Stubborn Brazil Water Crisis Pushes Sabesp to Fix Infrastructure

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Sao Paulo’s water crisis isn’t over yet.

After drought pushed Sao Paulo to the verge of severe water rationing, late summer rains gave the state-run utility Sabesp, Brazil’s biggest water provider, a second chance to fix infrastructure that city officials blamed for the crisis. With the dry season starting, it’s a rush against time to divert rivers and connect lakes before reservoirs run low again.

The time squeeze highlights the precarious situation that South America’s largest metropolis is in after two decades without any major new water projects. Reservoirs still haven’t recovered from last year’s drought and forecasters are calling for hotter months ahead because of the El Nino weather pattern.

“Infrastructure wasn’t Sabesp’s priority in recent years - - it didn’t take steps to avoid the crisis,” said Pedro Caetano Mancuso, director at the Center for Water Safety at the University of Sao Paulo. “Even though Sabesp is willing to do the work now, whether or not it’s completed on time to avoid an even bigger problem is the big question.”

Sabesp has said it was the severity of last year’s drought and not a lack of infrastructure investments at Latin America’s largest publicly traded water utility that led to the crisis.

“We were prepared for a drought that was as bad as 1953” when Sabesp faced a similar crisis, Chief Executive Officer Jerson Kelman told city council members in a May 13 hearing. “What happened in 2014 was that we got half that amount of rainfall. We weren’t prepared for that.”

Shortage ‘Predictable’

Sao Paulo’s City Council in a June 10 report blamed Sabesp for the crisis that cut off water to some neighborhoods, calling the water shortage “predictable.”

“If Sabesp had invested the dividends it paid to shareholders in New York in projects to modernize systems and to maintain networks, we wouldn’t be in this situation,” said Laercio Benko, the council member who led the commission to investigate the shortage.

The largest of the infrastructure projects that the state-run utility needs this year to guarantee drinking supplies is late. The project to connect the Pequeno River to the Billings reservoir, originally scheduled to be finished in May, won’t be done until August because of environmental and land-use permit delays, Sabesp’s press office said in an e-mailed response to questions. If completed this year, the package of five emergency works Sabesp is pushing through should be enough to avoid rationing, the utility said.

Key Reservoir

Without the projects and if rainfall comes in at or below last year’s level, Sabesp forecasts its largest reservoir -- known as Cantareira -- could dry up by August, according to internal company forecasts provided by Sabesp to the government and obtained by Bloomberg News. In the company’s worst-case scenario, water could be shut off to most of the Sao Paulo metropolitan area five days a week, according to the document, which was prepared as part of an emergency contingency plan.

Sabesp said in the e-mail that rainfall so far this year has been positive.

As Sabesp accelerates investments now, it’s cutting back elsewhere and raising water prices. The company, whose full name is Cia. de Saneamento Basico do Estado de Sao Paulo, is cutting by half spending on sewage collection and treatment this year, executives said on a conference call with investors in April. The rate increase reflects Sabesp’s “financial stress,” Chief Financial Officer Rui Affonso said on the call.

Share Plunge

Sabesp shares fell 4.8 percent Monday, the worst performance in Sao Paulo trading, after industry association Fiesp said it filed an injunction to stop the rate increase. Shares were down 0.1 percent at 11 a.m. Tuesday.

“Last year’s drought will be fully felt in this year’s results,” Alexandre Montes, an equity analyst at Lopes Filho & Associados Consultores de Investimentos, said in a telephone interview from Rio. “Even if the drought eases now, even if everything goes right, Sabesp’s earnings will drop.”

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