Brazilian Port Deepening Projects Delayed

Last year Brazilian transport officials proudly trumpeted a plan to invest $1.6 billion into port infrastructure over the next decade. It seemed the hardest parts – changing Brazilian law to allow for the investment and finding the money to do so – were over. But in fact it’s proved harder to actually make the investment than they anticipated.

The government’s first goal was to improve shipping at the Port of Santos the busiest port in all of Latin America despite its historic troubles maintaining depth through its channels. The federal Secretariat of Ports (SEP) has now put out two separate contract tenders to deepen the port but not a single bid has come in below the government’s price ceiling. Officials say they are now talking to the dredging companies that bid higher than that ceiling about how to compromise on a price point and will be issuing a third revised tender by mid-August. But it is unclear whether that tender will have any more luck than its predecessors.

A lack of adequate dredging has long plagued the Port of Santos which serves Brazil’s largest city Sao Paolo and counts among the world’s busiest ports. In 2012 some 104 million tons of cargo shipped through Santos including 14 million tons of sugar and 11 million tons of soy.

For more on the change in Brazilian regulations see the IDR September/October 2013 issue New Brazilian Port Regulations to Open Up Dredging.

But ships have had to leave the port less laden with cargo than they would like because the heavily silted 25-kilometer (15.5-mile) access channel the turning basin and the berths have never been dredged deep enough to maximize carrying capacity on large ships. The government had hired dredging consortium Dragagem Brasil to dredge those areas but the enterprise failed to reach the contractually obligated channel depth of 15 meters (49 feet). Reuters reported that by January the port had been forced to reduce the port’s maximum draft to 12.3 meters (40.4 feet) and even to 11.2 meters (36.7 feet) in some places. In many cases the private terminals that occupy the port have paid for dredging at their own wharf – technically the responsibility of the port – because otherwise it would not have been done. For more background on the Port of Santos project see the IDR January/February 2014 issue Brazilian Government to Finance $240 Million Dredging Project at Port of Santos.

The dredge Hung Jun did not reach 15 meters (about 49 feet) at the Port of Santos before the end of last year. Port officials are looking to restructure its bid and contracts.

Jose Newton Barbosa Gama special advisor to the SEP said that immediate problem was resolved with an emergency contract with Brazil DTA Engenharia which was able to increase draft to 12.7 meters (41.7 feet) in most places.

But the longer term conundrum of how to increase draft to 15 meters (49.2 feet) is still unresolved. Newton said the problem is more economic and political than technical. The government recently introduced new laws that require all dredging work to be contracted on an outcome basis rather than a cubic-meter basis. In other words dredging companies will be hired to reach a certain depth and maintain it rather than based on the quantity of material they remove over time.

As the law dictates the new contract would provide the dredging company three years to dredge the port to 15 meters at which time the government will conduct a bathymetric survey to ensure compliance and if parts of the port are still higher than 15 meters then the contractor won’t be paid fully for its work. The contractor would then be required to maintain that depth over the course of two to four more years. Transport officials hope to eventually extend the contract and deepen the waterways to 16 meters (about xx feet) or more down the road. The dredged material is mostly silt and will require suction hopper dredges.

But potential contractors have balked Newton said uncertain whether the timeline is achievable and concerned about risk if the project cannot be completed. Brazil’s political situation may also have an effect; Brazilian President Dilma Rousseff is up for reelection in October and some companies feel that if she is voted out of office a new government could have an effect on the contract.

But the main concern Newton said is uncertainty over how the new contract structure will play out. Because of this insecurity bidding companies are building higher risk into their bids which is driving up the price of the work.

“The majority of these companies typically work with cubic meters dredged rather than output and both we and the companies have to learn from this experience” he said. “We’re going to call the companies again and have another talk with them and see if we can solve their uncertainty.”

“I would say that in the next month we’re going to be able to overcome this situation” Newton said in mid-July.

Newton also said that a recent shift in leadership of ports may provide some impetus for compromise. In June special Secretariat of Ports Leonidas Cristiano was replaced by Cesar Borges the former minister of transportation who earned a reputation for negotiating complicated contracts for the improvement of roads. Newton said that Borges has been specially tasked to navigate the new contract contentions.

Meanwhile all other pending dredging contracts in Brazil are essentially on hold until Santos is resolved. Dredging companies and port officials across Brazil have their eye on Santos; everyone sees Santos as a roadmap of how other dredging contracts elsewhere in the country will likely proceed Newton said.

“The thing we are most concerned about right now is the Port of Santos. Why? Because it’s the biggest port we have in Brazil” Newton said. “This situation has sort of brought some uncertainty to the market which is understandable but as soon as it is resolved the other contracts will begin to be resolved as well.”

Also to be resolved is a conflict with Dragagem the company that failed to meet its contractual obligation to reach 15 meters at the port before its contract expired at the end of last year. The SEP is currently in negotiations with them about how much money should be paid for the work considering that it was not completed. Newton said the government hopes to resolve the issue through negotiation but that legal proceedings are not out of the picture.

“Everything is possible” he said. “They do have to be compensated and on the other hand we have to be compensated because the contract was not completed. It’s a question of analyzing each of our arguments and arriving at a number. But the relationship is quite sound – we have differences in terms of contract interpretation but no hard feelings.”