Analysis: Brazil may finally have the basics in sanitation

RIO DE JANEIRO, BRAZIL – With a regulatory framework that requires companies to invest, the country may finally dream of no longer dumping sewage on its beaches and rivers, doing justice to its natural beauty.

“Saneamento Básico” (Basic Sanitation) is one of those movies in which the comedy that gives its name to the genre extends beyond the script itself.

Starring Wagner Moura, Camila Pitanga, Lázaro Ramos, and Fernanda Torres, the movie portrays the story of a village in Serra Gaúcha that seeks to carry out a sanitation project. The problem? The town hall does not have the funds for the work, but has a grant from the federal government to produce a fiction film.

One might say that this bizarre situation in itself is something better than the good jokes in the film, but there is yet another irony: the film is a production of the “Casa de Cinema de Porto Alegre”, a respected institution in the capital with the second-highest income in the country, but where treated sewage, the so-called “basic sanitation,” is a reality for less than half of its population.

The capital with the highest income in the country, according to federal tax data, is Florianópolis, Santa Catarina, which also has less than half of its sewage treated.

There are exceptions, of course. In the South region, Curitiba has 99% of sewage coverage, against 64% in Florianópolis, while 94% of it is treated, against 48% in Florianópolis.

The fact is that, with a few honorable exceptions, sanitation is a problem that extends from the North to the South of Brazil. At least 49% of Brazilians do not have access to sewage collection, and of the remainder, 54% do not have treated sewage.

It could have an obvious answer. After all, for every R$1 invested in the area, R$4 are returned to society in benefits such as health, work productivity, and so on. It is, by far, one of the sectors in which investment presents the greatest social gain.

Still, Brazil is sluggish when it comes to investments in such a crucial area. The consequences of this neglect are many and varied.

A study by the NGO Trata Brasil points out an average gain of up to 4.4% in workers’ income with the universalization of sanitation.

In practice, this means something like an additional R$35 in monthly income for each worker in São Paulo, or up to R$113 in Amapá. In the country as a whole, it means R$42 billion in salary gains resulting from increased productivity.

The gains also extend to the real estate sector. On average, real estate could gain 13.3% in valuation, representing an impact of R$176 billion. However, this impact occurs essentially in real estate in peripheral regions, more affected by the lack of sanitation, which implies a direct benefit for the poorest population in the country.

The cost of all this? R$508 billion, or about 40 years of the average investment the country has made. It may seem like a lot, but when put into perspective, the annual amount is relatively low, even if the calculation is for two rather than four decades.

The amount is equivalent to less than 20% of the average BNDES (National Bank for Economic and Social Development) disbursement during the “national champions” binge. It is equivalent, for example, to 80% of Bolsa Família (Family Grant) spending alone, or 0.4% of GDP.

In short, it is a tiny investment with virtually guaranteed returns.

So what is holding back these investments? There are some possible answers.

The financing of this type of work is undoubtedly a relevant issue. Large infrastructure projects have returns over decades, which makes financing them complicated. It requires a robust capital market, or a public bank willing to invest.

We are witnessing a strong advance on the first point, which can mean a significant relief for the sector. With declining interest rates (despite the recent SELIC hikes, there are still negative interest rates), infrastructure sectors have gained appeal because of the stable yields that are better than the interest paid on government bonds.

Still, it is important to note that this sector is, in essence, a so-called “natural monopoly” sector. In practice, this means that it is impossible for consumers to choose which service provider they want.

It is true that other sectors previously considered natural monopolies have suffered disruption and gained competition, such as energy, which today can be generated autonomously for competitive prices. But this does not seem to be the fate of the sanitation sector.

Therefore, there are two issues on the table: there is a sector that demands heavy investments that only pay off in the long run, and there is no competition during the provision of services. How to reconcile this issue?

The simplest and most direct answer is: a well-designed contract, with targets and that is subject to regulation.

This is, in essence, the goal of the Sanitation Framework, passed last year. Knowing that it is unfeasible to generate competition in service provision, the regulatory framework draws competition, a crucial factor for the improvement of any service, toward the concessionaire’s choice.

Source: Infomoney