The idea that privatization is related to the efficiency of a company is a fallacy unsustained by facts. This affirmation comes from Suyá Quintslr, researcher and professor at the Urban and Regional Planning Research Institute of the Federal University of Rio de Janeiro (IPPUR/UFRJ), about the arguments that sustain privatization of state water and sewage utilities, including Rio de Janeiro’s state-owned CEDAE.
“There are numerous private companies running deficits—or companies that are highly indebted in order to sustain their level of remuneration to shareholders—and neither of these cause people to question their efficiency or make counterarguments in defense of their government takeover,” affirms the researcher, who is frequently invited to speak at public debates about the attempts of Rio’s government to privatize the utility.
When asked about the contradiction of Governor Wilson Witzel’s attempt to sell a company that generates an annual net profit of approximately R$1 billion (US$184 million), Quintslr goes further and affirms that the privatization of CEDAE, in a context of great social inequality such as ours, points to the “possibility of worsening differences in access to services,” something that a public utility cannot ignore.
“There is a widely-documented tendency of private operators choosing to invest in services only where they are profitable, leaving the networks and infrastructure of areas inhabited by people with reduced capacity to pay to become degraded,” says the IPPUR/UFRJ professor.
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Brasil de Fato: Why can’t CEDAE be privatized and how does its privatization affect the population?
Suyá Quintslr: First of all, it is necessary to clearly define what we are referring to as privatization. There are many ways in which private enterprises already act in our sanitation services. It is possible, for example, for a state utility to post its shares on the stock exchange [IPO]. This is the case, for example, with Sabesp, in São Paulo, which, despite having shares traded on the stock exchange, still has the São Paulo state government as its main shareholder and controller.
Another form of private participation are public-private partnerships (PPPs). We have some examples of this in Brazil, with the partnership for sewerage construction in the Greater Recife metropolitan area being one of the largest sanitation PPPs. Finally, there is the possibility for the owner of services to contract their operations to a private entity. In this case, the concession occurs through a contract that has a fixed deadline and must be regulated by an agency designated for this purpose.
In Rio de Janeiro, we have many examples. Niterói, which contracted its services to the company Águas de Niterói in the late 1990s, is often cited as a successful example of privatization. The municipalities of the state of Rio de Janeiro’s Lakes Region (Região dos Lagos) also have their services operated by private companies, as well as Petrópolis and Paraty.
Returning to CEDAE, what is being proposed by the state government is this last model: the transfer of [full] responsibility for water and sewerage operated by the utility to private concessionaires. In theory, and according to the dominant discourse, the concession contracts should have strong State regulation.
However, the Regulation Agency for Energy and Basic Sanitation of the State of Rio de Janeiro, which regulates such contracts, has less than 20 career employees on staff and has been denied its requests to contract more employees due to Rio de Janeiro’s current fiscal recovery regime. This is only one of the challenges that privatization faces in the state of Rio de Janeiro.
“In my view, the biggest problem with surrendering fundamental public services in a context of great social inequality such as ours is the possibility of worsening differences in access to services in our state.”
There is a widely-documented tendency of private operators choosing to invest in services in areas in which they are profitable, leaving the networks and infrastructures of the areas inhabited by people with reduced capacity to pay to become degraded. This process can ultimately lead to a break in the urban solidarity provided by the networks of fundamental public services—which are operated, as a rule, through cross-subsidy systems that allow monetary collections in some areas to finance the expansion of services in others.
From the population’s point of view, another probable adverse effect is the increase in utility prices. Although there is no prediction of readjustments above inflation in the proposed model, they can occur through reviews and contractual amendments.
Brasil de Fato: From an economic perspective, CEDAE generates profit year after year. Why do some sectors insist on privatization?
Quintslr: Currently, CEDAE is, in fact, a profitable company. However, this has little importance in defining the ideas and attitudes of different social groups in relation to sanitation and the company itself. Public or private, CEDAE is a company, and as such, it is subject to the rules of the market. Because of this, the oscillation of its results—profits or losses—is an essential characteristic of its performance.
“However, there exists a more or less general belief in the inefficiency of public management, in contrast to private management, which is equated to efficiency.”
According to this discourse, which associates property and private management with the rational actor model, the market would be the best form to distribute resources. But it would be difficult for that argument to pass an empirical verification. There are numerous private companies running deficits—or companies that are highly indebted in order to sustain their level of remuneration to shareholders—and not even that causes people to question their efficiency or make counterarguments in defense of their government takeover.
Brasil de Fato: How do you classify this state fiscal recovery regime which puts CEDAE as a guarantee?
Quintslr: The federal government’s Fiscal Recovery Regime (RRF), to which Rio de Janeiro’s state government adhered in 2017, has been functioning in a similar way to the structural adjustment imposed by international organizations such as the World Bank and the International Monetary Fund in the 1980s and 1990s. Thus, by adhering to the RFF, Rio’s government committed itself to reducing the public deficit through measures such as revision of the unique legal regime for state employees, changes in pension regulations, and privatization of companies. In exchange, it gained the possibility of refinancing debts with the federal government and contracting loans based on projected revenue from privatizations.
And this is where the privatization of CEDAE comes in: the company’s shares were offered as a guarantee on a loan to the bank BNP Paribas, used mainly for employee payroll. For the payment of this loan, Rio’s state government, according to the model proposed by Brazil’s national development bank BNDES, began a public hearing process about the concession of the utility’s water and sewage systems in June.
RRF’s initial deadline is September, and Rio de Janeiro has been pushing for a three-year extension. In this way, the privatization of CEDAE is seen as a key to achieving the renewal.
Brasil de Fato: What examples do we have of places where government has resumed control of water and sewerage services, and what made these cities realize the problems of privatization?
Quintslr: Several cities in different parts of the world are making a move to reverse the privatization of water and sewerage services that occurred in the 1980s and 1990s. The examples vary and include small, medium, and large cities; rich and poor cities. The motivations for reversing privatization, terminating contracts with private operators, or simply not renewing them are equally diverse.
“One widely-cited example of a large European city to re-municipalize services is Paris.”
The decision to create Paris’s public sanitation utility was not because of problems in concessions to private operators, but because of the understanding that the resources collected through water bills could be reinvested in a public company’s services rather than being privately appropriated. In this way, water shutoffs were suspended, tariffs were reduced, a network of public water sources was organized (which today is very important for guaranteeing water to the homeless and refugees), and a fund was created to subsidize water tariffs for low-income families.
In Latin America, we have more dramatic examples of privatization followed by contractual terminations, such as Cochabamba (Bolivia) and Buenos Aires (Argentina). Cochabamba privatized water and sewage services in 1999 and, in the following year, saw an episode of popular mobilization known as the Water War, in which social movements contested tariff increases and restrictions imposed on access even to untreated natural water sources.
In Buenos Aires, the private operation of services lasted for more than a decade, enough time for the private concessionaire to break several clauses of the contract and promote large tariff increases, which led to the contract’s termination. This process, however, did not occur without a fierce dispute and losses on the part of the public entity. These and other experiences of reversing privatizations are catalogued by the Transnational Institute (TNI), which edits a series of publications on the subject and maintains an updated website on re-municipalization processes worldwide.
Brasil de Fato: What problems do you notice in the new “Legal Framework for Sanitation” that was recently sanctioned by President Jair Bolsonaro and what it will allow?
Quintslr: Bill 4.162/2019, recently approved by the Senate, alters a series of laws (including the National Sanitation Policy, Law 11,445/2007), and seeks to encourage private participation in the provision of water and sewerage services. According to expert evaluations, the main result of its approval and the vetoes of the President of the Republic will be the inviability of the State Basic Sanitation Companies, due to the extinction of the program’s contract.
In the absence of this instrument, which makes it possible for the municipality to allocate the operation of services to a state-owned company without the requirement of a bid process (Law 8,666/1993), bidding becomes mandatory, opening the market and encouraging private operation.
In addition, the bill provides for regionalized provision as a way of maintaining the cross-subsidy. However, it defines that the states and federal government, in a subsidiary way, must establish the blocks for this type of provision, which hurts the autonomy of the municipalities and the Federal District in relation to the ownership of the services. According to Brazilian legislation, states can institute metropolitan regions, urban agglomerations and micro-regions; however, there is no basis for imposing the formation of other blocks of municipalities to provide services (see Art. 25 of the 1988 Federal Constitution and Law 13,089/2015).
In summary, the changes promoted in the Regulatory Framework for Sanitation aim to increase private participation in the sector through a series of provisions. However, the approved bill has elements that are unconstitutional that will certainly be challenged in federal court.
Brasil de Fato: There is a proliferation of discourse in the public debate against and in favor of privatization. What are the interests involved for some sectors of society that defend the sale of CEDAE?
Quintslr: It is difficult to specify the interests of the different public and private agents, in this case. On the federal government’s side—which has been pushing for the privatization of sanitation through the changes promoted in the legislation, actions by BNDES, and, in the case of Rio de Janeiro, of the RRF—there is a clear intention to promote a reduction in the functions of the State and a fiscal adjustment following the neoliberal agenda.
Rio de Janeiro’s state government, apparently, seeks to fulfill the RRF’s goals in order to obtain its extension for another three years, but it is possible that there are other interests involved. Considering the history of the most recent governments in the state, it would not be surprising if the concession process was used for the illegal appropriation of public resources by certain agents.
As for the private sector, we see a series of law firms, consultancies and water and sewerage operators pushing for privatization as they will effectively profit from operating the services. Thus, the concession of such services, like any privatization process, opens up numerous possibilities for private accumulation.
Brasil de Fato: In your assessment, why do media sectors prefer to highlight corruption in public companies?
Quintslr: This strategy is used to discredit public companies and highlight a supposed inefficiency of the public sector. Currently, corruption scandals are frequently mobilized by the media and conservative movements to promote their interests. But this is not the only form of negative advertising in relation to CEDAE: the issues of high salaries on its board, water quality problems, high loss rates, etc., have all been widely publicized with the intention of the population consenting to the sanitation privatization project.
“This strategy is used to discredit public companies and highlight a supposed inefficiency of the public sector.”
Corruption, inefficiency and high wages are not exclusive to public companies. But when there are episodes of corruption in the private sector, or cases of delinquency by economic and financial elites, for example, they are treated by the media as an exception—a supposed single bad apple that can be removed without contaminating its peers.
Brasil de Fato: How can public administration solve the problem of dominance of names like that of former congressman Eduardo Cunha (MDB) and Pastor Everaldo (PSC) at CEDAE?
Quintslr: The democratization of CEDAE’s management is essential for overcoming patrimonialism, seen by some as a fundamental feature of public management in Brazil. One way to overcome patrimonialism is by having your employees involved, somehow, in choosing the company’s presidency and board. As long as the appointment continues to be made exclusively by the governors of the State of Rio de Janeiro, we will be subject to patrimonial influence. In addition, CEDAE needs to be more open to social participation and dialogue with municipal governments in order to define investment priorities.
The lack of participation and transparency reinforces patrimonialism and clientelism, that is, the use of public companies for private, electoral and/or partisan purposes. This results in a pattern of behavior that is not always in the public interest; on the contrary, it was used, at various times, to benefit economic groups that act (legally or illegally) as financiers of electoral campaigns.
It is notorious, for example, that CEDAE has prioritized, in recent years, works that benefited real estate developers in Barra da Tijuca, in the municipality of Rio de Janeiro, to the detriment of important interventions to guarantee the right to water for residents on the outskirts of the municipality and in areas of Greater Rio’s Baixada Fluminense.
Brasil de Fato: Even today, the universalization of basic sanitation has not occurred in the state of Rio de Janeiro, and this is a weak point that is usually attacked by those supporting privatization. How can we combine the defense of maintaining CEDAE as a public utility and the full access of the population to these basic rights?
In my opinion, only public management will be able to reduce inequalities in access to sanitation in a context of great socio-spatial inequality, like that which we see in Rio de Janeiro.
“In the metropolis of Rio de Janeiro, areas without water and sewage networks coincide with areas that house the low-income population.”
Thus, universalization depends on continuous investments in infrastructure in places where residents have low ability to pay. And this, for the reasons previously mentioned, is incompatible with private operation.
The prevailing model of public operation in Brazil today is that of large mixed-capital companies under state control, such as CEDAE. However, this is not the only possible model. There are good examples of public sanitation services operated by municipalities in other regions. In addition, the legislation makes it possible to form public conglomerates to provide services.
Considering the different types of public sanitation management, what is fundamental is the end of clientelism and of political use of the resources that are invested and the opening of the company to social control, in addition to the establishment of clear contractual goals for reducing inequalities.