The legal problems of Brazilian sanitation concessions

Aside from major investments, Brazil’s sanitation concessions agenda is also expected to create some legal challenges.

"I do not see the concession agenda being blocked due to legal aspects, but definitely the particular characteristics of the sanitation segment bring major risks and investors are obligated to evaluate that deeply, compared to others sectors, before entering into a concession contract," José Guilherme Berman, a partner specialized in infrastructure, regulation and government affairs at Barbosa Müssnich Aragão law firm told BNamericas.

A reform last year paved the way for private sector involvement and since then development bank BNDES has structured sanitation concessions for nine states, including Rio de Janeiro, Acre, Amapá and Ceará.

The Rio de Janeiro sanitation concession is considered a benchmark.

"The ownership of sanitation belongs to city halls, the management of the sanitation services is mostly done by the companies controlled by state governments and federal government banks finance the investments, so the sector has institutional schizophrenia. The new sector regulation approved last year will start to provide more legal certainty only with time," Rodrigo de Pinho Bertoccelli, a lawyer specialized in infrastructure and sanitation at Felsberg Advogados told BNamericas. 

A labor court has already ordered the suspension of the auction for the Rio de Janeiro concession. It was planned for April 30 and is considered the largest infrastructure contract in terms of value, expected to generate investments and fees of 40.6bn reais (US$7.1bn).

The court sided with a labor union that demands a plan to avoid the layoff of over 4,000 employees of state water utility Cedae. Rio de Janeiro is appealing the decision and wants to move ahead with the auction.

The service contracts are divided into four blocs and cover 12.8mn consumers, representing about 90% of Cedae’s customers.

Given the high complexity of the services and the investments, the blocs are expected to be assumed by multiple players, including consortiums.

Another legal risk involves exposure to political interference because certain rules are being determined by local governments.

INVESTORS 

But new players keep flocking to the segment which is expected to generate more than 750bn reais in the next years in projects to cover nearly 100mn citizens that currently don’t have access to adequate sanitation services.

Brazilian holding company Itaúsa – which controls the country's largest private sector bank Itaú Unibanco and industrial companies – announced on Tuesday the acquisition of a 8.53% stake in water and sanitation company Aegea Saneamento e Participações for 1.3bn reais.

Aegea’s controller Equipav will keep a 63.30% stake and Singapore’s sovereign fund (GIC) 28.17%.

"Itaúsa is focused on strengthening the company's management practices and create long-term value for its investors, and its inclusion as Aegean’s shareholder, in addition to the Equipav Group and GIC, will contribute to reinforce the company's capital structure, to enhance the execution of Aegea's growth plan, identifying new opportunities that maximize the value creation in its business," Aegea said in a statement.

"I see three stages of investments in the sector, the first is the expansion by companies that are already here, such as BRK Ambiental, Aegea, Igua Saneamento, among others. The second is the expansion of some small and medium-sized infrastructure companies and the third wave will be the entry of new companies in the sector, so we are talking about global giants, especially Chinese companies," Bertoccelli said.

According to Bertoccelli, players such as China Railway International Group (CREC), China Gezhouba Group Co (CGGC), and China Communications Construction Company (CCCC) are evaluating the segment, but likely wait for more regulatory certainty before investing.