States will have a fundamental role establishing laws for creating the “regional basic sanitation units”, adding clear rules for tariff adjustments and considering this investment by larger municipalities as a “cross subsidy” in order to reach the goal of universalization
Article by Luana Tavares and Andrei Covatariu
On August 31, the CLP – Center for Public Leadership, in partnership with Trata Brasil, CNI, ABCON (Brazilian Association of Private Concessionaires of Public Water and Sewage Services), Humanize Institute, and several other public and private institutions that operate in the field of Sanitation, have released the “Sanitation Guide”, in an online event with the participation of municipal and state managers and several experts.
During the meeting, the Maceió’s Mayor, João Henrique Caldas (JHC) expressed his concern about the “ownership of basic sanitation” and the lack of authority of municipalities such as Maceió while being part of regional blocks, which include both small towns of 10,000 inhabitants, for instance, and large capitals, with millions of inhabitants. In his view, regionalization deprives the large municipality from making decisions with autonomy”, which contradicts with its direct responsibility of providing this service to the population and making investment decisions.
The Mayor’s speech reflects one of the main challenges in implementing the new framework and, at the same time, reveals the paradigm that is at the heart of the new law: the concepts of equity and social benefit. Furthermore, in addition, the standardization and modernization of contracts with clear and well-tied rules in relation to tariff changes are also at the center of the debate while we write this article.
Resistance in the regional blocks creation
The main goal of universal sanitation by 2033, foreseen by the new law, is grounded in the concept of equity, with regionalization and attraction of scale investments to increase efficiency. In Brazil, small cities are the ones that suffer the most – 33% do not have treated sewage, versus 73% coverage in larger cities. However, they generally pay the same amount for poorer quality services. This happens because smaller municipalities do not have the size, financial and technical capacities to provide efficient services..
With the formation of blocks foreseen in the new framework, small, medium and large cities can, together with the states, access to the same type of services, due to a now regional negotiation power. According to Daniel Antonio Narzetti, General Coordinator of Sanitation at SDI, this principle, purposefully embedded in the new framework, “aims to have the entire population on the same level, in order to correct these inequalities and make possible the reach of the universalization goal”. On the other hand, the concern of large municipalities is to bear a higher tariff for smaller municipalities, thus subsidizing their services, while trying to explain the situation to their citizens.
To address this dilemma, states will have a fundamental role whilst establishing laws for creating the “regional basic sanitation units”, adding clear rules for tariff adjustments and considering this participation of the larger municipalities as a “cross-subsidy” in order to reach the goal of universalization in the state as a whole. Despite large municipalities’ adhering resistance, such as Maceió and Porto Alegre, currently, fourteen states already have published laws with the regional blocks and six are in an advanced stage of approval. Some states have even moved forward with auctions for the sanitation services’ concession (Alagoas, Espírito Santo, Mato Grosso do Sul and Rio de Janeiro), totaling more than 60 billion in investments. Regional consortia is already an old solution for large countries worldwide, and have already proven their relevance in several areas. Therefore, if we want to have more chances of reaching the 2033 goal, this overall goal needs to prevail over the local ones, and the adherence of larger cities in the blocks is essential.
Contractual modeling and tariff review rules
Another major implementation challenge that is being discussed is the framework of new contracts and rules for future tariff review. The National Water Agency (ANA) is in charge of standardizing the contracts’ model and aims to create more modern mechanisms to avoid negative consequences such as the disproportionate increase in tariffs for citizens and impacts on the continuity of the services.
To face this challenge, the contracts will have investment targets and efficiency goals addressing unfortunate potential events (i.e. consumption, population growth, water availability) that may affect them in the medium term and room for readjustment. The regional blocks, after being formed, will be able to count on the technical and financial support of the federal government through development banks and national and local development institutions (i.e. BNDES and Caixa Econômica). In order to have access to these resources, municipalities must adhere to regionalization and formalize the regional blocks, otherwise they will not count on the federal support.
Since the beginning of the discussion regarding the new legislation, the increase in the water and sewage tariffs was a counter-argument brought by those who did not encourage the private sector’s entry in the sanitation sector, as the population will have to afford this “heavy bill” in the medium and long term. The truth is that this outcome can only be fully known after the modeling of the contracts or after drafting the investment rules, which aim for an increase in efficiency.
In Argentina, for example, with prices kept far below reality, AySA was totally scrapped. For recovery, in 2016, the company had to increase the tariff by almost 300%. In Brazil, given the size of the investment needed for universalization, the already-mentioned cross-subsidies and other public social investments will be needed in the medium and long term, especially to subsidize any increases in tariffs in economically disadvantaged regions – along the lines of the current “social tariff” model.
International experience
Done properly, sanitation privatization does not create winners and losers. It creates added value, economic growth and sustainable development for individuals and businesses, communities and economic sectors. While privatization processes are highly influenced by different social and economic contexts, learning from both best practices and bad examples is key in taking advantage of the lesson learned and in avoiding other secondary long-lasting problems.
In the United Kingdom, while the water tariffs have increased, after the privatization, so did the investments and, thus, the service quality. For comparison, in the first 6 years after privatization, the water companies have invested £17 billion, in comparison with only £9.3 billion in the six years before privatization. East Manila (The Philippines) is another, overall, good example. Between 1997 and 2009, thus from the beginning of the privatization process onwards, the share of water access increased from 49% to 94%. At the same time, the water losses (so called “non-revenue water”) levels have decreased significantly, from 63% to 16%, between 1999 and 2009.
Lastly, Colombia opted, at the end of the 1990s for public-private partnerships for water and sewage services in municipalities with poor water infrastructure. The central government provided support and financed different investment grants, to avoid an increase in the end tariffs. As a result, both water access and sewage coverage improved consistently.
On the other hand, Cochamba’s case (Bolivia) is a scenario to be avoided. Poor communication with all stakeholders (including the population), lack of experience in these regulatory modeling processes and improper local governance are some of the ingredients of this famous failure. The project aimed to privatise the municipal water supply of Cochabamba converted into a series of public protests, now known as the Cochabamba Water Wars, as a result of tariff increase.
There is no silver bullet
Considering the country’s moment in relation to the implementation of the new national regulatory framework and some international cases, it is clear that there is no silver bullet for success in the transition process towards the private sector in the area ofsanitation. However, the negative examples have shown that the process needs to be well prepared, communicated clearly and transparently to all actors and meticulously executed, considering the potential financial impact on the population.
We have the chance to write a new positive case study and implicitly become a global benchmark in the universalization of this basic service. Therefore, it is critical to have the collaboration of the whole society, and, in particular, of the government officials. At the same time, it’s important to create the mechanisms that allow capital entry in the sector, doubled by a guarantee of the quality in the services supply. A diversion from this recipe can turn a necessary efficiency-improvement initiative into multiple social and economic struggles.
As part of Brazil’s Climate Change Priorities series – developed by the CLP Institute and VirtuNews – we are starting our conversations on climate, sustainability and energy with a focus on issues related to water, a critical element for life and economic growth.
Luana Tavares has spent the past 15 years dedicating herself to the social impact sector in Brazil, working with several non-profit organizations focused on strengthening democracy and state effectiveness. Between 2013 and 2020, he directed one of the pioneering and most relevant organizations in this field called CLP – Center for Public Leadership, which since 2008 has trained more than 8,000 public leaders throughout Brazil and is informing and engaging society in the defense of a structural national agenda with the National Congress. Luana is also an advisor for Vetor Brasil and Poder do Voto – two social impact organizations focused on increasing the State’s capacity through better people management and strengthening civic participation, respectively. Luana has a degree in advertising, an MBA – Master in Business Administration (Fundação Getúlio Vargas – FGVSP) and two international specializations, one in public management and the other in leadership development, at Harvard Kennedy School and Oxford University. She is currently completing a Master of Public Policy (MPP) at Blavatnik School of Government-Oxford University and developing her Summer Project with the IEPS-Institute for Health Policy Studies.
Andrei Covatariu is a Senior Research Associate at Energy Policy Group and an expert for the United Nations Economic Commission for Europe’s (UNECE) Task Force on Digitalization in Energy. Andrei was the Head of Public Affairs at Enel Romania (2019-2020), previously holding several positions inside the utility company (2014-2019). He was also a Member of the Board of the FEL-100 community (World Energy Council, London), a 2020 Non-resident Fellow at the Middle East Institute (Washington DC), and a 2021 GYCN Climate Ambassador (an initiative of the World Bank Group). Andrei has a bachelor’s and a master’s degree in Nuclear Engineering (Politehnica University of Bucharest), and a master’s degree in Business Administration (Bucharest Academy of Economic Studies). He is currently finalizing a Master in Public Policy (MPP) at the Blavatnik School of Government, University of Oxford, with a Summer Project performed at the Harvard Kennedy School’s Belfer Center for Science and International Affairs – Managing the Atom Project.
