In return for Rio de Janeiro's adhesion to the tax recovery regime proposed by the Federal Government in 2017, the National Bank for Economic and Social Development (BNDES) modeled the concession of public services for drinking water supply and the collection and treatment of sanitary sewage in 64 municipalities in the state of Rio de Janeiro. Currently, these services are provided by Companhia Estadual de Águas e Esgotos do Rio de Janeiro (the “Rio de Janeiro State Water and Sewage Company”, Cedae).

Recently, the state of Rio de Janeiro submitted drafts of the public notice, concession contract, and other documents related to the project for public consultation, which will extend until July 8. The project will also be presented to the population and potential investors at two public hearings scheduled for June 25 and July 6.

BNDES has distributed the municipalities of the State of Rio de Janeiro into four lots, which may be granted to the same concessionaire or to different concessionaires for a period of 35 years. The regulation of the concessions will be under the responsibility of the Energy and Basic Sanitation Regulatory Agency of the State of Rio de Janeiro (Agenersa).

As some municipalities had already delegated sewage collection and treatment services to the private sector, the draft concession contracts even provided for the possibility that these services may be taken over in the future by the new concessionaires, especially to provide stability to performance of contracts and avoid future legal clashes.

The modeling proposal is based on a premise of associated sanitation management, according to which the municipalities (holders of these public services) delegate to the state of Rio de Janeiro the right to exploit and grant such activities to the private initiative. To structure the associated management, the following were prepared: (i) draft cooperation agreements and program contracts were prepared to regulate the conditions under which these services will be delegated from the municipalities to the State and from it to Cedae and the new concessionaires; and (ii) management contracts, the subject matter of which is the transfer to Agenersa of the inspection and regulation prerogative, including rates, of public services.

Although the concession represents a substantial reduction in Cedae's duties {assignments}, the company will be preserved to capture and treat the water to be sold to future concessionaires, in addition to, exceptionally, continuing to supply water to certain municipalities included in the lots that will be granted. This function is provided for under the terms of the interdependence contracts to be entered into between the concessionaires and Cedae.

Regarding universalization of access, the modeling proposed by BNDES has set the goal of universalization related to water supply for 99% of the municipalities referred to and the collection and treatment of sanitary sewage for 90%. An 8 to 14 year time frame was estimated for the achievement of the water supply target and 15 to 20 years for the collection and treatment of sewage. The differences in the reality of each municipality justify this variation. In parallel with the goals of universalization, investments will also be required to reduce water losses through the distribution network, which is quite common in concessions and PPPs in this sector.

In relation to public bidding, as is already common in the infrastructure sectors, the system adopted is that of an international competition with phased investment and a live auction. The judgment criterion will be the highest grant amount, which must be paid in two installments (60% as a condition for signing the contract and 40% after the term of transfer of the system).

In summary, the model proposed by BNDES for the concession of basic sanitation services in the state of Rio de Janeiro assigns: (i) to Cedae the collection, treatment, and supply of water; (ii) to the concessionaire(s) the distribution of water, collection, and treatment of sewage, and investments in infrastructure, including for the expansion of capacity and reduction of losses in the distribution network; and (iii) to Agenersa the regulation of the provision of these public services.