Bolsonaro veto casts doubt on Brazil's plans to privatize sanitation sector

While federal and state governments in Brazil expect that new rules in the sanitation sector will attract a wave of private investments, full-blown privatizations are unlikely in the near term.   

"Privatization in the sector is not a trivial matter. Sanitation is a very capital-intensive sector and the return of those investments take place over a very long period. It requires a certain expertise from investors," Gustavo Mueller, director of the sanitation area at Fitch Ratings, told BNamericas. 

Water utilities controlled by state governments currently handle around 75% of the revenues in the sector, with municipal firms responsible for approximately 20%. Private sector players account for just 5%.

State governors, faced with a lack of revenues, had high hopes that the rules facilitating PPPs and privatizations – approved by the senate in June – would help raise cash. However their plans face new headwinds after President Jair Bolsonaro vetoed a key point in the bill.

The veto prohibits an authorization for state-run companies to automatically renew their existing contracts with municipalities for 30 years.

State governors had strongly defended this item, as state-run companies with firm long-term service contracts would be more valuable in the case of a privatization and might also attract greater interest from investors in the case of PPPs.

The scenario is particularly negative for state-run firms in the country's north and northeast, which have no long-term contracts with municipalities, unlike São Paulo utility Sabesp, Paraná’s Sanepar and Minas Gerais state water utility Copasa.

The federal government, which expects the new rules to help trigger investments in the sector of up to 700bn reais (US$131bn), justified the veto by saying that the new rules aim to increase competition, not guarantee long-term contracts for state-run firms. 

However, even considering the major and well capitalized firms in the sector, such as Sabesp, the task of attracting private investors is likely to be made more difficult by Bolsonaro's move. 

"Financially and operationally speaking, the privatization of a company with the size of Sabesp, which is the largest sanitation company in the continent, is quite difficult. In the most likely scenario, in the case of a privatization, we would see something similar to what happened in the [São Paulo] state's [natural] gas distribution sector, where this was divided by three companies," said Fitch's Mueller.

The veto imposed by Bolsonaro drew criticism from senators and is likely to further contaminate the relationship between the government and congress at a time when the current administration is seeking to advance its tax reform plans. 

"I think the government is shooting itself in the foot because it is a project that was being enthusiastically applauded from a good part of Brazilian society. It will become a major controversy," said Tasso Jereissati, an influential senator and the proposed rapporteur of the new sanitation rules. 

BNDES ROLE 

Looking for the major challenges ahead to structure models of public private partnerships and privatizations in the segment, state-run development bank BNDES is likely to play a key role in the area. 

"We have noticed in the last few weeks an enormous demand to advance on this agenda and the BNDES is at the disposal of any governor or mayor who wants to elaborate or debate the sanitation strategy for their region," said Gustavo Montezano, the bank's CEO. 

Moves to overhaul sanitation rules coincide with efforts to improve water and sewage disposal services throughout the nation. 

Nearly half of Brazil's population, or some 100mn people, do not yet have adequate sanitation services.