Water privatization in Brazil

19th century

The first water privatizations in Brazil took place with English capital in Rio de Janeiro (1857) and São Paulo (1877) at the time of the post-colonial Empire under Pedro II of Brazil. Two decades later Campanhia Cantareira’s services In São Paulo were deemed unsatisfactory and its contract was not renewed. Rio de Janeiro’s services were similarly re-municipalized a few years later following "popular uprising."

Water privatization in the 1990s

Privatization in Brazil was initiated under President Collor, through the Programa Nacional de Desestatização created in April 1990. In infrastructure, a major privatization program was initiated only in 1994, covering energy, transport, water supply and sanitation and telecommunications.

Between 1994 and 2000 a total of 38 private sector contracts (concessions, BOTs and service contracts) were signed, with investment commitments of more than US$ 2.5 billion. The nine first private concession agreements were in 1994-96 were all in the state of Sào Paulo (Limeira, Mairinque, Marília, Mineiros do Tietê, Ourinhos, Pereiras, São Carlos, Salto and Tuiuti).

To support the privatization effort, in 1997 the Workers Compensation Fund FGTS approved the use of 10% of the funds allocated for the Pró-Saneamento program to be directed towards privatization. In the same year, the Caixa Economica Federal, which was a main source of funding for water and sanitation, established a Special Water Works Concession Bureau (Eesan) to support private concessions. International financial institutions such as the World Bank supported private sector participation. For example, according to Miranda, following an unsuccessful 1999 attempt to privatize Compesa, the state water company of Pernambuco, it became extremely difficult to craft an acceptable loan proposal sans privatization.

In 1999, Brazil was viewed as "one of the world's largest concentrations of water and wastewater privatisation opportunities"; Thames Water opened an office in Rio de Janeiro and Azurix purchased AMX Acqua Management Inc. in order to get a "foot in the door."

However, the jurisdictional conflicts characterizing the regulatory environment in the water and sanitation sector complicated privatization efforts. For example, attempts to encourage private sector participation at the state level (in Bahia and Rio de Janeiro) have been challenged in the Supreme Federal Court by municipal governments. According to McNallen Brazil’s system of civil law, with its limited adherence to precedent, is another obstacle to further privatization. It also affected concessions, planned for Espirito Santo and Petrolina. According to a report by Business News America, between 2002 and January 2007, no private sanitation contracts were signed. In part due to this legal uncertainty, a mayoral initiative to cancel a 40% tariff increase in Limeira requested by the concessionaire Suez was upheld by a federal court. The specific Brazilian context of water governance has produced "unprecedented wrangling” between national, state, and municipal officials.

As of 2000 only 1% municipalities had issued concession agreements to private companies. 71% of Brazil’s municipalities delegated water and sewage services to state companies and 28% retained municipal provision.

21st century

A bill (Bill 4147/2001) which would have granted states the conceding authority for metropolitan areas failed to be passed due to opposition from trade groups. The primary controversy over the bill was about the interpretation of the Federal Constitution. But the discourse was also infused with rhetoric of the private sector as “inherently abusive in setting rates and unable or unwilling to invest to serve poorer areas adequately.” Finally another bill (Bill 5296/2005) was passed that clarified the role of the federal government in the sector, but failed to clarify the respective roles of states and municipalities. The law became effective in January 2007 as the sanitation law (law 11.445). Subsequently seven new contracts for public-private partnerships (PPPs) were signed in 2007 alone, with Abcon expecting 15-20 more in 2008.

The sanitation law allows service contracts without launching a bidding process. It is being challenged by Brazil's Attorney General Antonio Fernando Souza, who is seeking an injunction from the Supreme Federal Court.

Results

So far no comprehensive study has assessed the results of private sector participation in water supply and sanitation in Brazil. Such a study is, however, currently underway with support from various Brazilian stakeholders as part of a global multistakeholder dialogue on water and the private sector. The study attempts to assess private sector participation using the following criteria:

In the absence of a completed comprehensive study this article draws on partial data and case studies quoted in the literature. The criteria used are increase in investment, increase in access, changes in efficiency, impact on water demand and health impacts.

Investment

Water and sanitation investment by public and private utilities has dropped by an average of 30% since 1998. Projections of future capital requirements vary. One source estimates a minimum need of US$60 billion over the next 20 years.

One justification for privatization has been that it would increase investments. For example, the Brazilian Association of Private Water and Sewage Operations (ABCON) promotes privatization primarily by arguing that it is the only way to acquire necessary infrastructure investments. Between 1990 and 2006, the Brazilian water and sewage sector produced 52 private projects, received US$3.069 billion in private capital.

In some concessions, actual investments remained below investment commitments, such as in concessions in Limeira, Manaus, Campo Grande. For example, in July 2000, Campo Grande, the capital of the Mato Grosso do Sul state granted a 30-year, US$ 217 million water and sewage concession to Aguas de Barcelona, a subsidiary of Suez-Lyonnaise des Eaux; by November 2001, planned investment was reduced 27.1% from the amount pledged.

Access

One justification for privatization has been that it would accelerate the increase of access to water and sanitation, in particular the poor. However, according to McNallen and Olivier, private cherry picking has had deleterious effects on the cross-subsidization which has made possible even the moderate provision of water and sanitation services to such users. According to the think tank PSIRU—which is financed by Public Services International, a global federation of public sector trade unions—in Manaus, Suez-Lyonnaise des Eaux backtracked on promises to expand access to 95% of the population immediately after receiving a 30-year concession in June 2000.

Efficiency

There has apparently been no study analyzing changes in efficiency of privatized utilities in Brazil. However, Motta and Moreira have compared the efficiency of public and private utilities in Brazil at one point in time. Their cross-sectional statistical study examined the relative technical efficiency of public and private water companies in Brazil reveal that utilities with private sector participation are not much more efficient than public utilities. Faria speculates that the relatively low difference in efficiency in comparison to private sector participation in other countries can perhaps be explained by the relative weakness of the Brazilian regulatory regime. Public and private local operators also apparently face similar firm-specific costs. The differences between which are swamped by the stark difference between state and municipal firms. Ayres concludes that privatization is not a sufficient condition to improve efficiency, unless coupled with regulation to curtain anti-competitive practices and additional government stabilization.

Impact on water use

Water tariff increases have occurred throughout Brazil in both public and private utilities, contributing to a decrease in water use.

According to Olivier, a 2004 tariff increase in the Manaus municipal water network by Aguas do Amazonas—a private operator and subsidiary of Suez Environment, which acquired a 30-year concession in June 2000—resulted in a substantial reduction in consumption, even steeper among low income users. According to PSIRU in another case poor water users in Paraná reverted to drinking rain water and other contaminated sources as a result of tariff increases by Vivendi’s subsidiary, Sanepar.

Health impact

There are no specific data on the health impact of water privatization in Brazil. According to Peres et al., privatization is likely to negatively affect the health of poorer populations if service gaps between rich and poor increase. This would contrast the experience of at least another country that has been studied in detail. According to a detailed 2002 study in Argentina, water privatization has had a positive impact on child mortality. It found that in the 1991-1997 period child mortality fell 5 to 7 percent more in areas that privatized compared to those that remained under public or cooperative management. It also found that the effect was largest in poorest areas (24%). The authors estimate that the main reason is the massive expansion of access to water, which was concentrated in poorer areas that did not receive services before private sector participation was introduced.

Opposition

Opposition to privatization has too often been characterized by "controversial and emotional debates," laced with “doubts, fears and prejudices” originating from generalized objections to globalization and neoliberalism. Similarly, according to Lemos and Oliveira many potentially beneficial public private partnerships (PPPs) have suffered from widespread mistrust—bred by “decades of broken promises”—and numerous “accounts of policy failure.”

Many politically influential groups in Brazil harbor an “outright aversion to private capital participation” in water and other essential services. Politically, water privatization has often been conflated with conflicts over decentralization vis-à-vis the return of control from State water companies established under the military regime to re-municipalized companies. Thus, Brazilian water reform has remained “paralyzed by the controversy” because the municipal-state contest has too often been reduced to a question of which level of government should have the authority to grant concessions to private actors, rather than the authority to develop a coherent policy including both public and private elements.

Political parties that oppose privatization include the Workers' Party (PT) and the Socialism and Liberty Party (PSOL).

Alternatives

Emerging Brazilian alternatives have increasingly transcended the public-private debate by focusing on stakeholder participation and institutional cooperation.

Participatory models

Public water companies in Porto Alegre and Recife have developed “people-centered, participatory models” for improving water access. This has allowed them to position themselves as more than just being anti-privatization, but to develop a constructive alternative. Porto Alegre’s DMAE in particular has become known for its participatory budgeting process. According to PSIRU, this has enabled Porto Alegre to "continually fight off privatization attempts" that were allegedly supported by the Brazilian Congress as well as international donors such as the Inter-American Development Bank (IADB) to the World Bank. The participatory budgeting process — which allows any public demand to be included in the following year’s budget subject only to a popular vote and evaluation for technical feasibility — has become a model for direct democracy elsewhere in Brazil, and the world.

Sale of shares in the stock market

São Paulo’s state water and sewer company Sabesp, the largest water company in Latin America, has chosen a different path. Instead of awarding a private concession it has sold shares in the Brazilian stock market and even on the New York Stock Exchange. In addition, it obtained loans from the Inter-American Development Bank and the Japan Bank for International Cooperation. Rio de Janeiro's state government also plans to sell shares in its water and sewerage company, Nova Cedae, while still retaining majority control of the company, citing the example of Sabesp (four attempts to privatize the company in 1998 failed due to lack of agreement between the city and state governments). Shares of the state water and sewer companies of Minas Gerais, Copasa, and of Parana, Sanepar, are also traded on the stock exchange. In São Paulo, the state regulatory agency ARSESP, sets a rate of return for the utility - the weighted average cost of capital - which was set at 8.06% in 2011.

According to PSIRU such "civically active utilities" are alternatives to "desperation-induced privatization attempts" in Parana and Rio de Janeiro.

Reduction of private sector influence in existing agreements

In Paraná a 1998 concession agreement had given Dominó Holdings (formed by Vivendi, Brazilian bank Opportunity, and the Andrade Gutierrez group) control of the state water and sewer company SANEPAR. Recently, the Supreme Federal Court authorized the state government to increase its stake in SANEPAR, overturning an injunction granted by a lower court which had prevented the state from calling a general shareholders meeting.