Sanitation in Brazil: solid progress at last?

Brazil’s new legislation on public sanitation is intended to remedy the dramatic deficits in water and sewage services in the country through a comprehensive set of rules that purport to bring legal certainty and predictability to this industry.

The law comes after decades of unsuccessful attempts to stimulate investments in the sector. PLANSAB, an ambitious Federal Government investment plan launched in 1971 failed after fifteen years. The Federal Constitution of 1988 then purported to bring legal certainty and stimulate investment by providing that municipalities are responsible for water and sewage services; stalemate and litigation ensued, however, as most sanitation companies are controlled by federated states. Additional sanitation plans launched in 2007, 2013 and 2018 either failed to address the key concerns of potential investors or lacked political support to be implemented.

The legislation just approved in Congress may well lead to a different, positive outcome. It is the product of a rare political agreement across party lines to overcome the historical deficits in this sector (even though last minute hurdles have emerged as a result of the veto by President Bolsonaro of a provision that authorized long-term renewals of concessions to state-owned companies). The new law sets concrete long- term goals to increase the reach of water and sewage services and, this time, addresses the main concerns that have long prevented investors from funding sanitation services in Brazil.

Under the new legal framework, concessions of sanitation services remain in the hands of municipalities, which may either grant them directly to a company controlled by the municipality itself (assuming they meet a set of technical and financial requirements) or tender them to investors through competitive bids. Municipalities that decide to pursue concession or privatization will enjoy priority access to federal funding over those that do not. Until now, municipalities could (and effectively did) grant concessions directly to the sanitation company controlled by the respective state. Hence, an ample room for private sector involvement in this industry will open once a transition period designed to accommodate existing arrangements elapses, which will happen in the first quarter of 2022.

Neighboring municipalities will be able to join under consortia to offer concessions of sanitations services for larger areas, and thus attain economies of scale and attractiveness for investors (Brazil features over 5,500 municipalities, nearly 5,000 of which with less than 50,000 people).

Sanitation companies controlled by the Brazilian states, which are historically the major players in this industry in Brazil, will be called to compete with private-sector companies. The agreements that allow municipalities to hire these state companies directly can be postponed only until March 2022. After that, any relation with such state-owned entities will be carried out on arm’s length, if they succeed in a public bid also open to private parties.

The desire to foster private sector involvement which underlies several key aspects of the new legislation also translates into the possibility for the extraction and distribution of water to be contracted separately. This tends to reduce the minimum investment necessary to fulfill the contract and increase competition, especially in large cities.

The new law also purports to solve a long-time conflict between real estate developers, sanitation companies and municipalities. It provides that the relevant regulatory agency shall set rules which differentiate the situations in which an investment by a real estate developer to connect each unit to the sewage system is an anticipation of the fulfillment of obligation of the sanitation company and, therefore, warrants reimbursement, from those in which such investment is in the sole interest of the developer. This ensures legal certainty while addressing the situation of each municipality individually, depending on the obligations imposed on each sanitation company.

More broadly, Brazil`s new legal framework for the sanitation industry will bring greater legal certainty, as concession agreements entered between sanitation companies and municipalities will necessarily contain a set of relevant provisions – ranging from objective goals for the expansion of the services, reduction of losses in treated water distribution, quality of service rendered, rational use of water and reuse of water waste and rain water. They shall also include provisions set by the Public Concessions Law relating to (i) financial and physical timeframes for fulfillment of the obligations related to the concession, and (ii) guarantees concerning such obligations. Uncertainty regarding these issues have long discouraged players from the private sector from investing in sanitation services in Brazil.

It is expected that companies active in this sector abroad which have long neglected investment opportunities in Brazil now start considering opportunities that the changes now instituted tend to create. Also, the focus on investment by the private sector means this sector will be less exposed to fiscal constraints which have often in the past been invoked to postpone public investment in sanitation.

L&S Authors

Marcos Drummond Malvar

Marcos Drummond Malvar

Associate

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