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March 02, 2017

Newsletter - Water and Sewage Sector in Brazil: Privatization of Cedae and its controversial topics

One of the infrastructure sectors that has raised interest of the investors is water and sewage. In this sector, the privatization of the Company of Water and Sewage of the State of Rio de Janeiro (CEDAE) is, unarguably, one of the major projects currently in discussion.

The first formal event for the privatization took place last week with the approval, by Rio de Janeiro’s Legislative Assembly (ALERJ), of the Bill that authorizes the sale of the totality of the shares owned by the state of Rio de Janeiro in CEDAE.

Some topics in the Bill are considered controversial: (i) the absence of indication of Cedae’s sale value; (ii) the lack of parameters for the future parties interested in acquiring the shares; (iii) absence of evidence that the Plan of Financial Recovery of the state is feasible; (iv) potential impacts on services delivered to population arising from the privatization (i.e., tariff increase, water supply shortage and the end of the cross-subsidies).

Besides that, considering that Cedae serves 64 of the 92 municipalities within the State of Rio de Janeiro, the privatization proceeding will have to reconcile the interests of such municipalities. Both Cedae’s servers and the municipalities argue that the privatization process must be widely discussed with the affected community and take into account the users’ interests. Otherwise, Cedae might face the disruption of many partnerships, including with the municipalities.

In an attempt to address some of the controversial topics above, in February 21, 2017, two amendments were made in the Bill: the assurance of priority for payment of the state’s public officials (active, inactive and pensioner ones) and the maintenance of the social tariff for water and sewage. This tariff currently subsidizes part of the value charged from families with lower income.

The text approved grants the Federal Government the term of up to six months, which can be extended for an equal period, to hire the federal financial institutions that will be responsible for the evaluation and structuring of the transaction. The revenue obtained with the sale of Cedae’s shares owned by the state will be used as guarantee of a loan in the value of BRL 3,5 billion signed with the Federal Union, enabling the Plan of Financial Recovery of the state of Rio de Janeiro and suspending the payment of the state’s debts with the Federal Government.

The Bill must be sanctioned or vetoed, total or partially, by the governor of Rio de Janeiro in 15 days. After the sanction, the Government of the State will be able to initiate the practical measures necessary for structuring the sale of Cedae’s shares.

 

 

 

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