• Filthy water alarms world but offers opportunity to make case
  • Michel Temer, interim president, pushes to reduce state

Two months before the Olympics, the world is eyeing the sewage off Rio de Janeiro with both alarm and black humor -- marathon swimmers say they are afraid of getting sick while Saturday Night Live has depicted President Dilma Rousseff saying blithely that Brazil just needs to "take 1 million poo-poos out of the river."

But for the new government of President Michel Temer, which has taken over while Rousseff faces an impeachment trial, the sludge represents an opportunity -- to press for privatization in a state-heavy economy.

A jet ski passes over a sediment and sewage spill at the entrance of Barra da Tijuca beach.
A jet ski passes over a sediment and sewage spill at the entrance of Barra da Tijuca beach.
Photographer: Dado Galdieri/Bloomberg

The Rio sewage utility has long been among Brazil’s biggest bureaucratic disasters -- federal police are investigating it for fraud -- and Maria Silvia Bastos, the new president of BNDES, the state development bank, said the bank would help privatize it. She noted that less than half the country has access to sewage collection or treatment and has chosen a sanitation specialist as one of her new directors.

"BNDES has the technical capacity to do it and we are going to support it," she told reporters after her inauguration speech on June 1.

A Signal to Advocates

That was seen as a signal to privatization advocates that the interim government will move to sell off state assets. Many backers, including Bastos, participated in the 1990s wave of privatizations under Fernando Henrique Cardoso. Securing the development bank’s subsidized loan would help face down opposition from Temer critics who say his government doesn’t have the political capital to start stripping down the state. 

QuickTake: In Brazil, Hopes Give Way to Slump, Scandal, Turmoil

"With an alarming fiscal deficit and no money to invest in infrastructure, Brazil has to open up to international and national capital," said Jorge Picciani, president of Rio’s state legislature and an outspoken proponent from Temer’s party of privatizing the state’s water and sewage company, Cedae.

Maria Silvia Bastos
Maria Silvia Bastos
Photographer: Yasuyoshi Chiba/AFP via Getty Images

Temer is scrambling to find ways to fill public coffers after a recession eroded tax revenue and more than tripled the budget deficit. Gross government debt has grown to 70 percent of GDP and high interest rates make borrowing costlier to service.

Bastos says the development bank will sell equity assets and use concessions and privatizations to attract investment. She told reporters the bank "shouldn’t hold permanent stakes" in companies, a reference to the interests in 116 companies it has accumulated over the years. Meanwhile, a government task force is considering selling stakes in state companies like power utility Furnas Centrais Electricas.

Delicate Balancing Act

Under Rousseff, the role of the government and state companies grew. Temer is facing the delicate balancing act of imposing unpopular austerity and pulling the country out of recession without causing a backlash. Meanwhile, in his first month in office his budget and anti-corruption ministers resigned after leaked wiretaps suggested they tried to stymie a corruption investigation. And he has plenty of critics after Rousseff accused him of acting as an accomplice in a "coup" to oust her.

"There’s no climate for selling assets," said Fernando Nogueira, a former vice-president of state bank Caixa Economica Federal and professor at Universidade Estadual de Campinas. "Temer doesn’t have the political legitimacy to implement that kind of a program."

There are other potential snags: state company unions are already planning protests and Rio’s acting governor faces legitimacy questions because he wasn’t elected. But after Finance Minister Henrique Meirelles said BNDES will oversee the "crucially important" task of selling state assets, the champions of privatizations are feeling confident.

"Privatization is no longer a taboo, it’s openly part of the agenda now due to the fiscal crisis," said Elena Landau, a lawyer who was director of privatizations at the development bank during the 1990s.

Not Same Scale

Bastos said that privatizations won’t be on the same scale as the 1990s, when governments sold off steelmakers, banks, telecom companies, highways and airports (they came with scandals as well, like the 1998 wiretap leak that caused the resignation of a minister and the BNDES president).

The development bank’s role shifted after the 2008 financial crisis. It began using more than 500 billion reais ($125 billion) in off-budget Treasury loans to buffer Brazil’s economy with subsidized lending for industrial conglomerates and megaprojects like Olympic venues. The bank’s new leadership must explain its subsidies, and revamping decrepit sewers has a clear public benefit, says Joao Manoel Pinho de Mello, professor at Insper business school in Sao Paulo.

That’s a glaring reality at Guanabara bay, where Olympic windsurfers and sailors can already be seen training for the games. One recent afternoon, near the yacht club that they use, raw sewage and bits of toilet paper could be seen flowing directly into the bay.

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