The House of Representatives approved, earlier this month, the core text of the bill that establishes a new legal framework for basic sanitation in Brazil, one of the country’s biggest bottlenecks. To this day, nearly half of the Brazilian population lacks access to the sewer system. One of the main points of the bill, which now moves to a vote in the Senate in 2020, paves the way for the private sector to play a greater role in the sector and establishes a bidding system so that municipalities can choose the companies that will provide water supply, sewage collection, and treatment services. This effectively ends the right of first refusal for state-owned sanitation companies. On one hand, supporters of the bill argue that this opening will bring greater efficiency, competition, and investment, while the opposition fears that the rule change will harm poorer municipalities—which would not be as attractive. There is also a fear that rates will rise unchecked and that legal uncertainty will take hold in the sector.
At the heart of the bill is also the establishment of a new target for universal access to sanitation in the country, set for December 2033. All new contracts will have to have this goal on the horizon. In the case of agreements already in force—the so-called “program contracts”—there will be the opportunity to align with the new target by March 2022, thereby allowing for contract renewal for an additional 30 years. Economy Minister Paulo Guedes has shown himself to be an enthusiast of the bill approved by the Chamber of Deputies and believes that basic sanitation will replicate the expansion of access that the cell phone market underwent following the privatization of telephone companies in 1998. Until then, Brazil relied solely on the government to invest in telecommunications, and Brazilians faced year-long waiting lists to purchase an expensive phone line, resorting to renting phones instead. “No one had sanitation, and now they will have it,” he declared during a speech in Brasília in December.
According to experts, progress in sanitation services has been very slow. Today, annual investment in the sector is less than half of what is needed, according to Percy Soares Neto, director of the Brazilian Association of Private Water and Sewage Service Concessionaires (Abcon). Studies indicate that 700 billion reais are needed to meet the goal of universal sanitation by 2033. “We need 45 billion per year. And the country cannot invest more than 11 billion reais annually. That is far short of what Brazilian consumers need,” explains Soares Neto.
Poor performance has consequences for the population and places a strain on the healthcare system. According to the World Health Organization (WHO), every dollar invested in water and sanitation results in savings of $4.30 in healthcare costs.
According to the director of Abcon, the new legal framework has three new pillars: competition, regulatory quality, and regionalized service delivery. “The main point of change really is to create room for competition between public and private entities. Any public company that wants to provide services will have to be more competitive than its competitors. It will need to improve its services, demonstrate a capacity for investment, and set an appropriate rate,” he says.
Soares Neto points out that, of the total investments made in sanitation in the country, 20% come from the private sector, even though it is present in only 6% of municipalities. “The investment is proportionally much higher.”
Centralized regulation
The National Water Agency (ANA), currently responsible for regulating access to and use of water resources, will, under the new legal framework, assume the role of regulator for the basic sanitation sector. The agency will be responsible for establishing quality standards, setting sector-wide targets, and determining rates. “Today we have 50 regulatory agencies in the sanitation sector across the country, with no coordination. It’s confusing for the infrastructure sector. Foreign investors ask themselves: which regulatory rules do I have to follow? It’s hard to understand,” says Soares Neto.
The director of ABES, Alceu Bittencourt, notes that while it is an interesting idea to establish a federal agency to operate in the sector, it does not yet have the capacity to provide these services. “Today, the states have regulatory agencies that have already gained experience, and regulations have advanced significantly. Since most of the operation is regionalized, there is cross-subsidization that allows for operation in small cities. There’s no need to start from scratch. Establishing ANA is a good proposal, but implementing it this way is an authoritarian move,” says Bittencourt.
In the view of the ABES director, eliminating “program contracts”—which are awarded without competitive bidding and signed directly between service providers and concessionaires—is also controversial. “They could certainly increase the role of the private sector, but without dismantling existing public companies; instead, they should combine public and private sectors and establish subconcessions. Many contracts need to better define their goals, but I think it should be up to municipalities to decide whether or not to open them up to bidding, while continuing to improve regulation across the board,” he explains.
The proposal approved by the House also provides that sanitation services will be provided in regionalized blocks of municipalities. This provision in the text seeks to address criticism from the opposition, which argues that very small municipalities could be left without service since they are not financially viable. By grouping viable municipalities—those with a positive balance of revenue and expenditure—with non-viable ones, the operation would remain attractive.
Soares Neto states that today 58% of private operations in the country are located in municipalities with 20,000 inhabitants. “If small municipalities aren’t important, as the opposition claims, why are more than half of them located there?” he asks.
Viviane Borges, president of the Sabesp Engineers Association, warns that, in theory, the idea of bringing municipalities together seems appealing, but in practice it is much more complex. “Find a region where you have a large municipality with a surplus and a group of smaller municipalities that could be incorporated into this arrangement. Merging regional groups is no easy task. There are regions in the interior of the Northeast where all the municipalities are in deficit. That is why we need to see this regionalization in practice,” she says.
Borges points out that Brazil is bucking the trend seen in European countries. “These countries have already undergone privatization, and now these services are being run by public companies. There are three reasons for this: lack of investment, inefficiency, and rising rates. Those were the complaints,” he says.
Bittencourt agrees that very few countries around the world have established an entirely private system. “You need government action to plan and organize. The focus of any change should not be on favoring the public or private sector, but rather on promoting efficiency. The main concern is that, as proposed, it could disrupt the sector,” he explains.
BNDES as a coordinator of the agenda
The Brazilian Development Bank (BNDES) has set out to play a key role in the new framework for sanitation. The head of the bank’s Partnership Structuring Department 1, Guilherme Albuquerque, stated that BNDES projects to attract private capital for sanitation estimate investments of 61.7 billion reais over the next 35 years. Of this total, 15.9 billion reais are projected for the first five years.
For the bank’s president, Gustavo Montezano, there is no shortage of funds to invest, but rather a need for better financial management. “We want to be the leading national coordinator on the sanitation agenda. With the ‘S’ standing for social, it [social] is our flagship initiative, because how can we even think about education for those without sanitation, or health care for those without sanitation, or economic development and environmental protection, without sanitation? For this, financial modeling is necessary and we need to talk to investors and politicians,” he stated. “God willing, with the approval of the Sanitation Framework, we will open a new phase of water treatment, water protection, and environmental protection for the Brazilian people,” he argued.
