Introduction

Historically, Portugal has limited the intervention of private companies in certain economic activities of public interest. The provision of telephony services was only fully liberalised in 2000 and the opening up of the power distribution and generation markets is now underway. The Government still retains a 10% golden share in Portugal Telecom, the former telecommunications State monopoly, as well as 34% share in EDP, the electricity dominant player.

The water sector is still controlled by local authorities and by ADP – Águas de Portugal, SGPS, SA ("ADP"), the State holding for water supply.

The Portuguese Government has recently decided to foster the creation of public/private partnerships in the water supply sector as well as to privatise ADP, valued at 2.247 million euro.

In this article, we review the opportunities for private investors in the Portuguese water market.

Background

Until 1993, the supply of water was restricted to the State and to local authorities. In November 1993, Decree Law 379/93 allowed the creation of water supply municipal systems, operated by the local authorities or by private entities under concession agreements.

Almost a decade after the approval of Decree Law 379/93 the supply of water and water treatment systems still lack quality in management, have low financial, technical, environmental and human resource investment and consequently suffer from overall lack of service quality. More importantly, there investment in water and waste treatment facilities has been to date has been not sufficient to improve the existing systems.

In order to tackle with these problems, the central Government has created a regulatory authority for the water and waste sector (Instituto Regulador de Águas e Residuos), in charge of setting the guidelines and quality standards for water concessions.

In April 2000, the Government approved a Strategic Plan for the Supply of Water and Disposal of Residual Water (the "Strategic Plan"), which aims at extending the water supply and wastewater treatment services coverage to a maximum level of 95% of the population in accordance with the projections set out in the 2000-2006 Regional Development Plan (Plano de Desenvolvimento Regional).

The Strategic Plan sets forth the following goals:

  1. expand existing water and waste systems;
  2. build new systems;
  3. improve wastewater treatment facilities;
  4. repair and replace water ducts;
  5. promote the re-utilisation of treated wastewater;
  6. preserve the quality of water and water sources; and
  7. promote efficient behaviour in water using and saving by customers.

These measures will enhance direct private investment in the supply of water creating higher levels of operating and management efficiency, accounting standards in the expansion of systems and of product and service quality.

Having as background the Portuguese and European regulations and directives, we may expect the development of a truly competitive water industry, managed on a commercial basis with the involvement of private investors, the central Government and local authorities.

Portuguese Water Sector

A. Municipal and Multi-municipal Systems

In Portugal, the water sector includes the following activities:

  • abstraction, treatment and distribution of water for public consumption;
  • treatment wastewater; and
  • operation of the sewage systems.

The operation and management of water, wastewater and sewage systems is carried out by:

  1. Municipal Systems. Municipal systems are water distribution systems operating within a municipality, controlled by local authorities or by private or public companies under concessions granted the local authorities.
  2. Multi-municipal Systems. Multi-municipal systems are created by at least two municipalities and operated by public or private companies under a concession granted by the relevant municipalities. As a rule, the central Government or other public entities have a controlling interest in the operating company either directly or through a state holding. Concessions are granted for 10 to 50 years, except for wastewater treatment concessions, subject to a 30-years limit. During the concession the concessionaire shall own the water distribution facilities, which will revert to the public domain upon the termination of the concession.

B. Entities responsible for the operation of water systems

The operation and management of municipal systems is carried out by:

  1. Local authorities. The municipality is responsible for the Public Water Supply and for its management as well as for all the system development funding requirements. The municipality has also the power to set the water consumer prices.
  2. Municipal Companies. Municipalities, associations of municipalities and administrative regions may incorporate companies for the supply of water, which may take the form of (i) municipal undertakings (empresas públicas municipais); (ii) municipal companies (sociedades municipais), private law companies which are wholly-owned by the local authorities, (iii) public/private joint ventures, where private entities are allowed to own minority stakes; or (iv) private companies under concession agreements with local authorities, that may last from 5 to 50 years, following a public tender process undertaken by the relevant municipality.
  3. Water Concessions. Concessionaires of municipal or multi-municipal systems are responsible for the construction of the project facility and operation and maintenance of the facilities as well as for the development of the system in compliance with the technical requirements set out in the project contract.

Market Opportunities

A. The Privatisation of ADP

ADP is a sub-holding of IPE – Investimentos e Participações Empresariais, S.A. ("IPE") controlling the State’s interests in the water and environmental sectors. IPE also invests in other business sectors, both in Portugal and abroad, such as telecommunications, distribution and power industry.

The privatisation of ADP will probably be one of the most significant privatisations in Portugal. ADP’s water systems cover over 70% of the population (7,2 million inhabitants) and are valued at 2.247 million euro, which puts ADP among the leading Portuguese economic groups.

The total net income of ADP has increased from 558 million euro in 1995 to 2247 million euro in 2001. The turnover almost tripled in the same period from 100 million euro in 1995 to 280 million euro in 2001.

The largest company within the ADP group is Aquapor – Serviços, S.A. where ADP holds a 75,5% interest together with the Portuguese bank BPI, with a 24,5% stake. Aquapor has recently acquired Luságua – Gestão de Águas, S.A. the leading private company in municipal systems water supply, responsible for supplying water to 800,000 people. After the acquisition of Luságua, Aquapor became the Portuguese water sector largest operator of municipal systems management serving a total population of 1 million inhabitants in 21 different municipalities.

Currently, Aquapor is responsible for managing and operating the following municipal systems: Águas de Gondomar, Águas da Figueira, Águas de Cascais, Águas do Tejo, Águas do Vouga, Águas do Planalto, Águas do Lena, Águas do Alcanena and Águas do Sado.

ADP has stakes in several domestic and foreign companies in partnership with municipalities and private investors. In Portugal, ADP has agreements with 204 of the total 308 Portuguese municipalities. ADP – Águas de Portugal Internacional S.A., the ADP subsidiary responsible for managing, developing and expanding the ADP Group activities in international markets, has interests in Mozambique, Chile, Brazil, South Africa and Cape Vert.

B. Public/private partnerships

Public/private partnerships have been used successfully by the Government to finance the construction of several infrastructure and facilities. In the water sector, the most relevant example is the joint venture formed in July 1994 by Severn Trent Water International, with local investors and municipalities: Indáqua – Indústria e Gestão de Águas, S.A. ("Indaqua").

Indaqua was awarded concessions involving municipalities:

  1. Fafe. The 25-year concession involves water supply and billing for a total population of 50,000 people;
  2. Santo Tirso. The 25-year concession involves water supply and billing for a total population of 100,000 people;
  3. Santa Maria da Feira. The 35-year concession involves full water and wastewater service for a total population of 130,000 people.

Until 2007, investments projected for the three concessions will exceed 175 million euro.

There is no specific legal regime for the establishment of public/private partnerships in the water sector. Nevertheless, over the last ten years Portugal has developed several major construction projects under design, build, finance and operate (DBFO) arrangements. These included the second Tagus’ crossing, the Pego and Tapada do Outeiro power plants and a DBFO road programme.

Public/private partnerships may be used for the development of new water and waste treatment systems as well as old systems needing improvement. Under public/private partnerships the local authorities will award a concession for the management and operation of municipal or multi-municipal systems, setting out the authorities’ goals with respect to:

  • the construction of new networks or the improvement and expansion of new systems; and
  • the construction of wastewater treatment facilities.

© Macedo Vitorino e Associados - October 2002

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.