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SABESP | A Drought Foretold?

Sabesp | A Drought Foretold?

By: Felipe Bianchi | Barão de Itararé

Trans. C. Brayton

See also the New York Times … Sorry, wrong citation, although the times has covered the issue in the most cursory of manners. One of the other global dailies, as I recall, recently wrote about the aversion of local politicians to the “d” — drought — word.

In 2003, when Sabesp began selling its shares on the market, lawmakers and activists were already concerned about the priority afforded private interests over the universalization of access to water.

Though the crisis did not explode until 2014, the reasons for the serious drought conditions in São Paulo today reach back to episodes that have little to do with lack of rain or the whims of Nature.

Midnight Oil

One such episode took place in 2003, when Alesp, the state legislature, in a midnight vote, approved Law No. 410/2003, drafted by the PSDB and making it possible for Sabesp to sell its shares in the market. The tally was 55 votes to 22, in a session convened at 4:30 a.m. on August 27.

With the change in management, 50.3% of Sabesp shares were held by the state government, with NYSE holding 24.9% and BM&F Bovespa 24.8%. During this period, the company put up impressive numbers: Its share price rose 601% and its market value grew from R$ 6 billion to R$ 17.1 billion.

In 2012, thse impressive results were celebrated with a Sabesp Day, a series of events at the NYSE. During the festivities, Sabesp president Dilma Pena reaffirmed the company’s commitment to “offer 100% of treated water and 100% of sewage collection in the entire inland area of the state of São Paulo by 2014”. Applauded by shareholders, the executive argued that “every year that passes, Sabesp demonstrates its ability to meet its goals in an efficient, solid, dynamic, innovative and financially, environmentally and socially sustainable.

Either Pena failed to get her story straight with the Governor, Geraldo Alckmin or she was describing a fantasy land. The water bill does not add up. Despite the success of Sabesp in the stock exchange, São Paulo suffers from a lack of supply — the Cantareira System, for example, is operating at 11% of its capacity and is already down to the second level of its technical reserves, raising the following question: is the company’s management model adequate to guarantee the universalization of the right to access to water?

During the Alesp session that sanctioned the entry of Sabesp into the financial world, state deputy Maria Lúcia Prandi made a “prophetic” declaration on this question, asking whether the company could maintain its publicly traded status and prioritize the public interest or whether it would attend to the desires of the shareholders.

“In practice, this is a virtual privatization, and the company could lose its character as a public works company, making way for private interests in search of profits and not of the common good.” Those who buy into Sabesp shares will exercise considerable power over management. What will happen to the setting of rates? To what extent will the company invest in impoverished or hard to reach areas, like the hillside shantytowns? How will the company bring water and sewer networks to distant communities?

Ten years later, Prandi says, “It was not a prophecy, it was my view of the world and of the State.” The current federal deputy says her 2003 speech was “proof that in the middle to long term, the population might pay heavily for the choice the government was preparing to play.”

Prandi recalls that when Law No. 410/2003 was being debated on the flow, there was strong resistance from the leftist parties of the Alesp, who commissioned extensive reports on which to base their arguments against the measure. “At the time, Sabesp was deep in debt. So much so that pressure was being brought to bear on non-subscribing municipalities. The IPO was one of the tools the government used to control the situation, and they were victorious.”

Prandi’s analysis, however, shines a light on the origins of a crisis treated in a murky manner by the São Paulo powers that be. “When you sell shares, you suffer pressure from shareholders to increase profits, making shareholders your first priority,” she argues. “Access to an essential service such as water should never be relegated to a secondary concern.”

According to Prandi, the government could have made excellent investments that would have prevented crises such as this. The state is suffering an unprecedented shortage and the federal government supplies a significant amount of financial resources in response. “But the priority,” she says, “has to be keeping the shareholders happy.”

Government choses to treat water as a business

In the eyes of Edson Aparecido da Silva, sociologist and coordinator of the National Front for Environmental Sanitation, the choice made 10 years ago was to treat water management as a private business. “At the time, the argument was that it was necessary to capture resources from financial market actors and international banks. Listing on NYSE would reassure those who lent Sabesp money,” he explains.

“A public company with private management.”That is how Aparecido describes Sabesp ever since it began following the logic of growing profits and distributing dividends.”

The main problem, in Silva’s view, is the absolute lack of transparency in the current management model. “Even though the quantity of resources invested is significant — nearly R$ 2 billion a year — there is no way to discover what it is used for. The quarterly reports state only whether the money was spent in the metro region, the shore, or the inlands, without further details. It may be that other uses are embedded in these values — payments to outsourced services providers whose work is shoddy, for example. The crisis proves that the investments made by Sabesp in recent years could not have been worse.”

Silva repudiates the posture of Governor Geraldo Alckmin in response to the crisis, the seriousness of which he failed to address publicly and for which his administration is responsible, even after asking a federal bank for R$ 3.5 billion to fund a package of emergency measures. “Alckmin refuses to admit that water pressure is reduced during certain hours of the day, so that a sizable portion of the metropolitan periphery confront this problem on a daily basis. The government could opt for a more transparent policy, informing the citizenry of a schedule for rationing, which among other things might minimize waste.

“The brewer of a specific brand would never tell its customers, ‘don’t drink beer.’ But this is the marketing logic that Sabesp has followed, even though its product is a public service, open to anyone,” says Silva.

[image caption] Beverage maker Itu, inland São Paulo. The city hosts one of the largest beverage concerns in Brazil, despite rationing and the constant shortage of water for local residents and businesses.

Sabesp By Numbers: Imminent Decline?

The corporate charter of Sabesp provides that shareholders are entitled to up to 25% of the annual net profits, but since this regulation was approved, this index has never been lower than 26.1%. In 2003, for example, after Alckmin was elected, the share of profits that ended up in the hands of private capital reached an obscene 60.5% of the total. It is estimated that a third of the total net profits have passed into the hands of shareholders — this implies some R$4.13 billion, double what Sabesp invests per year in basic sanitation, according to calculations by Jornal GGN.

President of the Water, Sewer and Environment Workers Union (Sintaema) from 1988 to 1994 and current VP of another labor federation, the CTB, Nivaldo Santana stresses that Sabesp’s once vigorous rate of return now points to the central cause of the crisis: “The cutting of tax receipts because of the diminished availability of water has made the company less attractive for shareholders, if only because investor is in New York, for example, and is not thinking much about the shortage in São Paulo. His eyes are on profits and return on investment. That is why the company’s numbers are increasingly coming up short.

According to Santana, “What you see at Sabesp is a privatizing management that follows the logic of the market even though it has, at least in theory, a mixed management.” “In the short term, the approval of Law No. PL 410/2003 was to raise cash for Sabesp, but in the long run, it is part of a project to reduce the role of the State in public services,” he says.

Santana closes by pointing to the “media factor” as an obstacle to a debate on the issue: The media establishment ignore the political dimension of the crisis, which it find “directing too much attention to the drought, which is a natural phenomenon, as though the only solution were for us to pray for rain.”

As Santana says, “There is a smokescreen surrounding insufficient and imprudent investments by Sabesp, in order to support the state administration from critical public opinion.”