It is both a national disgrace and a huge business opportunity. In one of the world’s largest and wealthiest emerging economies, nearly half the population lack proper sewage services and 35m struggle without clean drinking water in their homes.
“There are 100m people in Brazil without access to mains drainage,” says Gustavo Montezano, president of the national development bank BNDES. “When you talk about social inequality, environment and health, you have to talk about sanitation services.”
Brazil’s deficiencies in water and sewerage are the consequence of decades of neglect, part of a broader lack of infrastructure investment which the conservative government of President Jair Bolsonaro is moving to address.
This year, congress approved a government-sponsored bill opening up the sanitation sector to private investment. Previously almost exclusively the preserve of publicly owned monopolies, these services are now being opened to bidding from private companies, which can tender to run them for 30 years and improve coverage.
“As of today, six to seven per cent of the sanitation sector is controlled by private entities,” says Cassio Gouveia, managing director of investment banking at Itaú BBA, a commercial and investment bank. “We expect this percentage to increase substantially after passage of the new law.”
Industry experts estimate that up to R$700bn ($130bn) of contracts could be tendered in coming years. International infrastructure groups such as Canada’s Brookfield and Singapore’s sovereign wealth fund GIC are among those bidding via their local units. Both have already submitted winning bids in auctions for concessions to offer services.
“It’s a golden opportunity,” says Luis Alberto Andrés, lead economist for the World Bank’s infrastructure programme in Brazil. “The new law . . . has most of the elements we see as a potential game-changer for this sector . . . the challenge these days is the actual implementation.”
One of the key uncertainties is whether Brazil’s congress will insist on a clause it inserted into the bill during debate, which would allow existing sanitation contracts to be renewed for 30 years without competitive tender. President Bolsonaro vetoed that clause but congress could yet overturn his decision.
Another question mark hangs over regulation: the national sanitation watchdog ANA is charged with overhauling a patchwork of local regulation to ensure a level playing field, but this process is still under way.
In any case, Mr Montezano is confident that cash-strapped municipalities across Brazil will be tempted by some of the juicy premiums that may be on offer if they put their services out to tender.
In an auction of sanitation contracts in September covering some 1.5m people in Alagoas state in Brazil’s impoverished north-east, BRK Ambiental, owned by Brookfield, beat several competitors by paying a premium of $R2bn reais ($373m), he says. The company expects to sign the contract later this month.
“It was a very strong indicator,” Mr Montezano says. “This agenda is financially profitable beyond the social impact . . . now the states and mayors are calling us asking for projects.”
The states of Acre and Amapá are due to tender water and sewage contracts next, followed by the state of Rio de Janeiro. Others have expressed interest.
“In our view this programme of sanitation could be the biggest reduction of social inequality in the history of Brazil,” Mr Montezano concludes.
Henrique Carsalade Martins, CEO of Brookfield Brazil, compares the nascent opening of Brazil’s sanitation sector to moves a quarter of a century ago to liberalise electricity generation. “It’s the first step in a long road,” he says.
Brookfield has assets of $26bn under management in Brazil and invests in a portfolio of infrastructure, including toll roads, ports, railways, electricity generation, agribusiness and property.
In some Latin American countries such as Chile political opposition to privatised public services has increased recently, amid consumer complaints over high prices and poor quality, but Mr Martins is confident that Brazil’s sanitation reforms will not be reversed.
“The federal, state and municipal governments don’t have money to invest and the investment needs are very big,” he says. “The pandemic also brought home the importance of basic sanitation and access to treated water.”
State entities have historically proved unable to deliver adequate investment in these services, partly because of political priorities, Mr Martins explains.
“They are important but they don’t get you votes,” he says. “Some people even say in Brazil that sanitation works differently [in local politics] to bridges because it’s all underground, the works are not above ground, so you don’t see them happening.”
What nobody doubts is the urgent need for Latin America’s biggest economy to tackle its investment deficit.
“Infrastructure development will be key to Brazil’s recovery and halting the descent into poverty for millions of Brazilians,” says the World Bank’s Mr Andrés. “Access to water and sanitation remains a public health priority and the need to rapidly expand access to basic services is critical.”