Brazil - water & wastewater sub-sector - São Paulo
Environmental challenges come with the development of industrial and agricultural capacity in all countries. Brazil went through an industrialization process much broader and stronger than its Latin American neighbours after World War II. Consolidation of industrial manufacturing capacity and infrastructure was reflected in the high GDP growth rates observed during the 1970s. By the early 1980s, much earlier than other countries in Latin America, Brazil already had a comprehensive body of environmental legislation in place, most of it inspired by U.S. environmental regulations. Since then, Brazil has been consistently improving its regulatory capacity, although-as is the case in most developing countries-its enforcement capability leaves room for improvement.
Among Brazil’s regions, the state of São Paulo has gone the farthest in introducing environmental regulations and ensuring compliance by industry. The environment agency of the state of São Paulo, CETESB, is the country’s leader and is considered a benchmark by the other state environment agencies. As part of the international corporate trend to move beyond compliance and make environmental management an important variable for successful performance, Brazilian companies have, since the early 1990s, increasingly adopted ISO quality standards. By June 2007, Brazil had 2,800 companies with ISO 14001 certification for environmental management.
In 2006, the Brazilian environmental market was estimated to be worth $3.8 billion, of which about 15% was imported goods and services. Market share estimates for imports stand at 35% for the United States, 25% for Germany and 15% for France. Canada is estimated to have a 12% market share, which would translate into approximately $68.4 million, with an expected annual growth rate of 5% for the next five years.
Market and Sector Challenges
The best opportunities in the Brazilian environmental market are found in the following areas, which can be supplied by competitive Canadian expertise. Focus is shifting from conventional environmental technologies (air, water, soil) to emerging areas of Canadian excellence (renewable energy, climate change technologies):
- air pollution control and monitoring;
- water and wastewater equipment and services;
- industrial waste management;
- soil remediation;
- clean process technologies;
- environmental information systems analytical software;
- consulting engineering;
- renewable energy (solar, biomass, wind, biofuels);
- greenhouse gas emissions reduction technologies.
Opportunities are concentrated on services, rather than equipment. Canadian environmental service companies have a much better chance than Canadian equipment manufacturers of succeeding in the Brazilian market. High duty rates, local manufacturing of similar equipment, even if at a lower technological standard, and the presence of international competitors manufacturing locally make it more difficult for Canadian equipment suppliers to compete in Brazil.
Several infrastructure projects are in the pipeline (ports and logistics, hydro-electrical plants, roads, ethanol pipelines), some under the public-private partnership (PPP) format. They offer excellent prospects for Canadian environmental consulting services.
Buyers for environmental services are predominantly from the private sector. Municipal, provincial and federal governments operate under severe budget restrictions and face strict constraints for borrowing from international sources. Moreover, public tenders require minimum-priced bids (Law 8,666), which do not favour foreign companies with higher quality and technological content.
The offer of a product or service to a Brazilian client becomes much more attractive if accompanied by financing. Export Development Canada (EDC) offers export financing and insurance to Canadian exporters. Additionally, insurance can be provided for larger transactions that are subject to the terms and conditions established by the buyer. EDC prefers to work through letters of credit, bank credits or bank guarantees. Approval for financing is considered on a case-by-case basis.
Canada is recognized in the Brazilian market as having leading-edge environmental technology and excellent environmental management practices. However, the Brazilian market requires commitment, opening up of offices as well as a full-time physical presence. All successful companies have taken this road. This approach is not limited to the environment sector, but is in fact the pattern of all successful international companies operating in the Brazilian market.
Waste & Waste-waster Sub-sector
The public sector in Brazil is the most important client for water and wastewater goods and services. Annual revenues of all state and municipal-owned water and wastewater utilities reached $5.8 billion in 2006. These companies are also responsible for annual investments of $1.3 billion, representing 75% of total investments in the sector.
A major shift took place in the Brazilian water and wastewater industry in the mid-1970s, when the federal government created the state-owned sanitation companies. Nowadays, there are 27 such companies in Brazil providing water and wastewater services to 3,800 municipalities all over the country. In the remaining 1,700 municipalities, water and wastewater systems are operated by the municipalities themselves. These municipalities are allowed to transfer water and wastewater services to the private sector through concessions. The Brazilian legislation allows foreign companies to participate in tenders for the concession of public services either by themselves or in a consortium with local companies. In the case of a consortium, the Brazilian company has to be the leader.
Eleven years ago, the first concession contract for water and wastewater was signed in Limeira, in the state of São Paulo. There are now 63 concessions in the country rendering services to 7 million people. Altogether, these companies have invested $620 million in the expansion and modernization of their systems. In the next four years, these companies expect to invest an additional $500 million.
The Brazilian market for equipment and services for water and wastewater is estimated at approximately $1.8 billion per year, 30% of which is earmarked for machinery and measurement equipment. The municipal sector purchases $1.4 billion, while the private sector spends $400 million. Management consulting services will be required more and more as Brazilian water and wastewater utilities feel the need to increase productivity levels and improve management practices. Continued solid market growth is expected in the next five years, particularly due to environmental management certification of industries and suppliers, introduction of technologies for water reuse to achieve significant cost reductions, and the risk of harsh fines imposed on senior management under the Environmental Crimes Law.
Most water and wastewater equipment in Brazil is manufactured locally. Shielded by protectionist measures until 1990, the major local and foreign companies built plants locally and became suppliers of all water and wastewater utilities. This long-term relationship, established through more than four decades-along with a bureaucratic decision-making system, a large number of competitors and strong ties between local suppliers and their clients-makes it more difficult for new suppliers to penetrate the market if they do not have a local partner. Participation in trade shows is a very effective way to identify potential local partners, as well as an important tool to assess the real demand for goods and services in the Brazilian market.
In the private sector, industries have heavily invested in wastewater systems. The majority of international companies established in Brazil are in compliance with the Brazilian legislation and have implemented additional procedures, following their headquarters’ guidelines as well as the demands of shareholders and clients abroad. In the state of São Paulo, it is estimated that industrial waste is responsible for 10% of water pollution, whereas residential wastewater is responsible for 90%.
In January 2007, President Lula signed the National Sanitation Bill (Lei de Saneamento Básico), which defines the federal policy for the water and wastewater sector in Brazil. The major issue of whether states or municipalities are responsible for servicing metropolitan areas was left out of the law and awaits a decision from the Supreme Court. This was the compromise reached in order to have the law approved, to end 20 years of discussion over the sector’s regulatory framework, to renew interest in the sector by private companies and to unlock much-needed investment.
It is estimated by Caixa Econômica Federal, the main financing agency for the water and wastewater sector, that Brazil will need $160 billion in order to offer water and wastewater services to the entire population by 2020. The lack of services affects rural areas the most. Fully 61% of the rural population does not have a water supply, compared with only 7.5% in urban areas.
The best opportunities in the water and wastewater sector can be found in the following areas:
- equipment and services for water reuse in industrial processes;
- equipment and services for reduction of water losses;
- measurement, control and monitoring technologies ;
- analytical laboratory equipment;
- automation technology for wastewater treatment plants;
- control systems for underground water;
- UV systems for water disinfection.
Excerpts from: Environmental Industries Sector Profile Water & Wastewater Sub-sector - São Paulo, Brazil, Foreign Affairs and International Trade Canada, October 2007. www.infoexport.gc.ca