WATER GLOBAL PRACTICE WSS GSG UTILITY TURNAROUND SERIES Case Study— Copanor, Brazil Wilson Dos Santos Rocha and Maria Salvetti AUGUST 2017 Key Characteristics of Aggregation Case Study COPANOR, BRAZIL Context • Upper-middle-income country • Aggregation covering rural areas • Low level of WSS performance Purpose Professionalization, performance, economic efficiency Scope WSS functions and services Scale • Watershed limits • Localities covered: 239 for water and 74 for sanitation • Population covered: 304,000 inhabitants for water and 138,000 for sanitation • Connections: 101,280 for water and 45,900 for sanitation • Network length: 2,113 km for water and 1,416 km for sanitation Process Bottom-up with financial incentives Governance • Merger • Public company • Decision making: The state government of Minas Gerais is the sole stakeholder of the company. • Asset transfer: No assets were officially transferred from municipalities to the state; assets were financed by state funds. • Liability: No liabilities were taken. • Staff transfer: No staff transfer • Clear entry and exit rules Outcome • Positive but financial sustainability for operation yet Findings • “Itinerant” staff contribute to higher cost as not suited for the scale and dispersion of rural settlements, cooperation agreements with local associations strengthen customer relationships 1 In 2006, the government of Minas Gerais decided to areas, serving municipalities’ headquarters and their implement a bold investment program to make water surrounding areas. This institutional vacuum of water and sanitation universally accessible in the rural and and sewerage services in rural areas made room for poorest region of the state. These areas had been left specific aggregation solutions and models to provide aside by the state water supply and sanitation (WSS) these locations with access to WSS services. company, COPASA (Companhia de Saneamento), which had predominantly focused on urban access to A Large Investment Program Supported WSS services. To do so, the government conducted a Financially to Improve WSS Access in study entitled Project Vida no Vale (VNV, or Life in the Rural Areas Valley) that surveyed 1,852 rural localities. Based on Minas Gerais is a Brazilian state spanning 586,528 km2. the Project VNV recommendations, the government of It is the second most populated state in the country, Minas Gerais created COPANOR (Copasa Serviços de with an estimated 20.98 million inhabitants in 2016. Saneamento Integrado do Norte e Nordeste de Minas COPASA is a state-controlled company that provides Gerais), a public company, a subsidiary of COPASA, water services to 585 municipalities and sanitation which would be specifically in charge of WSS opera- services to 243 municipalities. Services are regulated tions in rural communities. However, despite the by ARSAE, the state regulatory agency in charge of achievements of COPANOR, it has not yet reached water and sanitation services. financial sustainability, which puts the aggregation model at risk. The process that gave birth to COPANOR aggregation was a political initiative to set up an investment pro- gram funded by the state. As such, it was not con- National Policy for Urban WSS ceived as a reform for the sector at the state or federal Aggregation Leaving Aside Rural Areas level. The state government was prompted to create In the early 1970s, Brazil implemented a major service COPANOR for two main reasons. First, the state com- aggregation reform through PLANASA—the National pany COPASA resisted serving small localities, as Sanitation Plan. Municipal governments—which, until doing so could affect its overall sustainability and then, had been playing the role of service providers— potentially affect its capacity to deliver good-quality began to delegate these services to state governments, services to its existing customers. Second, several encouraged by the criterion to access federal invest- previous experiences of service delivery in rural ment funds predominantly through these companies. areas had failed. In 1988, the region received Between 1970 and 1983, investments in the sector investments—through the National Rural Water and reached an average of 0.46 percent of gross domestic 1 Sanitation Pilot Program, or PPNSR—that were used product (GDP). But the implementation of PLANASA to deploy 106 water and sewerage systems in small was affected by the global financial crisis starting in municipalities and rural areas; these systems were 1983. Between 1980 and 1990, investments in the sec- then handed over for operation to local associations tor dropped to 0.24 percent of GDP, and then to 0.16 with support from local governments. However, the percent during the 1990s; in 2012, they reached 0.11 2006 diagnosis found that many of the WSS systems percent—the lowest level yet. In Brazil, for the purpose funded by PPNSR had been poorly maintained and of WSS service provision, communities located outside were dysfunctional. Hence, it became clear to the city borders are considered rural. This represents a state government that the PPNSR model should not significant portion of the population that remains be repeated and that an alternative model to deliver unserved by state companies, which focused on urban WSS service in rural areas should be implemented. 2 Case Study—Copanor, Brazil TABLE 1. Evolution of Number of Communities in two ways. A collection system with a sewerage net- Served by COPANOR work and treatment is available for municipalities’ Year Number of communities headquarters and larger locations, and individual sys- 2007 7 tems with septic tank and leaching fields are set up for 2012 198 small rural localities. In the first case, the company 2016 239 takes over the operations, maintenance, and the charging scheme of services, whereas in the second In this context, COPANOR was set up in 2007, provid- case, the solution is up to each family. ing services to 7 localities. It then expanded quite COPANOR is a public company under the state govern- rapidly, and in 2016, it covered 239 locations, serving ment and a subsidiary of COPASA. Its structure con- 304,000 inhabitants with water, representing 101,280 sists of a board in which only the position of chairperson connections. Any community wanting to receive ser- is exclusive to COPANOR and paid for by the company. vices from COPANOR needs to get the state govern- The other four directors are from COPASA and are not ment’s approval. remunerated by COPANOR. COPANOR also has COPANOR sanitation services cover 74 communities, audit and management boards. The operating area of representing 45,900 connections and 138,000 COPANOR is bounded by river basins in the north and inhabitants. The COPANOR program handles sanitation ­ northeast of Minas Gerais. Given the size of the MAP 1. Service Area of COPANOR Case Study—Copanor, Brazil 3 localities served by COPANOR, water supply is usually TABLE 2. Treatment Level of Wastewater Collected already in place, often with a distribution network or a by COPANOR fountain. There were no reported cases of conflict over Ratio of volume treated to total Share of total (%) ­volume collected asset ownership with municipalities, as assets usually No treatment 48.9 originate from funds donated by state and federal Primary treatment 5.4 governments. Secondary treatment 32.4 COPANOR’s expansion was very quick between 2007 Tertiary treatment 13.3 and 2012 as large investments were funded through the state budget for the health sector. The current economic crisis in the country took a toll on the state’s investment to be made as water macrometering is not available capacity so that, since 2012, expansion has occurred at and there are no indicators for losses or unaccounted-­ a slower pace. In 2016, the state looked for other ways for water. Moreover, operational cost recovery has not to secure investments, and a government resolution been reached yet, and the company’s results for 2016 determined that investments would come from show a relative financial imbalance, with an operating COPASA’s dividends, earned by the state government as deficit of 6 percent (US$6.92 million in revenue and the majority shareholder of the company. According to OPEX at US$7.38 million), while the WSS tariff of the law that created COPANOR, its tariff must be lower US$0.51 per m3 or US$3.76 per connection per month, than that of COPASA. As a provider of services in poor does not cover the full OPEX. The persisting deficit in rural areas, COPANOR does not have to amortize its recent years has been covered by COPASA. According investments (that is, there are no capital costs). As a to COPANOR, the deficit is due to a flattening of the result, the service tariffs are limited to covering operat- water tariff, since the adjustments granted by the regu- ing and maintenance costs only. These legal provisions latory authority have been based on the country’s hamper the development and the sustainability of inflation rates, which are lower than the company’s COPANOR, thus putting the company at risk. payroll adjustment. Most COPANOR employees earn the national minimum wage—which, in recent years, An Aggregation Model Bringing Some has effectively increased at a faster pace than the Performance Improvement but also High inflation rate. Labor Costs, Hampering Operational Cost Recovery For local operations, COPANOR employs full-time workers who perform “itinerant” activities in small The purposes of the COPANOR aggregation encompass localities; that is, they travel from one locality to professionalization and performance enhancement as another, and to regional headquarters and supervision well as economic efficiency. Service access and quality centers where they usually reside. This model gener- have increased since 2007, as service quality data from ates high costs, due to travel expenses as well as to 2016 exhibit a 99.6 percent compliance rate for water. compensation paid to itinerant workers. COPANOR’s In the 74 localities with collective sanitation services, long-term financial sustainability is also threatened by the treated volume represents approximately half growing labor union pressure to increase wages to of the total volume collected, as broken down in the levels equivalent to COPASA’s. The tariffs charged by table 2. COPANOR are approximately 602 percent of the tariffs COPANOR also enabled the use of economies of charged by COPASA. If COPANOR were to pay its scale when purchasing treatment products. However, many  workers the same wages as its “parent com- despite those achievements, some progress still needs pany” (COPASA) and continue to charge the usual 4 Case Study—Copanor, Brazil COPANOR tariff (60 percent that of its parent com- Most  COPANOR employees earn the national mini- pany), the company’s financial sustainability would be mum wage. However, there is significant pressure jeopardized in the long run. Such persisting financial from the labor union to increase wages to levels equiv- unsustainability sheds light on the fact that COPANOR’s alent to COPASA’s. If COPANOR were to pay its work- operational structure—which replicate the structure of ers the same wages as its “parent company” (COPASA) the state-owned company serving urban areas—is not pays and continue to charge the same water tariff best suited for the scale and level of dispersion seen (capped at 60 percent of its parent company’s tariffs, in in  rural areas, which contribute to higher costs. 2015), the company’s long-term financial sustainability However, given the slow progress in providing univer- would be jeopardized. sal access to water and sanitation services in rural areas, this aggregation model reflects a bold political Financial Support and/or Incentives (a “Big Push”) Are Important to Help Services Get Out of the Low-Level decision to promote greater access to WSS through a Equilibrium Trap large investment program in a poor part of the state of Minas Gerais. To boost the success of aggregation reforms, national and external stakeholders can provide financial sup- Aggregation Case Study at a Glance port to aggregating utilities to help them achieve the aggregation purpose. In most cases, these subsidies Key Lessons Learned from Aggregation are used to fund investment programs, thus acting as a Case Study Big Push, which helps WSS services get out of the low- Harmonization of Administrative Practices May level equilibrium trap. In Minas Gerais, COPANOR ben- Level Costs Up efited from a large investment program funded by the When the scope of aggregation includes consolidation state budget. These investments enabled COPANOR to of functions, a harmonization of administrative prac- upgrade water supply systems in the 239 localities tices across aggregating service providers is necessary. served and to set up sanitation services in the 74 rural In the best-case scenario, this harmonization leads localities covered. to  leveling standards up to those of best practices. However, under less favorable circumstances, harmo- nization may lead to leveling costs up, thus hampering Notes the success of aggregation. In Brazil, COPANOR is a 1. According to the IPEA, Institute for Applied Economic Research. rural subsidiary of the state company COPASA. 2. SNIS, 2015 Indicators, average water rate. Case Study—Copanor, Brazil 5 © 2017 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. 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