Brazil's water and sewerage sector is set to experience at least three additional concession tenders in 2025, with bids being prepared for contracts in the states of Pará, Pernambuco, and Rondônia, reports BN Americas.
According to the development bank BNDES' project platform, which provides details on all the projects the bank is structuring, the total investments for these three contracts could reach up to 51.6 billion reais (US$9.2 billion). The largest contract is in Pernambuco, estimated at 25 billion reais, followed by Pará with 21 billion reais, and Rondônia with 5.8 billion reais. These figures are still tentative as the tender notices are being finalized.
"The projects we're structuring in these three states are at a more advanced stage. It is possible that next year we will have auctions in these three states, and they could even take place in the first quarter of 2025. These three contracts will be offered in a concession format and not as PPPs," said Luciene Machado, project structuring superintendent of BNDES, in an interview with BNamericas.
In addition to these, the state of Piauí is planning to offer a 9.57 billion-real water concession in an auction scheduled for October 30.
Since mid-2020, following Brazil's congress passing a regulatory measure that mandates cities and states to achieve full water and sewerage coverage by 2033, private companies have increasingly entered the sector. Previously dominated by state-owned firms, BNDES has since emerged as the leading project structuring agent.
"We have been working intensively on structuring projects, and the demand is so great that our focus has been on structuring larger projects, those organized by state governments, because we don't have enough staff to serve individual municipalities, for example," Machado explained.
These water and sewerage contracts have attracted interest from various players. Earlier this month, Iguá Saneamento secured a water services concession from the state of Sergipe, winning with a 4.5 billion reais bid. It outbid competitors BRK Ambiental, Aegea Saneamento, and investment firm Pátria Investimentos. The minimum fee for the 35-year contract was 2 billion reais, and the estimated investment over the contract period is about 6.3 billion reais.
Due to the large investments involved, BNDES is actively financing these projects, while also promoting additional funding options. "BNDES remains very active in financing the projects, but it's very healthy to see more financing mechanisms for the sector too, as has already been the case with the use of infrastructure debentures. With this bond mechanism we see that the projects are ultimately financed by investors, investment funds in the debt market," said Machado.
"When we see auctions attracting so many different companies, so much competition, as was the case with the Sergipe state contract, this also sends a signal to capital market investors that the water sector is very attractive," she added.
The government recently expanded the use of debentures to finance projects in the water sector. The cities ministry approved an increase in the proportion of debentures that can be used to finance tender fees. Previously, companies that won concessions or PPP contracts in auctions based on the highest bid could finance up to 50% of the amount with debentures, but this limit has now been raised to 70%.
While some in the market support the change, others have expressed concerns that the measure could lead to higher fees in tenders, which might be passed on to consumers during the contract period.
"All perspectives are valid, but what I understand is that the government considered this measure on debentures for payment of fees because it wants to see the contract offerings progressing. Considering things more broadly, our main problem is to guarantee adequate water and sewerage coverage for the entire population in the shortest possible period of time and there has been a lack of progress on this for many years, so any measure is valid to speed this up," Machado commented.
