Water privatization in Brazil

Water privatization in Brazil has been initiated in 1996. In 2008 private companies provided 7 million Brazilians - 4% of the urban population - in 10 of the country’s 26 states with drinking water. The private sector holds 65 concession contracts in the states of São Paulo, Rio de Janeiro, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Santa Catarina, Minas Gerais, Paraná, Pará and Amazonas. Private companies have committed to invest 4.5 billion Reals (US$ 2.8 bn) in the sector. [ [http://www.abcon.com.br/ ABCON] Reals are converted using the exchange rate of 1.61 of July 4, 2008 ] The bulk of Brazil’s population receives water and sanitation services from public municipal or state-level utilities (see Water supply and sanitation in Brazil).

Water privatization in Brazil has been relatively limited compared to other infrastructure sectors (power, transport, telecommunications). Compared to other Latin American countries, it has been more stable than in Argentina and Bolivia, but also less widespread than for example in Chile. As under all concession contracts, the infrastructure itself remains public, but is being operated by the private sector. Likewise, water resources themselves remain publicly owned. [Sabbioni 2008: 13.] Most concession contracts have been awarded by municipalities. A lack of legal clarity as to the right of state governments to also award concession contracts has thwarted some efforts at water privatization, notably in the state of Rio de Janeiro.

Privatization in Brazil has taken pplace without having previously developed a comprehensive regulatory regime, as it was the case in Chile. ["The privatization of water and sewage services in Brazil is still at the pre-regulatory stage, and is thus lagging behind other “pioneering” countries in Latin America, namely Argentina and Chile" (Parlatore 1999: 15-20).] The impact of water privatization on access, investment, service quality, water use, tariffs and efficiency remains controversial and has not been analyzed systematically. A study to assess its impact is currently underway with support from various Brazilian stakeholders as part of a global multistakeholder dialogue on water and the private sector. [ [http://www.waterdialogues.org/country-01.htm Multistakeholder Dialogue on water and the private sector in Brazil] ]

History

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."Barraqué et al. 2007: 3446; Prasad 2007: 224.]

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. [ [http://ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryID=104 World Bank PPI database] ] 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. [Parlatore 1999: 13.] 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. [ Miranda 2005 ]

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." ["FT Energy Newsletters - Global Water Report". 1999, September 17. "Brazil: Azurix secures Rio foothold." lexis.]

However, the jurisdictional conflicts characterizing the regulatory environment in the water and sanitation sector complicated privatization efforts. [da Motta and Moreira 2006: 185; Tupper and Resende 2004.] 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. [McNallen 2006: 178-179, 193.] According to McNallen Brazil’s system of civil law, with its limited adherence to precedent, is another obstacle to further privatization. [McNallen 2006: 185.] It also affected concessions, planned for Espirito Santo and
Petrolina. [McNallen 2006: 175; Arretche 2001.] According to a report by Business News America, between 2002 and January 2007, no private sanitation contracts were signed."Business News Americas". 2008, March 6. "Abcon; Only PPPs can solve sanitation problem."] 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. [de Motta and Moreira 2006: 187. A landmark court ruling in May 2002 against Sanepar—suspending a 18.6% tariff increase—has led to successful copycat litigation in neighboring municipalities (See Hall and Lobina 2002: 17).] The specific Brazilian context of water governance has produced "unprecedented wrangling” between national, state, and municipal officials.McNallen 2006: 172.]

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. [Barraqué et al. 2007: 3462.]

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 Brazilian Association of Sanitary and Environmental Engineering (Abes) and the National Water Works Association (Assemae) are two prominent and vocal opponents of Brazilian water privatization (See Parlatore 1999: 12). Curiously, though, current private sector involvement has not resulted in employment “adjustments” seen in other sectors in Brazil (See Anuatti-Neto et al. 2003: 26).] 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.” [da Motta and Moreira 2006: 186.] 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. [Sabbioni 2008: 13.] 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. [Business News Americas. 2008, April 1. "Attorney general requests injunction against sanitation law." lexis.]

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 [ [http://www.waterdialogues.org/country-01.htm Multistakeholder Dialogue on water and the private sector in Brazil] ] 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:

*improvements in operational performance
*improvements in financial performance
*increase in sector investments

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$60 billion over the next 20 years. [da Motta and Moreira 2006: 185-186. Interestingly, Parlatore (1999) puts the cost for universal water and sewage provision at R$ 42 billion; a massive disparity even taking into account exchange rates and price changes between the two articles.]

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. [Sabbioni 2008: 13. For example: “privatization is paving the way for reviving Brazil’s water utility sector which has experienced a long period of stagnation and underinvestment” (See Parlatore 1999: 1).] Between 1990 and 2006, the Brazilian water and sewage sector produced 52 private projects, received US$3.069 billion in private capital. [World Bank 2007. For a detailed list of all concession agreements see [http://ppi.worldbank.org/explore/ppi_exploreDetail.aspx?mode=detail&panel=sector&results=0 PPI database project view] ]

In some concessions, actual investments remained below investment commitments, such as in concessions in Limeira, Manaus, Campo Grande. [Hall and Lobina 2002: 11.] 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. [Lobina and Hall 2003: 38.]

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. [McNallen 2006: 189; Olivier 2006: 9.] According to the think tank PSIRU - which is financed by Public Services International, an organization that opposes water privatization under any circumstances - 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. [Hall and Lobina 2002: 18.]

Efficiency

There has apparently be 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. ["The statistical results show that private companies are only marginally more efficient than public ones" (Faria et al. 2005). Faria et al. measure efficiency in terms of an estimated production function in the context of a stochastic frontier model, such that: ln(y_t) = β₀ + β_t1ln(x_t1) + β₂ln(x_t2) + ε_t - u_t where y = output; t = 1,...,n; x_t1 = capital for firm t; x_t2 = labor for firm t; ε_t are "iid N"(0, σ²_ε); u_t are independent inefficiency components also independent of ε_t with distributions with support in (0,+infinite); the constants β_t are unknown elasticities. Their data comes from Sistema Nacional de Informações sobre Saneamento (SNIS) from 2002 for 279 firms (148 of which, 135 public and 13 private, had sufficient data for inclusion in the regression).] 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. [Faria et al. 2005.] 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. [Sabbioni 2008.] 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. [Ayres 1996.]

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. [Olivier 2006.] 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. [Lobina and Hall 2003: 56.]

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. [Peres et al. 2004: 1187.] This would contrast the experience of at least another country that has been studied in detail. According to a detailed study in Argentina, water privatization has had a positive impact on health indicators.

List of concession agreements

Opposition

Opposition to privatization has too often been characterized by "controversial and emotional debates," [Prasad 2007: 219] laced with “doubts, fears and prejudices” originating from generalized objections to globalization and neoliberalism. [Parlatore 1999: 1.] 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.” [Lemos and de Oliveira 2005: 134.]

Many politically influential groups in Brazil harbor an “outright aversion to private capital participation” in water and other essential services. [da Motta and Moreira 2006: 186.] 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. [Barraqué et al. 2007: 3465.] 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 grant concessions to private actors, rather than the authority to develop a coherent policy including both public and private elements. [da Mott and Moreira 2006: 193.]

Political parties that oppose privatization include the Workers' Party (PT) and the Socialism and Freedom Party (PSOL). ["Latin America News Digest". 2008, March 18. "Two Brazilian Parties Appeal Against Cesp Privatisation."]

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. [Balanyá et al. 2005.] Porto Alegre’s DMAE in particular has become known for its participatory budgeting process. According to PSIRU, the think tank financed by Public Services International which opposes water privatization under any circumstance, 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.Hall and Lobina 2002: 8; Maltz 2005.] 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. [ Maltz 2005: 33.]

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 obatined loans from the Inter-American Development Bank and the Japan Bank for International Cooperation. [Hall and Lobina 2002: 9.] 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). ["Business News Americas". 2008, March 7. "Rio govt to sell Nova Cedae shares."]

According to PSIRU such "civically active utilities" are alternatives to "desperation-induced privatization attempts" in Parana [Hall et al. 2003: 2-3.] and Rio de Janeiro. [Hall and Lobina 2002: 8.]

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. ["Business News Americas". 2008, March 27. "Supreme court authorizes Paraná to increase stake in Sanepar."]

See also

Water supply and sanitation in Brazil

Notes

References

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