Despite setbacks, Brazil’s sanitation sector projects new contracts and investments

The  sanitation sector in Brazil continues to attract interest from private-sector companies, despite recent warning signs.

In one of the most anticipated transactions of the year in the segment, two groups submitted proposals to take a 30% stake in the Minas Gerais sanitation company, Copasa, as part of the privatization process.

The state government, which controls 50.3% of Copasa, while the remaining shares are traded on the local stock market, wants to privatize the company in two stages. The first involves the sale of a 30% stake to a reference shareholder, while the remaining shares will be sold in a diluted manner.

Equatorial, which currently holds an equity stake in Brazil’s largest sanitation company, Sabesp, was one of the companies to submit an offer to take over 30% of Copasa, while a consortium made up of Aegea, Equipav, Singapore’s sovereign fund GIC and Itaúsa also submitted a bid, an executive with knowledge of the transaction told BNamericas.

However, the official selection of the best offer to purchase 30% of the company, expected for May 27, was postponed, and the privatization process now tends to suffer delays.

According to Copasa, by decision of the state government, “due to supervening factors identified within the scope of the offer”, certain conditions related to the sale of shares will be revised.

The government of Minas Gerais seeks to raise around 10 billion (bn) reais (US$2bn) with the sale of its stake in Copasa.

The privatization of Copasa is part of a broader context.

The sanitation sector has been undergoing a transformation since the adoption of the new regulatory framework in 2020, which required states and municipalities to achieve universal coverage of water and sewage services by 2033. The regulation led to the rapid entry of private companies into the segment, previously dominated by state-owned enterprises, through a series of concession auctions, PPPs, and privatizations.

However, in recent quarters, euphoria has given way to a more cautious stance, as many private companies that took on contracts in recent years began to see the rapid increase in their levels of indebtedness. This scenario was driven by heavy investment obligations and also by high interest rates, which put pressure on these companies’ funding costs.

Even amid signs of greater selectivity, many investors continue to bet on the segment.

“Sanitation contracts have a profile of strong cash generation, but of course, to be attractive to private investors, the projects to be offered need to be well structured. If they are well structured, I would say that for us contracts in any region of the country are of interest,” Perfin’s COO, Carolina Rocha, of the Brazilian asset manager Perfin told BNamericas.

Perfin is currently a minority shareholder of Copasa and also a shareholder of Corsan, a sanitation company that operates in Rio Grande do Sul, in addition to having a PPP contract with Sanepar in Paraná, and the concession for the municipality of Palhoça in Santa Catarina.

Other Initiatives

Amid signs of investor confidence, even in the face of existing challenges, Iguá Saneamento received a new capital increase of 700 million (mn) reais from its shareholders, CPP Investments, AIMCo and BNDESPar.

The capital increase will strengthen the holding company’s financial structure, increasing the company’s liquidity and supporting the acceleration of the investment plan for strategic assets in the portfolio. The transaction will be carried out in proportion to the shareholdings of the current shareholders, with no change in the company’s ownership structure. CPP Investments holds 66.5% of Iguá, AIMCo holds 24% and BNDESPar, 9.5%.

“This capital increase demonstrates our shareholders’ confidence in Iguá’s long-term strategy, in our delivery for the population of the regions where we operate, and in the company’s ability to execute a significant cycle of infrastructure investments with a high-quality portfolio. We are talking about a sector that requires planning, financial discipline, and a vision for the future. This move strengthens our capital structure and expands our capacity to accelerate investments, generating value and reinforcing our commitment to universal access,” said René Silva, CEO of Iguá Saneamento.

The move is taking place in parallel with the progress of the long-term financing strategy for Iguá’s unit in Sergipe, which received a capital injection from the Inter-American Development Bank (IDB Invest) of 1.04bn reais, through the purchase of debentures issued by the concessionaire.

“These are two distinct transactions that reinforce Iguá’s ability to combine equity, long-term debt, and operating cash generation to support the maturation of its portfolio, organic growth, and the excellent execution of the investments set out in the contracts,” the company said.

Upcoming Auctions

The current context is unfolding as the Brazilian government attempts to auction, in the coming months, contracts in regions with lower economic and social development, which may create greater difficulties in attracting private companies, increasing the need for more detailed contract drafting.

Currently, the state development bank BNDES, the largest structurer of sanitation contracts in Brazil, is working on the preparation of some projects.

“The most advanced is the one in Rondônia, which involves the municipalities that have not yet been tendered in the state within a single microregion. We are also in a public consultation regarding Caern’s sanitation PPP contract, a state-owned company of Rio Grande do Norte,” said Luciene Machado, head of project structuring at BNDES, to BNamericas.

“There are still contracts being drafted for 27 municipalities in Espírito Santo, where we are structuring a model for localities that do not yet have a defined solution. In Porto Alegre, we continue working on the preparation of a partial concession, in which the municipality will remain responsible for the production and distribution of water, while the private partner will be in charge of sewage collection and treatment. We have also started a project in the state of Maranhão, still in the initial structuring phase”, he emphasized.

The sector will still have other contracts offered in the coming weeks.

The city government of Andradas, in Minas Gerais, will auction on June 18 a concession contract for sanitation services. The 30-year contract, extendable for another five years, provides for investments of about 210mn reais.

The state company of Ceará, Cagece, will offer PPP contracts on June 30, with 7bn reais in projected investments. The contracts will be divided into five blocks and will have a term of 28 years, covering sewage services in 128 municipalities currently operated by the company.

(The original version of this content was written in Portuguese)