Brazil is preparing to privatize the Port of Santos, a big prize for the future operator as global demand swells for natural resources from anywhere but Russia.
For years, driving the 10 miles of cobbled streets along the Port of Santos took a lot of nerve. Motorists had to zigzag between a mess of old trucks lining up to deliver grain for export from the Brazilian port. Trains often blocked traffic. This made the port, the biggest in South America, certainly look busy. But behind all the chaos was poor logistics that curbed the port’s productivity and Brazil’s competitiveness in the global market.
The Port of Santos, just 50 miles downhill from São Paulo, Brazil’s economic and financial capital, is vital to Latin America’s largest economy at a time when demand for the wealth of natural resources in Brazil and the region is poised to surge. Buyers around the world are looking to replace supplies from Russia in retaliation for its war on Ukraine, which has hobbled exports from the two natural resource-rich nations. This has raised concerns of global food shortages, pushed up commodity prices and taken world inflation to dangerously high levels. To take advantage of the supply opportunities, Brazil must improve its port facilities to increase exports, led by its wealth in agricultural products, from coffee to meat, orange juice, sugar and soybeans.
The trouble for the Port of Santos is that it has long been a symbol of inefficiency, bottlenecks and bad governance in Brazil.
Fernando Biral, the government-appointed CEO of the Santos Port Authority (SPA), plans to change this. He is leading a process of bringing on private operators with the wider goals of improving Brazil’s competitiveness and boosting exports.
The management of the port is due to be transferred to the private sector at auction before the end of this year, which would allow the 35-year concession to be awarded between the October general elections and the end of Jair Bolsonaro’s presidential mandate on December 31.
Image: Fernando Biral
The timing may sound tricky, but the benefits of the concession are all too obvious and investors have been knocking on his door, Biral says.
“It is a unique, once-in-40-years chance for foreign investors. Those who do not take advantage of this now will have to wait for 40 years to have the same opportunity,” Biral says. “It is a unique opportunity for a unique, unrivaled asset. The port has been breaking records every year. It has enormous potential.”
BIG INVESTMENTS
The new management company will have to invest BRL15.6 billion ($3.3 billion), including BRL14.2 billion in capital expenditures and BRL1.4 billion in maintenance. A tunnel between Santos and Guarujá, on the other side of the Santos Estuary, will also have to be built by another private concessionaire, according to the tender documents. The additional investment is estimated to amount to BRL3 billion.
“Talking about port concessions used to be taboo,” says a former head of a state-owned company. “The Bolsonaro government has clearly achieved important progress that had not been made in decades.”
A first Brazilian port auction already took place in March in the much smaller ports of Vitória and Barra de Riacho in the southeastern state of Espírito Santo. Brazilian investment firm Quadra Capital outbid a local rival, Nasdaq-traded Vinci Partners Investments, to win the concession with a BRL106 million offer.
This was just an appetizer for Santos, however.
“It was an important experience to test the concession model. We learned a lot from that,” says Marcus Mingoni, CFO of SPA.
Santos is the big prize for private companies. The port handled 156 million metric tons of goods last year, including 4.2 million twenty-foot equivalent units (TEUs) in containers, according to SPA.
The port’s jumbled roads and terminals have been improved, too, in preparation for the privatization. Towering blue and green cranes, most of them imported from China, and huge warehouses operated by the likes of Brazilian pulp and paper giant Suzano have replaced the rusty and obsolete equipment at the port’s 54 terminals.
SPA’s finances also look healthier. “We registered the largest earnings on record during the first quarter of the year (BRL135.2 million), with a 91% increase compared to the previous year,” Mingoni says. “Cargo handling increased by 9.6%, which helped to boost sales.”
FUTURE FINANCING
The privatization will also open up financing opportunities for the port authority, now restricted because any bond sales, for example, would depend on the SPA getting authorization from the federal government. By comparison, a private company will be able to freely raise funds whenever and wherever.
“It may be an initial public offering, but most probably debentures to finance infrastructure,” Biral says.
The private operators that have been investing in terminal concessions in Brazil over the past 30 years agree.
“Private capital transformed terminals and may also transform the port like it did airports. This is the same concept,” says Antônio Carlos Sepulveda, CEO of Santos Brasil, a big container terminal operator that won a key private concession in the Port of Santos in 1997.
“Private capital transformed terminals and may also transform the port like it did airports.”
Antônio Carlos Sepulveda
The figures speak for themselves. Twenty-five years ago, the Santos Brasil terminal moved 280,000 TEUs per year. Now it handles more than 2 million per year, Sepulveda says. Productivity has shot up from 11 containers moved per hour to 100 per hour, with peaks at 140 per hour, he says.
Santos Brasil, which raised $392 million in its 2006 IPO and BRL790 million in a follow-on offer in September 2020, may be one the main contenders at the looming SPA auction.
“We will be looking at this with great interest,” Sepulveda says.
But other larger groups may also throw their hats in the ring, such as the Netherlands-based APM Terminals and Switzerland-based Terminal Investment Limited, which are controlled by the shipping companies Denmark’s Maersk and Switzerland’s MSC, respectively, and jointly control the BTP container terminal in the Port of Santos. Nevertheless, no single group will be able to own more 15% of the SPA, and no consortium will be able to control more than 40% of it in order to avoid conflicts of interest, port officials say.
“We expect intense competition. We believe there will be a lot of interested parties, such as investment funds and current operators. Our expectation is as good as it can be,” Biral says. “Beyond that, there is a desire that this happens, indeed, because the benefits for the country are great. The homework has been done. The company is prepared to be privatized. We are confident the process will be completed.” LF