Fitch examines Brazil's water and sewerage sector

Fitch, the international rating agency, has today issued a special report analyzing proposed reform and regulation of the Brazilian water and sewerage sector.

CHICAGO, Aug. 3, 2001 — Fitch, the international rating agency, has today issued a special report analyzing proposed reform and regulation of the Brazilian water and sewerage sector.

The report, titled "Brazilian Water & Sewerage: Necessary Sector Reform Mounts," focuses on the proposed regulatory and structural reform that lay the inroads to sector funding and private sector participation.

Over the past few years, state-water utilities' ability to secure financing for infrastructure investments has been hindered, due to greater restrictions on government spending. `Earlier this year, the loosening of certain restrictions on state-owned entities' debt financing activities brought some relief to the sector,' said Jayme Bartling, Corporate Analyst at Fitch in Sao Paulo. `Several state-owned utilities have been tapping the local debt capital market in the form of bond issuances and commercial paper. Although the entrance of these companies into Brazil's developing debt market may prove to be a viable source of financing, the associated financial costs are significantly higher than traditional financing granted through the state-owned bank Caixa Economica Federal. Furthermore, only a few companies possess the financial capacity to attract local fixed-income investors.'

Progress in water and sewerage services reform and expansion has been minimal when compared to the Brazilian telecommunications and power sectors. `Although the 1995 Brazilian concession law that permits the private sector to participate, through concessions, in providing public sector services, lack of clear rules and defined regulations has limited private sector involvement in the water and sewerage business,' said Jason Todd, Director for Latin American Utilities at Fitch. `In addition, lack of uniform rules will somewhat restrict public entities from access to local capital and bank financing, heightening the need for reform.'

Todd explains that as experienced private-sector operators invest in the Brazilian water and sewerage sector, Fitch expects increased operating efficiencies, reduced water losses, improved water quality and quality of services, expansion of sewerage services and more financially sound water utilities. `However, a transparent and credible regulatory framework, possibly one which embraces the concept of economic-financial equilibrium of concession agreements, will be fundamental in order to attract private sector participation and lenders,' said Todd.

An important first step in sector reform was taken this year with the introduction of proposed Law 4.147, which is currently awaiting congressional approval. This proposition outlines a constructive framework for establishing transparent concession guidelines in providing water and sewerage services. In achieving this goal, two specific issues are addressed. The first involves the establishment of an adequate and transparent regulatory framework for concession agreements. The second deals with delegation of responsibility for conceding water and sewerage services. Currently, members of congress have come forth with several amendments to the proposed law in respect to municipalities that are viewed to lose their autonomy in providing water and sewerage services. Although it is important to consider all interests, Fitch hopes that such amendments do not materially `water down' the guidelines' credibility and transparency that is crucial for private sector investment.

An expedient deregulation and reform to the water and sewerage sector is imperative in order to make necessary sector investment possible. `The recent electricity crisis in Brazil has shown the effects that federal government budget restrictions cause to the infrastructure sector over the long term,' confirms Rafael Guedes, Managing Director of Fitch Brazil. Fitch would view positively the approval of Law 4.147 after congressional recess in July 2001. `Given that 2002 is an important election year for president, congress and state governments, approval of this law could be delayed and only be decided by the next government administration, thus, further delaying necessary sector reform.'

The report `Brazilian Water & Sewerage: Necessary Sector Reform Mounts' can be found on Fitch's web site at `www.fitchratings.com' or `www.fitchratings.com.br' via FitchResearch, Fitch's subscription-based web site.

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