Was privatizing sanitation in Minas Gerais a good decision?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: PRIVATIZATION OF STATE SANITATION COMPANIES: AN ANALYSIS FROM THE EXPERIENCE OF MINAS GERAIS

Authors of the article: Thiago Guedes de Oliveira and Sonaly Cristina Rezende Borges de Lima

Location of intervention: Minas Gerais, Brazil

Sample size: Data on the company's operations between 2003 and 2012, in addition to other socioeconomic information from the same period.

Sector: Others

Type of Intervention: Effects of sanitation privatization

Variable of Main Interest: Supply of water and basic sanitation services

Assessment method: Others

Policy Problem

The debate about the privatization of public companies is intense in Brazil. Those in favor argue about the efficiency gains that the private sector offers, theoretically improving the supply of public goods, in addition to reducing the need for public investments. However, critics of privatizations point out that private companies, by prioritizing individual profits, do not meet the demands of the population and end up depreciating the supply of public goods and services.

In relation to basic sanitation, this topic is even more sensitive, as it directly impacts the health and quality of life of the population, a right guaranteed by the Brazilian constitution. In this way, researchers from the Federal University of Minas Gerais (UFMG) evaluate whether the privatization process of the Companhia de Saneamento de Minas Gerais (COPASA) generated positive consequences and developments for the state of Minas Gerais.

Implementation and Evaluation Context

State basic sanitation companies were created in Brazil throughout the 1960s and their responsibilities involve the provision of drinking water and sanitary sewage services. The strong wave of public investment that made this creation possible ended during the 1980s, so that the public system entered a considerable economic crisis.

As a consequence, governors of states such as Minas Gerais, Paraná, Santa Catarina and São Paulo began moves to open capital for their state sanitation companies in the financial markets, which is a form of privatization. Among the main arguments, the ease of access to investments and efficiency gains that can generate improvements in the provision of services and the increase in the company's coverage network stand out.

It is important to highlight, however, that there was no scientific consensus. Several scholars presented opposing arguments and examples, demonstrating that privatization is repeatedly not the best path, especially due to the primordial nature of basic sanitation, which is incompatible with systems based on profitable premises. In other words, even if efficiency and investment gains actually occurred, the benefits would not outweigh the public losses caused by privatization.

Policy Details

COPASA's IPO took place in February 2006, raising 806 million reais from share trading on the São Paulo Stock Exchange (BOVESPA). The amount is equivalent to 40% of the company's net worth in 2005, whose value was 2.06 billion reais.

Privatization through an IPO, which occurs when public company shares are put up for sale on the financial market, allows the company to receive private capital and invest in improving and expanding its services. However, upon completing the sale, the state company also receives the need to operate profitably. In the water supply and sewage market, this phenomenon makes the decision to invest in less developed locations even more difficult.

This phenomenon occurs because the provision of supply and sanitation services has different revenues, costs and investments. Therefore, operations in regions that are difficult to access, with low urban density or with lower return prospects are less profitable and do not always meet market demands. In this way, researchers carry out a general analysis of information related to the company's operations before and after the privatization process.

Methodology Details

The database that makes up the research was collected from several other bases and research activities. Information on the company's operations and financial results was provided by COPASA itself, for the years 2003 to 2012. Data on service coverage and other socioeconomic aspects were collected from the National Basic Sanitation Survey (PNSB), for the years 2000 and 2008, and the 2000 and 2010 Demographic Censuses. Finally, to validate the data obtained, 15 interviews were conducted with professionals and researchers in the area.

The statistical tests carried out compare the sample means of each of the variables analyzed and determine whether or not there have been improvements and advances in the provision of services offered by COPASA and other public institutions.  

Results

The main results show that the privatization of COPASA did not confirm the expectations of government officials and other agents involved in the process, similar to what other studies in Brazil and around the world state.

Although there are indeed advances and improvements in the provision of water and sanitation services in the municipalities served by COPASA, these results do not differ from other municipalities in Minas Gerais, even taking into account those that receive strictly public services. Furthermore, the authors state that the practices adopted by the company after 2006, when the company started to operate on the stock market, profit assumptions change the public characteristics of COPASA's operations, so that less developed regions are clearly negatively affected. . In other words, COPASA starts to ignore its public function, which further penalizes those who most depend on the vital service of drinking water and sewage.

Public Policy Lessons

It should be noted that the present work does not definitively conclude that privatizations are not bad. Investing in essential public services is a necessary task for any government and privatization is a viable option. However, it is also necessary to highlight that privatization can be a bad option. Especially in cases where the public goods and services offered are essential and irreplaceable, such as the Minas Gerais example of water supply and basic sanitation.

When planning a privatization process, it is essential to remember that people's lives can be affected by the search for profit and that it is the government's duty to prevent the financial system from prevailing over the fundamental rights of its citizens. After all, a developed society depends on the health of its population.

Therefore, taking into account the social costs of a privatization system is mandatory and must guide any planning and monitoring systems that aim to make national public goods private.

Reference

Oliveira, Thiago Guedes de; Lima, Sonaly Cristina Rezende Borges de. Privatization of State Sanitation Companies: An analysis based on the experience of Minas Gerais. Environment & Society, V. 18, P. 253-272, 2015.