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Legal Framework for Water and Sewerage Sector enacted

On January 5, 2007, Law No. 11,445, which establishes the legal framework for Water and Sewerage Services was enacted. The enactment of such law is one of the measures included in the recently announced Federal Government’s Development Acceleration Program (Programa de Aceleração do Crescimento – PAC). Such legal framework had been intensively discussed over the past ten years and, due to certain controversies as to the correct interpretation of the Federal Constitution, and has only now been enacted because of the more neutral approach taken by the Federal Government vis-à-vis States and municipalities. In accordance with the Federal Constitution, the following interpretations could be acceptable: (i) municipalities are the only responsible entities for the provision of water and sewerage services, given that such services are included exclusively within the local interest of municipalities (clause V of article 30 of the Federal Constitution), and (ii) States are responsible for the provision of the services in metropolitan regions with interconnected support networks (paragraph 3 of article 25 of the Federal Constitution). Under Law 11,445/07, States and municipalities have considerable discretion to mutually establish responsibility for the provision of water and sanitation services, since such law expressly contemplates the possibility of execution of a consortium agreement (in accordance with the provisions of Law 11.107/05) for the transfer of the provision of the services to state-controlled companies. In addition, Law 11,445/07 establishes the guidelines for the regulation of water and sewerage services. The entity responsible for the provision of the services (States or municipalities, as the case may be) may effect such regulation directly or transfer the same to an entity controlled by another entity (State or other Municipality) or by several municipalities united pursuant to a public consortium agreement. This is the first provision permitting the transfer of regulatory activities to other entities. The regulation of water and sewerage services must be in accordance with the Service Plan, which must be prepared and established by the entity responsible for the provision of such services (State or Municipality, as the case may be). In the event a public consortium is formed among several municipalities for the unification of water and sewerage services, a public state-controlled company, a public entity or a private concessionaire may provide the services. All companies providing water and sewerage services in more than one municipality are obligated to maintain separate accounting for each of the municipalities. It is important to mention that Law 11,445/07 regulates several issues that have been highly controversial with respect to sewerage and water services. Among others, the most relevant issues are: (i) the definition of “tariff” (which does not have the nature of tax) as the preferred form of remuneration for water and sewerage services, (ii) the definition of the criteria for the amortization and repayment of the assets required for rendering the services upon termination of the concession agreement, (iii) the possibility of direct negotiations between the water supplier and large consumers regarding the terms and conditions for the supply of water, (iv) the definition of the applicable measures upon the termination of concession agreements entered into before the effectiveness of Law 8,987/95. Another interesting change set forth in Law 11,445/20 is related to the concessions to be granted to private companies for the provision of water and sewerage services. In accordance with the provisions of the new law, the competent public authority must carry out a public hearing process to discuss the drafts of the relevant invitation to bid and concession agreement. The procedure for the granting of the concession shall follow the provisions of Law 8,987/95. Finally, it is important to mention that the provisions of Law 11,445/07 shall be further regulated by other local laws enacted by States and municipalities, as applicable. Having regard that Law 11,445/07 regulates the most relevant issues in connection with water and sewerage services, it is believed that private investments in the provision of such services shall increase. Such investments may come in the form of concessions or public-private partnerships.

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