The new regulatory framework: perspectives for water and sanitation in Brazil post-Covid-19

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Kleber Luiz Zanchim

SABZ Law Firm, Sao Paulo

kleber@sabz.com.br

Bárbara Teixeira

SABZ Law Firm, Sao Paulo

bteixeira@sabz.com.br

Sanitation in Brazil

Even before the Covid-19 pandemic, Brazil’s parliament had already started discussing ways to address the country’s dramatically underdeveloped water and sanitation infrastructure. About 35 million Brazilians are in households not connected up with drinking water, while 47 per cent of the population do not have access to a sewage system. The situation is most critical in the North region, where almost 43 per cent of the population has no drinking water supply and almost 90 per cent no access to a sewage system.[1]

The majority of the existing infrastructure is managed by state-held companies. The current system is insufficient and hazardous, with several obstacles to expansion. From all the waste generated in Brazil, only 46.3 per cent of it is treated.[2] The amount of drinking water lost along distribution pipes presents a picture of the management inefficiency as well as the misuse of the natural and financial resources. The loss averages at around 38 per cent of all water treated. Although the worst situation is in the North region, with 55.3 per cent of loss, the figures in region with the lowest loss, the Centre-West, is also disturbing, with a third of water lost in distribution. These losses are mostly related to leaks, underground connections and sub-measurement.[3]

Only six per cent of Brazil’s sanitation service providers are private companies,[4] meaning that the failure of the system is a state responsibility. This is due to the ‘programme contracts’, an agreement included in the dated Brazilian regulation through which state-owned companies could provide sanitation services to local government authorities regardless of any bidding process, creating a monopoly that blocked private investment. Such contracts usually did not bring either service level agreements or investment commitment for the state-held companies. It was also possible to renew them automatically, independently of achieving any expansion goals. The ‘programme contracts’ were, during the 2000s, something of a gamble in the state’s capability of managing sanitation. Today, they represent an archaic structure that is obstructing different approaches to improving the sanitation network. This is borne out by the figures. Between 2010 and 2018, the annual average investment in the sector was of BRL10.8bn (approximately US$1.9bn),[5] far from the amount of BRL26.6bn a year initially estimated in 2014 by the National Plan of Sanitation to achieve universal sanitation services by 2033.[6]

Water and Covid-19

The correlation between health and basic sanitation is long established. A satisfactory sanitation structure works as an important factor in the prevention of infectious disease. According to the World Health Organization, it is estimated that, for every dollar spent on sanitation, the health system is spared 4.3 dollars.[7]

With the appearance of the new SARS-CoV-2 virus, the focus on hygiene practices has increased, being a major approach in preventing the spread of Covid-19, along with social distancing. In this context, the inadequate access to water supply and a sewage system, which was already a persistent reality in many neighbourhoods, has become far more apparent and concerning. Essential workers, such as health professionals, living in these neighbourhoods have expressed their unease for not being able to maintain minimum hygiene routines, such as taking showers and washing clothes, which could potentially increase the risk of contamination for their families and neighbours. State-held companies claimed the problems were due to a shortage of water in reservoirs, momentary faults, low water pressure and emergency works in the supply network. It is clear, however, that there is a common underlying issue: deficient and insufficient infrastructure.

New regulatory framework

In face of the multitude of issues stemming from the inability of the state to promote necessary investment, the need to bring private companies into the sector won out during the two-year legislative debate.

A new regulatory framework was sanctioned on 15 July 2020.[8] It aims to put in place a universal standard of coverage for sanitation services in Brazil by December 2033, which would mean providing drinking water to 99 per cent and sewage services to 90 per cent of the population.

To achieve this objective, new ‘programme contracts’ are now outlawed and replaced with compulsory bidding processes for sanitation service franchises. By increasing private companies’ access to the sector, and through promoting competition between private and public players, more favourable proposals should be presented to local government authorities, with potential incentives to investors.

Business contracts must outline clearly defined objectives for the expansion of the sanitation network and include provisions to reduce the loss of water in distribution. Existing contracts will need to be amended to include the universal standardisation goal and state-owned companies will have to prove their technical and financial capacity in order to retain their ‘programme contracts’.

A particular controversy about private company participation in water supply and sanitation is the provision of services to less economically lucrative locations. Allegedly, there were complex so called cross-subsidies in force, under which the state, through lucrative contracts, earned was able to subsidise the provision of services in non-profitable localities. It was therefore reasoned that, if privatisation was allowed to happen, private companies would not be interested in providing services to such locations, and the state, without the support of other lucrative contracts, would have to step in to foot the bill.

Although there was no proof of such cross-subsidies, the new regulatory framework addresses this topic anticipating the possibility of regionalised contracting, so that smaller towns and cities are included in concessions of financially attractive cities, making private contracting and network expansion economically feasible. Also, to allow for the privatisation of the state-held companies that currently operate the system without undermining their value, the new regulation permits the extension of current ‘programme contracts’, as long as dully amended with the new performance requirements.

Another important innovation is the designation of authority to the National Water Agency (ANA) to establish regulatory benchmarks for the sector, parameters for monitoring compliance with targets, quality, and efficiency indicators, all of which will work as national guidelines for local regulations. Consequently, with the standardisation of regulations at a national level, legal certainty for privatisation and partnerships (PPPs and concessions), the new system should progress, since scattered former regulation made it more difficult to surmise the relevant legal risks.

Final remarks

The overcoming of deprivation of basic human rights is a known objective in Brazil. With the new regulatory framework, the universal standardisation of sanitation services is one of its fundamental principles. The regulation also stimulates the research, development and use of suitable technologies to improve the quality of the system.

Following the Covid-19 pandemic, Brazil expects to combine law and technology to modernise the sanitation sector, facilitating the implementation of innovative solutions for long-standing local problems.

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