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São Paulo’s privatizations dilemma

The fate of the privatization of two major publicly owned companies in the state of São Paulo is hanging in the balance, as the governor of the state and Brazil’s president have taken polarized positions on the matter. Since assuming office on 1 January 2023, President Luiz Inácio Lula da Silva (Lula) has criticized the proposed privatizations of the Port of Santos, São Paulo’s water utility company Sabesp and privatizations in general. The Governor of the state of São Paulo, Tarcísio Freitas, is in favor of continuing efforts to privatize the companies however, and market players told Infralogic that there could yet be a path for the transactions to break the impasse in the medium-term future.

Former Minister of Infrastructure (2019-2022) under ex-President Jair Bolsonaro, Freitas was elected governor in November 2022 alongside Lula’s election for his third term as president. Freitas campaigned as the heir to the outgoing president and promised to continue partnering with private investors in his new role as the governor of Brazil’s richest state.

Freitas had barely got used to his new address in the Bandeirantes Palace before facing an early political dispute regarding one of the main projects he had helped structure as Bolsonaro’s minister: the privatization of the Santos Port Authority (SPA).

The SPA is a state-owned company which administers the Port of Santos and its terminals and was due to go on sale alongside Companhia Docas São Sebastião (CDSS), which administers the Port of São Sebastião, under the plans of Brazil’s previous government. The original model was designed by Brazil’s BNDES development bank and received final approval from the Federal Court of Accounts (TCU) on 15 February this year.

However, Minister of Ports and Airports Márcio França has spoken out against privatizing the largest port in Latin America on multiple occasions and had his first meeting to discuss the issue with Freitas on 8 February.

“They wanted to sell the port authority, and this is like selling Federal Policy. This option is discarded, in our point of view,” França said in an interview a day after the meeting. “We agree to privatize port services, like the concessions we already have, dredging services, but we do not agree that the port authority ceases to be a public entity.”

Political chess

The privatization process is ready to be launched and the main obstacle it is facing is politics, according to Massami Uyeda Junior, partner of law firm Arap, Nishi & Uyeda.

“The municipality of Santos has been a breeding ground for powerful politicians like former President Michel Temer (2016-2018) and former Agriculture Minister Wagner Rossi (2010-2011). França himself started his career in the region,” Uyeda Junior recalled. “Gov. Freitas is an outsider in São Paulo state and, if he picks a fight without knowing the local politics, the project may not go ahead,” he added.

França served as mayor of Santos’ neighboring city São Vicente (1997-2005), was congressman for the state of São Paulo (2007-2015), São Paulo’s vice-governor (2015-2018) and had a brief stint as governor (2018-2019).

The now minister is a member of the center-left Brazilian Socialist Party (PSB) but has a more moderate profile, Alberto Sogayar, partner of MAMG Advogados law firm, observed.

“He [França] is not a radical and he had a close relationship with Vice-President Geraldo Alckmin, who is also a market-friendly figure. França is an easy-going person and a mature politician to understand the needs for this project,” Sogayar said.

Sogayar believes that França’s opposition to the privatization is part of a post-election narrative, and that the privatization of the Port of Santos can find a place within the federal government’s strategy.

“Lula is on his third and apparently final mandate. He wants to leave a social legacy and he understands that the Port of Santos is fundamental for the outflow of Brazil’s production and economic growth,” he said. “I believe there is room for this privatization after equating political issues and Freitas addressing Sabesp's case.”

Low sense of urgency

Although Freitas has publicly demonstrated his willingness to pursue the privatization of the SPA, the port sector is showing little urgency for a transaction of this type, Helcio Tokeshi, CEO of terminal operator Corredor Logístico Infraestrutura (CLI), told Infralogic.

“The companies who operate terminals are not concerned about who is managing the port. The cancellation of this project would be a frustration only for those who were specifically studying the privatization, not for the ports market. And those investors are completely different from terminal operators,” he said.

Tokeshi and Uyeda Junior stressed that the main issue for the Port of Santos is the currently limited space available for expansions of the terminal infrastructure. “The port is surrounded by the city. There was a discussion to expand to a new area, but this is very hard and would require building new channels,” Tokeshi observed. “I believe the policy has changed with Lula’s third term and I don’t think this or the privatization of any other port administration will advance,” he added.



Current market conditions are not at the most favorable point and pushing for the privatization entails a high risk of not attracting investors, Uyeda Junior said.

“The competition for infrastructure assets in public auctions decreased a lot in the past year. The Port of Santos should require an offer of about BRL 8bn and finding investors for that type of transaction is challenging,” he added.

On the financial and operational side, Uyeda Junior highlighted that the SPA overcame inefficiency issues and became a dividend payer for the federal government.

The SPA registered BRL 1.4bn in gross revenues in 4Q22, a 24.1% rise over 4Q21. The company booked BRL 547.3m in net profit in 4Q22, a 66.3% rise over 4Q21, ending 2022 with BRL 1.8bn in cash reserves.

In 2022, the SPA registered 162.4 million tons of cargo and 5 million TEUs against 147 million tons of cargo and 4.8 million TEU in 2021.

The Ministry of Ports and Airports told Infralogic through its public relations team that it is “reassessing” the project based on new guidelines and public policies focused on generating employment and income and on economic and social development.

“This process should result in a new model of public-private partnership for the proper development of ports, vis-à-vis the new public policy and its guidelines,” the statement read.

Before leaving the former Ministry of Infrastructure in 2022, Freitas carried out the privatization of Companhia Docas do Espírito Santo (CODESA) and promoted that situation as a ‘training’ for the privatization of the SPA. Quadra Capital won that auction through its fund FIP Shelf 119. Local investors Vinci Partners and Serveng also bid for the asset.

São Paulo’s water utility crown jewel: Sabesp

While the federal government owns the SPA and has the final say on its privatization, Freitas has more room for maneuver over São Paulo’s water utility Sabesp, as the state government owns 50.3% of the company’s shares. Another 37.6% is traded in free float on São Paulo’s B3 stock exchange and 12.1% is traded on the New York Stock Exchange (NYSE).

Studies for Sabesp’s privatization are not as advanced as those for the SPA and discussions at the federal level regarding new regulations for the sanitation sector could cause delays.

“Freitas campaigned on promises to sell Sabesp’s control quickly but found out that modeling studies were not yet contracted, and it takes a year to conclude such studies,” Uyeda Junior explained.

The governor approved contracting studies for the privatization on 28 February.

Due to personal medical issues, Freitas had to postpone a meeting with the federal government in which they were due to discuss including some of São Paulo’s infrastructure projects in Brazil’s Investment Partnerships Program (PPI). A source close told Infralogic that the meeting would have addressed the inclusion of Sabesp in the PPI.

The privatization of São Paulo’s water company has been under discussion for years, but the company has satisfactory levels of operations and financial management.

“The issue is not the quality of the sanitation services. What is at stake is value capture,” Uyeda Junior said. “Sabesp is a BRL 40bn market cap asset. The state owns a 50% stake and could get BRL 20bn with the transaction. It is a world-scale company in terms of market cap that would attract any large investor.”

Freitas’ team is pursuing a follow-on share sale model to transform the company into a corporation by diluting the company’s shares and thus São Paulo’s controlling stake. In this situation, the value raised from the follow-on offering would go directly towards the company’s cash reserves.

This model was used nationally for the privatization of power company Eletrobras in 2022. Freitas has also suggested the creation of a golden share with certain veto writes, according to local media reports.

A second possibility would be selling the existing Sabesp shares through an auction. In this scenario, the amount raised from the sale would go towards the state’s treasury.

The state of Rio Grande do Sul tried to follow the Eletrobras model in its privatization of water company Corsan but was forced by the local court of accounts to sell the existing shares instead.

Game-changing opportunity for the sector

The privatization of Sabesp is a unique opportunity for investors to gain the upper hand in Brazil’s sanitation sector, Italo Joffily, CEO of concession company YSanso, told Infralogic.

“Sabesp is the fourth largest sanitation operator in the world and the largest in the southern hemisphere. Whoever owns Sabesp, can transform it into a vehicle to expand beyond the state of São Paulo,” he said. “This would be a major game-changing situation.”

Joffily believes that it could be possible to create a new business division in Sabesp after the privatization and double the size of the company.

“We need to look at this in a dynamic way. We have an entire market to be developed and Sabesp could invest in other state-owned companies as well,” he suggested. “The capital energy and potential for value generation with this vehicle is extraordinary.”

Sabesp has operations in 375 municipalities in the state of São Paulo, being responsible for 30% of Brazil’s investments in sanitation. It serves 28.4 million people and 25.2 million people with water and sewage services, respectively.

Sabesp booked BRL 5.9bn of net operational revenues in 3Q22, a 16.2% rise over 3Q21. The company registered a BRL 1.08bn net profit in 3Q22, a 130.7% increase over the BRL 468.6 booked in 3Q21.

Joffily believes that the Sabesp privatization should be carried out through a follow-on offering to attract large investors.

“This game is not played by small groups. There is no way to build financeable conditions and leverage potential for a business of this size with people with shallow pockets,” the CEO said.

Studies regarding Sabesp’s management model are ready and the fact that the company is listed on the Novo Mercado, B3’s highest segment of corporate governance, means the privatization could be possible by 1H24, Joffily said.

Sabesp recently appointed André Salcedo as new CEO and Sogayar highlighted his experience as a positive factor for the privatization progress.

“He came from the financial market and from companies operating in the sanitation sector. That gives him a very interesting business view,” he said.

Salcedo previously worked for BNDES and Iguá Saneamento, according to his social media profile.

The federal trump card

Sogayar believes that some municipalities served by Sabesp, especially those with fragile economic feasibility for being placed under a private concession, could prove to be obstacles to the privatization.

“Salcedo and Freitas will have to gain political padding and wait for regulatory questionings to calm down,” Sogayar added.

The review of a regulatory framework created to encourage broader participation of private players in the sanitation sector by the federal government could also delay Freitas’ plans.


Lula has criticized the potential privatization of Sabesp, according to local media reports, while his ally and House representative Guilherme Boulos promised to carry-out an in-depth analysis of the regulatory situation.

Lula and Boulos’ signals have fed opposition to the project in unions and within the sector's own state-owned companies, Uyeda Junior observed.

“There is still a discussion about countries which have privatized water services and now are talking about nationalizations, such as in England. This spills over here in São Paulo,” he added.

Despite the possible political pressure, Joffily, Uyeda Junior and Sogayar do not believe there will be major regulatory setbacks to the privatization.

“This [the privatization] was an arrow released and it will be very difficult to change its course. Lula could delay the process for his voters, but he is very pragmatic and is unlikely to change the regulation,” Joffily said.

For both the SPA and Sabesp privatizations, Sogayar believes that Freitas is in a peculiar and powerful position.

“For the first time, we have a former and very capable Minister of Infrastructure leading the richest state in the country,” he said. “I see people concerned with the big picture, but we have to look for infrastructure for the medium- and long term, observing what has been done and when the results should come.”

São Paulo’s state government declined to comment for this article.