The Government of São Paulo today published Sabesp’s new regulatory model — an important step towards completing the sanitation company’s privatization process.
Sabesp’s shares rose more than 5% on the news, before giving back some of the gains. In mid-afternoon, the stock rose 3.3% to a new all-time high of R$81.62, with the company worth R$55.77 billion.
In general terms, the new regulation was in line with what the market expected, with the government reducing the power of the regulatory agency (ARSESP) compared to the current model, and changing the rules for tariff reviews in order to reduce risks.
Citi said that, in general, the tone of the changes is “bullish,” but some investors may be disappointed by the fact that from the third cycle of the contract — which begins in 2036 — ARSESP will have more powers.
Even though these powers “are more limited compared to today, this is more risky than the scenario that was being debated, in which most metrics remain in the contract ‘forever’,” wrote analyst Antônio Junqueira.
The definition of the regulatory model is one of the last stages of Sabesp’s privatization, which is scheduled to take place in June.
The terms of the offer have not yet been defined, but it is expected to take place in two stages. First, the Government would sell a 15% stake to a reference shareholder, who would have a 5-year lockup (the same period stipulated for universalization). Then, it would make an offer on the stock exchange to disperse the capital.
The forecast is that the total supply will be around R$20 billion (R$15 billion in secondary and R$5 billion in primary).
In the end, the State Government, which currently owns 50.3% of Sabesp, would hold between 15% and 30%.
In the new regulation, published earlier today, one of the main changes has to do with the review of tariffs charged to consumers.
Until now, Sabesp carried out this review every four years, based on a projection of investments and costs for the following four years. Now, the review will be annual, taking effect every January, and will be based on past investments.
The Government also defined that this tariff review will be impacted by a ‘productivity factor’, made up of quality indicators and service coverage level indicators, based on universalization goals.
For a sector analyst, the main benefit of this change “is to reduce the perception of risk.”
“Before, the company made capex every year, but had to wait four years for the regulator to recognize that the investment was well made and incorporate it into the tariff. This meant that companies were always afraid that capex would not be 100% recognized up front,” said the analyst.
“Now, this risk will be greatly reduced, which will give more confidence to companies to invest, which is the objective of the measure.”
Another positive definition of the new regulation, in Citi’s view, has to do with the operational efficiencies to be captured by the company after privatization. It was determined that these efficiencies will only be shared with the consumer, via tariff, after the first contract cycle, which ends in 2030.
“The regulatory opex for the first cycle was referenced to actual costs and, from the wording of the text, it appears that the initial opex (which the company will not share in efficiencies) will be high, which is obviously positive,” the bank wrote.
Regarding RAB (the regulatory asset base), the new contract defined that it will be calculated every year until the end of the second cycle based on past numbers, instead of numbers from the next five years, as is the case today. After that, it will be calculated at the end of each cycle. (The regulations defined that there will be five contract cycles, lasting five years each).
The Government also opened today the 30-day public consultation for the privatization process.
Pedro Arbex