Historically, Brazil’s basic sanitation market has been less developed than in other emerging markets. In 2019, the percentage of the Brazilian population covered by water and sewage services was 81% and 52%, respectively, according to the National Sanitation Information System (SNIS).
The following chart shows the coverage of water and sewage services in Brazil in recent years:
In this context, in 2007, the Brazilian government approved the water and sanitation law, which outlines the federal government policies to improve the sector’s performance. The law’s objective is to universalize access to water and sanitation across Brazil. In 2013, the Brazilian government took a step forward towards improving water and sanitation conditions in the country, approving the National Basic Sanitation Plan (Plansab), whose aim is to provide universal access to drinking water by 2023, universal access to sanitation in urban areas by 2033 and achieve 93% of sewage treatment coverage by 2033.
Though the government’s efforts to improve and universalize water and sanitation services in Brazil date back to 2007, development has been limited and the advances in water and sewage coverage rates too have been limited. To overcome the nationwide deficit in sanitation, Plansab has estimated that investments of R$142 billion in water and R$215 billion in sewage are needed through 2033, which comes to an average of R$27.6 billion per year at 2019 prices and is much higher than the investments made in recent years, as the graph shows:
In this regard, the sanitation market in Brazil offers several opportunities for players operating in the sector. And the recent regulatory changes introduced by Law 14026/20, which updated the Sanitation Legal Framework to (i) attribute to the National Water and Basic Sanitation Agency (ANA) the power to issue reference standards on sanitation services, (ii) oblige the definition of universalization targets in agreements for the provision of public basic sanitation services: ninety-nine percent (99%) of water supply and ninety percent (90%) of sewage collection and treatment by 2033, as well as quantitative targets for continuous supply, reduction of losses and improvement of treatment processes, (iii) enable the privatization of public companies providing public sanitation services; and (iv) encourage the regionalization of services by creating regional blocs, contributing to technical, economic and financial feasibility, generating scale and efficiency gains, and universalizing services.
Key characteristics of the private sanitation market
The market share of the private sanitation segment in Brazil is still small, considering that only 16% of the population is served by private companies, according to Aegea’s estimates.
Following are the main characteristics of the private water and sewage service model:
Concession authority: municipal or state government, or state-owned company
Regulatory agency: state, municipal or regional agency
Tariffs: established through a competitive process (bidding), is fixed in the concession agreement and adjusted annually by inflation indices
Obligations of private entity: achieve the physical targets (water and sewage coverage, reduction of loss distribution index, among others) established in the concession agreement
Term of concession: 30 to 35 years
Any situation that leads to a change in the rights or obligations and impacts the economic and financial balance initially established by the concessionaire in the bidding process may give rise to a request by it for rebalancing. The most common cases involve (i) advancement or addition of regulatory milestones that result in changes in the investment schedule; (ii) new obligations not established in the initial agreement, extraordinary increases in the prices of inputs (above inflation) such as electricity; (iii) situations classified as factum principis (increases in taxes other than income tax); and (iv) Actions of Administration (fresh conditions imposed by Concession Authority), among others.