Brazil water sector gearing up for major operations
The dry spell in Brazil's water services segment is coming to an end, with major operations on the horizon and more auctions set to take place.
"Since the beginning of the [Luiz Inácio Lula da Silva] administration, we have had a certain absence of new auctions in the sanitation area because investors were analyzing potential changes the government might implement," Percy Soares Neto, the founder of water and waste consultancy Ikigai, told BNamericas.
President Lula's new term began in January 2023.
“Now, with stakeholders being more familiar with the government, the second half of this year will see a resumption of major operations in the sector,” Soares Neto, who is a former head of water concessionaires association Abcon, said.
Although water services are considered a vibrant segment in terms of new projects and investments, relatively few contracts have been offered in recent months.
Private sector participation became only viable after a regulation opened the sector up in 2020.
A major operation poised to spark interest is the privatization of São Paulo state utility Sabesp, which is Brazil’s biggest water firm. It will be privatized in two phases, with the state planning to reduce its stake from 50.3% to 18.3%.
The first phase involves the sale of 15% to a single strategic investor and the second the sale of 17% in the equity market, open to individuals and investment funds.
In the first phase, the state will reveal the best two proposals on June 28, after which the bidders may improve their definitive offers. The winner will be announced on July 15.
The bookbuilding process as part of the second phase will take place between July 1 and 15.
The privatization is expected to improve Sabesp’s access to financing and its cash flow, enabling it to accelerate investments and comply with the national universal coverage law, mandating full access to services by 2033.
Sabesp plans to invest up to 68bn reais (US$12.5bn) through 2029, when it plans to achieve universal coverage, while up to 260bn reais will be invested through 2060.
"Just as the regulation of the sector in 2020 was a moment of transformation, the privatization of Sabesp is likely to generate another phase of transformation because it is the biggest [water] company in the country and will be controlled by the private sector," said Soares Neto.
"It will attract international investors more associated with the equity market and who were not yet present in the segment in the country. It is a truly transformative operation," he added.
OTHER OPERATIONS
Meanwhile, Piauí state is planning to auction a 35-year, 9.57bn-real water services PPP contract on August 14.
Interested companies must deliver proposals with guarantees by August 9 to São Paulo’s B3 stock exchange, where the auction will take place.
Of the total amount, half must be invested in the expansion of wastewater services and half in water supply and other investments, a state spokesperson told BNamericas. The bidder offering the highest fee to the state will win, with the minimum set at 1bn reais.
Finally, Sergipe state published a notice for a 35-year water services concession, which involves projected investments of 6.3bn reais and is scheduled to be offered in an auction on the B3 stock exchange on September 4. Of the total investments, 4.7bn reais should be made in the first 10 years.
The concession includes extending water coverage to 99% of the state's urban areas by 2031, to 99% of rural communities by 2033, and ensure sewerage services for 90% by 2033.
Overall, 2.3mn people in 74 municipalities are expected to benefit.
REGULATION
Although the regulatory changes were approved in mid-2020, sector watchdog ANA is still developing additional frameworks and clarifying rules.
As part of this process, ANA recently created a working group to propose guidelines for treating PPP assets in determining rates as part of price reviews for water supply and sewage services provided by state companies.
ANA will coordinate the group, which must produce a report within 180 days, counting from its effective installation, the regulator said in a statement.
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