• Mauricio Endo, Partner |

Brazil is moving boldly forward with ambitious plans for the universalization of its water and sanitation services. Under Brazil’s ‘New Sanitation Legal Framework’ launched in July 2020, the federal government’s objective is to guarantee that 99 percent of Brazil’s population has access to clean water and 90 percent to sewage collection and treatment by 2033.

About 84 percent of Brazil’s population of more than 211 million currently has access to adequate water-distribution services – leaving about 34 million residents lacking services.1 Sewage-treatment services, meanwhile, currently cover just 54 percent of the population across the country’s 5,570 municipalities, with about 100 million residents lacking adequate sanitation services.2

The universalization framework should dramatically boost Brazil’s annual spending on water and sewage infrastructure and services and is expected to transform the nation’s water and sanitation sector. A study by KPMG in Brazil, prepared with the Brazilian Association of Private Concessionaires of Public Water and Sewage Services (ABCON), estimates that the total investment needed for the proposed universalization of services is about US$150 billion. This represents an annual future investment exceeding US$10 billion – more than four times the average annual investment made in the sector over the last five years.3

By May 2021, 10 months after the issuance of the new framework, more than US$6 billion in investments had already been contracted via concession contracts with private investors for universalization of services in four out of 26 states.4

The new 2020 framework opens the market for the private sector to provide much-needed services – breaking the monopoly of 26 state-owned sanitation companies that have traditionally renewed concession contracts automatically with Brazil’s municipalities, which are responsible for these services under Brazil’s constitution. Currently, private-sector companies provide sanitation services in only 6 percent of the nearly of 5,570 municipalities.5

A new era of competition is emerging

Under the new framework, it is now mandatory for municipalities to carry out public tenders that will allow any public or private operators to compete for concession contracts to deliver water-distribution or sewage-treatment services. To significantly reduce regulatory risks for investors, the framework also requires the National Water Agency (ANA) to institute new national-reference standards that are to be followed by local regulatory agencies.

Currently, more than 70 local regulatory agencies – municipal, inter-municipal or state – oversee sanitation, each with diverse regulations that, to date, have significantly increased the complexity and cost of providing adequate services.6 In April 2021, the ANA announced a Regulatory Agenda containing a timetable for the publication of 23 new regulatory standards until the end of 2022. These standards are related to:

  • Service quality and efficiency requirements;
  • System maintenance and operation;
  • Tariff regulation;
  • Standardization of contractual instruments;
  • Universalization goals;
  • Regulatory accounting;
  • Calculation of indemnities; and
  • Contract expiration rules.

In addition, three decrees in the new framework regulate aspects of interministerial governance, the federal (Union) government’s support to states and municipalities, and proof of the financial capacity of potential service providers:7

  • Decree No. 10,430 regulates the creation of the Interministerial Committee for Basic Sanitation (CISB), chaired by the Minister of Regional Development and composed of the Ministers of Health, Economy, Environment and Tourism. It will oversee the performance of the federal government for the management of public policies and the application of resources in compliance with the new framework.
  • Decree No. 10,588 regulates the government’s technical and financial support to states and municipalities, covering services guidelines in the new framework and rules for allocating federal resources and financing. The decree requires all states and municipalities to follow measures established in the new framework.
  • Decree No. 10,710 regulates the methodology for proving the economic-financial capacity of service providers to deliver water-distribution or sewage-treatment services. Verification must be done in two steps. In the first phase, service providers must comply with four indicators based on audited financial results of the last five years: profit margin, indebtedness, return on equity/net income, and cash sufficiency.

Public and private service providers that meet the first-phase requirements will qualify for the second phase, in which they must submit feasibility studies to the respective local regulatory agency by the end of 2021. This includes proposed investments needed to meet universal service targets in the municipalities with which service providers have concession contracts, plus compatible fundraising plans. Service providers that do not comply with the first-phase and second-phase requirements will be subject to the cancellation of contracts and municipalities can then open tenders for contracts with new service providers.

New investment targets more than 100 municipalities

Four bidding processes for sanitation concessions have already been held, all won by consortia led by private investors that have raised more than US$4 billion in grants to the governments, and that have guaranteed more than US$6 billion in investments to improve services in more than 100 municipalities in the states of Alagoas, Espirito Santo, Mato Grosso do Sul and Rio de Janeiro.

Looking ahead, five more bidding processes for sanitation universalization concessions worth about US$4 billion are expected to begin by the end of 2021 in the states of Alagoas, Amapá, Ceará, Rio de Janeiro and Rio Grande do Sul.8

As noted, Brazil expects to have more than US$10 billion in investments contracted with private investors by the end of this year in six states. This means another US$140 billion will need to be raised for the universalization of water and sewage services nationwide, mostly via new concession contracts, IPOs or privatization of state-owned sanitation companies until 2033.

There is more ground to cover but the future of the sector looks promising as Brazil moves progressively forward to generate critical new investments in much-needed services for citizens and businesses across the nation.