In one of his impromptu utterances, Brazilian President Jair Bolsonaro said his countryfolk deserved being studied by scientists.

“Brazilians don’t catch anything. You see a guy jumping into the sewer, getting out, diving, ok? And nothing happens to him,” he said.

Any scientist willing to follow Bolsonaro’s research tips would have plenty of samples to pursue their studies. It is estimated than less than 50% of all sewage produced in Brazil is properly collected and treated, and millions of people live close to open air sewer drains.

But the conclusions would be unlikely to meet the president’s rosy views about exposure to untreated waters. In fact, the COVID-19 pandemic has made it clearer than ever that those who do not enjoy proper water and sewage services are more exposed to diseases. This is true not only of the novel coronavirus, but also of a long list of aliments that pester Brazilians on a daily basis, such as typhoid fever and dengue.

However, Brazil’s water and sewage misery could now create opportunities for investors to clean up while helping the country close one of its most shameful social gaps. After many years of debates, a new bill was approved in July by Congress that creates a new framework for investments in the sector. It couldn’t have come soon enough: experts believe that a total investment of between BRL700 billion and BRL900 bln will be required through 2033 to universalize the services. With governments at all levels virtually broke, it will be up to the private sector to dish out much of the money.

Even before the new framework was approved, the private sector already played a role in water and sewage services, albeit a small one. By the end of 2019, private companies answered to a mere 5.2% of the market, but 21% of annual investments, according to Abcon, a trade association for the water and sewage sector. The remainder is under the responsibility of companies owned by state governments that are notorious for their inefficiency and waste.

The new framework intends to change this situation by increasing legal security and removing hurdles to the offering of concessions and PPPs (public private partnerships) that are economically viable. Among other measures, it strengthens the role of ANA, a regulatory agency, in supervising the segment. It also creates incentives for the bundling of several different townships in a single concession, which could help extending services to poorer municipalities.

“The lack of a pipeline of good-sized projects has prevented more private capital, both domestic and foreign, to come to the sanitation sector,” Guilherme Albuquerque, the head of the Privatization and Project Structuring Department at BNDES, Brazil’s development bank.

BNDES is doing its bit to help and change this situation. Since the end of 2017, the bank has worked with municipalities to draft tenders that are both attractive for investors and meet the needs of the population. It has nine projects in its books that should hit the market in the next two years. BNDES estimates that these projects, which encompass a combined population of 36 million people, will demand CAPEX investments of more than BRL55 bln. They include water and sewage concessions in wealthy states like Rio de Janeiro, Minas Gerais and Rio Grande do Sul.

But they will not be the only game in town. One of the concessions most anticipated by the market is the PPP of all sewage treatment services in the Mato Grosso do Sul state, one of Brazil’s agribusiness powerhouses. Other smaller projects are on the radar of investors as well, and it seems that the market has been preparing to step on the gas once the new framework was in place: the recent tender for a water and sewage PPP in Andradas, a town of 37,000 people in the Minas Gerais state, attracted nine participants, according to Abcon.

“We have seen a significant increase in the number of tenders,” said Percy Soares Neto, the chairman of Abcon. The association says that seven new tenders were launched in September alone, taking the 2020 total to 20 so far. Last year, the number was 23, and the average until 2018 hovered around 10 a year.

Financial markets are also on the move. Santander, Brazil’s third largest private sector banks, has set up a new, BRL5 bln credit line dedicated to water and sewage projects, a first in the country. Carlos Brandão, the CEO of Iguá Saneamento, a water and sewage firm, said that several capital market investors and financial companies have sought out the company since the new framework was approved. Iguá, which belongs to private equity group IG4 Capital, has decided to resume its IPO (initial public offering) plans to benefit from the new, more positive environment.

“The new framework is a catalyser for the next steps of our company”, he said. “It is a transformational change in the market.”

José Guilherme Cruz de Souza, a partner at private equity firm Vinci Partners in Rio de Janeiro, expects plenty of opportunities to be created in the future, following a trend that could be similar to the privatization of electricity transmission sector in the past few decades.

“We are studying the sector very closely, and in a few years we expect to have a significant presence there,” he said. “More than a lot of construction, which will also take place, the new framework should bring more efficient provision of services. We are thinking of transforming the way water and sewage services are provided.”

New investment opportunities should come mostly in the shape of concessions and PPPs to deliver sanitation services, but there could be also privatizations of state-owned companies, which have been facilitated by the new bill. Although much criticized for allowing the sector to deteriorate, they own significant portfolios of projects, and some are even listed in the stock exchange. One of the latter, Sabesp, which belongs to the government of the wealthy São Paulo state, has indicated that it plans to recapitalize itself and become a player in other parts of the country via partnerships with other companies.

Renato Sucupira, the chairman of consultancy BF Capital in São Paulo, sees little room for growth in a competitive market for the inefficient state-owned companies. But potential returns in the water and sewage sector could be so enticing, in times of rock-bottom interest rates, that all opportunities shall be looked at closely by savvy investors. Return-on-equity in the sector is already positive right now, he said, and, with the new framework, it could stand at around 15% a year for a long time.

“With the new framework, companies can get high returns with low risks, which is the best possible world,” he said.

The industry also hopes to benefit from the current demand by international investors for ESG (environmental, social and governance) opportunities. Soares Neto stressed that water and sewage clicks all the boxes, as it helps to reduce pollution, improves the quality of life of vulnerable people, and creates jobs locally, helping governments to collect taxes that can be used to fill other glaring gaps.

A glimpse of this potential was provided by Iguá, which sold in July BRLN880 million in green bonds to raise money for its current water and sewage concessions in Cuiabá and Paranaguá, two mid-sized cities. The bond was almost three times oversubscribed, Brandão said.

But challenges remain in the sector, even with the new rules. Brazil harbors a well-established opposition to the provision of basic services by private players, and some experiences in the water and sewage sector have been disheartening. For instance, Manaus, in the Amazon region, has enjoyed private services for over two decades, but still has only 39% coverage of treated sewage. Litigation of tenders is a perennial risk, and one concession process due in September was delayed for at least a month due to issues raise by participants. Politicians may resist the privatization of companies owned by state governments, and wealthier cities may refuse to be bundled with poorer ones.

But even then, opportunities can be created. Analysts expect, for example, that the federal government, which is today the source of most of the money in the industry, will use its financial muscle to force the regional bundling of townships. Wealthier cities that want to go alone may then forsake federal support and use its attractiveness to develop projects funded by capital markets. Time will tell if the new framework will help the achievement of such goals, or will become just another set of good intentions that go down the drain.