Private sector share of Brazil's sanitation market 'will reach 40% in 6-8 years'

The water and sanitation sector in Brazil is expected to see an increase in investments in the coming years.

The increase will be due to the expansion of the private sector, which currently represents around 10% of the market, and more investments by the largest state-owned companies in the sector, São Paulo state’s Sabesp, Minas Gerais’ Copasa and Paraná’s Sanepar.

Gustavo Mueller, a Fitch Ratings water and sanitation sector expert, talked to BNamericas about the outlook for the segment.

BNamericas: What is the scenario for sanitation companies in Brazil for 2023?

Mueller: Generally speaking, the trend we’ve seen in recent years is likely to continue, with an increase in the market share of private companies in the sector, whether through PPPs or even new concession contracts.

Despite some noises that we’ve heard [in terms of regulatory changes] from the new government, we don’t see changes in the trends.

The sanitation sector in Brazil still needs a lot of investment to expand the coverage of services to the population and for that it’s necessary to seek resources from all areas.

BNamericas: How robust is the cash position of companies in the sector to make more investments?

Mueller: We see that, in general, within the universe of companies that we monitor, investments will proceed as planned and the expectation is for a strong expansion in investments.

Of the state-run companies that we monitor, Sabesp, Sanepar and Copasa are companies with greater investment capacity and are better positioned for investments, not least because their coverage levels [of water and sewerage services] are already high.

Other smaller companies, such as Cagece, Casan and Saneago, will need to make a greater effort to increase investments, perhaps making more PPPs to reach coverage targets.

BNamericas: How do the current high interest rates affect the financial position of sanitation companies and could it compromise their scheduled investments?

Mueller: The interest rate is an issue that we’re closely monitoring because the sanitation sector will need to leverage itself. In general, there’s room for companies to leverage themselves more. It will also be important to monitor the efficiency of these companies.

BNamericas: There is a current debate about the functions of ANA as a market regulator. Do you see the sanitation sector having a national regulator as strong as in the electricity sector, through Aneel, for example?

Mueller: The sanitation sector is different from other sectors, such as oil and gas or energy, for example.

In sanitation, the awarding authority is the municipal governments and in some cases this power is shared with states.

When the new regulatory framework for sanitation was approved [in mid-2020] the local governments remained the awarding authority.

In this model, ANA is not the actual regulatory agency, it has the task of publishing and defining reference standards, to be used by local regulators, that is, it standardizes the regulations. But that being said, I don't see a national [sanitation] regulator like Aneel in the electricity sector, for example.

Anyway, ANA plays a very important role in the standardization of rules and this gives regulatory security to investors.

BNamericas: In recent years we’ve seen many concessions in the sector. What can we expect for the coming years?

Mueller: I see a trend of more opportunities for investors, that is, I see private companies gaining more room, not least because there is a regulatory goal to increase the coverage of services, in the short term.

Those operators who are not able to gradually reach the targets may even see their contracts expire. Because of this, the trend is for investments in the sector to increase.

In this scenario, I believe that the participation of private sector companies in the sanitation sector will reach 40% in 6-8 years.

BNamericas: Do you think we can see the privatization of some of the large state sanitation companies, such as Sabesp, Copasa or Sanepar in the short or medium term?

Mueller: That will depend a lot on a political decision by each governor.

Looking at what happened in Rio de Janeiro, where there was a large concession, and in Rio Grande do Sul, where the company there was privatized, I would say that in these states this happened because the scenario was more delicate, as there was a great need for investment and the state-run companies did not have the capacity to invest, and there was even a risk that companies in these states would lose contracts.

In the case of Sabesp, Copasa and Sanepar, this risk is minimal, they are companies that have investment capacity, so a privatization decision is more political than any other reason.

BNamericas: What should be the financing mechanisms most used by companies in the sector in the coming years?

Mueller: We’re going to see a diversification of financing instruments, whether through infrastructure debentures or public financing, among others. I see companies looking for a variety of financing mechanisms, because the need for investment is high.