Opportunities and challenges BNDES and BNB identify similar opportunities and challenges, facing their loan portfolio for water and sanitation relate to the legal, regulatory and institutional framework of the sector. These include: •
Changes in the legal and regulatory framework, requiring utilities to invest. Since last year, there is a change in the legal framework, which obliges utilities to show that they have the investment capacity to expand their services and reach universal coverage. One of the key conditions for that is that projects need to be regionalised, covering more than one municipalities, with the aim of creating more economies of scale and possibilities for cross-subsidies. These kind of regionalised figures exist already in the form of State Utilities and in some metropolitan and urban regions, but may need to be developed elsewhere. If States don’t do this voluntarily, the Federal Government may create such structures. This process will take time, as it implies that States (or Federal Government) need to establish the regionalisation structure and municipalities need to join these structure. This association is not an obligation to the municipalities but if a municipality does not do it, it loses the access to federal resources, including the financing by BNDES or BNB. Whereas in the longer term, the regionalisation should lead to more capacity to take on finance, and have financially more sustainable utilities, in the short term this may actually lead to a temporary reduction in investments in regions where this process have obstacles to be completed. This will be a key risk and opportunity for BNDES in the coming years. Many states have already established the regional structure, such as Alagoas, São Paulo, Bahia and Ceará.
•
Concessions and contracts between utilities and States and municipalities. The new legal framework also opens up concessions to private enterprises. However, these concession contracts require specifying investment responsibilities of utilities. That is sometimes a bottleneck. For example, in the State of Alagoas, there were no investments at all in basic sanitation. BNDES is therefore now supporting the structuring of the concession contract, so these investment obligations are more explicit.
•
Mismatch between demand and availability of budgets. The demand for loans is skewed. Many utilities are financially not sustainable, nor do they have incentives to invest in expansion. This means that demand for financing is not coming forward. That is why the regulatory changes and the structuring of concessions contracts and investment project is key. At the same time, some of the larger players – State utilities – have very high financing needs, and they can structure projects, but the size of the investments is sometimes higher than what the banks have available. Co-financing between development banks is then needed.
•
Limitations of fiscal rules. There is a general limit to credit to the public sector as a whole. It can only take on so much debt, and that even gets translated to public utilities.
•
Multitude of institutions at different levels, when compared to other sectors like energy. The water sector includes a multitude of institutions at different levels: municipal, State and Federal. This implies major need for coordination, and alignment of responsibilities in financing. That makes it much more difficult to come to financing agreements, at least compared to other sectors.
•
Coordination and competition with other development banks. The investment needs for the water and sanitation sector are so high, that there is not really competition between BNDES, State-level banks, and IFIs. Rather, there is often need for co-financing agreements between them, whereby each has its own niche, advantages and disadvantages. For example, IFIs can provide larger amounts of finance, but leave the currency risk entirely with the borrower. BNDES has a very large portfolio and more financing capacity, and State-banks have more coverage on the ground. Together, they can therefore come to co-financing agreements.
•
Environmental sustainability compliance. Whereas there is obviously a need to comply with environmental sustainability standards, this is complex. This is amongst others due to gaps in the regulatory framework, in environmental information, and differences in legislation between States.
49
