Brazil establishes new decrees for the sanitation sector
Decrees relax recently enacted rules provided for in Law No. 14,026/2020
On April 5, 2023, Brazil’s government published two decrees (Federal Decree No. 11,466/2023 and Federal Decree No. 11,467/2023) that introduced important changes to the country’s sanitation sector. The decrees change and even relax to rules determined in Federal Law No. 14,026/2020, which previously amended Brazil’s Basic Sanitation Law (Federal Law No. 11,445/2007).
Federal Decree No. 11,466/2023 repeals Federal Decree No. 10,710/2021, introducing new rules regarding how sanitation service providers must demonstrate their financial and economic standing. On the other hand, Federal Decree No. 11,467/2023 repeals Federal Decree No. 10,588/2020 (as amended) and adjusts rules regarding regional sanitation services and the Brazilian government’s technical and financial support to the sanitation sector.
Certain provisions within the decrees had their constitutionality questioned in the Federal Supreme Court (STF) under ADI No. 1,055, currently pending trial. These provisions were also the subject of a bill for a decree approved by Brazil’s House of Representatives, which is currently with the Senate, pending approval.
Despite these attempts to repeal the decrees, they are still in force. Their main provisions are outlined below:
Incentives for regional services
One of the fundamental pillars of Federal Law No. 14,026/2020 is the regionalization of basic sanitation services, which is considered fundamental to achieving Brazil’s goal of universal sanitation services by March 31, 2033. In addition to providing for the formation of these structures, Article 50 of the Basic Sanitation Law stipulated that Brazilian municipalities must implement and adhere to them to obtain federal government funding.
However, Article 15 of Federal Decree No. 11,467/2023 provides that this condition will now apply only after December 31, 2025, from which point the municipalities will have 180 days to adopt regionalized structures for basic sanitation services. Still, this deadline does not have binding effects as the decree also states that the condition will be considered met even if only achieved later.
Another important aspect of Federal Law No. 14,026/2020 concerned a prohibition on municipalities and state-owned companies entering into new “program agreements” (contratos de programa) without a prior bidding process. This rule sought to promote competition within the sector, obligating state-owned companies to participate in bidding processes (and therefore compete with private operators) in order to enter into new service contracts.
However, Federal Decree No. 11,467/2023 now creates an alternative to providing services without a prior bidding process. In the case of micro-regions, urban agglomerations, and metropolitan areas, the governing entity may authorize state-owned companies within the administration of their respective state to conduct decentralized service. With this rule, the federal government appears to have endorsed a model used in the Brazilian state of Paraíba, which is currently being analyzed by the STF (ADI No. 7335), opening the door for it to be used in other states.
Limits on contracting public-private partnerships (PPPs)
Law No. 14,026/2020 set a 25% cap on subcontracting services to third parties. The use of the term ‘subcontracting’ raised doubts within the sector, as there was a lack of clarity as to whether the limit applied to PPP contracts or not. Federal Decree No. 11,467/2023 has resolved the legal uncertainty surrounding this issue, specifically stating that the limit does not apply to PPP contracts. This represents a reprieve for state-owned companies as it enables them to act merely as managers of PPPs.
Service providers’ economic and financial standing
Law No. 14,026/2020 conditioned the continuation of existing contratos de programa on service providers demonstrating adequate economic and financial standing. The rule was regulated in 2021 by Federal Decree No. 10,710/2021, which established the methodology and procedure for state-owned companies to demonstrate proper economic and financial standing. Although this procedure was completed on March 31, 2022, many companies failed to even submit the required documentation to the competent regulatory agencies.
By revoking Federal Decree No. 10,710/2021 and establishing a new procedure, Federal Decree No. 11,466/2023 gives state-owned companies a second chance. Service providers now have until December 31, 2023, to submit the required documentation. The decree also introduces a provision stating that in the event a service provider does not meet the requirements, it may have its financial standing recognized if it presents a plan to meet the requirements within up to five years.
The Brazilian Water Agency’s role in standardizing rules
At the beginning of the year, the Brazilian government caused alarm in the sector by suppressing a provision from Law No. 9,984/2000 that established the Brazilian Water Agency’s (ANA) jurisdiction over reference regulations concerning sanitation. Federal Decree No. 11,467/2023 clarifies that this was a mistake and that the ANA’s authority in this regard has been maintained.
However, the same decree establishes specific criteria for developing such reference regulations, which did not exist in the Basic Sanitation Law, thus limiting the ANA’s regulation to the “minimum necessary to achieve standardization targets.” In practice, these generic guidelines could lead to further debates on the types of regulations the ANA may approve.
For further information on this subject, please contact Mattos Filho’s Infrastructure & Energy practice area.