law from Pontifícia Universidade Católica de São Paulo. He is the coordinator of the Natural Gas work group of the Brazilian Institute for Studies of Energy Law, and member of the Association of International Petroleum Negotiators and of the Energy Institute.

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