Waves expected in Brazil's water sector with more tenders on the way

Brazil's water and sewerage sector will likely see at least three more tenders for concessions in 2025, with bidding processes being prepared for contracts in Pará, Pernambuco and Rondônia states, which should lead to a new round of heavy investments in an already vibrant market.

According to development bank BNDES' project platform, which contains details of all the projects being structured by the bank, the total investments outlined in the three contracts could be as high as 51.6 billion reais (US$9.2bn), with the contract in Pernambuco being the largest, at 25bn reais, followed by Pará (21bn reais) and Rondônia (5.8bn reais).

Those amounts may be subject to change, as the tender notices are still being prepared by the bank.

"The projects we're structuring in these three states are at a more advanced stage. It is possible that next year we will have auctions in these three states, and they could even take place in the first quarter of 2025. These three contracts will be offered in a concession format and not as PPPs," Luciene Machado, project structuring superintendent of BNDES, told BNamericas.

Along with those contracts, Piauí state is expected to offer a 9.57bn-real water concession in an auction scheduled to take place on October 30. 

Since mid-2020, when Brazil's congress approved a regulatory measure forcing cities and states to achieve complete water and sewerage coverage by 2033, private companies have been moving into a sector that was previously dominated by state-owned companies, with BNDES becoming the main project structuring agent.

"We have been working intensively on structuring projects, and the demand is so great that our focus has been on structuring larger projects, those organized by state governments, because we don't have enough staff to serve individual municipalities, for example," said Machado.

The water and sewerage contracts available are attracting the interest of multiple players. 

Earlier this month, Iguá Saneamento won a water services concession offered by Sergipe state with a bid of 4.5bn reais, outbidding water companies BRK Ambiental and Aegea Saneamento, and investment firm Pátria Investimentos. The minimum fee for the 35-year contract was 2bn reais, and the estimated investment is about 6.3bn reais during the tenure of the contract.

With the huge investments involved in these contracts, BNDES is also active in financing the projects, but it is also promoting increased funding options.

"BNDES remains very active in financing the projects, but it's very healthy to see more financing mechanisms for the sector too, as has already been the case with the use of infrastructure debentures. With this bond mechanism we see that the projects are ultimately financed by investors, investment funds in the debt market," said Machado.

"When we see auctions attracting so many different companies, so much competition, as was the case with the Sergipe state contract, this also sends a signal to capital market investors that the water sector is very attractive," she added.

DEBENTURES 

The government recently allowed greater use of debentures to finance projects in the water sector, with the cities ministry approving an increase in the proportion of debentures used to finance tender fees.

Previously, companies that won concessions or PPP contracts in auctions based on the highest bid were allowed to finance up to 50% of the amount offered with debentures, but that limit is now 70%.

While some market participants applauded that, others have claimed that this measure could mean that higher fees are offered to win a tender, with the costs being passed on to consumers during the contract. 

"All perspectives are valid, but what I understand is that the government considered this measure on debentures for payment of fees because it wants to see the contract offerings progressing. Considering things more broadly, our main problem is to guarantee adequate water and sewerage coverage for the entire population in the shortest possible period of time and there has been a lack of progress on this for many years, so any measure is valid to speed this up," Machado said.

Amid a series of upcoming auctions and the significant investment requirements stipulated, debentures have become one of the preferred financing mechanisms for infrastructure sector participants.

There are two types of debentures commonly used in infrastructure: incentive debentures, which offer a tax break to investors and have been available since 2011, and infrastructure debentures, which provide a tax exemption to the issuing company. The latter mechanism was authorized at the start of this year.