Privatization of Brazilian sanitation firms set to move forward

The privatizations of key sanitation firms will move forward in Brazil following the election of a new president and state governors.

While president-elect Luiz Inácio Lula da Silva has stated his opposition to privatizing publicly owned firms, local officials such as former infrastructure minister Tarcísio de Freitas, now governor-elect of São Paulo, and Eduardo Leite, who won re-election in Rio Grande do Sul, have come out in support of privatizing sanitation firms in their states. 

"Opposition to the model of privatizations and concessions in Brazil, is generally something that is in the past. Society has understood that it can be a win-win game, where the government raises funds with the privatization and can focus investments in other areas, and the public tends to have better services," Roberto Guimarães, planning and economic director at industry and infrastructure association Abdib, tells BNamericas.

Preparations for privatization are most advanced at Rio Grande do Sul state water utility Corsan, as the company could be sold off before the end of the year. 

Leite, who was re-elected to a second term on October 30, became governor in January 2019. He quit his post temporarily in an effort to win the presidential nomination for the center-right PSDB party, but eventually pulled out and decided to run for reelection as Rio Grande do Sul governor instead. 

During his absence, the state government underwent few changes and the privatization has been approved by state legislators. 

Earlier this year the government tried to privatize Corsan via an IPO, with the state planning to retain a minority stake in the firm. However, it suspended the plans after the state audit court demanded corrections to the economic and financial model, leading the government to make changes and opt to sell full control of the utility. 

SABESP 

The country's largest sanitation firm, São Paulo state's Sabesp, is also likely to be sold to the private sector.

"Sabesp, if privatized, could become an aggressive platform for participation in the national sanitation market, because it has the advantage of operational know-how in different types of operations and would also have adequate financing capacity," Karla Bertocco Trindade, a former CEO of Sabesp and currently a partner at asset management Mauá Capital, tells BNamericas.

Tarcísio de Freitas, a rightwing former minister from 2019 through March, defeated leftist Fernando Haddad in the state governorship election and will take over the role in January. He has advocated for a concession and privatization agenda, stating during the election campaign that he would advance with plans to privatize Sabesp if he was victorious. 

The plans for Sabesp will now likely move forward unhindered, as the elected legislators in the state, who will have to approve any privatization, are dominated by center-right forces that back the initiative.

According to sources close to the Freitas campaign consulted by BNamericas, the privatization of Sabesp could take place in the form of the sale of company shares via a public offering.

The state government currently controls 50.3% of the firm, while the remaining shares are outstanding.

The privatization of the utility has come under the spotlight in recent years, as former state governor João Doria tried to advance with efforts to sell the firm, but without success, due largely to the impacts of the COVID-19 pandemic during his tenure, which shifted the focus to health issues. 

The privatization of Sabesp could pave the way for its national expansion. The company is already the largest water and waste company in the country in terms of revenues and population served, delivering water to 28.4mn people and sewerage services to 25.2mn people, but as a state-run firm it faces legal obstacles to taking on services outside São Paulo state.

After privatization, the company could participate in water concessions in other states given the fact that it is a profitable company with the capital to invest in existing operations, while a fresh capital injection could allow it to put money into new contracts and projects.

The sanitation sector has been undergoing a major transformation since a regulation approved by the national congress in mid-2020 facilitated the entrance of private firms into an area previously dominated by state-owned companies.

The regulatory changes have come amid efforts by the government to expand coverage of sanitation throughout Brazil, since around half of the population does not currently have adequate water and sewerage services.

According to government estimates, the sanitation sector requires investments of around 750bn reais (US$147bn) to guarantee services for the entire population by 2033, and expectations that large investments will be made in the industry has players jockeying for position.