There are currently 84 dams of this kind in Brazil, of which 43 are classified as having a high potential risk of collapsing, according to local mining watchdog ANM.
City hall in Santa Marta and the country's housing ministry will instead focus on a series of short-term investments to expand the capacity of the existing water system.
For decades, authorities have announces plans to clean up the highly polluted bay but with no success to date.
The utility in Brazil's Rio de Janeiro state will invest some US$400mn in the project.
While bids for the construction of a sewage system in Bluefields have already been submitted, national water and sewerage utility Enacal launched another tender to improve potable water services in the country's so-called white villages.