New Sanitation Landmark Permits Private Sector to Provide Sewage for Half of Brazilians

RIO DE JANEIRO, BRAZIL – Earlier this month, the Chamber passed the basic text of the bill that establishes a new legal framework for basic sanitation in Brazil, one of the greatest challenges facing the country.

At this time, nearly half of the Brazilian population has no access to the sewage network.

One of the project’s main points, which is going to be put to a vote in the Senate in 2020, paves the way for private initiative to act more strongly in the sector and establishes a bidding system for municipalities to select the companies that will provide water supply, collection, and sewage treatment services. This ends the right of preference for state-owned public sanitation companies.

On the one hand, supporters of the project argue that this openness will lead to greater efficiency, competition, and investment, while the opposition wing fears that changing the rule will hurt the poorest municipalities – which would not be as attractive. There is also concern that tariffs will rise and that legal insecurity will be created in the sector.

At the heart of the text is also the introduction of a new goal of universal access to sanitation in the country, which was set for December 2033. All new contracts will need to have this goal on the horizon. In the case of the agreements already in force, the so-called “program contracts”, there will be the possibility of adapting to the new goal by March 2022, thus being able to renew the contract for an additional 30 years.

Economy Minister Paulo Guedes has proved to be an enthusiast of the project passed in the Chamber and believes that basic sanitation will replicate the expansion of access to the mobile phone market after the privatization of telecommunications companies in 1998.

Until then, Brazil relied only on the state to invest in telecommunications and the Brazilian faced year-long delays to buy an expensive line, appealing for phone rentals. “Nobody had sanitation and now they will”, he declared in a lecture in Brasília in December.

In the experts’ assessment, advances in sanitation services have been very slow. Today, the annual investment in the area is less than half of what is required, according to Percy Soares Neto, director of the Brazilian Association of Private Utilities of Water and Sewage (ABCON).

According to studies, R$700 billion are required to achieve the goal of universal sanitation by 2033. “We need R$45 billion per year. And the country cannot invest more than R$11 billion annually. It’s far below what the Brazilian consumer needs,” Soares Neto explains.

The poor performance has consequences for the population and overloads the health system. According to the World Health Organization (WHO), every dollar invested in water and sanitation results in 4.3 dollars of savings in health.

According to the director of ABCON, the new legal framework has three new pillars: competition, regulatory quality, and regionalized provision. “The main point of change is to actually open space for competition between the public and private sectors.

The public company wanting to provide service will have to be more competitive than other bidders. “Improving the service, showing investment capacity, and having an adequate tariff will be required”, he says.

Soares Neto points out that, of the total investments made in the country in sanitation, 20 percent comes from the private sector, although it is present in only six percent of municipalities. “The investment is much higher proportionally”.

Centralized regulation

The National Water Agency (ANA), today in charge of regulating access to and use of water resources, will play the role of regulator of the basic sanitation sector, according to the new legal framework. The agency will establish quality standards, standardize sector goals and determine tariffs.

“Today we have 50 regulatory agencies in the sanitation sector in the country, lacking consensus. It is confusing for the infrastructure sector. Investors from outside ask themselves: What rule or regulation must I follow? It’s hard to understand,” says Soares Neto.

The director of ABES, Alceu Bittencourt, thinks that although it would be useful to have a federal agency operating in the sector, it still doesn’t have the capability to operate the services. “Today there are regulatory agencies in the states that have already accumulated experience, and regulation has advanced a lot”.

“Since most of the operation is regionalized, there is cross-funding that allows operating in small cities. There is no need to start from scratch. To place ANA is a good proposal, but to place it like this is an authoritarian operation”, says Bittencourt.

According to the director of ABES, terminating the “program contracts” – without any competition, signed directly between the service holders and the concessionaires, is also controversial.

“They could increase the power of the private sector, but without dismantling the existing public companies, combining both public and private, making sub-concessions. Many contracts need to better define the goals, but I think it should be an option for the municipalities to decide whether or not to hold a bid but to continue evolving in the regulation of all,” he explains.

The proposal approved by the Chamber also provides for sanitation to be carried out in blocks for municipalities in a regionalized manner. This item of the text attempts to address criticism from the opposition, which claims that very small municipalities could remain unassisted because they are not financially viable.

By grouping viable municipalities – with a positive result in the balance of revenue and expenditure – and unviable, the operation would continue to be attractive.

Soares Neto says that today 58 percent of private operations in the country are located in municipalities with 20,000 inhabitants. “If a small municipality doesn’t matter as the opposition claims, why are more than half in them?”, he asks.

Viviane Borges, president of the Association of Engineers of SABESP, alerts that, in theory, the concept of agglutinating municipalities seems interesting, but in practice, it is much more complex.

“Look for a region where you have a large surplus municipality and a minority block that could be added to this business. The joining of regional blocks is not an easy thing. There are regions in the Northeast interior where all the municipalities are in deficit. That’s why we need to see this regionalization in practice,” she says.

Borges points out that Brazil is moving in the opposite direction of the trend in European countries. “These countries have already gone through private operations and now they are being governed by public companies. There are three reasons: lack of investment, inefficiency and high tariffs. These were the complaints,” she claims.

Bittencourt agrees that very few countries in the world have built an entirely private system. “You need to have government action planning and organizing. The focus of change should not be on public or private, but on promoting efficiency. The main concern is that the way it has been proposed could disorganize the sector,” he explains.

BNDES as the program’s organizer

The National Economic and Social Development Bank (BNDES) has proposed to play a relevant role in the new sanitation framework. The head of the bank’s Partnership Structuring Department No. 1, Guilherme Albuquerque, said that BNDES’ projects to attract private capital for sanitation foresee investments of R$61.7 billion over the next 35 years.

Of this total, R$15.9 billion are planned for the first five years.

According to the bank’s president, Gustavo Montezano, there is no lack of resources to invest, but rather better money management. “We want to be the main national organizer on the sanitation agenda”.

“With the S for social in our name, it [social] is our flagship, because as we can think of education for those without sanitation, health for those without sanitation, economic development, and environmental protection, without sanitation. This requires financial modeling and talking to investors, politics,” he claimed.

“God willing, with the approval of the Sanitation Framework, we are opening a new stage in water treatment, water protection and environmental protection for the Brazilian people,” he said.

Source: El Pais

For the full picture, see our Brazil Tax Reform: Complete Guide.