Investors are poised to jump into Brazil’s long underfunded and neglected water and sanitation sector as new legislation, on the cusp of finally being signed into law, will allow outside cash to be put to work and meet the clean water goals set more than a decade ago by the government for all in Latin America’s largest economy.
The potential is so huge and wide open for competition that financial investors from Singapore and Canada have already positioned themselves to inject massive capital in an under-performing and cash-starved industry.
The new bill, passed by Brazil’s Chamber of Deputies, or lower house, last year, is a seen as a game changer. If is passes, as expected in the Senate, or upper house, it will herald a new era of “total market opening”, according to Pedro Antonio Gouvea Vieira, a business lawyer in São Paulo with strong interest in the sector.
A new law will end the dominant position of state-owned companies, foster competition, curb inefficiencies and strengthen regulation, executives tell LatinFinance.
“In the worst-case scenario, the bill will be passed by the middle of the year and it will be implemented by the second half of 2019,” said Rogerio Tavares, vice president of Aegea, one the leading private sanitation companies.
In 2007, Brazil set an ambitious target: 99% of the population should have access to clean water and 90% should have access to sanitation by 2033. This requires investment of BRL600 billion ($140 billion) according to Jerson Kelman, a former head of ANA, the water regulatory agency. This is a tall order, as Brazil currently only invests some BRL10 billion per year, says Aegea’s Tavares.
“The government has been listening to sanitation companies before drafting the ideal model. We can expect a great leap forward thanks to this new regulatory framework,“ said a director of another company.
Brazil’s development bank (BNDES) has also prepared new concession and PPP (Public Private Partnership) models in four states, including Rio de Janeiro.
“It is going to be an upside for these projects,” said Fábio Almeida Abrahão, director of BNDES’s structuring department for investment partnerships. “The future will be very different compared to we have had until now… We are going to have bigger operations in private hands. The credit profile will change as well,” he said.
Sanitation companies have already started to build ties with investors. Singapore’s sovereign wealth fund owns 29% of Aegea, and Tavares is looking for other funds to invest in its operations. “We will bid for all of the companies available that are slated for sale,” he said, adding: “There is a clearly great window of investment opportunities in the country right now.”
Brookfield, which owns 70% of BRK, another leading player, is expected to be a strong contender to bid for other sanitation companies. So too is Alberta Investment Management Corporation (AIMCo), which bought a stake recently in Igua.
Investors from China and Australia have also expressed interest, as well as local private equity funds, such as Patria. “There are resources available. There is some appetite. It is only a matter of creating a proper environment,” said Gesner Oliveira, a former president of Sabesp, the São Paulo state water sanitation company, who now sits on Igua’s board.
Paulo Guedes, Brazil’s economy minister, has hammered the message: “There are trillions of dollars sitting over there, waiting to get in and help us,” he said late last year.
Ripe For Investment
Brazil has privatized most of its key infrastructure in the past 25 years, but water and sanitation lagged. “If you take energy, communications, things are underway. It’s ok. But sanitation has been left behind, it’s really backward,” said Aegea’s Tavares. Private concessions currently account for less than 10% of the market.
Oliveira blames “vested interest of corporations and political interference,” adding: “This does not match the social interest. When they defend their own jobs, they don’t necessarily deliver good quality service.”
Current indicators are appalling. Only half of the population of 210 million has access to sanitation services and more than 30 million Brazilians do not have access to clean water, according to official statistics on the nation’s sanitation system. Dirty water raises infant mortality rates, spreads disease and dysentery. “The well-offs can afford mineral water. But others have to deal with contaminated water,” said Oliveira.
This recently happened in Rio de Janeiro when Cedae, the state-owned company, released dark and smelly water to its customers. Cedae’s concession is due to be auctioned in four regional blocks this year, according to the BNDES’ Almeida.
“We would rather wait for the end of the year as the market is expected get in to gear by then,” said BNDES’s Almeida. Investors will have to inject 33bn reais ($7.7bn) to put the company back on its feet. Almeida adds that 70% of that amount will have to be invested within 10 years.