Cleaning up in LatAm & Caribbean sanitation

There’s a big opportunity cropping up across Latin America and the Caribbean as programmes of sanitation PPPs work their way through the system. IJGlobal's Americas senior reporter Juliana Ennes delves into this murky world…

Latin America and the Caribbean, despite being the most urbanized region in the world – with a concentration of 80% of its population living in cities – have yet to solve one of the most basic infrastructure issues: water and sanitation services.

The current world health crisis has highlighted the enormous gap in the region. According to International Finance Corporation (IFC) data, only 60% of the region’s population is connected to a sewage system and less than 40% of the region’s wastewater is treated.

In times of airborne virus pandemics, which require frequent and thorough handwashing as the most basic frontline defence, access to clean water become an even more urgent necessity… if it was not already being treated as such by governments.

To bolster this drive, the United Nations has made universal access to safe drinking water one of its 17 sustainable development goals for 2030, an acute issue in Latin America were some 35% of the people do not have access to reliable potable water services.

However, while the Covid-19 pandemic has brought this issue to sharp refine, it has also created budget constrains for governments, limiting their investment power – even to something as basic and urgent as water and sanitation services which are largely provided by public utilities and state-owned companies throughout the region.

But, as high-risk investors like to say, wherever there’s a challenge, there’s also opportunity.

Many countries in the region are accelerating the structuring of public private partnerships in an attempt to guarantee that clean water and sewage collection and treatment are provided in a universal and efficient manner, without depending entirely on public funding.

Adil Marghub (pictured), IFC’s regional industry sector senior manager on the Latin American and Caribbean infrastructure and energy group, points out that the region has currently few PPPs or private sector-driven projects in water and sanitation.

“You need to create contractual structures to bring in the private sector into that space. In many places, it is still a sector dominated by either a state or a sub-national utility,” says Marghub.

The opportunity focal point is Brazil, a country with a population of almost 210 million people where nearly half of it does not have sewage collection and around 35 million people do not have access to clean water.

The fifth largest country in the world has just laid down the main foundation for the advancement of private sector participation in sanitation projects. After two years of discussion in Congress, in mid-2020 Brazil approved the new law establishing clear goals for universalization of sanitary services by 2033, which will require an investment of between R500 million ($90m) and R700 million ($126m).

One of the biggest changes of the new regulation is increased openness for private parties to act in the sector, either through concessions or privatizations. This participation will also be facilitated by the centralization of responsibilities at the national water agency (ANA), which from now on will define technical rules and tariffs to be adopted. This is a massive improvement on the previous way where a decentralized system created uncertainty for investors.

Brazilian development bank BNDES is already building a pipeline of projects. Its sanitation portfolio currently has 8 projects that will require investments of more than R50 billion ($9bn).

“In our modelling for sanitation projects, no one is left behind. All municipalities are included,” says Fábio Abrahão, managing director of infrastructure, concessions and PPPs at the development bank.

BNDES will bundle cities together, where larger and richer ones will be paired with smaller / poorer localities. This is to avoid less-interesting regions failing to attract bidders. Many investors are already eyeing those investments, including banks, funds, and DFIs

The two most advanced projects are in the Metropolitan region of Maceió, in the state of Alagoas, in Cariacica (Espirito Santo state). Rio de Janeiro’s project, although advanced, threatens litigation due to political opposition to privatization of parts of the state-owned company Cedae.

Additionally, the bank has been structuring projects to the states of Acre, Amapa, Ceara, and Rio Grande do Sul.

Location

Alagoas

Cariacica (ES)

Rio de Janeiro

Acre

Amapa

Rio Grande do Sul

Porto Alegre (RS)

Ceara

Business model

Concession for water & sewage distribution

Sewage PPP

Concession for water & sewage distribution

Water & sewage concession

Water & sewage concession

Sewage PPP

Water and/or sewage concession

Sewage PPP

Population (m)

1.4

0.4

13.7

0.6

0.7

1.9

1.5

4.1

Capex ($m)

1,097

111

6,252

255

801

289

192

1,540

Auction

Q3 2020

Q3 2020

Q4 2020

Q1 2021

Q1 2021

Q2 2021

Q2 2021

Q3 2021

Table's source: BNDES

The bank’s goal is to create projects that are financially robust and improve efficiency in the services provided. In water distribution, for example, losses average at around 40% due to theft, leaks, lack of charges and overall operational inefficiency. With 40% as an average, the worst end of the scale suffers losses up to 70%.

Although improved efficiency as the key to financial sustainability might seem risky, Marghub from the IFC says the same process happened in the country in the mid-1990s when Brazil started to open its power sector to private parties, which has been largely successful. “I see that as a direct analogy when I think about non-revenue water,” he adds.

“It is more important to look at the efficiency when you bring in the private sector. You are able to measure things like quality of service, increase in connections. Those are real tangible things that private sector investment can bring.”

As with the poorer areas of Brazil, some smaller Latin American and Caribbean countries worry about the impact on tariffs, as charging for water and sanitation could have massive social impact.

In some cases, however, the cost per gallon already paid today by people who do not have reliable access to water could be a lot higher than a private company providing regular services. Hiring private tankers to bring in water is a common – and expensive – practice throughout the region.

Water Access Index (% of the population)Source: IFC

Brazil

83%

Peru

87%

Bolivia

90%

Mexico

96%

Chile

99%

Sewage Access Index (% of the population)

Bolivia

50%

Brazil

52%

Peru

76%

Mexico

85%

Chile

99%

Water and sanitation inequality is a reality among Latin American countries. Chile for example has 99% of its population with both water access and sewage access, while Bolivia has 90% and 50% respectively.

A good example of a country that still has a relevant infrastructure gap but that already has a history of private sector participation in water and sanitation is Peru. Around 87% of the population has access to water and 76% to sewage.

Peru’s water and sanitation sector is dominated by public utilities, but about a decade ago it developed a successful pipeline of PPP projects, where at least five mega-projects around Lima were awarded.

With the economic downturn and political instability in the country, however, the pipeline dried up and no project was awarded between 2012 and 2019. And then the country’s procurement agency – ProInversión – awarded the water treatment plant PTAR Lake Titicaca.

Diego Harman, a partner at Garrigues who worked in the previous wave of sanitation PPPs, says that Covid-19 has made the social infrastructure gap in Peru even more evident. “There is now a real push because of the pandemic to try to award more sanitation projects and social infrastructure in general.”

He highlights that Peru is a country that many international investors have confidence, where a lot of PPPs have been successful. Now, the fledgling interest depends only on having sufficient projects to invest in and on the contractual structure chosen.

“As long as the government tries to replicate what has already worked in the past when it comes to sanitation PPPs, I think that the structure will become very successful and the projects will be well received by investors,” Harman said.    

The IFC’s Marghub, agrees that private investors will come if countries create the right framework and competitive processes. He does not see that happening across the region in one fell swoop, however.

“To be realistic, it is more important to step back and build the foundations in some countries. In Brazil, you had to change the law, which took some time. In other countries, you may need to put in the right frameworks and availability of the government to provide PPP teams, but that takes time. If you start the projects with these building blocks in place, then projects can start moving faster,” he says.

It is not uncommon for Latin American and Caribbean countries to have limited data availability, which hinders efforts to optimize sector planning, develop effective public policies and use existing infrastructure.

The region does not want for support to make this transition a reality with the likes of the Inter-American Development Bank (IDB) having the Latin American and the Caribbean Water and Sanitation Observatory (OLAS) which is designed to provide reliable, comparable, timely and consistent information to help monitor development progress associated with water and sanitation.

In a world hungry for projects to fund, lend to, deliver and operate there will be no end of support at hand… so long as the right structures are in place to achieve improved water delivery and treatment.

Asset SnapshotMaceio Water and Sanitation

Est. Value:
BRL 2,600.00m (USD 460.66m)
Full Details

Transaction SnapshotMaceio Water and Sanitation PPP

Value:
$464.76m USD
Concession Period:
35.00 years
PPP:
Yes
Full Details