Private Sector Participation and Access to Water Supply in Brazil

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This article is based on an article in Poverty In Focus Number 18, August 2009 (International Policy Centre for Inclusive Growth IPC-IG) by Andre Rossi de Oliveira, Department of Economics, Portland State University and Center for Studies on Market Regulation, University of Brasilia. It explores water privatisation in Brazil. It is argued that the expansion of coverage has stemmed mainly from high levels of investment by private operators.

Contents

The situation

Despite its abundant natural and human resources and its great potential for economic development, Brazil faces many social and economic challenges. There are of course many public policies available, but access to adequate water supply should be part of any initiative to that end. The following statistics, compiled from the National Household Sample Surveys (PNAD) in several years, bear that out:

  • About a third of households with access to piped water supply in Brazil are in the rich Southeast region, whereas about half of the population without access to water is in the poor Northeast region.
  • About 51 per cent of households without access are in rural, isolated urban or non-urbanised areas.
  • The illiteracy rate among individuals without access is relatively very high, about 10 percentage points higher than among those with access.
  • Individuals without access have appreciably fewer years of study than those with access. A striking 31 per cent of those without access have less than one year of study, and more than 23 per cent have only between one and three years of study.


The characteristics associated withhouseholds and individuals without access are consistent with those usually found in low-income families. Moreover, even though access to water supply has increased significantly in the recent past, its distribution is considerably skewed. Access by households in the lower income brackets is clearly substandard (see Figure 1). Of those that earned less than the minimum salary in 2007, for instance, only 69 per cent had access to piped water supply, whereas 94 per cent of those earning more than 20 times the minimum salary had access.

Figure 1: Access to Water Supply By Income Class in Brazil, Source, National Household Sample Survey (PNAD)
Figure 1: Access to Water Supply By Income Class in Brazil, Source, National Household Sample Survey (PNAD)

It stands to reason, then, that further increases in coverage of water supply services should mainly benefit poor families. In what follows, we suggest that private sector participation in the water sector has been successful in doing just that, and therefore should be considered a viable alternative to public provision.


To a great extent, water supply services in Brazil still reflect the policies established under the National Sanitation Plan (Planasa) in 1971, which favoured largescale investments and cross-subsidy schemes. The sector is dominated by regional companies that serve a large number of municipalities and have extensive networks. Since the mid 1990s, however, many municipalities have chosen to outsource the provision of water services to privately owned or operated companies. In urban areas, there were about 1,350 water and sewage entities in 2006, of which 32 had been privatised.


In the North region of Brazil, Manaus, the capital of the state of Amazonas, and Novo Progresso in the state of Pará are the only cities where water is supplied by private companies. In the Middle West there are private enterprises in the states of Mato Grosso, Mato Grosso do Sul and Tocantins. The Southeast has most of the private experiences, mainly in the states of São Paulo and Rio de Janeiro, but also in Espírito Santo and Minas Gerais. In the South, the states of Paraná and Santa Catarina have tried the private provision of sanitation services.


Private ventures undertaken so far differ considerably in terms of financing and tariff structures. In some cases, companies subscribed the totality of their initial capital, while in others relatively sophisticated financing schemes were set up, including equity and debt.


Tariff structures are in line with those adopted in the past by the sector, based on minimum consumption rates and increased block-rate tariffs, and differentiated according to user groups. In some cases, price-cap regulation was implemented. Concessions are the contractual instrument of choice in most cases.


In order to evaluate quantitatively the impact of private provision on access, we first apply panel data techniques to data from the National Sanitation Information System (SNIS).[1] This includes information on several technical indicators related to water services over the period 1995–2003 for a large number of municipalities.


The control variables in our model are GDP per capita, productivity, investment, and cost variables that try to capture economies of scale and density, besides auxiliary dummies. According to our results, private provision increases access to water supply by more than 26per cent compared to public provision.


More importantly, the impact of private provision is higher in the lower income deciles, indicating that the benefits of higher access rates due to privatisation accrue mostly to poorer municipalities.


These results, however, do not take into account possible “inertia” effects. This means that our results might be spurious if private provision were disproportionately introduced in municipalities that had higher access rates at the outset. To address this issue, we use a different dataset that allows us to compare municipalities before and after the privatisation of water supply services.

The database is from the Brazil Human Development Atlas (HAD), made available by the United Nations Development Programme in Brazil. This database consolidates socioeconomic data available in the 1991 and 2000 Brazilian Demographic Censuses. We use a difference-in-differences method to compare the change in outcome in the treatment group before and after the treatment (here, privatisation), to the change in outcome in the control group (here, the municipalities that did not privatise their water services).


By comparing changes, it is possible to isolate the effects of treatment from other factors affecting the outcome. As in the previous estimations, this method generates a positive and significant estimated coefficient for private provision, confirming the positive impact of privatisation on the population’s access to water services.


It is safe to say, therefore, that private provision has led to an improvement in access to water services in Brazil, and that this effect was more pronounced in municipalities at the bottom of the income (GDP) per capita spectrum. These results allow us to conjecture that lowincome households have benefited the most in that respect, since Brazil has a relatively high coverage rate in water provision (compared to other developing countries) and higher-income families are usually the first to get access.


Part of this result might be attributable to investment obligations assumed by private operators at the time they were granted their concessions. Total scheduled investments by private operators untilthe end of their concession contracts (between 2025 and 2030) amount to R$3.38 billion (about U$1.54 billion), of which R$1.10 billion (about U$500 million) or 32.7 per cent had been disbursed by the end of 2004. Disbursements to the end of 2009 are estimated at half the total value of investments.


Additionally, privately owned or managed companies in Brazil generally invest more than public companies or governments,2 which may be one of the reasons for the relative success they have had in increasing access rates (see Figures 2–4).

Figure 2: Investment in Water Provision, Local, Source: PMSS – National Sanitation Information System (SNIS)
Figure 2: Investment in Water Provision, Local, Source: PMSS – National Sanitation Information System (SNIS)
Figure 3: Investment in Water Provision, Microregional, Source:PMSS – National Sanitation Information System (SNIS)
Figure 3: Investment in Water Provision, Microregional, Source:PMSS – National Sanitation Information System (SNIS)
Figure 4: Investment in Water Provision, Regionl, Source:PMSS – National Sanitation Information System (SNIS)
Figure 4: Investment in Water Provision, Regionl, Source:PMSS – National Sanitation Information System (SNIS)


There is evidence that a greater presence of private undertakings in the Brazilian water sector can be beneficial—not only because the sector has a great demand for investments that cannot come entirely from the public sector, but also because private provision can improve access for the poor when under contractual obligations.


This potential greater participation on the part of the private sector would have a wider social impact if it came with strings attached. For instance, it could be made to serve poor customers by placing emphasis on tariff design, so that low-income families were targeted more accurately.


There are cases of private companies, such as Citágua in Cachoeiro de Itapemirim (Espírito Santo state), that actively engage in tariff policies designed for low-income families, usually in cooperation with the municipalities. Citágua has a joint programme with the city that gives waivers to low-income families with up to 10 cubic meters of consumption. Families have to register with the municipal department of social works in order to be eligible.

Summary

In summary, the positive outcomes in Brazil are related to contract design, the size and location of municipalities and the sophistication of their staff. Most contracts stressed investment obligations, something relatively easy to monitor. The municipalities are not large in size and are located in relatively prosperous areas. Their staff have also the capacity to enforce contracts.


Political, social and cultural institutions or norms to monitor the private sector should also be fostered. Currently they are almost non-existent. Municipalities and state agencies are the only entities in charge of enforcing concession contracts. Finally, universal service obligations, now absent from most concession contracts, could be negotiated with or even imposed on private providers.

References

  1. Published by the Programme for the Modernisation of the Sanitation Sector (PMSS) of the Brazilian Ministry of Cities.

Oliveira, Andre Rossi de (2008). “Social Policy, Regulation and Private Sector Water Supply: The Case of Brazil”, in N. Prasad (ed.), Social Policies and Private Sector Participation in Water Supply: Beyond Regulation. Houndmills, Palgrave Macmillan, pp. 126–148.

See also

A “Successful Privatisation” Nationalised in Bolivia. Why?

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