Brazil set to see new players structuring sanitation concessions

Brazil’s sanitation segment is set to see a wave of concessions involving small municipalities in the coming years that is likely to require the participation of new players to structure projects. 

"Surely [federal banks] BNDES and Caixa Econômica Federal alone will not be able to develop all the projects that the sector needs," Percy Soares Neto, executive director of the Brazilian association for water and sewage concessionaires (Abcon), told BNamericas. 

BNDES, which is the country’s largest development bank, has together with Caixa played a key role in structuring major sanitation concessions in the past few years.

According to a study from Abcon, 1,117 municipalities did not comply with the requirements of the sector’s new legal framework, which opens up opportunities for private sector players.

Approved by congress in mid-2020, the framework force municipalities to create a plan for reaching full water and sanitation coverage by 2033. The local authorities must also show that they have the financial capacity to reach the goals. 

Most municipal water and sewage services in Brazil are still handled by state-run utilities. 

"There are three main options for municipalities to adapt to the law. One is to create their own departments to offer services to the population, the second option is to offer a concession via a direct auction, and the third is to form a consortium between cities to offer a single concession involving several cities," said Soares Neto.

"In my view the third option is more realistic because most municipalities that are not compliant with the law are small municipalities, with less than 20,000 inhabitants and it makes more sense to come together to make the projects attractive," he said.

If a municipality fails to comply with the new rules, it will be prevented from obtaining funding and investments from the federal government.

Brazil has seen a series of concessions since the new framework came into place, but they have been large contracts that have been able to attract strong private sector interest.

The biggest concession was awarded by Rio de Janeiro state last year and it will generate 25bn reais (US$5bn) in fees and 80bn reais in investments.