Brazil's sanitation sector: Troubled waters or more opportunities on the horizon?

Brazil's sanitation sector has undergone a significant transformation in recent years, attracting sizable investments from private sector firms, but recent indications of a change in tack by the incoming government are making waves in the industry.

Investment began flooding into the sector after legislation was approved in mid-2020, facilitating the involvement of private sector companies in an industry that had been dominated by state-owned companies.

With the new regulation in place, local governments have been able to conduct 21 tenders for concessions, attracting a combined total of 82.6bn reais (US$15.7bn) in investments, according to figures compiled by local infrastructure and sanitation associations. 

One of the key changes under the new law was to provide greater supervisory power to national water regulator ANA. Regulation of the sector was previously spread among dozens of state and municipal watchdogs.

This was an obstacle to the involvement of private sector companies, since the regulations could be different in each state or even from city to city, creating legal insecurity.

However, members of president-elect Luiz Inácio Lula da Silva's incoming administration are looking at the possibility of reducing Ana's power again and restoring the oversight of local regulators.

Another point under review by the new government is to allow city halls to contract sanitation services without a bidding process, a measure that could favor state-run sanitation firms once more. This was also the case prior to the regulatory changes in 2020, which meant that many cities automatically opted to sign contracts with public sector companies.

Under the new rules, all cities are obliged to contract sanitation services via tenders, facilitating the involvement of private sector players.

With about half the population in Brazil, or about 100mn people, is estimated to lack adequate sewerage services, private sector investments are considered crucial to achieve universal sanitation coverage by 2033, the deadline established under current sanitation laws.

In recent weeks, BNamericas has talked with various stakeholders in the sector to find out more about their views on the situation and discover whether the industry is set for troubled waters or whether there are more opportunities on the horizon.

AEGEA

Brazil's biggest private sector sanitation firm, Aegea Saneamento e Participações, has pursued an aggressive expansion since the new regulation went into force. 

The company recently acquired the state-run firm Corsan in Rio Grande do Sul and has also assumed various concessions and PPPs during this period.

Despite the noise, the company remains optimistic about the potential for new business in the industry.

"We remain excited about the opportunities in the sector. Around 50% of the population in Brazil, some 100mn people, don't have adequate access to sewerage and this requires private sector investment to improve," André Pires, CFO of Aegea, told BNamericas.

"I don't believe this trend we're seeing is going to change. Of course, we’re always evaluating the situation, but I don't expect any [regulatory] setbacks."

ANA 

Any changes in the regulation of the sector could undermine investors' appetite and that can result in less interest in upcoming auctions for concessions and also for possible privatizations of state-owned companies.

"The framework for sanitation required intense debate with all the stakeholders until it was approved and it brought very significant changes to the sector," said Christianne Dias Ferreira, former head of ANA and a partner at infrastructure-focused advisory firm Vallya. 

"What worries me is that there seems to be an attempt to start a debate that there's competition between public and private sector investments and this discussion has already been had," she added. 

"Any sign of regulatory instability drives investors away from the sector. The rules for the sanitation sector in Brazil are quite complex, involving national and local actors. Investors who started to position themselves in the sector in Brazil took a while to understand all the rules and when it seems that they're understanding them well, there are talks to change them. This all creates an environment of uncertainty, and we'll have to wait to see what the government-elect will actually want to discuss regarding sanitation regulations," Dias Ferreira told BNamericas.

ASSOCIATIONS

Recently, a group of eight influential associations, representing business leaders in the area of infrastructure and sanitation, including industry and infrastructure association Abdib and water and sewerage services concessionaires association Abcon, published an open letter outlining their opposition to regulatory changes in the sector.

"With the regulatory improvements generated by the new rules, in which some gaps still need to be resolved, the new model shows that we are on the right path. In just two years, 21 concession auctions were held in the sector, benefiting around 24mn people in 244 municipalities in the north, northeast, midwest and southeast regions, with investments estimated at 82.6bn reais," read the letter.

"We cannot go back on the previously observed regulatory and legal advances, the result of broad debates in the national congress, and sector agents, the foundations of the investments already made and contracted and those yet to be made, which have already provided access to treated water and sewerage to millions of people," associations added.