The coming years in Brazil are likely to see investments in water and sewage projects increase in cities with low levels of services coverage.
BNamericas speaks with Pedro Scazufca, a sector specialist and partner at local consultancy GO Associados, about this trend and the role that state-run banks BNDES and Caixa Econômica Federal will play in terms of financing and structuring concessions.
Each year GO Associados and think tank Instituto Trata Bbrasil produce one of the country’s most prestigious water and waste studies.
BNamericas: What are the expectations for water and sewage investments by state capitals and major cities in the coming years?
Scazufca: We have a group of cities in Brazil that have already invested a lot in recent years and created robust water and sewage infrastructure. These cities have gone through a major investment cycle, so they don’t have such a large need for new investments.
The trend for the coming years is that cities that have invested little in recent years will start to play a greater investment role.
BNamericas: Could you name some cities that will stand out in terms of investments?
Scazufca: These cities can be divided into two groups.
One group are those cities that already have structured projects, such as Rio de Janeiro, Maceió, Macapá, for example. Those with projects already structured are set to have more investments in the coming years. These are cities that will drive the sector’s investments in the next decade.
But the other group of cities, those that have a poor level of coverage but no structured projects, are not part of the [investment] trend.
BNamericas: The regulatory framework was supposed to pave the way for full coverage of water and sewage services by 2033. Do you think this will happen?
Scazufca: 2033 is the baseline date. But there’s a provision in the regulatory framework that gives an exception for locations where it’s not financially viable to reach services universalization by 2040.
What I think will happen is that there will be cities that will need more time, beyond 2033, to reach universalization. The regulatory framework takes this into account.
BNamericas: Some industry participants are concerned with recent signs that the regulatory framework may see changes, which could affect the perception of a business-friendly environment for private sector firms. How do you assess this potential threat?
Scazufca: Regarding regulation, there’s always a risk of going backwards in Brazil.
But I think that in the end, we will have a scenario where common sense will prevail with the need to increase investments, and not to protect the business of state-owned companies.
BNamericas: Do you see private sector companies gaining market share compared to state-run firms?
Scazufca: State-owned companies have contracts in place and some of these are for 20, 30 years. So at least for the next decade, I see them with a very large market participation.
But there’s already a clear trend towards higher participation by private companies and this does not only happen through concessions, but also via PPPs.
BNamericas: Sanitation is a segment that demands high investments. What is the current scenario for this segment?
Scazufca: The current interest rate level is challenging for any company that needs financing.
In recent years, the sanitation sector has obtained a lot of funding through debenture issues [local bonds with tax benefits].
Today, with higher borrowing costs and some signals coming from the government, I see state-run banks like BNDES and Caixa Econômica Federal increasing financing for the sector. BNDES is already financing a large project in Rio de Janeiro.
BNamericas: In addition to the possibility of a regulatory change and an increase in financing costs, is there any other issue that industry participants are following closely?
Scazufca: One of the reasons for the success of the sanitation sector in recent years was the collaboration between local and state governments and BNDES in structuring projects.
Rio de Janeiro, Amapá and Rio Grande do Sul have advanced a lot with sanitation because BNDES structured projects in these states.
The discussion about the regulatory framework is important but just as important is keeping BNDES structuring projects in this sector, to help states and municipalities.
BNamericas: What is the importance that companies in the sector give to investments in technology?
Scazufca: We already see some investments taking place in automation, energy efficiency and techniques for water loss and reuse. But it’s worth noting that this sector still has many basic investments that are necessary, such as water and sewage networks, along with more modern treatment plants.
The greater role of private companies is likely to be accompanied by an increase in investments in technology as they have fewer technical and legal limitations in terms of investments in innovation. All investment that brings efficiency gains will help private firms gain scale.