In the remainder of 2024, the Brazilian sanitation sector is expected to offer the largest deals since the 2021 auctions to privatize a portion of Rio de Janeiro’s Cedae, according to two lawyers and a consultant. The potential opportunities for firms including Aegea Saneamento (Ba2/BB) will be headlined by the privatizations of state-owned companies in Sao Paulo and Sergipe, and the auction for public-private partnerships (PPPs) in the state of Parana.
These three projects involve more than BRL 80bn (USD 14.9bn) in investments during their concession periods, mostly concentrated in the next decade with an aim to meet the regulatory framework target of universal water and sanitation coverage by 2033, according to announcements by governments of the three states.
“The sector is booming, indicating that the regulatory changes made since the approval of the new sanitation regulatory framework in 2020 are yielding results,” said Fernando Vernalha, a lawyer specializing in the water and sanitation sector at Vernalha Advogados.
In the last five years, average investments in the water and sanitation sector have totaled BRL 20bn per year, according to data compiled by the think tank Trata Brasil. However, reaching the target set by the legislation will require more than double the average year’s investments of BRL 44.8bn.
This should be the best year for the sector since the Cedae auctions, driven by Sao Paulo’s Sabesp, said Rodrigo Bertoccelli, a lawyer specializing in the utility and infrastructure sector and partner at Giamundo Neto Advogados. But even without Sabesp, the environment is still favorable with several auctions planned, including in the states of Sergipe, Paraiba, Pernambuco, and Para, according to studies by Brazilian development bank BNDES, he added.
“With expectations for continued expansion in 2024, the market has proven attractive to financial investors and specialized companies, both domestic and international,” Bertoccelli said.
Additionally, solid waste projects for private partnerships with municipalities, in the structuring phase by government-owned bank Caixa Economica Federal (CEF) and BNDES, promise to attract new investors in the coming years, further expanding opportunities in the sanitation market, added Bertocelli.
In total, BNDES is structuring nine water supply and sewage projects, the bank said in an emailed comment. These are full or partial concession projects, in which the state company continues to produce water and grants water distribution and sewage collection and treatment, and sewage PPPs, normally carried out by state companies, with investments estimated at BRL 96bn by 2033, the bank said in the same email.
The projects in Pernambuco and Para are expected to have their notices released later this year, BNDES added.
Sabesp’s equity follow-on offering to privatize the company will require BRL 68bn in investments to reach universal coverage, according to an estimate announced by the Secretariat for the Environment, Infrastructure and Logistics (Semil), the authority responsible for the privatization process.
Sergipe’s government released the notice for the new partial concession for water distribution and sewage last week. The auction is scheduled for 4 September, with total investments estimated at BRL 6.3bn over the 35 years of the concession, according to information from the BNDES, which is responsible for the project.
The auction for three PPPs to provide sewage services by Companhia de Saneamento do Estado do Parana (Sanepar), scheduled to take place on 22 May, was suspended by a decision of the Supreme Federal Court of Justice (STF), following an injunction filed by Aegea, one of the interested bidders.
Aegea is questioning the rule in the notice of auction that prevents the same group from taking the three lots offered. Sanepar did not immediately return an email asking for comments about the next steps to resume the auction of the three PPPs.
Sabesp on radar
The Sao Paulo government aims to reach universal coverage by 2029, earlier than the 2033 target set by the regulatory framework. The government expects to hold the follow-up before mid-August, following the schedule previously announced by the company, which aims to use data from 1Q24 for the deal, Semil Secretary Natalia Resende said in a press conference last week.
“Sabesp [follow on] is perhaps the crowning achievement of that law approved in 2020”, said Percy Soares, from Transparente Consultoria and former executive director of the Brazilian Association of Private Sanitation Concessionaires (Abcon).
The auctions that sold concessions in Rio de Janeiro, Alagoas and Amapa in 2021 represented advances for the sector towards universal coverage, although they are nothing compared to Sabesp, Soares said.
“Sabesp will be an inflection point for the market,” he said
Sabesp is considered one of the largest sanitation companies in the world in terms of population served, with a total of 28.7 million people supplied with water and 25.5 million people with sewage collection, according to data on its website.
The company is responsible for around 30% of the investment in basic sanitation made in Brazil, and with privatization, the expectation is that the company will continue its expansion in Brazil and even abroad, Secretary Natalia Resende said at the press conference.
Sabesp’s follow-on will be held in two steps, according to the model proposed by the government following the project structured by the International Finance Corporation (IFC). In the first step, the Sao Paulo government, which owns 50.3% of Sabesp, will seek a reference investor to whom it will sell a 15% stake.
The government will publish instructions for interested parties to register on the Sao Paulo B3 stock exchange, then start the bookbuilding and choose the reference investor.
However, the secretary still hasnʼt disclosed the schedule for each of the next steps.
Aegea doubled its size with the acquisition of two blocks in the CEDAE auction in 2021, and is now one of the companies interested in participating in Sabesp follow-on, having held conversations with strategic investors to guarantee the necessary resources to compete in the process, including its shareholder GIC, as reported.
Aegea also acquired Corsan in December 2022, in the first deal to privatize a state-owned water and sanitation company since the approval of the new regulatory framework, in an auction with no other competitors and offering a minimum premium for the asset.
However, this time, Aegea is expected to face more competition, as Sabesp is drawing attention from several players, including some companies aiming to start operations in the sector, Soares said. There have been reports of large companies and funds such as Votorantim, Veolia, Equatorial, Cosan (BB-/BB) and IG4.
“Aegea follows the main transactions in the sector, evaluating opportunities in depth, maintaining focus on the pillar of financial discipline and adequate returns to its shareholders, through its operating model,” a spokesperson said in an emailed comment.
Aegea signed an agreement with YvY Capital in late April as part of the journey to expand the company’s financial ecosystem within the scope of studies for the participation of new businesses, with Sabesp being the first project that will be analyzed in this new movement, Aegea said at the time it announced the agreement. Although there is no decision yet, Sabesp’s participation in the auction will be evaluated, together with other strategic partners and Aegea shareholders, it said.
A representative from Sabesp did not reply to requests for comment.
Aegea’s USD 500m 9% 2031 sustainability-linked bond traded today at 105.8, and its USD 500m 6.75% 2029 bond traded today at 98.90, according to MarketAxess.