What next for Brazilian water firm Iguá Saneamento?

Brazilian water firm Iguá Saneamento will continue to consider new concessions and PPP contracts as it prepares to launch its IPO.

"We're ambitious; we have a goal focused on growth. The sanitation market in Brazil still has many important projects and we will evaluate them all and participate [in future auctions] whenever they align with our growth strategies," CEO Roberto Barbuti told BNamericas.

On Wednesday, Iguá Saneamento won the water services concession offered by Sergipe state in northeast Brazil with a bid of 4.5bn reais (US$803mn).

Iguá’s bid surprised market players as it was considered aggressive, well above the minimum fee set by the state and also much higher than rivals' offers.

The minimum fee for the 35-year contract was 2bn reais, and the estimated investment is about 6.3bn reais.  

Iguá outbid water companies Aegea Saneamento and BRK Ambiental, along with investment firm Pátria Investimentos, which offered 3.6bn reais, 3.2bn reais and 2.7bn reais, respectively.

"Of course, we know that we took a significant step in the auction and our next steps [in future auctions] will be carefully evaluated so that we don’t have surprises and move within a comfortable range. But our strategy is a growth strategy," said Barbuti.

He said the company will initially finance the obligations assumed with the Sergipe contract through capital contributions from existing shareholders and also financing from banks, but he did not disclose any names.

"Definitive financing solutions for contracts like this take a certain amount of time. For example, in 2021 we won the concession auction in Rio de Janeiro, for a block in the state, with a fee of more than 7bn reais, and our financial engineering for this contract was only fully completed a few months ago," said Barbuti.

Iguá, along with other water firms in Brazil, is financing most of its operations via issues of local bonds known as debentures and support from development bank BNDES.

IPO 

The company also plans to list its shares on the Brazilian stock market through an IPO.

"We're analyzing this. I worked in an investment bank when I was involved directly in the IPO process of Sabesp more than 20 years ago, so I know the dynamics of the equity market, and we need to be attentive to the opportunity," said Barbuti, referring to the largest water company in Brazil, which was then controlled by São Paulo state.

"The moment there is an alignment that makes sense, we will move forward with an IPO. This is a commitment already made with our shareholders, but I can't commit to an exact deadline because this will depend on market conditions," he added. 

Iguá is 90% controlled by international funds Canada Pension Plan and Alberta Investment Management Corporation, while the minority stake is held by BNDES.

The water sector in Brazil has undergone a major transformation since mid-2020 when new regulations paved the way for private sector companies to enter the industry, which was previously dominated by state-run companies. As part of the regulations, governments are obliged to provide water and sewage services for 100% of the population by 2033. 

Amid the rapid inflow of private sector companies, investors began to have high expectations for the listing of firms on the equity market, which has not happened until now. 

Currently only state-owned companies Copasa in Minas Gerais and Sanepar in Paraná, along with Sabesp, which was state-controlled until the middle of this year when it was privatized, are listed.

"There are cyclical issues that affect the listing of companies’ shares. We have to remember that we had the pandemic and this had a major impact on the equity market in 2020 and 2021. If we evaluate the period from when the regulation was approved until now, we've had practically no IPOs in Brazil of any company, so this isn't an isolated situation affecting the water sector," said Barbuti.

TAX 

Amid growth expectations, Barbuti, who is also chairman of water concessionaires’ association Abcon, warned about a risk relating to taxes.

"Water companies are currently working hard to alert congress about the negative effects for the sector of the tax reform that is being considered. If the reform is approved the way it is, in the end it is the consumer who will pay, as there could be an 18% increase in bills, not to mention that some contracts may be revised," said Barbuti.

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

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 municipalities could be made to pay those taxes.