EPL Frees 30% Brazil Port Capacity to Reduce Bottleneck

Brazil’s plan to use idled capacity at ports will boost shipments by as much as 30 percent, a stopgap aimed at easing bottlenecks while the government seeks 54.2 billion reais ($26.7 billion) in new investments.

“A lot of capacity” can be unlocked now by changing rules so private operators can sign more cargo-handling contracts with third parties, said Bernardo Figueiredo, head of the state logistics company, known as EPL. Companies including Vale SA and Usinas Siderurgicas de Minas Gerais SA now must use at least half of their port capacity for their own goods.

“If no one has the containers or cars on a scale big enough to make a terminal viable, you can only have scale if you are allowed to access the market,” Figueiredo said in a Jan. 24 interview in Sao Paulo. Ports also need to be expanded quickly because “we have small terminals that don’t have the scale to compete in the global market,” he said.

President Dilma Rousseff, seeking to stimulate the economy and upgrade infrastructure after a decade without investment, will auction off ports, airports and roads this year. Brazil, the world’s largest exporter of coffee and sugar, needs about 500 billion reais of spending in the next five years to “zero our infrastructure deficit,” Figueiredo said.

Beyond easing the rules for private ports, Brazil needs to expand terminal capacity and reorganize the public ports as well, Figueiredo said.

‘Sorely Lacking’

Challenges at ports, from berths unable to handle the largest vessels to distribution centers and warehouses that are “sorely lacking,” are hampering growth in the world’s second-largest emerging market, according to K.C. Conway, executive managing director at consultant Colliers International.

“You have economic activity that is three shoe sizes larger than your infrastructure can handle,” Conway said by telephone from Atlanta. “You don’t have the physical infrastructure to meet the commercial activity that’s occurring and that it can grow into.”

Growth in Brazil slowed to less than 1 percent last year, according to a central bank survey of economists, down from 2.7 percent in 2011 and 7.5 percent in 2010. The expansion is expected to pick up to 3.2 percent this year, the survey shows.

Brazil’s government aims to reduce port tariffs by about 30 percent, Figueiredo said in September. Efforts to improve and expand railways will lower those costs by about 40 percent, he said in the interview.

Batista’s LLX

The cargo-handling rules will allow LLX Logistica SA, the port developer unit of billionaire Eike Batista, to move freight for companies established at its Acu complex in Rio de Janeiro state without them needing to have their own terminals, said Paulo Resende, director at the Center for Logistics Studies of Fundacao Dom Cabral. Private terminals at the Espirito Santo port complex, including Vale’s Tubarao, also stand to benefit.

“It’s a very significant change and within modern standards of ports management,” he said by telephone from Nova Lima, Brazil. “The result is more competition in the free market, which is positive for the country.”

LLX declined 1.6 percent to 2.4 reais in Sao Paulo trading today, extending its tumble in the last 12 months to 35 percent, trailing the 4.4 percent decline for the benchmark Bovespa index. The stock slumped last year as projects by companies including Ternium SA and Anglo American Plc expired or were postponed.

Telephone messages left with LLX weren’t returned. Vale and Usiminas declined through their press offices to comment about the port rules.

Investment Incentives

Letting private port operators sign contracts for all of their capacity with third parties will boost shipments of containers by about 30 percent, according to Marcos Vendramini, transportation infrastructure director at Los Angeles-based Aecom Technology Corp.

That step also would encourage private developers to build terminals, he said. Now, only companies with huge shipping needs have the incentive to invest in ports, he said. That group would include companies such as Vale, the world’s largest iron-ore producer. Ports accounted for 0.8 percent of Vale’s 98.8 billion reais in revenue in 2011.

Limits on private-port operations, which were implemented in 2010, “delayed Brazil by years,” Vendramini said in a telephone interview from Sao Paulo. “It was an absurd intervention.”

Port Plan

Ports Secretary Leonidas Cristino announced in December the government’s plan to increase investments in ports, which included the third-party cargo-handling rule. The plan entails a new regulatory framework, investment of 54.2 billion reais through 2017 and a line of financing. The ports of Manaus, Porto Sul, Espirito Santo, Ilheus and Imbituba will be offered for private concession. The details remain under debate in Congress.

Santos Brasil SA, which already operates terminals at Santos and others, and Investimentos & Participacoes em Infra-Estrutura SA, which operates transportations systems including the Guarulhos airport in Sao Paulo, have expressed interest in the new ports investments. Both companies declined to comment further as details have not yet been decided upon.

Rates of return for infrastructure projects are varied and not set by the government, EPL’s Figueiredo said.

‘Reference Point’

“We have to have a return rate as a reference point,” he said. “The truth is it’s the market that regulates the value of a return.”

Private terminals are expected to receive 75 percent of initial investments because they can address immediate challenges, Figueirdo said.

“We need investors to bring larger and larger volumes of investment,” he said. “The government opted to stimulate this type of initiative because it is more agile, it can act more quickly to increase capacity.”

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