Sanitation: Government should extend deadline for adaptation – 03/08/2023 – Market

The government must extend the deadline for municipal sanitation companies to comply with the rules of the sector’s framework, established in 2020. With the change, they will have more time to promote the so-called regionalization —when they start to participate in a structure that serves more than one city .

Regionalization was envisaged with the aim of contributing to making investments more viable, due to gains in the scale of operations.

According to specialists, regionalization is positive because it allows for larger operations and, therefore, cost reduction. In addition, it makes it possible for municipalities whose bids alone are not attractive to join other more profitable ones —promoting the expansion of service provision.

The framework does not establish how regionalization should occur, but some possible paths are the extinction of municipal services and the creation of a joint bid for a group of cities (the case of Alagoas) or the creation of a single governance structure owned by municipal companies . It is still possible for companies to merge.

The sanitation framework determined that the allocation of federal funds or the granting of loans with Union resources are conditioned to the existence of a regionalized provision of service. Therefore, municipal companies are prevented from contracting financing with Union resources after March 31 if they have not promoted regionalization. The extension of this deadline is expected to be announced this month.

The negotiated alteration is supported by companies in the sector and pleases members of the government, who want to provide full conditions so that municipal companies can also continue operating in the face of the new legal framework.

“Case [as empresas não regionalizadas] stop investing because of this rule, the 2033 goal will be a mirage”, says the executive secretary of Assemae (National Association of Municipal Sanitation Services), Francisco Lopes.

The legal framework for sanitation, sanctioned in 2020, set 2033 as a goal for its universalization —that is, providing water for 99% of the population and sewage collection and treatment for 90%.

According to Lopes, discussions point to 2026 as the new deadline for regionalization. Municipal sanitation services represent a quarter of the sector, which also has state and private companies.

The largest municipal sanitation company in Brazil is Sanasa, from Campinas (SP). The company’s president, Manuelito Magalhães, says that the main obstacle to regionalization is that local representatives do not want to give up operating the service in their municipality, which ends up happening with regionalization.

This was observed in part of Alagoas, a state that has had a successful experience in regionalization —with around 85 of the 102 municipalities adhering to the mechanism. “For local political reasons, we ended up not having all of them,” says George Santoro, the state’s Secretary of Finance.

Before regionalization, 70% of the municipalities that joined the process had the state company as a provider, and 30% had their own services. They were grouped into three blocks, tendered in 2020 and 2021. Three different companies won the contests, which were responsible for all cities.

The expected investments are around R$ 7 billion. The state company was only responsible for supplying water.

Sanasa, from Campinas, even participated in discussions with the government of São Paulo to also regionalize itself, but the discussions did not advance. Now, the idea is to model smaller blocks.

Despite the consensus on the longer term for regionalization, the government, municipal, state and private companies differ on other sensitive issues.

The main one concerns the approximately 420 contracts between state companies and municipalities that expired without the service ceasing to be provided. In such cases, current law provides that a tender is to be held. The state company that provides the service can participate in the event and must present better conditions than the competitors to continue with the service.

State companies, however, want to continue to provide the service even without a bidding process – which is criticized by private companies in the sector. When contacted, Aesbe (Brazilian Association of State Sanitation Companies) declined to be interviewed.

Another problem is the approximately 190 cities where there is not even a contract. One of them is El Salvador. The company responsible is Embasa (Empresa Baiana de Águas e Saneamento), which belongs to the state of Bahia, commanded by the PT since 2007.

Between 2014 and 2022, the state was commanded by the current Minister of the Civil House, Rui Costa, who will have the final word on the case —since the debate on changes in the framework is touched by the portfolio. If he decides against state companies, Embasa could lose the service in Salvador, which represents about 35% of its total revenue – which, in theory, would harm his successor, fellow PT member Jerônimo Rodrigues.

Questioned, the Civil House said that “the issues involving the Legal Framework for Basic Sanitation are being discussed and, up to this moment, there is no established definition”.

“The government is meeting with different actors in the sector so that they can have the greatest possible number of contributions before a decision is taken. Therefore, it is necessary to wait a little longer for the debate on the subject to advance,” he said.

When contacted, Embasa said that “the company’s intention is to seek a long-term consensual solution with the municipality of Salvador, an opportunity in which commercial aspects and new investments will be dealt with that guarantee the expansion and improvement of the services provided”.

The city hall, led by Bruno Reis (União Brasil), an ally of former mayor ACM Neto (União Brasil) and rival of the PT group, did not respond to the questions in the report.

The tacit agreement in these meetings between the government and the sector is to avoid a legal change, which would require the approval of a bill in Congress, where the PT still does not have a consolidated base.

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Understand regionalization

What does the law require?

The sanitation framework determined that the allocation of federal funds or the granting of loans with Union resources to the sector are conditioned to the existence of a regionalized provision of service.

What is regionalization?

Regionalization is achieved when the service is provided in more than one municipality. It can occur, according to the decree that regulated the text, under three modalities:

1. Metropolitan region, urban agglomeration unit or micro-region (instituted by the states for neighboring municipalities by means of a supplementary law);
2. Regional basic sanitation unit (instituted by the states by ordinary law, constituted by the grouping of municipalities that are not necessarily bordering, to give economic and technical viability to less favored cities); It is
3. Reference block (grouping of municipalities not necessarily bordering, created through voluntary associated management).

When is the deadline current for regionalization?

The regulation of the law determined that the deadline for obtaining such loans would end on March 31, 2023 in cases where there was no regionalization (provided that certain conditions were met).