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OPINION July 10, 2020

Keeping the Lights On, the Water Running, and People Moving

As one of the countries in the world most ex­posed to the coronavirus pandemic, Brazil loc­ked down significant parts of its economy in order to “flatten” the contagion curve. Among all firms that will be impacted by the econo­mic supply and demand shock, utilities in the water, energy and urban transportation sec­tors deserve special attention for their critical role and specific characteristics.

In fact, the­se companies (i) provide essential services to the population at large, which is particularly critical for the most vulnerable; (ii) operate in a strongly regulated environment, and have no freedom to set their tariffs or select their customer base; (iii) are under financial stress because of the disruption of economic activity and supply chains resulting from the contain­ment policies in place; and (iv) have no imme­diate competitors (public or private) to replace them in case of collapse. A few examples can help explain this situation:

State-owned enterprises (SOEs) in the water and sanitation sector (WSS) provide water ser­vices to 57 million households, and sanitation services to over 32 million households in Brazil. The financial and fiscal risks faced by WSS-SOEs are increasing fast under COVID-19, even though their financial exposure varies across Brazilian states. The estimated loss of forgo­ne revenue and the financial risks affecting all Brazilian states range from US$100 million to US$125 million per year in the absence of COVID-19 response measures.

The states with the highest-exposed WSS-SOEs include Amazonas, Santa Catarina, Maranhão, Mi­nas Gerais, Rio Grande do Sul, São Paulo, and Piauí. Addressing the financial, budgetary, and forgone revenue risks affecting these utilities is critical for preventing their financial collapse. Financial support for WSS utilities and service providers should aim to maintain and restore operations and to avoid the risks of financial bankruptcy in the medium term.

Energy services are also essential to protect human health and keep hospitals running during the COVID-19 pandemic, as well as to ensure economic recovery. The demand shock co­ming from the quarantine resulted in a pro­gressive drop in energy consumption of up to 20% among the most profitable com­mercial and industrial users.

The impact of the financial and operational performance of dis­tribution utilities is compounded by increased default risks and pressures on revenue collec­tion, partly driven by the measure preventing disconnection in case of non-payment. Tariff increases have been suspended, further exa­cerbating distributors’ liquidity constraints, and affecting their ability to honor long-term power purchase contracts with generators.

The overall impact in the sector is estimated at R$22 billion, affecting most severely tho­se utilities operating in the poorer North and Northeast, which were already suffering from significant commercial losses and the low re­liability of the system. Beyond the ambitious policy measures already implemented, there is a need to prioritize fuel and energy efficiency, and to adopt financial programs to accelerate progress toward Luz Para Todos and a clean energy transition.

The impact is also strong on the urban pu­blic transportation sector, with different ur­ban mobility stakeholders being affected in different ways. Three categories of stakehol­ders have been identified: (i) a few large public transportation SOEs (for example, Metrô and CPTM in São Paulo, CBTU in several cities, or Trensurb in Porto Alegre); (ii) a few large private operators, essentially in the rail transport seg­ment, backed by large international firms (for example, CCR in Salvador or SP, or Mitsui in Rio); and (iii) many private bus operators, pre­sent in both large and small cities. Moovit data suggest that ridership has dropped from 50% to 70% in Brazil’s metropolitan areas. The ANTF (Brazil’s National Rail Trans­port Association) has reported a 63% drop in ridership in March compared to last year. This represents a US$130 million revenue shortfall for March alone.

Assuming that servi­ces and patronage start resuming around mi­d-July, the revenue shortfall is estimated at US$700 million for the urban rail sector alo­ne, US$400 million for private operators, and US$300 million for public ones. For the bus sector, losses are estimated at US$200 mil­lion per day. Elements are not available at this point on these large firms’ financial resilience, or their capacity to absorb the shock, even though they operate in a strongly competitive environment that does not leave much room for huge margins.

Brazil has about 34,000 bus companies, including urban and intercity services. They employ about 700,000 people, and are responsible for 86% of all public transportation in Brazil, that is, about 46 million trips a day in normal times. A collapse of these companies would have immediate effects on urban congestion levels, as well as on many workers’ ability to reach their workplaces, not to mention the af­fordability of any alternative solution.

Public support will be needed to ensure that affected companies in these critical sectors survive the lockdown, and to avoid important disruptions to the daily lives of many citizens, as well as contingent liabilities for the alrea­dy strained finances of subnational gover­nments.

An example would be to provide liquidity to public transport service operators or water and electricity distribution companies, through credit lines facilitated by national or state governments. Or a guarantee mechanism to leverage commercial loans. However, this could also represent an opportunity to introduce improvements rather than just returning to the status quo ante.

These improvements should focus on more sustainable investments and sounder management practices, such as green transport (for example, electric buses) or the requirement for advanced measurement technology for electricity and water distributors as a prerequisite for accessing financial support.

This article was written in collaboration with Renato Nardello, program leader of the Sustainable Development and Infrastructure sectors of the World Bank in Brazil.