Spotlight: The transformation of Brazil's sanitation sector

Several of Brazil's state-run water utilities are set to raise funds in 2020 from share offerings.

Among these companies is Embasa, which is the water utility of Bahia state.

The state government is planning to hold an IPO for Embasa next year with the goal of selling a minority stake for at least 4bn reais (US$975mn), a government spokesperson told BNamericas.

The state does not have funds of its own to invest in the expansion of water and sanitation coverage and the IPO proceeds will help solve this problem, the spokesperson said.

At least three other state-run water utilities - Cagece from Ceará state, Compesa in the state of Pernambuco and Saneago from Goiás state - are undertaking studies to advance their IPOs plans for next year. 

"We are already seeing interesting movements in the sanitation sector. In addition, with an incredible reform agenda, sectors such as telecommunications, transportation, along with sanitation, will likely get a large amount of investments," Frederico Araujo Turolla, an infrastructure expert at consultancy PEZCO Economics, told BNamericas. 

NEW RULES 

The IPO plans of the state utilities are partly driven by new sector rules that are set to see the light next year.

The proposed rules will make it easier to fully or partially privatize state-run companies as the state governments will be given the exclusive right to decide on the sale of their water utilities. 

Currently, the privatization of a water utilities must be approved by the state government and all the city councils where the company provides services, creating a big obstacle for privatization as the bigger utilities have contracts with dozens of cities. 

The federal government is pushing for more private investment in the sanitation area after years of low levels of public sector investment. Nearly half of Brazilians receive inadequate sanitation services. 

About 75% of the population are served by water companies controlled by state governments, while 15% and 10% are served by municipal and private sector companies, respectively.

Earlier this month, the lower house approved the proposed sanitation sector rules in a preliminary vote. There is still no date set for the final vote in the house and the subsequent move to the senate. 

IMPACT ON LISTED COMPANIES 

The upcoming regulatory changes are likely to have a positive impact on the biggest state-controlled utilities that have shares listed on the stock market, including Sabesp, Copasa and Sanepar.

"We have a positive outlook for the sector, given the growing relevance of sanitation on the Brazilian government’s agenda. In particular, we see an effort to expedite the updating of the legal framework, which provides for positive changes, giving private operators more conditions to access the market, equity analysts at BB Investimentos said in a research report. "With this, it is expected a boost of investments in the sector, currently far below those needed to achieve universalization within the period stipulated by the national sanitation plan."

On Wednesday, BB Investimentos initiated coverage of the shares of Copasa, Sabesp and Sanepar, saying it sees attractive upside potential for the share prices of the companies due to the sector transformations that are coming.