Sabesp privatization will make waves in Brazil's sanitation sector

Stakeholders in Brazil's water and sewerage sector are expected to be busy in the second half of this year, after several relatively quiet quarters with few significant moves.

The coming months will see the long-awaited privatization of the country's biggest sanitation company, Sabesp, currently controlled by the government of São Paulo state, in addition to the offer of a PPP contract in Piauí state and a concession contract in Sergipe state. 

Although all three of these initiatives are seen as important and are eagerly anticipated by market participants, the privatization of Sabesp is expected to be transformative for the sector.

Percy Soares Neto, head of water concessionaires' association Abcon until early June and the founder of water and waste consultancy Ikigai, speaks with BNamericas about the expectations for these operations.

BNamericas: What is your view of the three major operations in the sanitation sector confirmed for the second half of the year?

Soares Neto: There are three operations with distinct characteristics that are likely to attract different types of participants.

The contract to be offered in Piauí is a PPP contract, which have been gaining traction recently. This type of contract tends to attract operating companies in the sanitation sector that have interest and expertise in executing such projects.

In Sergipe state, the plan is for a concession contract, similar to the models in Rio de Janeiro, Alagoas and Amapá states.

In the case of a concession, we typically see interest from consortia, which are usually formed by operating companies in partnership with financial groups. Participants in a concession are generally joint ventures, bringing together an operator and financial entities, such as investment funds, which also contribute to financing the contract.

The Sabesp case is a privatization, which is completely different from a PPP or concession. This model will attract interest from operators as well, but the number of participants will likely be limited to companies with great financial strength, such as Aegea. In addition to operators, we can also expect interest from big investment funds like Kinea and Perfin.

I would class the privatization of Sabesp as a transformative operation for the sector.

BNamericas: Why is the privatization of Sabesp transformative?

Soares Neto: Currently, we have three pure sanitation companies listed on the local stock exchange: Sabesp, Copasa [Minas Gerais state], and Sanepar [Paraná state]. All three are state-controlled firms; none are listed companies under private sector control.

In addition to these three companies, there is Equatorial, which operates in both the sanitation and electrical sectors, so it is not purely focused on sanitation.

After the privatization of Sabesp, Brazil will, for the first time, have a pure sanitation company listed that is not under state control.

This marks a significant change because the company will definitively enter what we call the real business sector, attracting a more diversified type of investor who does not typically invest in state-controlled assets.

I see the privatization of Sabesp as a major step towards market maturation, perhaps the most important step since the approval of the current regulations in 2020.

Furthermore, once we have a listed sanitation company in the private sector, investors will better understand the sector, paving the way for IPOs of other private companies in the segment.

BNamericas: With an IPO and privatization, the more diverse and broader profile of investors also increases the level of demand. How can this higher demand be addressed?

Soares Neto: This is the big question for companies, and there’s no better test than Sabesp, the biggest company in the sector.

Even though Sabesp is already a listed company with advanced governance rules, its controller is currently the state government, so the company's management is accustomed to the demands of that main shareholder.

After the privatization, with private sector controllers, the company will need to improve its investor relations, enhancing communication significantly.

Another important aspect is governance. With new controllers from the private sector, Sabesp will need to refine its governance models, establish clearer rules for board formation, ensure transparency, and have a more structured management approach.

Additionally, there are regulatory aspects that need improvement.

BNamericas: What are the regulatory aspects?

Soares Neto: In the sanitation sector, ANA [the national water regulator] establishes general regulations, but state and municipal regulatory agencies implement them.

In São Paulo state, the regulatory agency is very well-structured, even more so than ANA itself, but this is not the case in many other states.

As part of the sector's maturation, we need a clearer definition of the role of regulatory agencies across the country.

The electricity sector reached maturity from an investor's perspective when its regulatory agency, ANEEL, became truly strengthened, providing regulatory stability.

I believe we will follow a similar path in strengthening the regulatory agency for the sanitation sector. This is essential to attract investor capital.

We must remember that the primary goal of changes in the sanitation sector is to increase water and sewage coverage throughout the country, aiming for universal coverage by 2033. While it’s possible to achieve this without strong capital market involvement, particularly the equity market, it wouldn’t be the smartest strategy.

Moreover, as we progress with more capital market operations, the sector will better align with comprehensive compliance models.

BNamericas: Are existing financing mechanisms for the sanitation sector sufficient to meet investment needs?

Soares Neto: Debentures [local bonds] have been sufficient so far, with the debenture market serving sector projects well with financing. Additionally, state banks such as BNDES and Caixa Econômica Federal offer major financing lines for these projects.

However, to achieve full water and sewage coverage by 2033, we need to reinforce companies' capital structures. I see IPOs and the equity market as crucial mechanisms for diversifying this funding.