Brazilian privatisation moves up a gear

Brazil’s water and sewerage sector is set to embark on the road to large scale privatisation later this year when the state companies of Bahia (Embasa) and Pernambuco (Compesa) go under the hammer, accelerating the demand for much needed wastewater treatment facilities.

Water and sewerage will be Brazil’s last major infrastructure sector to be privatised. There are some 27 state sanitation companies and 1700 municipal companies serving most of Brazil’s 160M population. The overriding objective of their sale is not to realise the largest cash premium at auction but to stimulate the greatest amount of investment.

So far the sector has only tasted privatisation on a small scale with some 30 municipal company concessions moving into private hands.

Since Brazil’s full return to democratic government in 1990, the question of basic sanitation has steadily risen as a priority. The government recognises the massive preventive cost in investing in sanitation, calculating that for every dollar spent, three may be saved in the health sector in future through the eradication of waterborne diseases.

Wastewater treatment offers a good business opening. While 91% of Brazilians have water supplies and 49% of urban dwellings have sewage collection, a massive 90% of wastewater is untreated.

Amazon sale – Cosama

The first major city to experience a privately owned water and sewerage system will be Amazonas state capital, Manaus (population 1.4M) on the banks of the Amazon river. Its concessionaire, Cosama (Comp-anhia de Saneamento de Manaus), controlled by the state government, will serve as hors d’oeuvre for the main dish of the Bahia state sanitation company, Embasa.

Cosama will be auctioned on the Rio de Janeiro Stock Exchange on April 4 with a minimum bid price tag of just over $100M. At least seven companies are reported as serious contenders: International Water; Vivendi; Lyonnaise des Eaux; Thames Water; Azurix; Ruhr Wasser and Brazil’s Andrade Gutierrez.

Like most of Brazil’s concessions, Cosama has a high rate of water supply coverage but wastewater collection and treatment services are almost non-existent. The company supplies all 62 of the state’s towns with water but just one, Manaus, with a sewage collection network.

A quantitative leap forward – Embasa

The sale of Bahia’s Embasa (Companhia Bahiana de Aguas e Saneamento) set for September represents a quantitative leap forward for the sector’s privatisation. Embasa’s concession area serves 6.8M people and is expected to bring in at least $1.5Bn.

Embasa provides water supply services in 406 of Bahia state’s 415 municipalities but just 30 with sewerage services.

The northeastern state is perhaps Brazil’s most favourable testing ground for privatisation. The state and its capital city government are in the hands of the same neo-liberal party and Bahia has exercised disproportionate political influence on Brazil’s presidents over the past 20 years.

This is an important point given that some of the country’s other major states: Sao Paulo, Rio de Janeiro, Minas Gerais and Rio Grande do Sul all have weighty political leaders and significant groups either with reservations or directly opposed to privatisation.

Bahia state will set benchmarks of 100% water supply coverage and 85% sewage collection over four years for Embasa’s new owners and expect this will absorb investment of some $3Bn.

Compesa

The state water company of Pernambuco, Compesa, (Companhia Pernambucana de Saneamento), is expected to be sold at auction by the end of the year. It is thought to be worth around $400M. Compesa supplies all 177 towns in the state with water and just 16 with sewerage services.

Compesa and Embasa have similar profiles – they both serve poor northeastern states with regional water shortages caused by frequent droughts and their largest urban conurbations (Recife and Salvador) impinge on the prospects of an increasingly important economic resource, their tourist beaches.

The trend will be for water and sewerage services, especially wastewater treatment, to be demanded with increasingly high specifications once a basic network is in place.

Emerging multi-utilities

Thanks to the success of Brazil’s energy privatisation programme, companies such as Azurix and Iberdrola have an added incentive to invest in the water and sewerage sector. Iberdrola already controls Bahia’s former state energy company and would benefit from the formation of a multi-utility service provider. On February 17, Iberdrola also took control of Pernambuco’s state energy company, Celpe, bidding around $1Bn.

Azurix is also likely to be a keen bidder for water and sewerage services in Sao Paulo and Rio de Janeiro states where Enron has control of electricity and gas distribution companies.

Investment climate

A long established foreign investor attitude to Brazil in the recent past has been ‘too big to ignore, too messy to get involved’. This is no longer valid. Brazil’s economy has been radically overhauled since 1990. The heavyweight state sector has been slimmed down and a successful government anti-inflation plan (Plano Real) has been in place since July 1994, forcing annual rates to tumble.

However, the problem faced by would-be privatisers is a still unclear legislative environment. State government owned water companies, including Bahia and Pernambuco, provide most of the municipal services and own the assets but the concession usually belongs to the municipality.

The situation is further complicated by a 1997 congressional decree stating that the concession for municipal water and sewerage services in metropolitan areas belongs to the state government.

This is now causing legal disputes such as the one between the Rio de Janeiro State government and local governments in some of Rio’s suburbs. Without consensus between local and state governments, the path to privatisation could be full of legal obstacles.

Private investors say the lack of detailed legislation is the single most important obstacle to their participating in Brazil’s water and sewerage market. A new wide-ranging water use law (Lei das Aguas) is still stuck in Brazil’s congress. It is hoped that this will provide a clearer set of rules for the sector and a powerful independent water regulator (Agencia Nacional de Agua – ANA).

The future

In several parts of Brazil, the benefits of privatisation have been overwhelmingly approved. As far as other major state companies are concerned – Sao Paulo’s Sabesp, Rio’s Cedae, Minas Gerais’ Copasa and Rio Grande do Sul’s Corsan – a question mark remains.