The formation of regional sanitation blocks, one of the great changes brought by the new legal framework for the industry, has faced challenges. One major obstacle is that municipalities are unwilling to join the model, which in some cases can turn projects unfeasible.

One example is the regional unit of Rondônia. The block may become economically and financially unfeasible if Porto Velho does not participate. The capital city, on the other hand, is about to launch a call for bids for its municipal concession.

The state has signed a partnership with the Brazilian Development Bank (BNDES) for studies of a regional project. However, Porto Velho says that it will go ahead with the project. Public hearings held in recent months were marked by protests of the state company, which suggests litigation is likely. The state government and the city hall did not immediately reply to a request for comment.

Another case is Rio Branco, which in 2021 decided to take over the services. As a result, the regional block of Acre, which was about to be auctioned, was made unfeasible as well.

The participation of capital cities is key due to the high degree of dependence on the states, said Felipe da Cruz, a research economist at the State University of Rio de Janeiro (UERJ), who took part in a study on the regionalization of the industry.

The study, conducted with data from 2018, reveals a large weight of capital cities in the states’ collection of water and sewage services. In nine of them, the participation exceeds 50%. The greatest dependence is seen in the North region – Acre, the capital city accounted for 70.06% of the revenue.

“It is challenging. Cities that are regional leaders have fewer incentives for voluntary participation because they know they will pay for other municipalities,” he said.

Cities do not always have the option of staying out of the block. Mr. Cruz recalled the case of Rio de Janeiro. The capital city of the namesake state has a large weight (65%) and was unwilling to join the regional block. But the city ended up joining the effort because it is part of a metropolitan region – in cases like this, the city is forced to participate because structures are shared.

The new sanitation law provides for different forms of regionalization, which can be either compulsory (such as micro-regions, in which cities are forced to participate) or hybrid (regional units, where participation is voluntary), said Rodrigo Bertoccelli, a partner at law firm Felsberg Advogados.

Analysts who follow the matter say that the mandatory model makes participation easier but does not eliminate resistance. First, a complementary law is required for that, which is more difficult to approve than ordinary law. Besides this, the definition of the governance and internal rules of the block is complex.

Convincing municipalities is even harder in the states that have chosen regional units, like São Paulo. In July 2021, the state approved the division into four regions: the municipalities operated by water utility Sabesp remained in a block and the others were divided into three others. However, many cities are raising questions, and participation has been low. The same challenge is faced by Rio Grande do Sul.

“It is necessary negotiation and a convergence of interests that is not simple. This model has not worked so well so far because municipalities are blocking it – in many cases because they are not aligned politically,” Mr. Bertoccelli said.

Other states have not even managed to approve laws to create regional blocks, such as Minas Gerais, Mato Grosso, and Goiás.

Goiás proposed two micro-regions, but the municipalities presented a counterproposal. “It is now up to the regional lawmakers to hold negotiations with all the interested parties so that the best alternative can be reached,” the Secretariat of Environment and Sustainable Development said in a note.

The governments of São Paulo, Rio Grande do Sul, Minas Gerais, and Mato Grosso did not immediately reply to requests for comment.

Aware of the obstacles, the federal government has already extended until March 2022 the deadline for the states to create regional blocks.

So far, 84 blocks have been approved in 17 states based on the rules of the new framework. Besides the three states that are still trying to approve the laws, three others (Acre, Pará, and Tocantins) have not prepared a regionalization proposal, according to data by Abcon, a trade group of private-sector water utilities, updated in May.

However, besides the approval of the laws, it is necessary to put in place the operation of the regional blocks, which is another challenge, said Fernando Vernalha, with law firm Vernalha Pereira Advogados.

One obstacle to regional services is the several contracts in force in the municipalities, which end at different deadlines. “The ideal would be to replace all municipal services by a regional operation, but contracts must be respected. It will be hard to regionalize in the short term.”

Renato Sucupira, a partner at BF Capital, says that there is a natural difficulty for municipalities to join. However, he highlights that the new law has already achieved important advances.

Source: Valor International

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