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Brazil: New Sanitation Law Provides Opportunities
New law aims to bridge $137 billion gap in needed investments.
BY DANIEL ENGEL AND
PETER BAUMGAERTNER
Basic sanitation is the infrastructure sector in Brazil with the greatest service deficit and challenges. According to the National Confederation of Industry, in 2018, 48 percent of the Brazilian population still had no access to sewage collection. The rates are even worse when considering the Northern regions of the country, where on average 80 percent of the population does not have sewage collection and 30 percent is excluded from the official water supply system.
The difficulties to develop this sector are due to several factors, such as the lack of appropriate planning, insufficient investments, management deficiencies of state public basic sanitation companies (state-owned enterprises or SOEs) and low technical quality of the projects.
PRIVATE OPERATORS
Law No. 14,026 (New Law), of July 15, 2020, aims to change this scenario by further opening the market to private investors and operators. It intends to bridge a 700 billion reais (US$137 billion) gap in investment, as well as to provide greater legal certainty for local and foreign investors. The New Law amends the existing legislation to embrace policies deemed essential in pursuit of the universalization of water and sewage services.
The Constitution gives the municipalities the authority to perform basic sanitation services. Nevertheless, they have often delegated those services to state-owned and controlled companies (State Water Companies) under so-called program agreements. Such contracts are not subject to a prior tender process and, in certain instances, they fail to meet adequate standards of transparency, service quality and investment goals. Prior to enactment of the New Law, this arrangement has applied to approximately 70 percent of the basic sanitation systems in Brazil. Municipal governments have been running approximately 24 percent of the systems, whereas private operators have kept a market share as low as 6 percent.
Upon enactment of the New Law, municipal governments (individually or assembled in a regional authority) may only award the services through a tender process. With the winning bidder, municipal governments must enter into a concession agreement containing clear investment commitments. Such rule is expected to foster competition among private operators and State Water Companies for new concessions and, naturally, a greater share of private operators on the market. According to the New Law, regardless of who operates the systems, 99 percent of the population must have access to drinking water and 90 percent of the population must have access to sewage collection and treatment by Dec. 31, 2033.
CONCESSIONS
While new program agreements have been banned, those existing as of the date of publication of the New Law will remain in force until their relevant expiration date. This allows State Water Companies to either operate the facilities or grant them to private operators under concessions or public-private partnership (PPP) agreements while the program agreements are in force. State Water Companies, many of them supported by the Brazilian Development Bank (BNDES), have chosen this path recently (such as in the states of Piauí, Alagoas, Rio de Janeiro, Mato Grosso do Sul, Rio Grande do Sul).
The New Law has also assigned authority to the National Water and Sewage Agency (ANA) to establish reference standards for the regulation of the services by municipal governments or their delegates, such as regional or state regulatory agencies. Such reference standards will cover, among other topics, performance quality and efficiency, tariff regulation, standardization of contracts, governance and mechanisms to assess the achievement of goals. ANA will carry out periodic studies on best practices, public hearings, form working groups involving regulatory entities and mediate conflicts in the sector. The New Law has not attempted to change the constitutional authority of municipalities to regulate basic sanitation services, but rather assigned to it the role of a "diffuser" of best practices. The aim has been to reduce legal uncertainty and standardize the regulation of the services across Brazil based on the best information available. By adopting the reference standards, municipal authorities will not only receive the support of ANA in the regulation of the services, but also remain eligible to receive federal funds for investments in sanitation facilities.
REGIONALIZATION
The New Law also encourages the reunion of municipalities in one regional authority responsible for a joint organization of the services, including their regulation and concession to a private operator. Municipalities that do not join regional authorities proposed by state and/or federal governments will not be eligible to receive federal funds for investments in sanitation facilities.
Regionalized provision is a key factor to increase efficiency gains in investments and in the operation of the systems, as well as to attract funds from large national and foreign institutional investors. The greatest challenge for its implementation, in each case, will be the political capacity of the players involved to align their interests, structure feasible projects, articulate themselves and settle the conflicts that will naturally arise. Action from the federal government (including the BNDES) and from state governments will be of the essence.
Therefore, the New Law is expected to create many opportunities for foreign operators in Brazil's water sector. Even if foreign operators do not intend to act as concessionaires individually, they may consider, depending on the bidding notice, 1) to set up a joint venture with other companies (Brazilian or foreign), or 2) to identify opportunities to provide services, equipment or other goods, through subcontracting, to companies (Brazilian or foreign) that have the necessary size and expertise to participate in the bidding processes. Many opportunities are already open, especially those led by the BNDES, as is the case of tenders for the concession of water supply and/or sewage services in the Rio de Janeiro metropolitan area. In September and October 2020, two tender proceedings of water and sewage systems – those in the metropolitan areas of Maceió (State of Alagoas) and Cariacica (State of Espírito Santo) – have rendered extraordinary results. Competition was fierce and the offers placed by domestic and foreign competitors were aggressive. Indeed, observers are likely to witness one of the greatest investment flows in the water market worldwide.
Daniel Engel is a partner with Veirano Advogados in Sao Paulo and Peter Baumgaertner is a partner in Holland & Knight's New York office. The authors received assistance from Veirano Advogados associate Antonio Albani.
This article was written for Latinvex.
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