With funding available and new regulations in place, a more intensive market is not far off

Friday, September 2, 2011

Brazil's water and sanitation sector has seen a surge in investment over the previous few years, most notably under the federal government's lauded PAC growth program. The second phase of the program, which began in January with the inauguration of President Dilma Rousseff, has contracted works costing 25bn reais (US$16bn).

While public investment has been responsible for the bulk of progress made in the sector, this is a scenario that looks likely to change, with overall investment in water and sanitation slated to hit 85bn reais by 2015.

A shift in regulations back in 2007 is largely responsible for the new interest in the sector, and foreign companies in particular are interested in Brazilian projects, according to José Roberto Martins, a partner at the Trench, Rossi and Watanabe law firm.

BNamericas spoke with Martins about the increased interest in the sector, the possibility of increasing public-private partnerships (PPPs) and the success of the government's PAC program.

BNamericas: You've said Brazil is seeing an increase in foreign investment in sanitation due to improved regulations. When did you start noticing this change?

Martins: There was a change in the law, which is now a bit old actually, but since this new statute we had a framework that's more friendly for investors.

The statute was enacted in 2007 but the actual rules, the way the principles are applied to practical business, were only put in place last year with a decree that regulated the 2007 law.

BNamericas: How quickly has investment been growing, and do you see this trend continuing in the medium-term?

Martins: The first wave of investment based on this new statute was mostly granular, because you had smaller projects carried out by local players.

The second wave is now just beginning. That's where these projects are being packaged as a single asset and being sold to other profiles of investors. We've seen some interest from international clients who are coming to us and starting to do due diligence regarding these packages of projects.

We're not far from seeing a more intensive market - it's definitely a good start. The trend is that we will have more and more projects as the cities are organizing themselves and joining forces, and also as you have more players in the market.

BNamericas: Which aspects of the regulation made investment more attractive?

Martins: There used to be a historic debate here in Brazil about who had jurisdiction over water and wastewater treatment. This law was very helpful in finally defining this.

BNamericas: What kind of projects are you seeing - are they mainly in potable water or wastewater management?

Martins: They're mostly in wastewater, which is our biggest gap here in Brazil. We have very good potable water access, but extremely low access to sewerage and wastewater treatment.

BNamericas: Does the new law allow for PPPs in the sanitation sector?

Martins: We have some PPPs that are being used, but most of the projects are still under standard BOT type contracts or public service concessions.

BNamericas: Why is that?

Martins: The PPP law in Brazil is still not as popular as the service concession law. The PPP law, at least at the federal level, is quite complex to implement. You have to go through a very complex documentation process compared with other types of frameworks.

BNamericas: Do you see the use of PPPs as something that's likely to grow in future?

Martins: Probably, and especially in this area. You can't only depend on tariffs to make some projects profitable in this area, so you still depend on some government support to make your investment return. Once the market learns how to structure PPPs, I believe they will become the instrument of choice for water projects.

BNamericas: Can you explain what your role is in helping foreign companies invest in sanitation?

Martins: My role here is to work with infrastructure projects in general - I work a lot, for example, in the power and oil and gas sectors, which are a lot more developed than water. Lately I've been working more intensively with water projects. My clients are interested in buying operating projects or even Greenfield projects that need to be developed. I've been working with foreign clients looking to work with local players.

BNamericas: You've said it's often a good idea for foreign companies to partner with Brazilian construction firms. Why is this?

Martins: It's not mandatory but I think it's advisable, especially when you are first entering the country.

This isn't an easy industry to enter because it's very granular in a sense - you're dealing with smaller projects and small government units. Some people on the government side don't even speak English.

So it's important to have local relationships, understand the local culture and the language of business, which is certainly not as sophisticated as in other countries. That's the advantage the local contractors have - they've been here their whole lives and have these relationships so it's proving to be more efficient for foreign investors.

BNamericas: Are there any regulatory changes needed to further increase investment in Brazil's sanitation sector?

Martins: I'm very optimistic about the rules and I think they are mainly very friendly to the investors. The problem is more how to execute these rules in the smaller cities. The cities still lack resources - and human resources in some cases - to implement the rules.

The problem isn't money; the federal government has funding available for projects. The problem is that not all the projects are able to qualify for the funding, because they are poorly structured.

I think the biggest challenge isn't money or even the regulatory framework - the biggest challenge is the people, particularly when it comes to the smaller government entities that have jurisdiction over this area.

We now need to look at ways help the thousands of municipalities to carry out the projects they need.

BNamericas: What do you think can be done to help these smaller municipalities?

Martins: You have to work on a case by case basis. What we've been seeing in this area is that wherever you have a need, you have people who see it as an opportunity. There are local players and developers who are spotting the need for human resources, for studies, for engineering work, and are offering their services and expertise.

There are definitely players digging for opportunities in these smaller cities.

BNamericas: The water and sanitation sector has received a lot of funding from the PAC growth program. Would you say the program has been successful?

Martins: I have mixed feelings about it. It's an ambitious program and it covers many different ministries. Overall I think it's been successful and it was one of the chief programs that led Dilma [Rousseff] to be elected. PAC reaches smaller cities rather than the big urban metropolises and brings benefits to areas that were ignored in the past by other federal programs.

I wish it could be faster and more efficient, but I do think PAC has been successful.

Probably the best feature of the program is that it adopts a comprehensive view of Brazil. When you look at how poor our infrastructure is, it's clear we have to do something about it, and I think PAC has been very helpful in calling attention to this and unifying efforts to resolve our infrastructure gap.

About the company

Established in 1959, Trench, Rossi e Watanabe represents both Brazilian and international clients. It is associated with the Baker & McKenzie international law firm, based in Chicago.