A new era for Sabesp as São Paulo hands control to private sector

Sabesp, Brazil's biggest water utility, wrapped up its privatization process last week, which should pave the way for it to make the heavy investments it needs to achieve universal potable water and sewerage coverage.

The privatization of the company, previously controlled by São Paulo state, took place in two phases, with the state reducing its stake in the firm from 50.3% to 18.3%.

The first step of the process was concluded recently when local utility Equatorial Energia acquired a 15% stake for 6.9 billion reais (US$1.26bn) at a price of 67 reais per share.  

The second phase involved offering a 17% interest on the stock market, with the government raising 7.9bn reais from investors on Thursday. The stock was trading at 82 reais by the closing of the B3 stock exchange that day. 

There was significant interest from investors, as demand reached 187bn reais, with foreign investors responsible for 96.5bn reais of the total.

“Sabesp carried out the largest public offering of shares on the Brazilian stock exchange in 2024, the result of consistent work carried out with a lot of dialogue and transparency from the beginning by the management. More than a sale of shares, the privatization is the result of a robust public policy, which aims to bring water and sanitation to everyone, cheaper, faster and better," Natália Resende, state secretary of environment, infrastructure and logistics, said in a statement.

"In other words, this will bring forward the universalization of sanitation services from 2033 to 2029, include rural areas and informal urban centers, and reduce rates with sustainability over time," she added. 

The privatization of Sabesp is a milestone in Brazil's water and sewerage sector as changes in rules have facilitated the entrance of private companies into a sector previously dominated by state-owned companies. The goal is to boost investment to ensure that all cities in the country have universal water and sewage coverage by 2033.

With the privatization, the São Paulo state government said that the company will be able to invest 260bn reais by 2060, of which around 69bn reais will be allocated to achieve the target by 2029.

CONTROVERSY

However, the Sabesp privatization has been controversial. 

Although many state-owned companies in Brazil have struggled to invest in improving services and posted consecutive financial losses for decades, Sabesp's case is different.

The firm, which has been listed on the stock exchange since 1994, has always had strong cash flow to make investments, generating intense domestic debate about whether there was any real need to privatize it.

Furthermore, during the initial process of selling the 15% stake, the conditions outlined in the notice issued by the company to investors prevented greater competition, according to analysts. 

Indeed, energy holding company Equatorial was the only bidder for the stake. The firm has limited experience in the sector, holding only one concession contract in Amapá state, assumed recently after the approval of the new framework for water and sewerage.

"Generally speaking, the privatization of Sabesp was a political decision, given the company's history of generating robust cash flow, which would possibly have made it able to make the necessary investments to achieve full water and sewage coverage in the state as stipulated in the regulatory framework," the partner of an infrastructure consultancy firm specialized in preparing contracts in the sector told BNamericas on condition of anonymity.

"However, I would say that within the entire privatization process, the point to be discussed was the process of selling this 15% stake, where the notice could have been better prepared to make room for more competition," the source added.  

According to experts consulted by BNamericas, the notice included a condition that the company acquiring the stake would not be allowed to take on contracts in other states. 

This ruled out Aegea Saneamento, the largest private company operating in the sector, which had said numerous times in the past that it was interested in purchasing a minority stake in Sabesp.

POLITICAL DISPUTES 

As the private sector now controls Sabesp, the company will become a touchstone for political disputes. 

The process was pushed by state governor Tarcisio de Freitas, an advocate of privatization of state-controlled firms, concessions and PPPs, and considered a strong possible candidate for Brazil's presidency in the 2026 election.

Freitas was the country's infrastructure minister between 2019 and 2022 and has the support of former president Jair Bolsonaro.

Meanwhile, President Luiz Inácio Lula da Silva of the Workers' Party (PT) is a fierce critic of privatization and has already said that he plans to run for reelection in 2026.

Last week, the PT filed a lawsuit in the supreme court in an attempt to block the Sabesp privatization, but the case was rejected. 

With the private sector gaining control of Sabesp, only two major water utilities in Brazil now remain under the control of state governments; Copasa in Minas Gerais and Sanepar in Paraná.

The Minas Gerais state government has previously said that there is interest in selling control of the firm, but Paraná state is not so amenable to the idea. 

"In Paraná, given our regulatory environment and business model, Sanepar appears to be an effective company. We operate efficiently as a state-owned company. What I usually hear from the governor is that we focus on methodology rather than ideology. I see that each state has its own approach to resolving issues related to the water sector," Wilson Bley Lipski, Sanepar’s president, told BNamericas in a recent interview. 

"Of course, the new regulatory framework opens up the possibility of privatizations, but I believe that this analysis must be done on a case-by-case basis," Lipski underscored.