Canadian pension funds are using over $900 million of Canadian workers’ money to privatize water in Rio de Janeiro, Brazil. Through the perverse logic of the market, Canadian workers’ pension funds will now work to exacerbate inequality in a country where access to clean water and sanitation is already limited.
Iguá Saneamento, a private Brazilian water and sewage service company, has been bought by Canada Pension Plan and Alberta’s pension fund AIMCo. The company currently operates eighteen long-term concession contracts in five Brazilian states, providing services for more than six million people.
In an auction on April 30, Iguá bid to take over the state of Rio de Janeiro’s publicly owned water system. It was the capital from Canadian workers’ pension funds that made this acquisition possible.
Privatization will undermine access to water and wastewater services, which the United Nations has recognized as a fundamental human right. UN experts have noted that the pandemic has exposed the “catastrophic impact” of privatization that “prices out the poor and may result in violations of human rights.”
Privatizing the Commons
Across the globe, cities that once chose to sell off their publicly owned water companies have taken back control over their utilities. This trend of re-municipalization in response to the inequalities and lowering of standards that privatization inevitably creates has been bucked in Brazil’s second-largest city.
Why is this privatization happening at precisely the same time that Brazil is experiencing its highest rates of infection and death from COVID-19? And why are Canadian pension funds investing in such a reprehensible project during the most intense phase of a global pandemic?
Rio’s water system, known locally as the CEDAE (Companhia Estadual de Águas e Esgotos) is the largest and most profitable water company in Brazil. The utility brings in over a billion reals per year — more than C$226 million. It uses these profits to subsidize water and sewage services where costs are high.
In a recent interview, former CEDAE president Wagner Victer revealed that if CEDAE had remained a public company, it would have earned the equivalent of $20 billion reals (C$4.5 billion) over the following seventeen years.
Public utilities present themselves as particularly attractive opportunities for investors because they can lay claim to a captive market. Regardless of the price, residents of Rio de Janeiro cannot do without water. This guarantees profits. If customers can’t afford to pay, private companies can simply cut their services. Unlike public services, private firms are not primarily concerned with the quality or universality of the goods they provide.
Intent on preserving a friendly and progressive image, Canada is greenwashing the privatization of Brazil’s public water system. The pension funds are branding the takeover of Brazil’s nationalized water system as “government support for sustainable projects and clean tech solutions in Brazil.” Canada’s Sao Paulo–based trade commissioner has touted Brazil’s large nationalized water system as “a promising market for Canadian companies.”
Canada Pension Plan Investment Board’s (CPPIB) interest in CEDAE stems from its “fiduciary duty” to Canadians. Following the neoliberal restructuring of the CPPIB in the 1990s, the board came to interpret this fiduciary duty foremost in terms of its ability to secure profits. At the same time, CPPIB eliminated mechanisms of democratic accountability over how pension funds could make profits.
This profit-centered interpretation of the responsibilities of pension funds to workers has not gone unchallenged. The federal public-sector workers’ pension fund — which also has a fiduciary duty to its participants — has recently come under criticism for its investment in the for-profit UK-based care home company Revera.
The potential damage to CPPIB’s reputation from its unethical financial decisions has led the board to turn away from unscrupulous companies in the past. In 2019, the CPPIB decided to offload its shares of the for-profit prison companies CoreCivic and Geo Group. In the words of then global head of active equities for CCPIB Deborah Orida:
For a long time, we’ve tried to incorporate reputational risk assessments into our due diligence process for investments and after that controversy, we did take advantages of new tools and ways to broaden our processes.
Even within the parameters set by narrowly interpreted fiduciary responsibilities, public opposition can force fund managers to take into consideration the social consequences of their investment decisions.
Commenting on CCPIB interest in the Brazilian deal, Bert Blundon, secretary-treasurer of the National Union of Public and General Employees, stated that
by getting involved in the privatization of water and wastewater services, Canada Pension Plan Investments is risking both its own reputation and that of the country as a whole. While privatization of any public services is a problem, privatization of a service providing something as essential as water is particularly likely to attract scrutiny and problems are more likely to get publicity.
Suspicions and Misconduct
The auctioning of CEDAE was years in the making. However, it took the exogenous shock of COVID-19 to provide cover for the sell-off. In a secretly recorded cabinet meeting, Brazil’s outgoing environmental minister, Ricardo Salles, urged his colleagues to take advantage of the pandemic to pass as many unpopular policies as they could, as quickly as they could.
The original federal law that allowed for the privatization of CEDAE in 2016 was authoritarian and arguably unconstitutional. The law stipulated that the state of Rio de Janeiro could not have access to $3.5 billion reals worth of government loans until it made moves to privatize the CEDAE.
The partial cause of Rio’s indebtedness was its hosting of the 2016 Olympics, which cost the state around US$13 billion. The state used these funds to build now-abandoned Olympic venues which displaced many poor communities. Combined with the reduced revenues of the state oil company, Petrobras, Rio faced financial problems it could not resolve on its own. Considerations about the practicality of running of a nationalized water company did not motivate the privatization. Rather, it was the state’s need to generate funds to repay its debt.
CEDAE was incorrectly included in a federal program for emergency assistance for heavily indebted public entities. The federal government used CEDAE’s inclusion in this list as a justification for its privatization. Rio’s utility was, however, never in debt. The federal government should not have included Rio in the program in the first place.
Hélio Anomal, president of the local union STAECON, describes this decision as “criminal.” After CEDAE’s was wrongly identified as being in debt, calls for privatization became more vocal. Defenders of privatization justified calling for the end of nationalization by asserting that doing so would improve the service, create economic benefits, and make CEDAE more universal.
This privatization has been coordinated by the extreme-right Bolsonaro government and its allies at the state and municipal level in Rio. The National Bank for Social and Economic Development (BNDES) presented a project called Universalization of Sanitation, which aims to grant private and international companies the right to run municipal sanitation services with thirty-five-year contracts.
Trade unions and defenders of public water tried to derail the privatization in the courts by pointing out that local legislation limited all contracts to twenty-five years. Luiz Fux, a pro-government Supreme Court judge, quickly ignored these complaints and made the decision to validate thirty-five-year contracts.
The privatization of CEDAE did not garner widespread support in Rio. Six percent of Rio’s water was already operated by private companies. Residents living in the areas with privatized water pay up to 70 percent more for their water than do those serviced by CEDAE. Rio’s inhabitants therefore had good reasons to assume that the same fate would befall the state’s largest water company.
A crisis in the water supply in January served as another excuse for pushing forward CEDAE’s auction. Algae infected the water supply, causing alterations in its color, odor, and taste and causing stomach ailments. This crisis damaged CEDAE’s image, contributing to the scheduled auction being brought forward precisely when the broad, national privatization strategy was faltering and in desperate need of a win.
The timing of the crisis led to speculation on the part of opponents of the privatization that the contamination was not accidental. Former governor of Rio Wilson Witzel publicly addressed these suspicions and denied responsibility for the disaster. The former governor quipped:
I suspect that there was sabotage, exactly to undermine CEDAE’s efficient management that is underway as it prepares for the auction.
Police opened, and then quickly closed, an investigation into allegations of sabotage due to insufficient evidence.
Privatization’s Antidemocratic Champions
While CEDAE was undergoing privatization, Witzel was impeached following accusations of corruption, only a year and eight months after he was elected in 2018. Six of Rio’s governors have been removed from office or imprisoned in the last four years. One, Sérgio Cabral, remains in jail. The others are all appealing their charges after having been released on bail.
Opposition to privatization did not only come from defenders of Rio’s constitution. A few days before the auction was set to take place, it was suspended indefinitely by a local judge. The state had ignored its legal obligation to negotiate with local trade unions in cases where mass layoffs were likely.
The current director-president of CEDAE, Renato Espírito Santo, had previously admitted that 80 percent of the water system’s 5,600 workers would lose their jobs in the event of privatization. Undeterred by these warnings, Supreme Court judge Luiz Fux came to the rescue of CEDAE’s sell-off. Fux overruled the decision to suspend the privatization, guaranteeing that the auction would go ahead as scheduled.
Frustrated with the federal demand that it should privatize the CEDAE as a condition for federal emergency debt relief, Rio’s state legislators debated a proposal to reverse the order. These last-minute attempts at resistance provoked fierce opposition from defenders of the deal. Parliamentarians reported receiving calls, some of them explicitly threatening, from the sitting governor, other state legislators, and even federal politicians, including Jair Bolsonaro’s son.
Local unions and social movements organized large, diverse, and noisy demonstrations inside and outside the legislature. Meanwhile, national trade unions in Canada wrote directly to the CPPIB urging them not to finalize the deal.
In Rio, pro-privatization state representatives left the legislature in an attempt to invalidate the vote by preventing a legal quorum. It quickly became clear that they would not have enough bodies to undermine the vote. Rio’s legislators voted thrity-five to twenty-four (with two abstentions) to delay the auction until a new agreement was reached with the federal government.
The victory only lasted for a few hours. The sitting governor publicly stated that the auction would go ahead and that they would ignore the vote to delay. The governor received legal cover for this decision from an appeals court judge that had previously absolved Bolsonaro for his racist and homophobic comments.
To the Private Sector Go the Spoils
During Bolsonaro’s tenure, the mandate of BNDES has been to guarantee as many privatizations as possible. The bank’s director of infrastructure, concessions and public-private partnerships, Fábio Abrahão has explained to the media that for months his department has been operating a “war room” inside the bank to push privatizations forward as quickly as possible.
Abrahão assembled his team of experts specifically to deal with legal challenges to privatizations. When questioned about the possibility that legal or political decisions could postpone the auction, Abrahão asserted that “we don’t work with delays.” This statement reveals everything we need to know about the strength and arrogance of Brazil’s capitalist class.
The auction went ahead as scheduled on April 30. However, Rio’s government did not choose to privatize all of CEDAE. Distribution and sewage treatment, the most profitable parts of the utility, were sold off. Water capturing and clean-water treatment will remain the state’s responsibility. Retaining control over the least profitable part of the water company while losing possession of the more profitable part will deprive the state of the ability to cross-subsidize internally.
In preparation for the sell-off, CEDAE was carved into four blocks, each to be sold off separately. The minimum price was $10.6 billion reals (C$2.4 billion). The three most profitable blocks ended up selling for more than double this price. The fourth block was not sold, despite the Rio government offering it for the lowest price.
Iguá — the company partially owned by the Canadian pension firms — won one of the blocks. Auctioneers saw no need to accept other offers because Iguá’s first was 130 percent of the asking price.
CPPIB and AIMCo own 46.7 and 38.6 percent of Iguá, respectively. The Brazilian national development bank, BNDES, and the asset management firm, IG4 Capital, divide the remaining 10.9 and 3.8 percent of the shares among themselves.
BNDES’s multiple roles as organizer, shareholder, and decision maker raises significant questions about the legality of this whole process. Opponents of the privatization of CEDAE will continue to contest it and will, rightly, draw attention to the role played by BNDES in orchestrating the deal.
The CEDAE sell-off is only the start of a wave of Brazilian privatizations backed by the pensions of Canadian workers. The Canadian Pension Plan’s Latin America director, Rodolfo Spielman, confirms that, within the new legal framework set by the auction, the private sanitation sector has the potential to grow.
CPPIB’s director of infrastructure, Ricardo Szlejf, estimates that Iguá will participate in “many, if not all, the concessions and privatizations in the coming years.” The CPPIB is looking to diversify its portfolio, and by investing in energy generation and transmission. The investment board has around $27 billion reals (over C$6 billion) worth of investments in Brazil, equivalent to half its portfolio for all of Latin America.
Brasília’s commitment to antidemocratic and authoritarian privatizations shows no signs of waning. One week after the CEDAE auction, a vote on a constitutional amendment to remove the requirement for a plebiscite in cases of large-scale privatizations took place in the state legislature of Rio Grande do Sul.
Investors and conservative politicians are targeting Rio Grande do Sul’s state bank and water systems for CEDAE-style privatizations. By a margin of one vote, the legislature approved the constitutional amendment, removing the mandatory democratic check on these types of political decisions. It soon came to light that the vote was miscounted: the winning side counted the vote of an absent legislator. The decision is now being contested.
The confidence and boldness with which the extreme right is attacking makes it clear that they have abandoned the “rules of the game.” We must expand our fight against the expansion of capital based on speculation, predation, fraud, and the theft of socially produced wealth. Only when we organize creatively and boldly can we secure and expand quality public services that are democratically managed and accessible to all.