São Paulo state presses ahead with Sabesp privatization amid climate risks

The state of São Paulo is trying to advance with the privatization of Brazil's largest water firm, Sabesp, but severe flooding in Rio Grande do Sul state also raises questions about the capacity of private players to deal with potentially large-scale damage.

Governor Tarcísio de Freitas and other São Paulo state representatives are in New York this week to present the pipeline of privatizations, PPPs and concessions to potential investors.

"São Paulo has an environment that’s conducive to receiving large investments. We’re showing our portfolio, which is very robust and presents many opportunities. São Paulo has a qualified workforce, infrastructure and a modern tax system that prioritizes attracting investment," Freitas said in statement.

The state plans to privatize Sabesp during this quarter although no date has been set yet. The question is if the disaster afflicting Rio Grande do Sul will have any impact on the privatization.

In recent weeks, Rio Grande do Sul has been hit by unprecedented rains that have caused rivers and lakes to overflow, killing close to 150 people and causing massive infrastructure damage. 

"We’re currently in the midst of the impact of an extreme weather event that affects Rio Grande do Sul, which has left a large part of the state suffering from floods that are likely to last for weeks," André Perfeito, an economist and founder of Brazilian consulting firm APE Consultoria, told BNamericas.

"This effect creates huge risks for the state's water and sewage networks, as we don’t know how damaged they are due to the floods and how much investment will be needed for repairs. In the case of a state-run company, these risks are assumed by the government; in the case of a privatized company, there are few that would have the economic capacity to deal with such large damage to its networks," said Perfeito.

Corsan, the water utility that serves Rio Grande do Sul, was recently taken over by Aegea as part of its privatization.

Extreme weather events in the form of heavy rains and strong winds have become increasingly frequent in Brazil. 

At the end of last year, São Paulo city was hit by strong winds, which impacted electricity distribution and made energy giant Enel a target of criticism for service interruptions.

SABESP PRIVATIZATION 

On Monday, the company unveiled the syndicate of banks that will coordinate the public share offering. 

Banco Itaú BBA will be the global coordinator of the operation, which will see the participation of Bradesco, Goldman Sachs, JP Morgan, Morgan Stanley, Banco Safra, Banco Santander and XP Investimentos.

The state is planning to privatize Sabesp in two phases, with the government reducing its 50.3% stake and getting a private sector partner on board.

The first phase involves the sale of 15% of the firm to a strategic investor and the second a sale of shares on the market, open to individuals and investment funds. 

The strategic investor must keep at least 10% until 2034 and the state would keep around 20% of Sabesp after the privatization. It will also keep a golden share, enabling it to influence strategic decisions and prevent a single group from taking control. The other 49.7% is already traded on the New York and Brazil stock exchanges.