Growth Sector With Financing Needs

Port Investments in Brazil

Brazil is one of the world’s largest exporters of commodities and agricultural products. In terms of global shippings, Brazil’s ports are of strategic importance and hence interesting investment targets. A Chairman of the Standing Committee of Infrastructure Studies of the São Paulo Institute of Lawyers (IASP), Luis Antonio Semeghini de Souza comments on latest developments and opportunities in light of the Covid-19 pandemic.

Mr Souza, to what extent has Covid-19 affected the Brazilian economy overall so far?

Souza: The impact appears to be less brutal than initially anticipated, from a 10% expected decline in GDP. Estimates now are closer to 4%, but this is without consideration to the second wave which seems to have started with severity over Europe and USA. The manufacturing and services sectors sustained the brunt of the pandemic because of the economic downturn entangled with the shutdowns and social distancing.

Agrobusiness on the contrary was impacted positively because of the increase in food consumption. In 2020, the Brazilian government obtained productive auctions, such as in the areas for pulp movement. Brazil has a fundamental role in the export of foodstuffs because these products may fluctuate in price, but the volumes consumed steadily grow even during a pandemic.

Irrespective of the pandemic, people need to eat and Brazil’s agricultural sector plays an important role for many countries in terms of the supply with food and commodities. How have these sectors developed in Covid-19 times?

Souza: As I mentioned the consumption experienced increases because of the economic support given by the Federal Government to the poor and to the agricultural sector. Particularly those farmers producing commodities for export saw their revenues in Reais increasing substantially because of the weakness of the local currency.

In terms of commodity and food supply, global logistics is decisive. What about the situation in Brazil’s major ports?

Souza: It’s a sector that has been shown interest by investors irrespective of the general uncertainties of 2020.

Auctions went very well and the Federal Government seems to be designing a system that could allow for the sector to finance itself, at least partially, which is very good. To integrate onshore logistics and the terminals it is crucial to coordinate – in terms of time, projection of volumes, compatible technologies, equipment, etc. – private interests in infrastructure to ensure that initiatives do not create roadblocks to free access to the public facilities.

Who owns and runs the ports in Brazil?

Souza: There has always been a coexistence of public and private ports in Brazil. The sector historically lives with a good public-private relationship, with public ports, private terminals and lease of areas and terminals to private investors within public ports. In addition, there’s an ongoing process of withdrawing the state from infrastructure investments, taking a more coordination-focused stance.

What exactly does this trend imply and lead to?

Souza: Hopefully this will lead to an increased level of investments for the betterment and expansion of the existing facilities. Brazilian exports have always offset the steadily increasing efficiency of the producers with the laughably degraded conditions of our logistics, roads, railways and ports.

What are the major challenges for Brazil’s ports at present?

Souza: There is a lack of investments, connections and logistics arriving at the ports. I see the problem of combining land logistics with investments in ports, which involves a multitude of concessions that often do not integrate well We are a continental country and the challenges are accordingly huge. Public budget constraints have for a long time relegated the transportation sector to sporadic initiatives, except for few roads in the southern part of the country. The flow of grain production from the central plateau with a wide gauge train reaching a deep-sea port will put the country into a strategic role of commodity conduit to the world.

Who can legally invest in Brazil’s ports?

Souza: Anyone with the financial wherewithal and experience. The areas within public ports are subject to public procurement rules and therefore involve the will and procedures of the public sector.

Which regulatory aspects should investors be aware of when it comes to port investments in Brazil?

Souza: The sector is governed by a series of laws and regulations which have been amended in recent years. In legal terms, an investment made under a concession or lease agreement should afford the private investor the peaceful enjoyment of the facility and the recovery of the investment if a tariff has been bid for. So, the terms of the concessions interpreted within the framework of laws and precedents is something crucial to the bankability and reward of the equity. We have a Taking clause in our constitution that should prevent expropriation without the due process for establishing the compensation that should be fair and paid prior to the taking. We have bad examples in Rio de Janeiro of Municipal governments taking back toll roads by force. Without considering the merits of the government claim, taking an asset by force is a brutality and an example which may contaminate other sectors. We must separate the wheat from the chaff. The Federal Government and most of the State government would not take justice into their hands We are therefore talking about an outlier.

Very likely the Judiciary will correct the wrongdoings and bring civility back to the relationship between the city of Rio de Janeiro and the road operator.

In which areas do you see investment potential regarding Brazilian ports?

Souza: There will be great demand for new agricultural terminals, which should maintain the demands. For liquid bulk, especially fuels, the resumption of levels moved by 2014 should still take a while to consolidate. The challenge for new port projects is to ensure the volumes will come back and remain stable in a world where, in addition to traditional risks, we have seen new ones which were considered more academic exercises rather than the hard reality we are living in 2020.