Sanitation concessions suffer resistance, and the universalization goal is threatened

Access to basic sanitation services needs to be expanded by 2033, but the goal defined by the new framework for the sector is at risk due to the resistance of governors and mayors in delegating water, sewage and waste collection services to the private sector.

Despite the fact that the population served by private concessionaires jumped from 4.5% in 2018 to 23% this year, most of the investment (81%) is still concentrated in public entities.

“States and municipalities need to accelerate the rhythm of concessions”, says Percy Soares Neto, executive director of Abcon (association of water and sewage concessionaires).

Data from the association indicate that the average investment for the entire population to have access to basic infrastructure needs to be BRL 75 billion per year for the next 12 years —4.5 times the current level (BRL 16.5 billion).

For Cláudio Frischtak, a partner at Inter.B, a consultancy that advises large infrastructure groups in the country, there is no more room for the State in this market. “It needs a lot of investment and the fiscal shortage prevents [a participação estatal]”, he says. “In just a few years, the private sector has already shown interest in [pelo negócio]. But, if the current pace of investment continues as it is today, we will not universalize the service.”

Frischtak also considers that the issue is political.

“These state-owned companies are inefficient and work as job hangers”, he says. “There is no way to universalize without having a robust plan of concessions by governors and mayors.”

The deadline for federal entities to publish the sanitation plan —with guidelines for meeting the coverage target— expires on December 31st. So far, few have complied with the legal requirement.

The 26 auctions planned in the country until 2023 should generate more than BRL 21.7 billion in new investments contracted over 35 years of concession in 303 municipalities —where 16% of the country’s inhabitants live. If they materialize, by then, almost 40% of Brazilians will be served by the private sector.

The main projects are water and sewage in Ceará, Sergipe, Rio Grande do Sul and Alagoas.

A recent study by BTG Pactual shows that the market has an appetite to finance new entrants. The concessionaire’s income —liquid and certain— is the main guarantee that companies will honor the payment of possible loans.

Banks have also been active in issuing debentures (private debt securities) for concessionaires. Only the top 12 have already raised BRL 6.5 billion after the approval of the milestone.

In general, funding with debentures increased from R$ 5 billion in 2019 to R$ 19.5 billion in 2021. This year, they moved R$ 14.7 billion until September.

However, these numbers are still inexpressive given the effort that the country needs to make to reach acceptable levels.

Data from Snis (National Sanitation Information Service) show that, in August 2020, about 16% of the population did not have access to drinking water and 45% was not served by sewage.

With this performance, the country is equal to Peru and is below other emerging countries, such as Mexico, Russia, Chile and China.

Next steps

Reluctant to privatizations, the president-elect, Luiz Inácio Lula da Silva (PT), left the subject to be discussed with the future Minister of Cities.

However, the transition team recommended the creation of a new legal framework for basic sanitation, making concessions difficult and barring privatizations.

Until the approval of the new legislation, Lula’s team calls for the repeal of provisions of the law through decrees to guarantee, primarily, the possibility of so-called program contracts —in which state sanitation companies assume service provision contracts in city halls, without bidding.

Today, according to the BTG report, more than half of these contracts are in an irregular situation and the vast majority are not under the supervision of regulatory agencies —which, as they are independent, require compliance with targets under penalty of fines and, at the limit, the termination of contracts.

One of the criticisms of PT advisors to the concession model defined by the new framework is that the price paid by consumers has risen too much.

The BTG survey, however, shows that the average price per cubic meter of water and sewage currently charged by private companies is R$4.63, against R$4.72 for public companies.

It is not yet known how Lula will handle the matter. Even so, eight associations linked to the sector have already asked, in a manifest, that the new framework be maintained.

In addition to Abcon, they include Abdib (Brazilian Association of Infrastructure and Base Industries) and Abimaq (Brazilian Association of Machinery and Equipment Industry).

Between public and private, the trajectory of sanitation in Brazil

Since the foundation of the country, the first projects of the kind were restricted to local initiatives of land dredging or construction of fountains.

The first work was a well built in Rio de Janeiro under the order of Estácio de Sá —founder of the city. The first aqueduct, the Arcos da Lapa, only began to be built in 1673 and was completed in 1723.

The demand for piped water only gained urgency with the arrival of the Portuguese royal family, in 1808, a movement that quickly doubled the Brazilian population, requiring planning.

However, given the difficulties of the Portuguese crown in carrying out a project of this size, the first projects only became reality from the end of the 21st century —and through foreign companies.

But infrastructure development was not satisfactory. The services provided were of poor quality, which forced the government to nationalize the service.

Between 1857 and 1877, the government of São Paulo built its first piped water supply system.

The elite, formerly installed in the Campos Elíseos region, close to Estação da Luz, moved to Higienópolis —a neighborhood that tried to reproduce the European style and was named for being the first to offer residents a water and sewage system.

Porto Alegre and Rio de Janeiro only received piped water in 1861 and 1876, respectively.

In 1930, the Constitution delegated responsibility for sanitation and water supply services to the municipalities —which remains to this day.

In the 1940s, the first autarchies and financing mechanisms for the sector began to emerge. There, the marketing of sanitation services to the population began thanks to a disease control policy, conducted by the then Special Public Health Service —today the National Health Foundation (Funasa).

The impetus for the sector was given in the military government by a decree of 1969, which authorized the then National Housing Bank (BNH) to apply its own and FGTS resources for financing in the area.

Shortly afterwards, the National Sanitation Plan (Plansa) was instituted, having as its pillar the self-sustainability of the system through the collection of tariffs.

Only in 2007, during Lula’s second government, did Congress approve the National Basic Sanitation Law, with national guidelines, recently modified by the new framework, which established competition (through auctions) between state-owned companies and private companies for city hall contracts. and states.