Mining: Secretary of Energy details changes to new Brazilian mining code.

Mines and Energy minister details changes to new mining code

By Daniel Rittner and André Borges Brasília
Facing company complaints, the government has promoted last-minute changes in the discussions of the new mining code, which is expected to be object of an executive order (MP). In addition to abandoning its plans to charge a special participations tax on high-productivity reserves, the government should set in law the maximum royalty rate at 4%, instead of the initially considered limit of 6%. With this, the idea is to avoid a situation of instability in the sector, with a permanent risk that price highs of metallic commodities on international markets turn into an extra dose of taxes over mining companies.
Aline Massuca/Valor
Edison Lobão
“We’ve retreated in some issues, after comments from the industry,” said the ministry of Mines and Energy, Edison Lobão, in an interview with Valor. He himself cited examples. “We will probably no longer include special participations in the new code,” he said, referring to an additional tax on big reserves, such as the mining explorations in Serra dos Carajás, Pará, and in the Iron Quadrangle of Minas Gerais, as it happens with the oil and gas industry.
The maximum rate of the Financial Compensation for Mineral Exploration (CFEM), the mining royalty, will rise less than expected. Today, it varies from 0.5% to 3%. Iron ore is taxed at 2%. “In a first though, we considered a maximum of 6%, but now limited it to 4%,” Mr. Lobão said.
Such limit will be set in law, preventing the hypothesis that a mere presidential decree may raise the charge, which creates a shield of sorts against thirst for tax revenues at moments of high prices on international markets. “We don’t want to generate instability,” the minister argued.
The minimum rate will fall to zero. This will allow a tax cut on decorative stones, construction aggregates (such as clay, sand and crushed stone) and inputs for agriculture fertilizers. With the new royalty policy, the government estimates annual CFEM revenue to be at the R$4 billion level. In 2012, it produced R$1.8 billion. Collection will be based on mining companies’ gross revenue, not net revenue, but the abandonment of creating special participations and tax cuts on basic ores reduced the prospect of leveraging these values even further.
Mr. Lobão made a point of saying: “These are decisions we’ve reached, but they may be revised up to the last minute.” The new code is very close to be announced by President Dilma Rousseff, he said, and the package tends to be sent to Congress in the form of an executive order. “This is our inclination, to give it more speed. If we were to send this as a message to Congress, this discussion would take two or three years. And an MP may be discussed by legislators the same way.”
In a sign of armistice with mining companies, the minister also no longer is adamant, as he was three weeks ago, on auctioning areas with reserves which already have filed requests for mining licenses — with concluded research and granted environmental licenses — and were depending only on Mr. Lobão’s signature to start operation. At least 120 mines are in this situation, which affects companies including Vale, AngloGold and Bahia Mineração.
Earlier this month, Mr. Lobão had said these reserves didn’t have any secured right and were liable to get into the auctioning system which will be created with the new code, generating a backlash from mining companies. Now, Mr. Lobão adopted a more cautious standing, without anticipating conclusions. “We have a tradition of strict enforcement of law and contracts. We wish to compensate these people for their efforts, without losing sight of what the new law sets. It’s possible that they get the mining authorization. We are studying this to solve the matter,” the minister said.
Under the new code, mineral-area concessions will be handed over to auction winners for a period of 30 years, which can be extended for another 20 years. Today, companies exploring reserves may extract ore as long as they last, without time limit.
In the mining package, as the minister has said several times, there are three different projects — or MPs: One updates the regulatory framework and creates the National Council of Mineral Policy, which will define areas to be auctioned; the other deals specifically with royalties; the third transforms the National Mineral Production Department (DNPM) in a regulatory agency for the industry.
To Mr. Lobão, the government didn’t handle the issue behind closed doors. He recalled that there were meetings with state governments, associations of municipalities and corporate trade groups. “No one can claim not to have been heard,” he said.

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Oil & Gas: Private Sector accounts for 20% of the oil exported by Brazil.

11:57 PM (GMT -03:00) – Apr 21 2013

Private sector accounts for 20% of the oil exported by Brazil

By Rodrigo Pedroso São Paulo
Foreign oil companies already account for 20% of Brazilian crude exports. Last year, when compared to 2011, these companies increased by eight percentage points their share of the crude oil exported by Brazil, contributing with $5.5 billion to the country’s trade.
Aline Massuca/Valor
Nelson Silva, with BG Brasil
Such increase is due to higher crude production by foreign companies, while Petrobras reduced its sales abroad by 15% because of higher domestic demand for fuels. Analysts consider that foreign companies will continue to increase their share of exports over the next few years.
Data from the Ministry of Development, Industry and Trade show that even with these shifts, Petrobras continues being the top exporter by a wide margin. Of the $27.8 billion exported by oil companies last year, $22.1 billion were by the state-owned giant. It was a 3.5% smaller value than in 2011, while foreign companies sold 38% more in dollar terms. Another Brazilian company with oil wells, OGX, exported $172 million in its first year of exploration. Such numbers take into account sales of crude and oil products.
A double industry trend has taken shape in the country over the past two years. Growing domestic demand for fuels means Petrobras was forced to use more crude for refining, weakening exports. Meanwhile, its production is stagnant. Through a spokesperson, Petrobras said its prospects for this year are of “daily production of 2 million barrels a day, with variation of up to 2% more or less.” Last year, for example, the state company produced 2% fewer barrels of crude and increased the refining volume by 4.5%, thus using part of the crude that was before destined to exports.
Foreign companies, which started to buy blocks to operate in the pre-salt fields in 2008, are starting their production, which closed last year at around 200,000 barrels a day, says Adriano Pires, director of the Brazilian Infrastructure Center (CBIE). “The oil extracted by these companies is mostly exported, since there’s a bigger price incentive in international markets. The numbers are small compared to those of the state company, but for those who were not producing and were exporting nearly nothing a few years ago, the results are good,” he says.
According to the ministry’s figures, Shell was the top exporter in 2012: $1.4 billion, 34% more than in 2011. But four companies at least tripled their sales abroad: Statoil ($1.2 billion), Sinochem ($808 million), BG Brasil ($667 million) and GE Oil ($292 million).
Higher exports match these companies’ increased activity. Norway’s Statoil was the second largest oil producer at the end of December, with average production of 45,000 barrels a day (20% more than a year earlier), followed by Shell, with 32,000 barrels.
After ending last year with average daily production of 28,000 barrels, this year BG Brasil is producing 39,000 barrels a day after starting operations of its second oil rig, Cidade de São Paulo, in the Santos Basin. For this year, a third platform is slated to get into operation in May in Paraty, Rio de Janeiro.
With these plans, the British company expects to end 2013 as the second largest oil producer in Brazil, after Petrobras. “In 2014 another two platforms will get into operation,” says President Nelson Silva.
BG expects to reach 2020 producing 600,000 barrels a day in Brazil, which would account for almost half of its overall production. “It was taken a decision last week that the country is responsible for the entire South American region for BG,” Mr. Silva says.
The decision is based on the prospect of relevant Brazilian output growth in a horizon of economic and legal stability for the sector. In addition to Brazil, BG operates in South America in Bolivia and is prospecting areas in Uruguay.
The policy of crude and oil-product prices in Brazil means foreign companies will tend to increase their exports in the medium term, says Edmar de Almeida, coordinator of the Economy and Energy Group of the Federal University of Rio de Janeiro (UFPR). With the decoupling of domestic fuel prices and those on foreign markets, oil companies have no interest in investing in refining in Brazil.
“Petrobras has enough production to meet the demand and doesn’t need to buy crude from them. Since there’s no incentive for refining, most of the output will go to exports and show up in the trade balance,” Mr. Almeida says.
By the end of the decade, with the pre-salt exploration blocks operating, Mr. Almeida sees foreign companies in better situation, because their earnings will vary according to international prices, while Petrobras will depend more on government decisions about fuel prices. “Unless the policy for the refining business changes, seeking to rebalance the price relation.”

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Energy: Government will change rules for auctions of new power projects

Government will change rules for auctions of new power projects

By Rodrigo Polito Rio de Janeiro
The federal government is considering adopting a series of changes in rules for auctions of new power this year. It aims to increase the security of supplies and reduce delays in the construction of generation facilities, after the frustration with Bertin, group which had won several auctions but never took off the drawing board more than 5,000 megawatts of thermal plants it had negotiated. But the new measures may have a side effect: increasing future electricity prices, reversing the falling trajectory of the past few years, when it reached the level of R$100 per megawatt-hour.
Brasília is working with the possibility of holding three auctions of new power (meaning from yet-to-be-constructed plants) in 2013, with one “A-3” (electricity to be supplied within three years, or in 2016), one “A-5” (for delivery in 2018) and one auction of reserve exclusive for wind farms. And it is exactly for the wind farms that the most significant changes are planned. The idea is to increase the rigor of the criterion to calculate physical guarantee (volume of tradable power) from wind farms. In practice, a project with the same nominal capacity will have a smaller amount of electricity to sell.
Another proposed change is restricting the participation in auction only to farms that have the possibility of connecting to the existing electric system. Although this would eliminate the risk of delay in supplying power for lack of transmission lines, the measure will reduce the offer of wind farms in auctions, which may result in higher prices.
“There will be a tendency to increase the top price for wind power because of the change in physical guarantee and due to the fact that we have a little less competition,” said Maurício Tolmasquim, president of the Energy Research Company (EPE), planning arm of the Ministry of Mines and Energy.
To have an idea of the impact that changing the physical guarantee calculation will have, experts explain that, considering the top price for the latest power auction, of R$112/MWh, this value would be modified to something around R$130/MWh.
Today, the calculation of physical guarantee is made under the “P50” criterion, which, taking into account a historical series, accepts a probability of 50% of the farm generating at least the declared volume of firm power (physical guarantee). The government now plans to use the “P90” criterion, which increases this probability to 90%. In practical terms, this means that the investor will be forced to opt for one of two alternatives: reducing the declared firm power or investing in expanding the installed capacity.
However, the proposal hasn’t pleased wind-farm investors. “It’s a measure too strong and unnecessary. We will pay for the insurance a higher value than the indemnity,” says Elbia Melo, president of the Brazilian Wind Power Association (Abeeólica). She says that to sell the same amount of electricity, capital expenditure in these projects will have to rise by 15%. The trade group even proposed to the government to alter the criterion to 75%.
Experts say the government’s motivation is to avoid overestimations of capacity of wind power and reducing the risk in implementing projects. Nivalde Castro, coordinator of the Study Group of the Power Industry at the Federal University of Rio de Janeiro, says the measure is in line with financing conditions for the industry. The Brazilian Development Bank (BNDES) uses “P90” to define financing to wind projects.
Two other industry sources, however, argue that the initiative aims to increase the price of wind power and pave the way to the use of coal and biomass thermal plants.
The government intends to reserve one part of the demand in new-power auctions for exclusive contracts for thermal power plants. “Looking to the medium and long terms, we need to keep and potentially increase a little the share of thermal plants,” Mr. Tolmasquim said.
He said he’s working to convince Petrobras to take part in the auctions. “I’m talking to Petrobras. I’m stimulating them to participate. I expect strong competition between natural gas, coal and biomass,” he said.
Experts say a larger share of thermal power in total generation will increase electricity prices. “It’s certainly not possible to think in a trajectory of falling prices,” said Claudio Sales, president of Instituto Acende Brasil.

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Infrastructure: Low return rates undermine infrastructure efforts.

Low return rates undermine infrastructure efforts, experts say

By Flavia Lima São Paulo
Unattractive project return rates, business plans poorly evaluated and little predictability in rules comprise the scenario which, in the opinion of experts who spoke to Valor, have the power to undermine the government’s effort to make infrastructure investments rise above the current 2% of GDP. The general perception is that the outlined concession model induces to what they call “adverse selection”: Seeking the lowest possible tariffs — fueled by the lowest imaginable return rates — the government ends up attracting not very committed investors, who accept unrealistic rates to, further ahead, try and renegotiate contracts in better terms.
Claudio Frischtak, of Inter B
In general, doubts are not uniform and vary a lot depending on the sector. Among changes being claimed, the internal rate of return (IRR) of projects is the aspect of biggest dissatisfaction — and highest expectation regarding changes. Based on estimates of future revenues and costs, the internal rate of return set by the government in the projects for which it has already distributed viability studies, such as those for railways and roads, of 5.5% a year, is considered unattractive.
“It is necessary to erase the notion that the government improved the projects’ return rate when, actually, it improved the return rate of shareholders, by offering more favorable financing conditions for these projects,” says Raul Velloso, a consultant and former secretary of Economic Affairs of the Ministry of Planning. Indeed, the government itself clarified differences between the rates in a roadshow for infrastructure that it carried out for foreign investors in New York, on February 26th. At the meeting, it announced that it would no longer release the IRR of projects, only the leveraged return rate, which reflects prospects of remuneration on equity.
Thus, taking into account better terms for financing from the Brazilian Development Bank (BNDES), including longer timeframes for amortization and grace periods, in addition to cuts in fees and demands to approve the credit, the leveraged rate of most concessions rose from 10% a year, discounting inflation, to up to 15% for roads and up to 16% for railways.
“The fact is that if the project is bad, with low internal rate of return, there’s no BNDES financing that helps,” Mr. Velloso says. He considers that a reasonable average return rate for infrastructure projects today would be around 10% a year, depending on the risk of each project. In the same line, Paulo Godoy, president of the Brazilian Association of Base Industry and Infrastructure (ABDIB), says the risk is an important component to form the project’s return rate and the fact that it is different from project to project, from region to region, means this rate can’t be a uniform one. But Mr. Godoy also says the government is proving to be receptive to the issue.
This receptiveness may well be explained by the amount of infrastructure investments needed in the next few years. The government itself calculates the prospects of investment in Brazil in several sectors at R$1 trillion from 2011 to 2015. Only projects of handing over ports, airports, roads and railways to the private sector, added to the Growth Acceleration Program (PAC), are expected to reach R$370 billion in the next few years.
Though infrastructure investments are seen as crucial both to boost economic growth and productivity and to answer population demands as income rises, the last few years have been somewhat disheartening. A study by Inter B Consultoria Internacional de Negócios shows that the minimum needed investment in infrastructure to compensate the fixed-asset depreciation is about 3% of GDP.
Between 2001 and 2011, though, the average volume of investments in infrastructure was at 2.2% of GDP, concentrated on the power, telecommunications and road-transport industries. In 2012, Inter B estimates that this investment fell to 1.96% of GDP, the lowest percentage in the PAC era. “The issue is to know if we bottomed out in 2012 or not,” says Claudio Frischtak, president of Inter B.
The consultant says that infrastructure investments are likely to reach something around 2.5%, 2.7% of GDP only in 2014, reaching 3% for the first time in 2015. “And with that we don’t get even close to our competitors, which invest between 5% and 6% of GDP,” he says.
The consensus is that the government took a big step by acknowledging that it can’t do all by itself — either for lack of budget or for difficulty in executing the investments. The evaluation, though, is that it’s trying to attract investors without predictability in rules, which generates insecurity. “The government has to commit to be the least discretionary as possible, but the signs it’s been giving lately go in the opposite direction,” say Mauricio Canêdo, researcher at the Brazilian Institute of Economics (Ibre) of Fundação Getulio Vargas.
Monica de Bolle, managing director of Galanto Consultoria, sees distrust in both sides: From the government, which believes that without its supervision the private sector will charge very high prices; and from investors, who are always wondering if the government will not change some contract term. “And this impasse prevents investors from putting real money in these infrastructure projects,” she says.
Facing such criticism, the government has decided to act, broadening financing sources, altering timeframes for concession, or, in the case of railways, ensuring the purchase from future concessionaires of their entire transport capacity, to eliminate the demand risk and thus guarantee the business viability. “Without facing the fact that, to get investments, the return has to be minimally adequate, there’s no point in offering sweeteners to attract businesses,” Mr. Velloso says.
For Mr. Velloso, another component to keep businesses away is what he calls “inversion of phases” — the effort of putting concession auctions ahead of the pre-qualification stage and of the analysis of the business in order to accelerate the process and avoid postponements motivated by investor issues. “This is being done since the 2007 round of concessions, with unsatisfying results,” Mr. Velloso says. He adds that it’s more than obvious that detailed studies need to be conducted, since these are complex projects, with long maturation times.
In general, the fear is that a hurry to fit auctions in an electoral calendar (presidential elections are next year) and the imposition of out-of-tune return rates may end up attracting not-well-prepared competitors. “The numbers don’t add up even with cheap money from BNDES [the national development bank] and worse, it induces adverse selection. Only bad businesses show up at auctions, those that plan not to invest properly and that, when things come to a head, renegotiate from a position of strength,” says Marcio Garcia, visiting researcher at the Sloan School of Management of the Massachusetts Institute of Technology, and licensed professor from the Department of Economics of the Pontifical Catholic University of Rio de Janeiro.
But there are dissenting views. Bruno Pereira, lawyer and coordinator of the Observatory of Public-Private Partnerships, says there’s a lack of technical acuity in criticisms to the projects’ IRR. “Within its business model, the government defined a rate. But if demand booms during the 30 years of concession, the effective return rate of this project can be much bigger than that of the business model.”
Mr. Frischtak, the consultant, says that if financing conditions are more favorable, the return on equity becomes more attractive, and the best proof of this is the success of some auctions already held, such as those of the airports in Brasília, auctioned at a premium of more than 670%; Guarulhos, with a 373.5% premium; and Viracopos, with a premium of nearly 200%, according to Inter B data. The three concessions had estimated rate of return of 6.46%.
Mr. Frishtak says that more important than altering the projects’ return rate would be to look into the quality of regulating agencies and ministries important to infrastructure. “The president signals she would like to have agencies dominated by technical factors, but the issue is whether she will spend part of her political capital to defend the agencies,” he says. “Without volatility in the economic policy and with a reasonable, credible and transparent regulatory regime, investments will come.”

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Mining: Brasília plans to auction mining reserves that are near authorization

13 hours and 31 minutes ago

Brasília plans to auction mining reserves that are near authorization

By Daniel Rittner and André Borges Brasília
The federal government is planning to auction mineral deposits that were already one step from having their production authorized. These are reserves whose mining authorizations were depending only on a signature from the Mines and Energy Ministry. The possibility of these areas being auctioned can fall like a bomb among companies.
Edison Lobão
The private sector calculates that at least 120 requests for exploration of new deposits have completed all necessary proceedings at the National Department of Mineral Production (DNPM), got environmental licenses and only need the signature of Minister Edison Lobão. In November 2011, the government suspended granting authorizations and froze the processes, until the new mining code comes into effect.
Wednesday, at an event at the Palácio do Planalto, seat of the presidency, Mr. Lobão said the government aims to introduce the instrument of auction in the sector. The winner will gain the right to extract resources from the auctioned deposit for a period of 30 years, renewable for 20 years, he said. Such measure was already being expected by the mining industry. What surprised it was the minister’s comment that auctions will be used not only for new areas, but also for mines that had their authorizations nearly ready.
“We understand that, while the mining license is not granted, the process has not been concluded. Therefore, it’s liable to be auctioned,” Mr. Lobão said. The minister said that the Office of the Solicitor-General of the Union (AGU) is close to conclude a legal analysis on the subject “to see if we have security in cancelling and restarting” the processes.
The Brazilian Mining Association (Ibram) reacted with skepticism and surprise when informed of Mr. Lobão’s comments. “We live in a democratic state governed by rule of law, where contracts are and will be respected,” the trade group’s president, Fernando Coura, said. Ibram estimates that there are R$20 billion in dammed-up investments because of the halt in authorization grants.
For Mr. Coura, grants of licenses already requested are companies’ “acquired right” and can’t be subject to auctions. He added he has “full conviction” that the new code measures will not violate “legal security” in the sector, but acknowledged concern with the comments made by the minister.
According to Ibram, only one in every thousand works of geological research results in commercially viable exploration of a mineral reserve. Because of this, it’s a risky investment for those who conduct the research and it doesn’t make sense to auction these areas, Ibram argues. The list of pending mining licenses include projects of companies such as Vale, AngloGold Ashanti, Anglo American Brasil, ArcelorMittal, Vetorial and Companhia Brasileira de Alumínio.
The list includes processes that were started in 1973. So, there was a gap of four decades between the first research activities and the prospect of starting production. “It doesn’t make sense to travel this entire path and then go through an auction,” said lawyer Plínio Gustavo Prado Garcia, who’s specialized in the industry. “What they are trying to do is a legal aberration. The law can’t be retroactively imposed to those who already had the right to mining license,” he said.
Mr. Lobão said the new mining code is nearly concluded and provides for a rise to 4% from 2% in the average rate of the Financial Compensation for Mineral Resources Exploration (CFEM), the mining royalty. The minister said it’s been decided the creation of a special participation tax, as it happens in the oil and gas industry, for high-productivity mineral reserves. Proceeds will go mainly, he said, to municipalities affected by the mines.
Moreover, Mr. Lobão confirmed the DNPM will be converted into a regulating agency, as expected.  Another change is that only companies — and no longer individuals — will be able to get mining licenses for the exploration of mineral resources.
The creation of special participations in mining results, measure that causes concerns among mining companies, is being advocated by the states of Minas Gerais and Pará, the two heavyweights of national mining. The Pará government also asks for the creation of a mining fund which would get part of the collected CFEM.
Bruno Feigelson, a mining specialist partner of the Ribeiro Lima Advogados law firm, said the decision of auctioning already researched areas will put a halt on the sector. “It’s necessary to invest in research in several areas, with huge chance of loss, to make a single project viable. It’s in this context that the country, historically, opted for the right of priority to issuance of research and mining licenses, guaranteeing the priority as a way of rewarding those who are willing to run the research risks,” he said. “Changing rules after companies have made heavy investments may lead to legal questioning.”

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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Road Concessions: Private sector wants road concessions, but if returns improve

Private sector wants road concessions, but if returns improve

By Fábio Pupo São Paulo
Infrastructure-concession companies have begun to run around the country collecting data on the nine roads to be auctioned by the government later this year. Industry officials say there are private-sector companies interested in most of the ventures, but sustain that its success depends on the improvement of the projects, now under revision by the federal agencies.
The companies interested in the auctions claim they need to have access to estimates of the total amount of capital that will be needed for building the roads, as well as regarding the running traffic in the future.  These parameters are essential for forecasting financial return on the long run.
Valor has learned that the federal government took the companies claims into account, particularly about the tight budget, and reconsidered, for the first time, ordering Estruturadora Brasileira de Projetos (the agency responsible for the projects) a review about the seven roadways recently included in the privatization process.
Pending analysis results, the government may raise the maximum value allowed for toll rates. It may allow also relocating the toll plazas, something that may also help maximizing returns.
These changes may address the main demand of the companies involved: increase the rate of return, today at the 5.5% per year level. So far, the government was addressing changes only in financing conditions – something that affects only stockholders’ rate of return, leveraged with borrowed money, and seen as more volatile by analysts. According to the government this rate will be around 9% to 15% per year.
Companies worry more about toll rates in this stage since schedules are tight. Huge investments will be needed, particularly for doubling the number of lanes of the roadways already in the first five years of contract. This was the rule that worried companies the most, since they don’t forecast such a strong demand growth to justify investment in this timeframe. 
The government insists in the rule of doubling lanes in five years based on the idea that investments must precede demand to avoid bottlenecks in the future. Furthermore, Brasilia sees infrastructure as the very dynamo that will induce development. Moreover, those investments are seen as highly important to increase GDP growth in the next few years. 
In the companies’ view, however, the tight budget will increase capital costs. Furthermore, government figures are underestimated, executives say, by what they call “superficial studies” for the concessions.  Accordingly, the companies asked revisions regarding estimates of revenues.
Despite complains, industry analysts believe that there will be interested parties in all projects, but some recognize that only a few will receive most of the financial effort. Some groups will concentrate on only two or three projects. 
Roads that had been handed over to the private sector earlier will also attract the attention of those groups. This is the case of BR-040, which despite having its auction postponed, still attracts Triunfo Participações e Investimentos (TPI), which is also interested in two other lots. EcoRodovias, controlled by CR Almeida, will study two projects, at most. Invepar (controlled by OAS, and pension funds Previ, Funcef and Petros) will also give priority to roadways that “make sense” for the company.
Odebrecht TransPort is analyzing all ventures, as well as CCR, which, however, will end up concentrating only on a few. Arteris (formerly OHL Brasil) will also “take a look” at all projects. But even if it will take part of the auction, it may not have the same aggressiveness it showed in the past, thanks to its large portfolio of projects currently ongoing. Foreigners, such as Isolux Corsán, were also attracted. Although the auctions should be highly disputed, no one yet is certain that all lots will find buyers.

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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Ports: Santos Brasil is ready to invest in private ports

11:57 PM (GMT -03:00) – Apr 01 2013

Santos Brasil is ready to invest in private ports

By Fernanda Pires Santos, São Paulo
Santos Brasil, the largest operator of port terminals in Brazil, is ready to invest. With a low debt burden, the holding company will bet also in private ports – which will not have to be licensed – a possibility opened by the new regulatory mark set by Executive Order (MP) 595, currently being debated in Congress.
Antonio Carlos Sepúlveda, Santos Brasil CEO
But Antonio Carlos Sepúlveda, Santos Brasil CEO, says that the only way for the country in the short run is to invest – heavily – in the so-called “organized port,” a joint ownership of public waterway areas handed over to the private sector through auctions. Currently the company runs three leased container terminals in organized ports, the largest being Tecon Santos in the coastal city of Santos, São Paulo.
In an interview with Valor PRO, the real-time news service from Valor, the executive repeated the thesis as a mantra. One of the main innovations of MP 595 was to create the private port figure, outside the organized port, and to lift restrictions regarding the need for its operator to handle only its own cargo, present on the former legal framework. With the possibility, called by some as the “new opening of the Brazilian ports,” a reference to the historic measure, taken in 1808 by the Portuguese court, allowing free navigation in Brazilian ports, the future investments will concentrate in private terminals, which have fewer restrictions.
But for those projects to succeed there is a timetable to be met. A private terminal is made from scratch, without any public infrastructure, Mr. Sepúlveda said.  It takes up to seven years to receive the first ship.
“What does it mean? That it will take seven years until we have an upgrade of Brazilian logistics? This is not enough. The organized port must be competitive tomorrow, the day after the measure becomes a law. It is the way we have in the short run to have a better Brazil also in logistics,” he added.
Mr. Sepúlveda says the first step is to elaborate the MP in such a way to direct investments for big projects with plenty of infrastructure access. “There is no new container-terminal project in the world without adjacent logistics areas. Port is a public policy tool, which can attract industries, logistic centers, thus reducing costs. Ports cannot be dealt only from the port investor point of view, which can be interested only in negotiating the real estate, in entering the good business which is the container terminal.”
Along with Tecon Santos, the largest in the country, Santos Brasil also runs Tecon Imbituba, in Santa Catarina, and Tecon Vila do Conde, in Pará. It also operates a vehicle-export terminal (TEV) in Santos, and integrated logistics units.
The next step is Suape, in Pernambuco. The company already has a project, ready to compete in the tender of a two-berth terminal in the Northeastern port. The tender notice is expected to be published in the next few months. “It’s a case of development of a state through a port, an example to be followed. We want to be there,” he said.
According to the executive, Santos Brasil is on the “pole position to invest.” The company has been on the sector since 1997, and has a low indebtedness level. It closed the fourth quarter with R$136.4 million in cash, and a net debt of R$296.7 million, half its EBITDA over the last 12 months.
Mr. Sepúlveda said that nothing will come from filling the coast with terminals. What Brazil needs, he said, is large units, which don’t yet exits on the Brazilian coast. “What reduce the unitary operating cost are very large facilities and thus low unitary cost per cargo handling. The world today is facing this process that begins with an increase in the size of ships, to reduce the unitary cost of container moved between seaports.”
The magic is in gains of scale. A Chinese or European terminal has 8 million to 10 million TEUs capacity (twenty-foot equivalent unit, the unit of cargo capacity often used in the shipping industry). This is the new order of magnitude of infrastructure being offered in the markets with which Brazil is competing now. “Here in Brazil we are talking about projects of 800,000 TEUs, 1 million TEUs at the most,” he added. The largest in the country, Tecon Santos has capacity for 2 million TEUs, and is doing this year some 1.6 million TEUs. “It is too little. To fill Brazil with this kind of terminal will not improve Brazilian exports,” he said.

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