What to expect from Brazil's New Legal Framework for Water and Sanitation?
On July 15th, the Brazilian President enacted Law no. 14,026/20209, called the “New Legal Framework for Water and Sanitation”. The Law does not replace the current National Water and Sanitation Law (Law no. 11,445/2007) but carries out changes in it and in other laws that govern the sector in order to create important innovations.
The New Framework succeeds two Provisional Measures issued in 2018 (MP 844 and MP 868) which lost effectiveness due to lack of parliamentary consensus. The Law stems from Bill no. 4,162/2019, presented by the Federal Government, and took into consideration much of what was negotiated in the course of those two Provisional Measures. The Federal Government expects to leverage up to R$ 700 billion in investments, most of those from the private sector, thus ensuring universal access and improving the quality of the public services.
Essentially, the New Framework presents four major guidelines, as follows:
1. Regulation Uniformity
The New Framework assigns the National Water and Sanitation Agency (ANA - Agência Nacional de Águas e Saneamento Básico) the legal competence to establish reference standards (or guidelines) for the regulation of the sanitation services. ANA is a Federal Regulatory Agency originally responsible for regulating the use of the country’s water resources. The New Framework thus ascribed the Agency a completely new competence: ANA will not be responsible for regulating the sanitation services – which is the municipalities’ constitutional responsibility – but for establishing reference standards for the subnational regulatory agencies.
These standards shall establish quality and efficiency norms for the provision of the services, as well as govern tariff regulation, provide for the standardization of contracts, and establish targets for the universalization of services and the reduction of water losses, among others. The aim is to standardize the regulation enforced by the sanitation regulatory agencies as well as the contracts signed between public authorities and the service providers, thus assuring greater legal certainty to providers and their investors.
This proposal stems from studies produced for the Federal Government with proposed a policy for improvement of regulation quality.
2. Regionalization
The New Framework induces the regionalized provision of sanitation services by conditioning the access to federal resources to the grouping of municipalities for the integrated provision of the services.
In Brazil, the municipalities are responsible for providing the sanitation services. However, some of them may face difficulties in rendering their services economically feasible and attractive to service providers, especially small-scale municipalities. Therefore, the New Framework stimulates the grouping of municipalities to boost attractiveness, notably by associating less profitable municipalities with highly profitable ones.
In addition to the possibility of creating metropolitan regions, urban agglomerations and micro-regions by means of Complementary State Laws (as provided for in article 25, paragraph 3 of the Constitution), the New Framework creates two other alternatives for the regionalized provision of sanitation services: (i) Regional Sanitation Units: established by State Laws and may be composed of non-neighboring municipalities; and (ii) Blocks of Reference: established by the Federal Government in case the State fails to create the Regional Units, and which may also be composed of non-neighboring municipalities and is formally created through what is called the associated management of public services (through which the grouping municipalities must form a public consortium or sign a cooperation agreement).
The New Framework establishes that, in any case, the municipality’s participation in the regionalized provision is optional. This determination is contrary to the Federal Supreme Court’s (STF) case law, which considers the municipality’s integration into metropolitan regions, urban agglomerations, and micro-regions compulsory. After the public session of the Law’s enactment, new vetoes were made to the original bill, one of them precisely because of the unconstitutionality mentioned above (in article 3, paragraph 4 of Law no. 11,445/2007). However, article 8-A, which also establishes that the municipality’s participation is optional, has been maintained, and thus, despite the veto, the unconstitutionality remains.
Moreover, the new item VII of article 50 of Law no. 11,445/2007 determines that the water and sanitation services provided through contracts concluded without regionalization, even those prior to the new law, may not receive public resources from the federal budget or hire credit operations with federal entities. This forbids private concessionaires operating in only one municipality or municipal authorities who provide the services to gain access to such resources. In other words, the regionalization, although apparently optional, has acquired a great deal of reinforcement.
Additionally, the New Framework encourages the delegation of the services’ regulation to state or intermunicipal regulatory agencies, as opposed to municipal agencies. It also allows state regulatory agencies to act in other states’ territories (new paragraph 1-A of article 23 of Law no. 11,445/2007). This possibility does not seem consistent with the constitutional principle of territoriality of the federative competences, according to which the federative unit may only exercise authority within its own territory. However, the following provision (paragraph 1-B of article 23 of Law no. 11,445/2007) mentions a “service provision agreement” which may indicate that the regulatory agency located in another state shall provide only technical advisory, while the regulation continues to be executed by local authorities.
Lastly, the New Framework also defines local interest sanitation services and common interest sanitation services, using criteria that have already been considered unconstitutional by the Federal Supreme Court (STF) in successive judgements. However, as long as adhesion to the groupings are considered voluntary in only privileged groupings, these unconstitutional aspects should have low repercussions.
3. Competition, privatization and targets
The New Framework prohibits the use of in-house providing agreements (contratos de programa) in the water and sanitation sectors. These agreements have been used by municipalities to delegate the provision of water and sewage services to public state companies without a procurement process. The New Framework now obliges the municipality to conduct a bidding procedure in order to delegate the provision of the services (that is, in case it does not wish to provide the services itself, by means of its own entities), in which public service providers shall compete with private companies for the concession of the services.
The bill as approved by the National Congress established that the municipalities would have until the 31st of March, 2022, to regularize or extend the duration of any contracts concluded with state companies, for up to thirty years (until 2052, which is a very long transition, so as to allow for the amortization of the investments required for the universalization of the services). However, the President of the Republic has vetoed this article, and, therefore, the conclusion of new in-house providing agreements is forbidden from the date of publication of the new Law.
The veto is expected to be overturned by the National Congress, since this article was the main element of the political agreement that allowed for the bill’s approval. Moreover, the veto may encourage the state governors to question the constitutionality of various articles of the new Law before the Supreme Court (STF). Either way, it is not good for investments that this new framework be enacted in a political environment of conflicts and disputes, rather than as the result of an agreement to sponsor changes leading to the universalization of the services.
Moreover, all contracts, concluded both before and after the enactment of the new Law, must establish targets and investments for the universalization of the services, so that 99% of the population (it is not clear if it is the urban population or the total population, thus requiring clarification by ANA’s reference standards) has access to potable water and that 90% has access to the sewage collection and treatment networks until 2033. In exceptional circumstances, this date may be extended by six years (limited to January 1st, 2040).
Naturally, the valid in-house providing agreements concluded before the enactment of the New Framework shall remain in force until the end of their contractual term. Moreover, the municipalities may only resume the services upon prior payment of indemnity to the service provider for the investments which have not been fully amortized (pursuant to the new paragraph 5 of article 42 of Law no. 11,445/2007).
Another article determines that the conclusion of new contracts or the maintenance of existing contracts depend on evidence of the contractor’s economic and financial capacity to meet the targets, either through equity or funding, under the terms of a future Presidential Decree (article 10-B and its sole paragraph). However, the article suggests that the economic and financial capacity shall be required only for contracts preceded by bidding procedures (since it mentions investments “in procured areas”) and thus would not be applicable to in-house providing agreements concluded with state companies – whose economic and financial capacities have different characteristics, since they may receive government subsidies. This aspect may need to be addressed through a Provisional Measure.
The targets are so important in the New Framework that an article forbids the distribution of dividends and other forms of remuneration of the service provider’s shareholders in case the contractual targets have not been dully met and recognized as such by the regulatory agency.
Finally, in the event of strong privatization of the services, the New Framework determines that the state companies may continue responsible for the provision of the wholesale water services, encouraging the retail services to be delegated to the private sector. In this case, the users of the services would pay two tariffs on their invoice: (i) one referring to wholesale, for the state company; and (ii) another referring to retail, for the private provider. In order for this measure to be successful, reinforcement from regulators and, in particular, from the antitrust authority, is essential. The requirement that it be two different tariffs is in article 12, paragraph 2, item VI, and paragraphs 3 and 4 of Law no. 11,445/2007 – which have not been changed by the New Framework, despite not being observed in recent concession designs.
4. Access to federal resources
Only water and sanitation services which are regionalized and whose regulation meet the reference standards issued by ANA may receive federal resources (with the exception of those arising from parliamentary budget amendments, which are not subject to these rules) and resources arising from credit operations with federal entities, especially those involving resources from the FGTS (Severance Pay Indemnity Fund).
Among the reference standards, ANA shall provide for the governance of regulatory agencies, so as to secure their decision-making independence, as well as their financial and administrative autonomy. It is expected that agencies acquire a more technical character, with in-house resources and managing positions with a fixed term of office.
Additionally, the regulators shall be responsible for designing the concession contracts and bid notices, whilst taking into account the reference standards issues by ANA. As a result, there shall no longer exist concessions without a regulator (which cannot be replaced by an Independent Verifier, for example).
It should be noted that not ensuring the regulator’s due independence, or not adopting the standard contracts or bid notices, shall lead to the heavy consequence of not having access to the federal resources. If Law 11,445/2007 originally aimed to restore the municipalities’ protagonism, the New Framework puts the regulator in the foreground.
Other aspects
In addition to the four guidelines mentioned above, there are also other important changes, such as: (i) the provision of urban waste management or rainwater management services may be remunerated by tariffs (new items II and III of article 29 of Law no. 11,445/2007); (ii) postponement of the deadline for termination of landfills until 2024 (new article 54 of Law no. 12,305/2010); (iii) non-residential users or horizontal or vertical condominiums may adopt their own water and sanitation solutions, so that they are no longer subject to the tariffs of public service providers, which may have a great medium-term impact on the service’s revenues (changes made by the revocation of paragraph 1 of article 10 of Law no. 11,445/2007); (iv) real estate developers are exempt from building their own connections to the water, sewage and rainwater networks, which shall be supported by the service providers or by the municipal budget (new article 18-A of Law no. 11,445/2007) – despite the agreement with the National Congress that the article would be vetoed.
As can be seen from the vetoes and their repercussions, the debate on the New Legal Framework is far from over. However, it is clear that changes must be made in order to universalize the access to water and sanitation and to face the impressive deficit of 35 million Brazilians without access to drinking water and 105 million Brazilians who do not have access to the sewerage system.
