By Nuno Branco, Research Analyst, Environment Group
Oct. 16, 2008 -- The Brazilian market for water and wastewater treatment is forecast to grow 20% per year over the next 3 years as the Government plans to invest more than US$25 billion until 2010 on building new and upgrading existing water & wastewater treatment infrastructure. The main objective is to enhance the level of drinking water supply and wastewater treatment services in the regions lacking these basic provisions.
Pushed by the United Nations Millennium Development Goals (MDG), the Brazilian Government wants to better manage and protect the water resources in the country in line with both national and international standards. These goals are specifically linked to renewing and expanding the existing water and wastewater networks and coping with an increase in demand for drinking water and wastewater treatment services. This market insight attempts to analyze the market prospects resulting of the significant investment in Brazil that is bound to offer growth opportunities in the municipal water and wastewater treatment market in Brazil.
Current situation
Brazil, with a population of about 192 million and a Gross Domestic Product (GDP) of around US$1.3 trillion, the region is characterized with a fast growing economy at a rate of 5.4 percent per annum. The Brazilian economy is the largest in South America and also one of the fastest growing economies in the world. The Brazilian territory covers a total area of 8.5 Million km2, is a sea of discrepancies, especially in the volume and quality of water, and in the population covered by fresh drinking water and wastewater service networks. The Brazilian government understands these differences and weakness and is working hard to meet the specific Millennium Development Goal of providing access to safe drinking water and basic sanitation by 2010. However, even if these goals are met in 2010, much still needs to be done, and the complete coverage of the country with drinking water treatment and wastewater treatment, which is only expected to be reached by 2015-2020.
Chart 1: Key Regional Territories in BrazilBrazil has the largest reservoir of fresh water in the world -- about 12 percent. However the water available for consumption in this country varies largely in latitude and longitude. About 80 percent of the fresh water is found in the Amazonian region in the north of Brazil, where only 5 percent of the population lives; therefore 95 percent of Brazilians live with only 20 percent of the country's water resources.
If there is enough water in the south and centre west of Brazil, the northeast, dry and arid, and the intensely populated southwest face some difficulties. The most populated areas are in the littoral and the biggest cities, Sao Paolo and Rio de Janeiro are located in the southwest of the country, where the population density is much higher than in other regions.
The water in the southwest and south of Brazil is of good quality but the availability of fresh water is constrained by the current operational capacity of treatment plants that are in continuous pressure due to an increase in population of those areas. For example, in Rio de Janeiro, the Guandu water treatment plant, the biggest in the world producing 3.7 billion of litres of water per day is currently being upgraded, to expand its capacity with the overall project costing an estimated US$280 million. Similar projects can be found in Sao Paolo, Minas Gerais and in all the other major cities in Brazil.
Rapid increase in population is a significant factor linked to the investments been made at the moment, especially in the southwest of Brazil. The situation is different in the Northeast of Brazil: on top of the increase in the population of the urban areas the local authorities manage water resources that are in low volume and poor quality.
Adding to the discrepancies in water supply and operational restraints, the differences in the population covered by drinking water and by wastewater networks are very high.
The Brazilian government has begun to recognize these differences and is working to address these aspects in the form of investment programs focused at the water & wastewater services sector. As part of the United Nations Millennium Development Goals, Brazil is a target to reach 83 percent of its population with access to safe drinking water and 77 percent with basic sanitation of wastewater service networks by 2015.
In 2007, the government launched the PAC (Program to Accelerate Growth) that plans to invest c. US$25 billion in Water and Wastewater networks and treatment plants. Together with PAC, local governments and development banks are also financing the achievement of the Millennium Development Goals. Drinking water coverage is still the priority, the reason for so many renewals in water treatment plants that are currently under way across Brazil; however the biggest expenditures will be in wastewater, networks and construction of new wastewater treatment plants.
In Brazil, the government uses "municipalities" to categorize geographical areas in its plan for investments. At the moment, there are 5665 municipalities with populations that range from 800 to 8 million inhabitants. Chart 3 highlights that the priorities will be given to those municipalities that are most populated and those that are capitals (in Brazil there are 27 states). Finally the government will aim to supply water and wastewater services to all the other municipalities.
Chart 3: Prioritization of Investment Based on Population Sizes in Brazil.Market on Threshold of High Growth PhaseAs a consequence of these dissimilarities and the political determination to meet the Millennium Development Goals, the water & wastewater market in Brazil is set to experience a high double digit annual growth of around 20 percent leading up to 2015. However, there are some barriers that need to be removed if we expect the end users to take full advantage of all the opportunities on offer for technology suppliers. We expect that, given the recent changes in government officials' attitudes and the subsequent modifications of the sanitation legislation, few of the current barriers caused by the procurement law can be eliminated, making Brazil an even more attractive market.
The Brazilian Municipal Water and Wastewater market is estimated to be around US$200 million in 2007 with double-digit annual growth rate leading up to 2015. The key market drivers will be the investment of PAC, local governments and other development banks such as the World Bank.
State water companies, the most important end users in the country, have a 'do-it-ourselves' attitude and are very price sensitive. However, due to the new sanitation policy legislation (Law 11.445/2007), these state companies are losing power to the 5665 Brazilian municipalities that now have the power to manage the water and wastewater services themselves or pass it to private companies. If such transfer of responsibility looks unfeasible in the poorest regions of the north or northeast, in the south and southwest, there is already a growing trend towards externalization of water services and the privatization of water companies
The other important players, besides the municipalities and state water companies, are the project engineering companies, the construction companies and the technology suppliers. These suppliers comprise of companies such as Veolia Water, Aquamec, Sigma, Filtrando, Perenne, and many others who supply technology and sometimes engineering services to the end users. All these companies are part of SINDESAM, the association of technology providers that is at the moment lobbying to change the existing procurement legislation (Law 8666 of1993).
Working in the municipal sector in Brazil can easily be very challenging at most of the times with the processes being too slow, taking a long time to finish, and the judiciary systems with a tendency to block projects if they suspect corruption or inapt spending practices. On top of all these factors, the municipal companies are forced by Law 8666 to always buy the cheapest product that meets the public tender specifications. If this looks good on paper, in reality there are many companies who under-deliver making the whole process even more challenging for everyone involved. As a result of this system, even if the technicians recognize there are better and more reliable technology solutions on the table they are always forced to buy the cheapest, even if they suspect the product is not good. SINDESAM is pushing for a change in this law, which is, according to them, old and does not represent the current economic scenario in Brazil.
In conclusion, the Brazilian Water & Wastewater Market is highly attractive and offers strong growth potential particularly in the medium to long term. The significant investments planned on upgrading particularly the wastewater treatment infrastructure is bound to offer both opportunities for equipment suppliers, process engineering and contracting firms.
The above market insight was authored by Nuno Branco, Research Analyst at Frost & Sullivan and is presently engaged in completing a syndicated research service on the Brazilian Water & Wastewater Treatment Market. For further enquiries please contact Fredrick Royan, Research Manager of Environment Markets. Email: [email protected].
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