LexisNexis

Brazil establishes federal programme to incentivise cabotage

Tuesday 14 June 2022

Marcelo Mattos

Veirano Advogados, Rio de Janeiro

marcelo.mattos@veirano.com.br

Rogerio Campos

Veirano Advogados, Rio de Janeiro

rogerio.campos@veirano.com.br

Matheus Teixeira

Veirano Advogados, Rio de Janeiro

matheus.teixeira@veirano.com.br

   

On 7 January 2022, the Brazilian President sanctioned Law No 14,301/2022, establishing the so-called BR do Mar (‘Highway of the Seas’) programme, aiming at making the cabotage legislation more flexible so to increase supply of vessels available in the country while also reducing some operational costs for this transportation modal, consequently boosting competitiveness in the sector. One of the flagship initiatives of the federal government, BR do Mar was championed as a paradigm shift in the Brazilian transportation sector and is expected to greatly affect the country’s logistics and naval industry.

The low use of cabotage in Brazil is notable, considering that the country has a coastline of about 7,500km (4,660 miles) which has been historically used as the main means of internal (and external) communication and trade. In 2022, the share of cabotage in the national logistics matrix corresponded to a meagre 11 per cent of the total transported freight. The reasons for such decline are manyfold, including the increasing dependence on highways from the 1950s and the adoption of protectionist laws regulating maritime transportation in general, which sapped the incentive for the use and the cost-effectiveness of such modal.

Shipping in Brazil is subject to regulation and oversight of the National Agency of Waterway Transportation (ANTAQ), and until the establishment of BR do Mar, the rules for cabotage in Brazil were defined pursuant to Law No 9,432/1997, which has now been amended by Law 14,301/2022. Originally meant to protect the Brazilian naval and shipbuilding industries from foreign competition, its provisions curtailed the competitiveness of cabotage as a major means of transportation of goods within the country.

Under Law No 9,432/1997, only Brazilian Navigation Companies (EBNs), that is, legal entities constituted according to Brazilian laws, headquartered in the country, and authorised by ANTAQ to operate in Brazil, are allowed to perform maritime transportation services, such as maritime and port support, inland navigation and cabotage services. Such EBNs had to operate vessels of their own, but could also operate chartered vessels, preferentially flying the Brazilian flag, raising their costs and adding red tape to the companies. As a general rule,[i] the commander, the chief engineer and two-thirds of the crew of a Brazilian-flagged vessel shall necessarily be Brazilian nationals.

To further complicate this scenario, the time or voyage charter of foreign-flagged vessels for use in cabotage in Brazilian waters required a formal administrative procedure within ANTAQ for consulting the national market (ie, all registered EBNs) called ‘circularisation’ (circularização). ANTAQ would only authorise such a charter if no EBN would offer a Brazilian-flagged vessel of the type and size suitable for the intended transport, or if the vessel was chartered in substitution of another vessel being constructed in Brazil, for a maximum period of up to 36 months.[ii]

With the advent of the BR do Mar programme, the federal government expects a substantial growth in cabotage and a positive impact on related economic sectors. Among the most impacting measures to foreign investors is the creation of Brazilian Companies for Investment in Navigation (EBN-i), entities designed with the sole purpose of chartering vessels to Brazilian or foreign shipping companies (ie, the EBN-i would solely own the vessel(s) but not operate them).

In this sense, EBNs are now allowed to time charter vessels either from their own wholly owned foreign subsidiaries or even from wholly owned foreign subsidiaries of other EBNs. The proportion to which the EBN’s economic group may use this to expand the deadweight tonnage of its own vessels operating is yet to be defined in a federal decree. This measure also allows EBNs to time charter foreign vessels in substitution of vessels under construction in Brazil in the proportion of up to 200 per cent of the tonnage of the Brazilian vessel under construction, for a period of up to 36 months. Should the chartered vessel be in substitution of a vessel under construction, modernisation, conversion or repairs in a foreign shipyard, this proportion is reduced to 100 per cent of the vessel’s tonnage.[iii] As such, the larger an EBN’s own fleet is, the greater access it will have to new lower cost vessels under the programme, allowing for the scaling up of its operations in cabotage with greater ease.

In addition, EBNs are now also able to bareboat charter one foreign vessel for cabotage, with suspension of its foreign flag, regardless of a construction contract in progress or ownership of any Brazilian-flagged vessel, further lowering the barrier of entry to the Brazilian market for new companies. This bareboat charter may be done, as aforementioned, through an EBN-i. As of 2022, EBNs operating under BR do Mar are authorised to charter one such foreign vessel, with the progressive authorisation for one more chartered vessel each January (two vessels in 2023, three in 2024 and four in 2025) up to 2026, when charter limitations of foreign flagged vessels for cabotage shall be fully abolished.

Other provisions of the programme include the simplification of port procedures for cabotage transportation in relation to international trade, the use of digital media as proof of cargo delivery and receipt and the veto on the minimum of two-thirds of the crew being Brazilian nationals.

With these steps the federal government hopes to increase fleet availability and lower capital expenditures for shipping companies, thus increasing the offer of cabotage services while encouraging competition and competitiveness within the sector. Notwithstanding this main purpose, the increasing proportion of the modal in the national logistics matrix is also expected to bring many more benefits, including the development of the naval industry, the reduction of Brazil’s carbon footprint in the transportation of goods and the continuing training and qualification of national sailors, officers and the workforce
 

[i] Federal Law 9.432/1997, Art 4.

[ii] Some other exceptions applied, as per Federal Law 9.432/1997, Arts 9 and 10.

[iii] Federal Law 9.432/1997, Art 10, IV.