Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Shipping volume discussing topics including sources of finance, compliance initiatives and foreign court decisions within key jurisdictions worldwide.
1 What is the current state of the shipping industry in your country?
In 2019, a new president took office in Brazil. The new government’s economic team has a clear liberal agenda, including ambitious privatisation plans, advantageous tax incentives for foreign investment, and plans to change the legal framework aiming to reduce Brazil’s highly bureaucratic and heavy administrative sector. These actions are imperative to help the shipping industry to leave behind the economic crisis and recession that severally hindered their development during the past three years.
After the 2016–2017 recession and a very stagnant 2018, it is already possible to see more optimistic numbers for 2019, showing a slow market recovery. Recent reports have registered a record of corn export by the Port of Paranaguá, in south Brazil. The same positive recovery can also be said about Santos Port, the busiest in Brazil, which has registered a 3.5 per cent growth in the container terminal, in comparison with the same period in 2018.
A proof of the government’s plans to boost the shipping industry comes with plans for a change in the rules of concession of public areas to the private sector in the infrastructure area. The government predicts that if the new concession model is approved investments could amount to 300 billion reais by 2022.
Furthering the idea of diminishing assets, the Brazilian federal government has already sold various port areas across the country to the private sector. In March this year, four areas alone – three in Cabedelo Port and one in Vitória Port – rendered approximately US$65 million. The plan is to expand vigorously the sale of port areas for the next four years.
In parallel, the downsizing promoted by the new government is also being put in practice by the companies it controls, such as Petrobras, which has already announced the sale of four refining units and associated logistics infrastructure in Brazil. This came following CADE’s (the Brazilian antitrust authority) recommendation aimed at reducing Petrobras’ dominance and promoting competition on the downstream sector. Another step towards the decentralisation in the oil and gas sector is the issuance of new regulations by the Brazilian Council for Energy Policy, changing the guidelines related to the promotion of free competition in the natural gas market.
Hence, under the current changes in the economic policy, the Brazilian shipping market is opening up and becoming more in line with international standards, increasing Brazil’s competitiveness.
2 What are the prevailing shipping market trends affecting your country?
Even though Brazil has a vast coastline, the national logistic is still heavily dependent on roads to move cargo around. However, in May 2018, truck drivers initiated an unprecedented national strike, which led the country into deadlock. The crisis had such magnitude that flights were grounded because of lack of available fuel.
The strike made both government and producers turn their attention to cabotage and inland navigation. Antaq (the Brazilian Waterway Transport Agency) has published a report informing that cabotage saw an increase of up to 20 per cent in some regions, mainly the northeast-southeast axis. As mentioned above, the Brazilian government is studying methods to diversify the national logistisc matrix.
The oil and gas industry is another important influence on the Brazilian shipping market. It is widely known that a large portion of Brazil’s oil and gas reserves iselocated in the pre-salt areas. During the exploitation activities, it was found that the volume of gas within the pre-salt areas was extraordinarily large, which led to an excess of available gas. As a consequence, the use of this excess gas to generate energy seemed like a natural result. As such, the need for floating storage and regasification units (FSRUs) increased, fomenting high-technology vessels, equipment and services, developing the Brazilian offshore industry. The use of FSRUs is proving to be a growing trend for the years to come, as regards the new contracts. According to a government study, a total of 67 ports and terminals are in the process of obtaining licences to dock FSRUs, with long-term contracts reaching spanning than 20 years.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
As mentioned above, the government aims to reduce Brazil’s protectiveness to attract more investments, mainly foreign ones, to leverage the navigation sector. The industry is waiting for the new legislation framework to be issued, when a series of laws and regulations will be considerably altered, which might happen in the next couple of years.
In 2020, the IMO’s sulphur cap will come into force, where sulphur limits for bunker oil will be considerably reduced. This alteration derives from Marpol, to which Brazil is signatory. To comply with the international rules, ANP, the Brazilian oil and gas agency, issued a new regulation reducing the emissions to 0.5 per cent, mandatorily from 1 January 2020. Brazilian companies are now in the process of adopting the new rule, mainly to the financial implications of such change.
Considering the revitalisation of the oil and gas market with more successful bids in new exploitation areas, aligned with new incentives for the shipping industry, it is not difficult to predict that the government will issue new regulations to a much-needed legal update.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The new government defends the reduction in the administration, namely, the reduction of personnel and departments. The federal government raised the possibility of unifying the transport agencies, namely Antaq, ANAC (the Brazilian aviation agency) and ANTT (the Brazilian road transportation agency), causing great anxiety within the market, which feared that such a merger would mean a confusion in competencies, plus a poorer standard of work. After much debate and requests from the industry in general, the federal government stepped back and decided to keep the agencies apart.
Another much anticipated regulatory landmark regarding the shipping market is a new government programme to stimulate cabotage activity, called BR do Mar (Brazil from the Sea). The new programme is to considerably alter the current legal framework, which dates back to 1997 with the issuance of Law 9,432/1997 (Law on Waterway Transport Organisation), also comprising Law 10893/2004, which governs the Brazilian Fund for the Merchant Marine (FMM) and the AFRMM (the Brazilian tax applied to freight destined to the FMM). The amendment to Law 9432/97 is set to target cabotage navigation, whose freight is not subject to AFRMM. As a consequence, Antaq expects to reach 2.7 million containers per year by the end of 2022.
The programme also aims to increase the marine fleet that travels to Brazil by 40 per cent, in deadweight tonnage, until the end of 2022 – excluding Petrobras or Transpetro vessels. Furthermore, the programme includes the reduction of taxes for some products, such as bunkers destined for cabotage during a predetermined period of time, yet to be established.
As is widely known, Brazil is a self-protective market, and this can be easily noticed within the shipping industry, with restrictions to foreign-flagged vessels in the cabotage and offshore supply navigation. The government is studying the possibility of widening the chartering of foreign-flagged vessels. The government estimates that such expansion is important for the growth of cabotage and increase the competitiveness of the modal. Under the proposal, an EBN (Brazilian shipping company) interested in building a ship outside the country could charter a similar foreign vessel, with flag suspension, for up to 36 months. If the company chooses to build at a national shipyard, the proposal suggests the right to charter without flag suspension for three years.
5 What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?
Even though Brazil is a large exporter, the shipowners’ market is still fairly undeveloped, meaning a lack of alternatives to fund construction of new vessels. The available methods are still pretty much the same as they were in the 1950s when the FMM was created. Nevertheless, nowadays, the FMM is the primary financing method for new shipbuilding projects.
The FMM is currently linked to the Brazilian Ministry of Infrastructure, and the resources come from the AFRMM. The National Bank for Economic and Social Development (BNDES) operates as a financial agent for the FMM, administrating and managing its related operations.
In 2019, the BNDES and FMM released data stating that 93 per cent of the funds used so far have been destined to the building of new vessels, and only 7 per cent to the renewal of the existing fleet, the largest number being from Rio de Janeiro. In the first three months of 2019 alone, the BNDES withdrew 1.5 billion reais from the FMM.
The FMM has already presented its budget for 2020 projects: 6.3 billion reais, which includes 3.3 billion reais in new shipbuilding and renewal projects.
In the near future, we foresee an increasing demand for funding to FSRUs, especially considering the rapid expansion of gas projects, as well as for service supply, construction and other types of offshore industry vessels.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
An important decision was issued in June 2019 by the Superior Court of Justice that could affect the entire marine insurance market, regarding the application of arbitration clauses to insurers when the arbitration clause is previously agreed by the insured.
A Brazilian company commenced a foreign arbitration against an insurance company. The Brazilian company won the case, and the insurer was bound to the arbitration clause agreed by its insured. As a consequence, the insurer did not have any right to claim reimbursement from the Brazilian company, although it had allegedly caused damage to the insured.
However, the insurance company decided to ignore the results of the arbitration award by filing a redress lawsuit in Brazil, arguing that the Brazilian company caused damage to the insured. To defend itself, the Brazilian company decided to enforce the foreign arbitration award before the Superior Court of Justice.
The insurer challenged the enforcement, adducing that the arbitration clause could not be applied as the insurer had not been part of the contract that set the clause. Despite the insurer’s arguments, the Superior Court of Justice decided that the insurer is bound to the arbitration clause entered into by its insured.
Another important decision is related to the acceptance of a limitation of liability clauses in bills of lading.
The São Paulo State Appelate Court recently recognised the carrier’s right to limit liability based on bill of lading’s clause. The decision was based on the fact that the contracting party had the opportunity to declare the real value of the cargo and pay ad valorem freight. However, the contracting party decided not to declare the cargo in order to pay a cheaper freight.
Although there are Superior Court of Justice precedents on the matter, they are based on revoked legislation,a reason why this precedent might confirm the same rationale as stated in the past, but under the current framework.
Another relevant decision to be mentioned involved the confirmation of unpaid bunkers as privileged credits that give rise to ship arrest.
A Brazilian shipowner purchased a bunker from a foreign bunker supplier. The bunker supplier filed a lawsuit seeking the payment of the bunker provided and also requesting the arrest of the vessels involved aiming to avoid the unpaid bunker being consumed. The bunker supplier argued that credits arising from obligations assumed by the captain to provide goods for the maintenance of the vessel have the nature of privileged credits, which allows the arrest of the vessel. After a first instance decision granting the arrest and payment, the Brazilian shipowner appealed the decision, which was rejected, confirming the privileged nature of unpaid bunkers under Brazilian law.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
After enduring one of the longest recessions in recent history, Brazil’s economy is at last showing signs of recovery. The liberal economic approach is being put into practice by the new government, tackling various areas that affect the shipping industry either directly or indirectly. A more modern legal framework is being prepared to speed up this recovery, stimulating cabotage and interior navigation, and bringing foreign investment into port expansion, which will allow bigger vessels to dock in Brazilian territory.
If the government manages to deliver all the promises in simplifying a heavily bureaucratic system, we can expect the coming years to be of steady economic growth, which will positively affect shipping activity.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Owing to the diversification of the shipping industry is Brazil, we believe clients have started to look for one-stop shop firms with specific shipping expertise instead of having to manage various firms (ie, one for regulatory shipping matters, other for shipping finance matters, other for taxes related to shipping activities, etc) or engaging individuals with small practices. As shipping businesses get more dynamic, sophisticated and even more international, clients doing business in Brazil prefer to receive efficient assistance at competitive cost from shipping lawyers who are part of a larger team with international experience, deep involvement in the industry and availability whenever necessary. Also, due to the increasing compliance requirements, shipping lawyers worldwide are required to build sophisticated internal structures to comply with clients’ policies and requirements for service providers.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
As a starting point, it is crucial to identify the source of the funds, which, as explained, in Brazil, shall most likely involve the FMM. Subsidised financing from the FMM is subject to the specific rules set out in Law No. 10.893/2004 and related decree, from the perspective of eligibility, destination of the available funds and guarantees to be provided to secure the debt. Elements of major concern vary on a case-by-case basis, but the assessment on the primary and collateral securities, as well as on a possible limited recourse structure, will always be crucial, both from the creditor and debtor’s point of view.
What are the most interesting and challenging cases you have dealt with in the past year?
We have been building a reputation for dealing with relevant marine incidents, and in 2019 our firm assisted in the emergency response and the subsequent investigations and procedures related to a serious casualty that resulted in losses of over US$100 million. We are also dealing with smaller incidents, such as a fire on board a supply vessel that resulted in material damage. We have also experienced a relevant demand for consultancy services and transactional work.