In Brazil, the largest country in Latin America and the eighth largest economy in the world according to the International Monetary Fund, around 40% of the population still does not have access to adequate sanitation, even after more than 10 years of the federal tax incentive program created to finance the expansion and improvement of services. The new study launched by CICTAR shows how and why tax incentives and the privatization of public water and sewage services that have not contributed to expanding access for the population are still helping to fatten the coffers of private companies and private equity funds.

According to the study Water down investment, top up returns - The pitfalls of financing Basic Sanitation in Brazil, carried out by CICTAR (International Center for Transparency and Research on Corporate Taxation), in partnership with SINDAE-Bahia (Union of Workers in Water, Sewage and the Environment), affiliated to the National Confederation of Urban Workers (CNU), with the support of Public Services International (ISP) and the Water and Sanitation Rights Observatory (Ondas), the winners of the sanitation auctions have been using the resources obtained from the tax benefit not to carry out essential works, but to buy other concessions and increase their control of Brazilian basic sanitation.

Through the issuance of incentivized debentures, which are debts issued by the companies on the market and have government incentives, they have raised R$38.9 billion in the last decade, of which R$21.1 billion (54.3% of the total) was used primarily or secondarily to pay all or part of the grants from the sanitation auctions. A concession is the formal permission granted by the government to use the service.

Created by the federal government in 2011 by Law 12.431 to attract funds for strategic infrastructure projects in various sectors (from energy to urban mobility), incentivized debentures function as loans that sanitation companies can take out from investors in the capital market, who, until 2024, were exempt from income tax on income from this operation. With Law 14.801/24, the advantage now belongs to the company issuing the debt, which can deduct an amount equivalent to the interest paid on this "loan" from the tax due.

"The change could further increase the funds raised by private concessionaires to finance the purchase of Brazilian basic sanitation concessions, since they can deduct the interest on debenture payments from their income tax," adds Livi Gerbase, researcher for Latin America and the Caribbean at CICTAR.

According to her, this situation could be avoided if the government banned the issue of incentivized debentures for the payment or refinancing of grants in new auctions, especially in lots in the south and southeast of the country, where the return is more lucrative, but not necessarily where there is greater urgency for sanitation improvement works.

"The practice of paying high sums to the government in order to win an auction for basic sanitation concessions has already led to cases of corruption around the world and the passing on of high concession prices to consumers, so much so that France banned the practice in 1995. In Brazil, not only are we not banning it, we are encouraging it with public funds," he says.

The BRK Ambiental case

To illustrate this process, the study analyzed the case of BRK Ambiental. Controlled by the Canadian private equity fund Brookfield, it is the eighth largest sanitation company in Brazil. From 2017, when it was founded, to the present day, BRK has doubled its turnover, has been valued by its shareholders at around R$10 billion, but has recorded timid financial results or even losses due to its high indebtedness.

This is because investors know that the concessionaire operates subsidiaries in more than 100 municipalities with average profit rates close to 10%, even though the parent company had an average loss of -0.1% in the period from 2020 to 2024. In those four years alone, BRK issued R$18.3 billion in debt, mainly debentures, against only R$7.8 billion in investments.

BRK's biggest expansion took place in 2020, when it bought the Maceió Metropolitan Region concession for R$2 billion. To do so, it raised R$3.7 billion in debentures, of which R$1.9 billion in bonds with the tax incentive. However, in the first three years of the concession, investments totaled only R$409 million, according to publicly available data from 2020 to 2023. The company claims that the amount already invested in the concession is R$770 million. Most of the billions raised have been used to roll over liabilities and pay interest, which in 2024 will exceed R$1 billion - a figure higher than all the company's personnel costs.

According to the CICTAR study, the consequences of this indebtedness weigh heavily on workers, public coffers and consumers. FI-FGTS, which owns 30% of BRK Ambiental Participações, received only 1.43% of the dividends that the subsidiaries paid to the parent company over the last five years. The company's salaries and working conditions have not kept pace with the growth in turnover, and the taxes paid have been derisory: in 2024, BRK paid just R$52.2 million, compared to R$1.2 billion by competitor Aegea, which makes three times as much.

For users, the services arrived more expensive and with flaws: the company's average tariff rose 71% between 2017 and 2024, a percentage above inflation. Complaints against the company are also common, ranging from irregular sewage disposal, non-compliance with contracts and supply interruptions, resulting in fines of R$50 million throughout Brazil, as well as two CPIs, in Tocantins and Blumenau. "The BRK case illustrates how the logic of sanitation concessions concentrates assets, values companies for future resale and generates chronic indebtedness, without guaranteeing an improvement in quality or expansion of the sewage network in Brazil," says Fernando Biron of SINDAE-Bahia.

The report recommends that the federal government urgently review the policy on incentivized debentures, prohibiting their use for the payment or refinancing of grants. The analysis also suggests that bodies such as Caixa Econômica Federal, which manages the FGTS, and the BNDES (responsible for structuring the auctions) stop supporting private conglomerates and use these resources to directly finance the expansion of sanitation, with transparency and social supervision. The report also asks BRK Ambiental to explain its high indebtedness and low contribution in taxes and dividends, pointing out that the Canadian parent company Brookfield cannot treat basic sanitation in Brazil as a simple asset in its investment portfolio, eager for profits.