Historically, the Brazilian water sanitation market has been relatively undeveloped as compared to other emerging markets. In 2016, the percentage of the Brazilian population with water and sewage coverage was 83.3% and 51.9%, respectively, according to the SNIS.
The maps below set forth Brazilian water and sewage coverage by state for 2016:
Source: SNIS Water and Sewage Services Diagnostic Report – 2016
In this context, in 2007 the Brazilian federal government passed a new water and sanitation law outlining federal policies to improve the performance of the sector. The aim of the law was to universalize access to water and sanitation in Brazil. In 2013, the Brazilian federal government took one step further to improve the water and sanitation conditions in Brazil by approving the National Sanitation Plan (Plano Nacional de Saneamento Básico), or Plansab, which aims to provide universal access to drinking water by 2023, universal access to sanitation in urban areas by 2033, as well as to reach 93% coverage in terms of wastewater treatment by 2033.
Therefore, despite government efforts to develop and universalize water and sanitation in the Brazil since 2007, development has been limited, and the water sanitation market is still highly unpenetrated.
The chart below illustrates the slow growth of water and sewage coverage in Brazil from 2008 to 2016:
On the other hand, the low level of coverage underlines the huge unattended base and the need for massive investments in order to achieve universal access. Given that the market has an enormous range of opportunities for its players.
Privately Owned Sanitation Sector
In Brazil, the City Halls are responsible for providing sanitation services to the population. This service can be provided by: (i) the municipality itself, through the creation of a municipal authority or department (ii) by a state company, through a contract, which dispenses bidding due to the fact that they are both public entities and iii) by a private company, through a public bidding process for the sanitation services.
Main characteristics of the private sanitation market
The private sanitation market in Brazil is still responsible for a small portion of the sector’s market share as a whole, considering that only 5% of the population is served by private companies, according to Abcon data.
Below are the main characteristics of the private model of exploitation of water and sewage services:
Granting authority: municipality
Regulatory agency: state or municipal entity
Tariff: established through a competitive process (bidding), fixed in the concession contract and adjusted annually by inflation indexes
Obligations of the private entity: to achieve the physical goals (water and sewage coverage, reduction of the distribution loss index, among others) established in the concession agreement
Concession period: usually 35 years, renewable for the same period
Any situations that entail a change in rights or obligations, with an impact on the economic-financial equation initially envisaged by the concessionaire in the bidding may give rise to a request for rebalancing by the private entity. The most common cases are: (i) anticipation or addition of regulatory frameworks that result in a change in the investment schedule; (ii) new obligations not provided for in the initial contract, extraordinary increases in inputs (above inflation), such as electricity; (iii) situations classified as Factum Principis / state act (increases in taxes other than Income Tax) and Administrative Acts (novelties imposed by the Grantor); among others.