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Back | Programme Area: Markets, Business and Regulation (2000 - 2009) | Event: Social Policy, Regulation and Private Sector Involvement in Water Supply

Social Policy, Regulation and Private Sector Involvement in Water Supply

Social Policy, Regulation and Private Sector Water Supply : the Case of Brazil

The water supply and sanitation sector in Brazil is dominated by regional (state) companies that hold concessions from municipalities and serve the largest cities in the country. Municipal provision of water and sanitation services, concentrated mainly in the states of São Paulo, Minas Gerais and Rio Grande do Sul, happens either through agencies under direct municipal control, autonomous agencies or municipal companies. There are a small number of cases (4% of the country’s population in 2004) corresponding to private companies currently holding partial or full municipal concessions.

Modalities of Private Sector Participation
There are several ongoing private sector provision experiences in the water sector in Brazil, although the majority of states do not have any municipalities where water is supplied by private companies. In the North region of Brazil, the states of Amazonas and Pará have private participation in the sanitation sector, more precisely in the capital city of Manaus, in Amazonas, and Novo Progresso, in Pará. In the Midwest, there are private enterprises in the states of Mato Grosso, Mato Grosso do Sul and Tocantins. In Tocantins, private participation occurs in the form of private management of the state sanitation company. The Southeast concentrates most of the private provision examples, 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 municipalities with private provision of sanitation services.

Concessions are the contractual instrument of choice in most cases. The municipalities in the state of Rio de Janeiro that privatized their sanitation services have opted mostly for full concessions (i.e., including water and sewage), whereas those in the state of São Paulo have preferred partial concessions. The private groups that acquired the concessions were typically comprised of construction companies in the public works business lured into the sanitation market by the possibility of restoring their core business through the concessions. There are a few cases of concessions granted to consortia of domestic and international companies.

In most cases, private companies followed tariff schemes adopted in the past by the public company or administration, based on minimum consumption rates, increasing block-rate tariffs, and differentiation according to user groups. In some cases, price cap regulation was implemented, with caps provided by state companies’ tariffs.

Social Policy and Regulation
Public policy in the sanitation sector, be it regulatory or social, was until the late 1980’s centralized by the federal government in the National Housing Bank (BNH) and followed the guidelines set by a plan called Planasa. Available resources were used to entice municipalities into turning the provision of water and sewage services over to the regional (state) sanitation companies. For an extended period of time, social policy for the sector amounted to heavy investments in the expansion of water supply systems (sewage was not a priority), thereby increasing coverage, and a system of cross subsidies put in place by the state companies.

After the extinction of Planasa, no coherent policy for the sanitation sector was put in place. Many programs were designed, though, to increase investments and improve sanitation services, some of them targeting special groups, like low income households and rural communities. Some of the initiatives included in those programs are the following: increase in coverage and/or production capacity of sanitation systems; institutional and human resources development and creation of cooperatives of workers; loans to low-income families at below market interest rates for joint projects with public entities to improve sanitation services and facilities; basic sanitation in Indian tribes; and set up, expansion and improvement of sanitation services in rural areas.

Virtually all sanitation companies, public or private, adopt social tariffs. In the case of state regional companies, their tariff structures generally have to abide by rules specified in state and/or municipal laws, but there are many cases in which they have a lot of leeway to set tariffs. Some of the most common criteria used to determine who can sign up for social tariffs are: household’s income, size and location of dwelling, type of construction, electricity consumption, proof of enrolment in a federal or state assistance program.

There are three econometric models, two for access and one for affordability. In the first model for access, the percentage of the population in the municipality with access to water service and quality of water are the dependent variables, and the explanatory variables are a dummy for private provision, municipality’s GDP per capita, extension of the water system by water connection, number of water connections, per capita water consumption, density of water economies by connection, average tariff and company’s productivity. This model was estimated for the whole sample and then by GDP per capita deciles. The sample used was a panel of municipalities (years 2001-2003), and the estimation method was random effects regression.

In the second model for access, the dependent variable is the percentage of the population that lives in households with access to piped water, and the explanatory variables are a dummy for private provision, income per capita, the Gini index, a poverty index, the number of doctors per thousand inhabitants, and the percentage of the population living in rural areas. The estimator used was the differences-in-differences estimator and the data came from the 1991 and 2000 Brazilian Demographic Censuses.

The model for affordability has affordability as the dependent variable, defined as the rate between the average tariff charged by the water supplier and the municipality’s GDP per capita. The explanatory variables are the same as in the first model for access, with the exception of the average tariff. It was also estimated for the whole sample and then by GDP per capita deciles. The sample and the estimation method were also the same.

Main findings
Private provision has a significant and positive impact (approximately 8.5 percentage points) on access to water services rates, with a larger impact in municipalities with the lowest GDP per capita. Given the already relatively high coverage rates of the higher income deciles of the Brazilian population, the benefits of such increased access rates accrue mostly to lower income families. Private provision has also a significant and positive impact on the quality of water supplied.

Higher productivity (as measured by employees per water connection) is associated with higher access rates. Higher efficiency is not necessarily correlated with higher quality.

Higher access rates are associated with higher income per capita and lower poverty indices. The percentage of the population living in rural areas has a negative effect on access, indicating that municipalities with large rural populations should be targets for universal service policies.

In municipalities where water is supplied by privately managed companies, the share of per capita GDP taken up by water tariffs is larger than in municipalities served by publicly managed operators.
In conclusion, participation of private companies in the business of water supply has beneficial effects for the poor in Brazil as far as access to services is concerned. Evidence regarding the effect of private provision on affordability is inconclusive.