The content has been shared, if you want to share this content with other users click here.
There is a plenty of room for private sector companies to expand their market share in Brazil's water industry, as the combined market share of privately-owned firms is currently only around 10%.
BNamericas spoke to Gustavo Mueller, a water sector expert and director at Fitch Ratings, about the way private players can increase their market share in this industry in the coming years. Mueller sees potential for the private sector to boost its share of the market to around 30% within the next 10 years.
BNamericas: Brazil has three major state-owned companies listed on the local stock exchange. What is your view of these firms that operate in the water sector?
Mueller: The three main listed companies in the water area are Sabesp, Sanepar and Copasa. These companies have the same level of ratings at Fitch Ratings, but there are some operational differences between them.
Sanepar has a lower hydrological risk than Sabesp and Copasa and this is an important aspect for the sector. Copasa and Sabesp suffered drastically when there was a severe drought in the Southeast region a few years ago.
When we look at historical data on reservoir levels, Sanepar for example, always kept high levels at around 85%-100%. The Sanepar reservoirs are well distributed.
Copasa, meanwhile, had a tight cash flow during the period of drought in the southeast region. But currently they already have a more robust cash operation.
Sabesp had a very restricted hydrological scenario as well. There were restrictions in the supply of water, with a reduction in pressure and this had an impact on the cost of water treatment. In addition, the company's moves to increase pressure also generated more electric energy costs.
BNamericas: Has the water crisis over the past few years changed the Brazilian public's behavior in terms of water consumption?
Mueller: During the drought, even companies who didn't have supply issues saw a reduction in demand. Since this situation was heavily covered by the media, with massive national coverage by leading national newspapers, people intuitively began to reduce water consumption, even in unaffected regions.
BNamericas: Looking forward, what are the most relevant issues in Brazil's water sector?
Mueller: An important issue to follow is the regulatory definition of the industry. The regulatory framework was approved in 2007 and [the sector] was regulated in 2011. We can still conclude that it is a framework that is in evolution.
If we compare this with the electric sector, where we already have operators in their fifth rate review, in the water sector certain companies, such as Sanepar and Copasa for example, only had their first rate review in the past year under the regulatory framework.
The trend is for the strengthening of regulatory agencies, as there will be greater demand for efficiency. It will be the role of the regulators to ensure that demand for higher efficiency is met.
BNamericas: The Brazilian government recently admitted that it is considering giving the ANA [the federal water agency] more powers. What is you view on this issue?
Mueller: The water sector has some regional particularities. We need to know more details about how the model that the government has thought out would work. In the case of the water sector, the structure is regional rather than national.
I'm a little skeptical about ANA becoming a major national regulator. What really need to be strengthened are the regional regulators.
It's essential for the sector to strengthen the regulatory framework, with balanced decisions and independence.
BNamericas: Some state governments have planned for the privatization of their water companies, but so far there has been little progress. What are the reasons for this?
Mueller: The maintenance of the contracts of those companies, if privatized, is a matter that needs to be circumvented. The main asset of a company is its contracts.
I believe that each state has its own particularities. In the case of Cedae in Rio de Janeiro, maybe a model that could be adopted would be to divide the company like the gas distribution sector in São Paulo, where it was split into three regions. Perhaps this segmentation, this division, would be a path to future privatization.
BNamericas: Many state governors and companies have opted to sell shares in water companies, via public offerings as well. How can the private sector's participation in the water industry be increased further?
Mueller: Regarding the stock offerings, companies need to go a long way in improving their governance structure and not all of them are at the same level. We currently have Sanepar, Sabesp and Copasa which have a high degree of governance and have listed shares.
Another important mechanism that can be used to increase private sector participation in the water sector is PPPs [public-private partnerships].
PPPs are also a very feasible design for private sector participation, especially in the area of sewage. This is a way for the private sector to have a greater market share in the industry.
BNamericas: Private sector participation in the sector is currently low. Do you expect any major changes on this front in the coming years?
Mueller: Companies under the control of state governments have a market share of about 80%, while municipal governments have between 10% and 15% and the rest is in the hands of the private sector.
I believe that in the medium and long-term the private sector will expand its market share, mainly taking over participation from municipal companies. Private players are also likely to participate in more PPPs with state-run companies, although there are uncertainties about how this will take place.
Considering all factors, in the next 10 years it is possible that private investors will have a 30% market share of the water sector in Brazil.
BNamericas: What impact could this year's presidential and general elections have on the sector?
Mueller: The effect of the elections is that the market should be less dynamic in terms of launching PPPs and bidding processes. In the medium-term, after the elections, we need to see the profile of each governor elected to understand the dynamics. In this regard we still don't have a clear view of what kind of governments we will have in each of the states.
About the company
Fitch is one of the three largest rating agencies in the world.