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Investments in Brazil’s water supply and drainage sector are expected to increase in the coming years.

Growth will be driven by the expansion of the private sector, which currently represents about 10% of the market, and more investment by the sector’s largest state-owned companies, Sabesp in São Paulo state, Copasa in Minas Gerais and Sanepar in Paraná. :

Fitch Ratings water and sanitation expert Gustavo Muller spoke to BNamericas about the outlook for the sector.

BNamericas:: What is the scenario for Brazil sanitation companies in 2023?

Mueller: Overall, the trend we have seen in recent years is likely to continue, with private companies increasing their market share in the sector, whether through PPPs or even new concession contracts.

Despite some of the rumblings we’ve heard [in terms of regulatory changes] We do not see a change in trends from the new government.

Brazil’s health sector still needs a lot of investment to expand service coverage to the population, and for this it is necessary to seek resources from all sectors.

BNamericas:: How strong is the cash position of companies in the industry to invest more?

Mueller: We see that, in general, across the world of companies that we monitor, investment will proceed as planned, and a strong expansion of investment is expected.

Of the state-owned companies we monitor, Sabesp, Sanepar and Copasa are companies with greater investment capacity and are better positioned for investment, especially because of their coverage levels. [of water and sewerage services] are already high.

Other smaller companies such as Cagece, Casan and Saneago should make more efforts to increase investment, perhaps creating more PPPs to meet coverage targets.

BNamericas:: How do the current high interest rates affect the financial situation of sanitation companies and could this jeopardize their planned investments?

Mueller: The interest rate is an issue that we monitor closely because the sanitation sector needs to be leveraged. In general, there is room for companies to use more leverage. It will also be important to monitor the performance of these companies.

BNamericas: There is a current debate about the ANA’s functions as a market regulator. Do you see the sanitation sector having a national regulator as strong as the electricity sector through Aneel for example?

Muller: The sanitation sector is different from other sectors such as oil and gas or energy.

In sanitation, the awarding authority is municipal governments, and in some cases this authority is shared with states.

When was the new sanitary regulatory framework established? [in mid-2020] LGUs remained the awarding body.

In this model, the ANA is not the actual regulatory agency, it has the task of promulgating and setting reference standards to be used by local regulators, i.e. standardizing the regulations. But having said that, I don’t see it nationally [sanitation] For example, a regulator like Aneel in the power sector.

However, the ANA plays a very important role in standardizing the rules, and this provides regulatory certainty to investors.

BNamericas: We have seen many concessions in the sector in recent years. What can we expect for the coming years?

Mueller: I see a trend of more opportunities for investors, meaning I see private companies getting more space, especially as there is a regulatory objective to increase service coverage in the short term.

Operators who fail to gradually meet the targets may even see their contracts expire. For this reason, the tendency is for investments in the sector to increase.

In this scenario, I think that the participation of private sector companies in the sanitation sector will reach 40% in 6-8 years.

BNamericas: Do you think we could see the privatization of some large state-owned sanitation companies such as Sabesp, Copasa or Sanepar in the short or medium term?

Mueller: Much will depend on the political decision of each governor.

Looking at what happened in Rio de Janeiro, where there was a big concession, and in Rio Grande do Sul, where that company was privatized, I would say that in these states it happened because the scenario was more subtle because it was; there was a great need for investment, and state-owned companies did not have the opportunity to invest, and there was even a risk that companies in these states would lose contracts.

In the case of Sabesp, Copasa and Sanepar, this risk is minimal, they are companies with investment capacity, so the decision to privatize is more political than any other reason.

BNamericas: What should be the most used financing mechanisms by companies in the sector in the coming years?

Mueller: We will see a diversification of financing instruments, be it through infrastructure bonds or public financing, among others. I see that companies are looking for different financing mechanisms, because the need for investment is great.


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