The advance of basic sanitation, a red-hot market since a new legal framework came into effect about two years ago, has been increasingly financed by private-sector funds – and not only in those places that auctioned water and sewage services. The use of tax-exempt infrastructure bonds to finance projects in the industry is growing rapidly and is already at all-time high levels this year.

Individual investors are exempt from paying income tax (IR) over these bonds. Any proposal for issuing the securities must be authorized by the government in order to guarantee the tax break.

This year to last week, the National Sanitation Secretariat passed proposals for the launch of R$3.018 billion in tax-exempt infrastructure bonds by companies in the industry.

Of this total, a little more than a third (R$1.12 billion) has already been approved, and the remainder (R$1.898 billion) is on its way for that – an ordinance must be published by Regional Development Minister Daniel Ferreira.

To offer a glimpse of the pace of requests and approvals, the previous record of tax-exempt infrastructure bonds in the basic sanitation segment was R$2.8 billion for the whole year, in 2021. Companies such as Paraná state’s utility Sanepar, Águas de Teresina and Rio Claro-based BRK Ambiental were authorized in recent months to raise funds through tax-exempt bonds.

Sanitation Secretary Pedro Maranhão told Valor seven other proposals to issue tax-exempt bonds are under analysis. They total R$13.8 billion, almost five times the combined amount of the projects authorized last year.

In the secretary’s view, new sanitation concessions are not the only factor driving the market. The goal of universalizing sanitation services – 99% of regular drinking water supply and 90% of sewage collection/treatment – by 2033, set in Law 14,026/20, has also speeded up requests from state-owned companies. Besides Sanepar, regional companies like Sabesp (São Paulo), Copasa (Minas Gerais), Cagece (Ceará) and Saneago (Goiás) have issued tax-exempt bonds.

Companies managing sanitary landfills have also started to explore this source of financing. Ciclus Ambiental, for example, is tapping these securities to finance investments in works related to the management of solid urban waste.

In June 2021, the company was authorized to raise up to R$450 million for a landfill in Seropédica, Rio de Janeiro. The funds can be used to put in place a new leachate treatment plant and a 2.8 MW biogas-fired power generation unit.

“We are talking more with companies, trying to convince them that bonds are an interesting financing mechanism,” Mr. Maranhão said. “On the other hand, we did an internal restructuring and managed to reduce to four from eight months the time for analysis of requests filed with the ministry.”

In recent years, even before the approval of the new legal framework, the Brazilian Development Bank (BNDES) and Caixa Econômica Federal had already been losing ground among the sources of credit for basic sanitation. Between 2016 and 2019, they had already seen their share of loans to private-sector water and sewage companies drop to 40% from 58%.

“The demand for investments is so high that diversification of financing is necessary,” said Ilana Ferreira, the technical head of Abcon, an association of private-sector sanitation concessionaires. For her, after starting to raise funds through tax-exempt bonds, the use of the mechanism in the industry skyrocketed. She believes that the next challenge is to lengthen the terms of the securities – the redemption period is still half of that offered by power companies, a market in which the bonds are better known.

Ms. Ferreira sees state-owned sanitation companies issuing more bonds after the economic and financial verification process to keep their contracts, which occurred in March. They needed to prove they were able to universalize services by 2033. Now they need to invest to offer drinking water and sanitary sewer to millions of people.

According to a financial adviser who works structuring projects and asked not to be named, the four privatized blocks of Cedae (Rio de Janeiro) are likely to raise billions of reais through tax-exempt bonds in the coming months.

Other concessions auctioned recently – in Alagoas, Amapá and Mato Grosso do Sul – also raise the expectation of billions of reais in investments in the industry over the next few years.