Why Brazil’s tax reform could delay sanitation sector investments

Brazil's water companies are struggling to convince senators to remove a tax being debated as part of the regulation of the country's tax reform, which could negatively impact investment plans and consumers.

Earlier this year, the lower house approved the tax reform's regulatory framework. 

On Monday, Eduardo Braga, the senate’s rapporteur, released a report on the reform with changes to the text approved by the lower house but they did not include the sanitation sector.

"Our request for the sector to be equated with the health sector was not addressed. In addition to increased tariffs, the tax burden will delay investments and jeopardizes the goal of universalizing services," Christianne Dias, head of Brazil's association of private water and sewage service concessionaires (Abcon), told BNamericas.

"We have been overlooked by lawmakers, the government, and even society. And this happens at a time when we have a window of opportunity to make progress."  

Companies in the sector currently have to pay the 9.25% PIS and Cofins federal taxes but are exempt from paying state tax ICMS and municipal tax ISS. 

Under the proposed tax reform regulations, the sector faces the risk of seeing taxes increase to 26.5%, which is the estimated VAT to be implemented through the reform.

According to Dias, if the tax increase is approved by the senate, it will immediately affect 4,000 contracts between public authorities and private operators. And the planned timeline to reach full national coverage of sanitation services will "inevitably be compromised," affecting around 90mn Brazilians who lack access to sewage collection and treatment.

Brazil’s sanitation sector has seen a major transformation since mid-2020, when regulations forced local governments to achieve full water and sewage coverage in their municipalities by 2033, or risk losing access to federal funding. 

This also opened the door for private companies to operate in a sector previously dominated by state-owned players, generating a wave of new investments via concessions, PPPs and privatizations. 

As the tax reform may affect existing contracts, companies could demand contractual changes that are likely to impact both ongoing and planned investments.

"Today, the tax issue is the most concerning topic in the sanitation sector because it could materially affect existing contracts. We're following the discussions being held in the senate regarding this reform, and there is a real risk that, with an increase in taxes, we will face a series of demands for contract reviews by companies," a project finance area head at one of the country's most active banks in the sanitation sector, told BNamericas on condition of anonymity.

Sabesp investment plan

Despite tax reform concerns, some companies are pressing ahead with their investment plans.

Sabesp, the recently privatized São Paulo state water firm, announced a plan to invest 15bn reais (US$2.46bn) in 2025-29.

The main investment projects are part of the IntegraTietê program, which looks to revitalize the Tietê river and its tributaries through improved sewage collection and treatment.

The program includes the construction of 850km of trunk sewers and interceptors, 550km of sewage collection networks, and the expansion and modernization of several treatment plants, the state government said in a release. "New stations are also planned in Guarulhos, Caieiras and Perus, strengthening the treatment capacity and ensuring greater efficiency and sustainability."