Spotlight: The top concerns of Brazil's water services firms

Taxes and financing are the main points of concern for Brazil’s water services industry, which is among the country’s most vibrant in terms of investments and new projects.

“Throughout the process of approving the tax reform, it was promised that the reform would bring neutrality, that is, without an increase or decrease in taxes, but what we are seeing in practice is the opposite,” Roberto Correa Barbuti, CEO of Iguá Saneamento, said during a special event to discuss sector concerns.

"We see risks of increases and taxes in the sector that could lead to an increase even in the price for the consumer in the long term," Barbuti, who is also chairman of water concessionaires association Abcon, said in response to a question from BNamericas.

At the end of last year, congress approved a tax reform aimed at simplifying the system and this year, congress must define the associated regulations for each sector.

"I would say that the No. 1 concern today is related to the impacts of the tax reform on the sector and then comes the concern regarding project financing," Barbuti said.

Currently, water companies must collect the 9.25% PIS and Cofins federal taxes but are exempt from paying state tax ICMS and municipal tax ISS. However, under the regulations being debated now, states and city halls could be allowed to impose these taxes.

Christianne Dias, former head of water regulator ANA and current president of Abcon, told the event that if the tax plans remain unchanged, rates for consumers may increase by 18% and investments could fall.  

"Brazil needs 900 billion reais [US$164bn] in investments to provide full sanitation services for the population by 2033, as foreseen under the current framework. But if new taxes are approved, companies that have obtained contracts since the regulatory framework [came into force in 2020] may be able to request a rebalance of their contracts due to the new conditions, and projected investments may suffer a reduction of at least 26%," said Dias.

According to Abcon representatives, companies are lobbying to convince the government to maintain the tax model, since the segment is directly associated with improving health conditions.

Regarding financing, Barbuti said, “We currently have various financing instruments in the sector, which are infrastructure debentures, [development bank] BNDES, as well as [state lender] Caixa Econômica Federal and multilateral banks. However, if we evaluate the most recent operations, debenture issues have an annual interest rate of 6%, 7% over inflation and this imposes a major financial cost on companies.”

Barbuti defended credit lines with subsidized interest rates. Currently, Caixa Econômica Federal offers a water services credit line with lower interest than in the capital market, but the line is limited.