Stabilising Brazil’s water system

Few OECD nations work as tirelessly as Brazil to bridge the development gap and attain financial prosperity. The State of Minas Gerais is doing just that, by increasing its water waste management

A general view of Belo Horizonte from Mangaabeiras district, Minas Gerais, Brazil, South America’s most heavily populated state  

Nestled between Rio de Janeiro and Sao Paolo, Minas Gerais is the industrial buffer zone that’s South America’s second most populous state, and it maintains one of the highest regional GDPs to boot. Much of that success stems from the state’s thriving metalwork industries.

Translated literally from Portuguese, the name Minas Gerais means ‘general mines’, and the region wears the badge well. From mining and metallurgy to steel and automotives, much of the area’s economic stability depends exclusively on the valley’s rich bounty of natural metals – and in turn, upon reliable water and waste water treatment.

In recent years, investment in the latter has begun to slide; however, new government initiatives and public-private partnerships (PPPs) are slowly seeing Minas Gerais’ public infrastructure catch up with its thriving industrial firms. Since 2011, the state has invested billions to increase the regional capacity of water waste treatment. It’s already risen by a third. Yet a new project linking two of the state’s great rivers should serve to thrust its central region to the forefront of global water sustainability.

Minas Gerais was the first regional authority in Brazil to approve the use of PPPs in 2003 – and Copasa was among the first state firms to benefit from the legislation

Recently actualised
With a view to expand sewage collection treatments to 95 percent of the state’s population by 2022, the Divinópolis Wastewater System is perhaps one of the most ambitious PPPs in Brazil today. Having only gone to tender in October 2014, the programme will see state utility firm Copasa hand over a 27-year concession that involves investment in civil work, equipment and overall maintenance of the project. Construction is set to kick off by 2016 under a revised budget of $97m.

New transportation and sewage treatment infrastructures are already being planned for the Itapecerica, Pará, and Ermida rivers as part of the project’s first phase. Consequently, the collection systems of Itapecerica will need to expand capacity by 400L/s, while Ermida’s is set to increase by 15L/s. Then, the second phase will see the Itapecerica system expanded to handle 600L/s. Meanwhile, the current sewage system at Divinópolis is to receive a noticeable facelift – including the installation of new interceptors, pumping stations and treatment stations. In turn, the city’s current Pará wastewater system will be expanded to accommodate 30L/s. The project is Minas Gerais’ most ambitious public works upgrade in recent memory. Copasa should be more than up to the task of overseeing the effective deliverance.

The water and sanitation firm is a private-public enterprise that controls water supply in over 600 area municipalities, and holds concessions to sanitation services in around 300 towns and cities across Minas Gerais and beyond. Minas Gerais was the first regional authority in Brazil to approve the use of PPPs in 2003 – and Copasa was among the first state firms to benefit from the legislation. Thanks to a flurry of international funding, the firm’s customer base is only on the rise.

In recent years, Copasa has relied less upon traditional domestic funding sources like Brazil’s Federal Savings and Loans Bank or the National Development Bank, and has instead shifted its focus towards attracting the attention of the German development bank Kreditanstalt fur Wiederaufbau. Those investments have gone on to fuel hundreds of new public service projects across Minas Gerais. At the end of 2013, Copasa’s total investments hit $368.3m – over a third of which related to water supply systems. Last year, the firm was consequently able to increase the population it serves by 484,000. Some $229m of the firm’s investments, meanwhile, are now in sewage collection and treatment.

In 2013, Copasa saw a 12 percent rise in the volume of treated sewage it was able to process – and the activation of new systems across the state have helped the company’s bring its total customer base for the service rise to some 9.3 million. At present, Copasa boasts just under 150 plants in operation; by 2016, the firm will maintain 230.

Sign on the dotted line
In recent years, water management in Brazil has become a slightly more complicated beast. The industry is still playing catch up following the introduction of legislation that has drastically raised treatment guidelines that favour only long-term projects. Consequently, the primary challenge for firms like Copasa has been to consolidate that regulatory framework in order to develop projects that aim to establish a more universal take on sanitation services.

Any project designed to be implemented for a period of less than 20 years is no longer given a second glance. Yet Brazil’s federal government does not merely penalise firms for failing to contract sustainable works – states are rewarded with major subsidies for investing in long-term sanitation projects such as that in Divinópolis. Ecological ICMS is a state value added tax that’s transferred in part to Brazilian municipalities based upon the levels with which those local authorities are able to preserve ecological reserves and curb landfill and sewage contributions through the implementation of new infrastructure and recycling centres.

Last year, Minas Gerais brought in $32.9m in ICMS government subsidies for its investment in new waste water infrastructure. In order to adequately facilitate their largest project to date, Copasa and Minas Gerais have relied upon the scrutiny of the likes of Banco de Desenvolvimento de Minas Gerais (BDMG), the state’s development bank.

Last year, BDMG was brought on board to advise Copasa on the project’s economic, financial and legal structuring. The bank was a natural selection due to its high level of experience in offering technical support and guidance on the PPPs of various municipalities across Minas Gerais. Although the institution faces intense competition from larger, international development banks, the bank boasts an unrelenting degree of security due to the state’s long-term role as a financial agent. Because the government is its primary shareholder, BDMG is an essential policy tool for local officials, and has played a pivotal role in the state’s recent flurry of infrastructure upgrades.

Standard & Poor’s has added that BDMG maintains a high bill of health in its asset quality due to its old-fashioned, conservative funding procedures and guarantees quality. It’s that same unwavering structure that the bank’s analysts have applied to Copasa’s 27-year PPP at Divinópolis. Last year, BDMG was brought on board in order to advise on the financial structuring of the project, as well as the consolidation of mechanisms within the project that ensure it adheres to the state’s stringent public policies on good governance. Those viability studies, which are valued at $344,847, are set to be reimbursed to the bank by the project’s eventual concession winner.

Copasa has invited up to three firms, investment funds and consortiums to bid for the concession on the development. Approximately $49.4m worth of investment is anticipated within the first three years of the contract. Authorities have already indicated the bidder requesting the lowest monthly concession payment will be favoured; although the state is expected to pay the winner approximately $172.6m across the length of the project. From the moment Copasa determines the winning bid, gears will be set into motion at break-neck speed. Construction must begin by 2016 – and in order to meet those deadlines, Copasa has already approved a 17 percent budget increase for the project.

With a burgeoning population and a backlog of industrial contracts, austerity-focused officials are more than aware that Minas Gerias’ economic stability rests almost entirely upon the promise of a modern, cutting-edge water infrastructure system. The Divinópolis Wastewater System will surely be a blessing to the local population.