28 September 2022
The new Brazilian cabotage legislature: Insurance Implications
Maritime transport in Brazil is on the precipice of change. In January this year the government enacted legislation to increase the offer and quality of cabotage (transport carried out between ports within the same country) in Brazil’s vast coastline and inland navigable waters. The move is likely to have profound and complex insurance and people risk implications – against a backdrop of growing civil unrest impacting cargo movement.
In the latter half of the 20th century, coastal navigation’s importance in Brazil declined in favour of road haulage. According to the Brazilian National Confederation of Transport, 61% of cargo transportation in Brazil is made via the road system, 20.7% by railways, and 13.6% by water.
In 2021, 864 ships were registered under the Brazilian flag. During the same period, Brazil had approximately 29,000 registered seafarers. Container port throughput for 2021 was 10,130,740 tonnes, an increase of 10.71 per cent in comparison to 2020.
Brazil currently has a total of 175 port installations, including around 32 public ports, while the rest are private. The country’s port sector has an average annual turnover of 700 million tons of various goods. Hence, the ports in Brazil contribute more than 90% of the country’s trade in terms of volume.
Taking this data on board, coupled with the fact that 80% of Brazil’s population live near the coastline, why isn’t more cargo transported via sea? The reasons are a blend of the following:
- Strict regulation of chartered vessels and imports
- High transportation costs – largely due to fuel and labour costs
- A relative historical lack of investment in infrastructure and the shipbuilding industry.
The ports in Brazil contribute to more than 90% of the country's trade volume
The Cabotage Transport Stimulus Program (known as BR do Mar) aims to change this and “stimulate the use of cabotage, increase the national fleet and balance the Brazilian transport matrix”. BR do Mar program was enacted by the government through Law 14,301/2022, which also amended interrelated legislation to ensure the entire legal framework was aligned with the new law. While most changes are directly related to the cabotage trade, some affect and are of the interest of other shipowners.
Before BR do Mar, Brazilian marine regulations have protected the local market, with several restrictions applicable to foreign vessels navigating Brazilian waters. Cabotage navigation was only performed by Brazilian shipping companies, registered with the National Waterway Transportation Agency, using Brazilian-flagged vessels as the norm. The chartering of foreign-flagged vessels was only allowed in certain circumstances. The new rules permit Brazilian shipowners to charter two foreign vessels from 2024, increasing annually, up to a maximum of four vessels by 2026. From 2027 onwards, this type of chartering will be unlimited.
Thus far, it has been difficult to gauge how shipowners have received the program since there are conflicting interests at stake. Certain shipowners lobbied for the new law and are satisfied with its approval, while others believe the new law does not adequately foster the growth of the local maritime industry.
Now that the law has been approved, both sides are following the subsequent set of regulations to understand the rules of the game for 2023. Once the program is fully regulated, we will be in a position to assess the BR do Mar impact.
Insurance Implications
BR do Mar will directly impact insurance for companies operating in the cabotage trade and indirectly affect all vessels that are registered on REB (the Brazilian Special Registry).
Cabotage companies must be approved before taking advantage of the stimulus program and, once qualified, must present proof of hull and machinery and legal liability cover for their vessels. There is no specification yet, as to the minimum level of cover requested for hull and machinery. While P&I cover is the most appropriate cover for the operation, companies must be aware that legal liability cover for cargo damage is compulsory in Brazil through a specific local policy.
Qualified cabotage companies will now also be able to use Merchant Marine Fund (“FMM” – Fundo da Marinha Mercante) generated by its operations to pay for hull and machinery insurance. This will certainly help companies’ cash flows and allow for improvement of cover.
Whilst the new wording’s intention is clear when read in isolation, the insurance dispositions enacted in Waterway Transport Law 9,432/1997 are in opposition to existing Brazilian insurance legislation. Brazil is a non-admitted country for insurance; mandatory or facultative insurance guarantees in-country risks or those concluded by individuals or legal entities domiciled in the national territory must be carried out exclusively in Brazil (unless cover is not available). Thus, there are two contradictory laws in place – each one pointing in a different direction.
Until this conflict is clarified we advise shipowners to be extremely cautious – the specialised insurance law (non-admitted insurance and mandatory local placement) might take precedence over the new general law (freedom to contract hull and P&I cover abroad). The law is still being regulated, and cabotage trade should not be impacted until next year. Following the rising demand for insurance as required by the new law, businesses may turn to brokers for assistance in navigating the insurance landscape and conducting business cost-effectively.
Seafarer Shortage
Under BR do Mar, for foreign vessels trading in cabotage, one-fifth of the crew is required to be Brazilian for trades lasting more than 90 days but less than 180 days, and one-third of the crew is required for trades lasting more than 180 days. Brazilian-flagged vessels must carry a captain, chief engineer and two-thirds of the crew of Brazilian nationality.
Since the law stipulates that the captain, cabotage master, chief engineer, and engineer technician must all be Brazilians, finding and keeping crew could become more difficult once the law is fully implemented and owners start chartering vessels.
Nevertheless, the requirement for foreign vessels could have been more onerous; changes to the original text of the BR do Mar proposed that foreign vessels would adhere to the same crew requirements as Brazilian-flagged vessels. However, President Bolsonaro vetoed this provision, arguing that it would increase vessels’ manning costs and diminish the attractiveness for many low-cost foreign vessels to participate in the program.
80% of world trade is carried by sea, and shipping is an industry that necessitates a huge requirement for human resources. According to Manning Annual Review & Forecast report by Drewy, it is estimated that the shortage of officers will continue increasing to over 5% come 2026, the highest level since 2013. The chronic global shortage of seafarers has been exacerbated by increased restrictions relating to COVID-19 and the war in Ukraine. Russian and Ukrainian seafarers did comprise 15% of the global seafarer workforce, while Brazil only accounts for 1.4%.
Seafarer shortage is not yet a major issue in Brazil. Some owners have already informed training schools of the anticipated increased demand in the hope they can attract more applicants. While BR do Mar’s requirements are not as demanding as originally intended, the growing number of vessels which will be available could eventually be constrained by crew requirements, and this may result in labour shortages, impede transportation, and cause bottlenecks.
Inequality and Protest
The Privatisation of Brazilian Ports
There are concerns about the ongoing port privatisation process regarding risks of increased costs and selectivity of cargo, with the future private-sector administration focusing on the expansion and construction of new terminals to handle more profitable products. A prolonged port privatisation process could prevent critical investments from being made, which could result in inefficient port operation. Independent terminal operators are working to block shipping giants Maersk and MSC from participating in the auction for the Port of Santos.
In January this year, dock workers at Rio de Janeiro and other ports in Brazil carried out protests, strikes, slowdowns and demonstrations linked to the privatisation of ports and against the refusal of companies to hire full time workers. These are not the first worker strikes at the ports of Brazil due to inequality in pay and are evidence that inequality reduction must be at the top of the country’s national agenda in 2023.
The recent round of privatisation is more focused on port administrations than on public terminals. The next few privatisation rounds focus on larger port administrations, and Brazil could experience some larger protests.
Since December 2021, the Brazilian federal revenue service auditors’ protests have delayed the clearance of documents needed to receive payments for corn exports. The auditors are demanding more staff be hired as well as a pay raise and bonuses linked to performance, according to Unafisco, the auditors’ union. This action has led to shipment delays, financial losses and containers bottlenecking in ports.
Federal revenue service auditors’ protests normally demand increase in wages to recover for inflationary losses. These strikes normally have a very large impact in the movement of cargo in Brazil’s terminals. In a time where inflation is reducing everyone’s purchasing power, perhaps it is a good time for clients to revisit strike and delay insurance cover?
To combat inequality a combination of common-sense interventions is required: ensuring the fairer collection of taxes, reducing subsidies for the wealthy, rolling-out more equal opportunity policies, and stimulating opportunities for the most vulnerable. Brazilian philanthropist Luciano Huck states:
“To win the war on inequality, Brazil needs an inclusive growth strategy, one that is not limited to growing income and smart deregulation but also ensures that quality public services delivering security, education, health, sanitation and transportation reach all citizens, not just those who pay a premium for them.”
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