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ARSESP Meeting Transcript Sabesp (SBSP3 BZ) September 22, 2009

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Mario Arruda Sampaio: I am the Sabesp’s Head of Capital Markets and Investor Relations and our event is a meeting with Mr. Hugo Sérgio de Oliveira, President of ARSESP, and with all the analysts covering or interested in Sabesp. We expect this meeting to last one and a half hours. Basically, Mr. Oliveira will talk about ARSESP and what he is doing, but mainly he will be taking questions. Our main objective is to align the analysts, open this channel with Mr. Oliveira and ARSESP, who will certainly contribute to everyone having a very deep and dynamic level of information. So this is the idea. I would like to introduce Mr. Oliveira. He is an expert in economic planning and sanitation economics. He worked at Sabesp for 15 years and was Head of Economic Planning, which is basically the company’s economic core. This was about 15, 16 years ago. He then went on to IDB, where he also worked for 15 years on the Environment and Natural Resources Executive Board, so he was regularly involved with sanitation, obviously not only São Paulo, Sabesp, but on the contrary, having a broad view of sanitation and the environment in the Americas. Recently, about a year ago, he became president of ARSESP and actually inaugurated the agency and its activities, chiefly in the sanitation sector. So, thank you for being with us today, Mr. Oliveira, the floor is yours. Hugo Sérgio de Oliveira: Firstly, thank you Mário and Sabesp for the opportunity to be here and explain our operations. ARSESP was created in December of 2007, after a period of planning, structuring and the enactment of Sanitation Law 11,445 when the government effectively created the agency. ARSESP has a solid base because it is grounded on the Energy Public Utility Commission, created in 2000. The commission has been operating for approximately 10 years, regulating the electricity and gas sectors. In the electricity sector, delegated by ANEEL (Brazilian Electricity Regulatory Agency), it supervises and technically regulates the distribution services; and in the gas sector, it fully economically and technically regulates gas distribution services, that is to say, it is a structured agency with about 80 employees, and sanitation services were added to its responsibilities as of December of 2007. So then it needed regulation. The idea of the Secretary and the government was to make use of the synergy existing in both sectors, the practical experience they have, in order to put all sanitation regulation into practice quickly. This agency makes its decisions in a joint committee, decisions are jointly discussed between groups and only after reaching a consensus, the board establishes or makes the resolutions. Out of five boards, three are technical and introduce technical regulations. One board is related to gas, another to electricity and another to sanitation. There are two other boards, which are more thematic, the regulation board, introducing regulation for all sectors, and the institutional board, which deals with contractual relationships, relationships with other institutions, agreements and all institutional development, qualification and everything related to the agency.


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Above the agency, there are two councils, the Energy Council and the Sanitation Council, and they are energy and sanitation oversight boards that can reconsider the agency’s decisions. In the agency, if there is any appeal, it should be taken to the respective council, which will then decide whether they approve or not with the agency’s actions. So, this is how these councils work; they represent the public. Basically, the Energy Council is comprised of representatives of the service providers, of employees, consumers and civil society. For the sanitation sector, mayors’ also participate due to the service ownership, as you all may know. So, the cities have a certain voice in the council, in addition to the construction sector. The Energy Board has been completely operational for a long time, and the Sanitation Board, due to restructuring, only recently has begun to be formed; this is still unfinished, and is not part of the institutional structure of the agency. As I said, in spite of being created in December of 2007, in fact, the agency’s Board was only formed in June of 2008, that is to say, I was appointed in April as the regulation officer and so was Karla Bertocco, as Institutional Officer. The electricity and gas officers were appointed only in July; accordingly, a joint committee was effectively formed in June, and recently we were able to recruit a sanitation officer. The problem with sanitation and the agency itself is the low salary the agency pays. So, we have to limit most of the officer positions, for instance, I am retired from the bank, University professors who can still teach while serving at the agency, and sanitation market was booming, with good professionals dedicated to projects, major consulting firms, so it was difficult to build a good staff. But at the same time, despite all that, today the Board is complete, and during this time we had to make a list of what we could do in parallel. First, the functional structuring of the agency; afterwards we needed to prepare a public contest, we went through all the red tape at the Management Secretariat to hold thepublic contest, showing the funds we already have, establishing a regulatory tariff on Sabesp in order to raise necessary funds to hire the staff, prove that to the National Treasury, carry out the public contest, hire Vunesp [test administration agency], and everything else. Two weeks ago, we released the public contest results and we already have the staff. The other problem is the building where we are going to be headquartered. We are currently located at Boa Vista, 170, on two floors of the Cidade I building that fit 80 people, and we are hiring another 120 people. We are going to have 200 people, so we have to find a new building. We were in a rental process a while back and it didn’t go through, so we are starting over. At the same time, we are going to train the staff that is joining us, because it is very difficult to find people who are trained in regulation matters. So, we have technical cooperation with the Inter-American Development Bank. Because I used to work there, I asked my old pals for some funding so we can offer a training course with USP, which will probably be a one-month course at first, and address all matters: energy, sanitation, inspection, rules, procedures, and so on. We are training the staff so that as soon as they are hired they can start to work.


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We already have a strategic plan, a certain organization. Also, we have started some customer relations programs: we asked the service provider to make the information clear to the customer. We’ve put our ombudsman’s number on Sabesp’s bill, and in some points and business units. We have a pilot project to create a customer service system and already have already defined sanctions and penalties. From a technical point of view, we established general regulation of services; we created an incident communication system and all that we have been responding to with outsourced employees since we still don’t have our own staff. If any water mains break or there is any other extraordinary event, we still don’t have our own staff, but we’ve hired consultants and credentialed some exports to resolve these problems. That does not mean we are not supervising it; at any given time, inspection is precarious, performed only in major events because we still do not have any regulation; however, when certain accidents happen we have corrected the problem through consultants: for example, major water main breaks are inspected, checked, warning notices, fines or notices are issued. The agency has done this promptly. We are preparing a complement to economical-financial aspects. We have begun a readjustment process for 2007—2008, that was when the agency did its first intervention. We authorized the Sabesp readjustment based on its charter, its relationship with shareholders, due to the fact that it is a publicly-held company and used to do a tariff readjustment and disclose it to shareholders, and we kept that practice at first. We tried to change it later but we had some problems, so we decided to change it back because we still did not have any definitive rule. We are hiring consultants, also supported by the Inter-American Development Bank, to make this readjustment process clear and to develop a series of procedures for both readjustment and the tariff review process since the sector needs it. We do not have any clear definition in terms of federal legislation, there is not even any rule established by other states; there is only one similar process in Brasilia, at CAESB [Federal District’s Sanitation and Water Company]. We are also contracting regulatory accounting studies, through which we will effectively measure costs and check the company’s performance in terms of regulatory issues. Basically, we are working so that all fundamental elements to structure this agency, such as regulation, rules, procedures, staff, facilities, are in place mid- or the end of next year. So, structuring this agency is not easy, especially following its development in terms of a company, a concessionaire big as Sabesp. I am willing to answer any kind of question; at the agency, we believe that total transparency is our responsibility. We haven’t yet fully implemented a transparency system, but we have attended all forums and we are willing to answer any of your questions. Soon, we hope to broadcast our Board meetings on the Internet. These meetings are already published in the Official Gazette and their minutes are available on the website. We intend to open our Board meetings to the public within two or three months. So, now, I will take your questions.


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Márcio Prado, Banco Santander: I would like to start with a quick question. It is about the last fact you mentioned that, by mid-2010, ARSESP will be completely structured and ready. I would like to know if, in addition, the agency would also establish its own method of annual tariff readjustment and annual tariff review. Basically, even though the new method should only be implemented in 2011, will the agents actually have access to the final method by mid-2010? Hugo Sérgio de Oliveira: Effectively, it’s like this: we would like to have finished this already, unfortunately, the obstacles are huge. We know that 2010 is an election year, when it is very difficult to implement anything like a tariff review process. Our experience with implementing the gas tariff review process was reported by Carta Capital magazine. There are complicated procedures, and they should be conducted in a clear way and in advance, considering all the publicity they get. So, the key procedures are to define the review and readjustment processes and to determine rules for them. That will be done with a consulting firm that I told you we are contracting with the funds from the Inter-American Development Bank, and all of this will have a public hearing period, that is, rules will be discussed clearly with all involved parties, consumers, concessionaires, and the granting authority; I mean, everyone has to participate. The problem is—and you should know that Brasília is a different story. I was talking to Ricardo Pinheiro, the chairman of ADASA who was my co-worker at the bank too, and I told him that because Brasilia is effectively both a city and a state, it has only one contract and it’s easier to review only one contract. Also, because that the state gas service concession has three territories regulated by a single contract, it’s easy, actually, because one review process can be applied to those three territories. Here, we have 180 contracts, some of them are indefinite. So, all this discussion will be about consistency, application and the process of including this tariffing in each contract, so I can migrate and say that this is a consistent formula. So everyone has to give their opinion and agree with this formula. If there are important definitions? Yes, there are. For instance, if it is going be a formula for short-, medium- or long-term financing, is it going to involve future financing and investments, and also remunerate the past compensatory basis? Everyone has to understand these decisions; otherwise, people will think we are raising the tariffs instead of understanding that return on investment is important and that that needs to come with technology, I mean, the industrial complex that works today is not the same that I am going to replace ten years from now. We have to understand that we can’t establish historical prices. It is easy to apply this idea to one contract but for 170 contracts, with the agreement of all cities and mayors and whoever else—that is a long process. That is why we intend to spend more than one year on that purpose or, if possible, to reach a consensus. Felipe Mattar, Banco Barclays:


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Although I have some questions, I will limit myself to two or three. The first is the following: as far as I could understand, and also based on Marcio’s question, it will take more than a year for us to have this definition. I am not talking about final policy implementation. Correct me if I am wrong, but I understand that there is a federal regulation requiring you to establish a rule by the end of 2010, and that is according to a law enacted at the beginning of 2007, and later those two Ministry ordinances that required a defined policy by the end of 2010 so that the cities could decide whether they would accept that particular agency or not. That is my first question, is there any requirement that the rule be defined by the end of 2010? The second question is about the asset basis, since you just touched on this. I mean, in the preliminary regulation, in the technical note, it was clear that, at first, your asset basis would be defined based on your current assets in 1995, restated to the present. Since we are now talking about a longer term, should we now expect a new asset base to be calculated with the consultants, etc? If so, I would like to know how the process is unfolding. Is it an independent consulting firm chosen by the company and another by the regulating body that will compare figures? How is the agency calculating its asset basis? Hugo Sérgio de Oliveira: Okay. The understanding is that the rule does exist. The sector does not have—actually we are working with a P zero that we are not exactly sure what it covers. But the adjustment rule had already been defined by Sabesp in the process, the agency maintained it, it tried to change it, but there was a misunderstanding, but we were not referring to contemplating future investments, i.e., if you look at the formula, there was no CAPEX, it was exclusively the basis plus OPEX. It was an intermediate formula to be effectively reached before 2010, since in 2010 it would be difficult, it would be difficult to anticipate half of the movement, let alone the whole thing. What has to be done by 2010 is the municipality must have a regulatory agency. That is mandatory. The regulation itself, of cost, service, tariffing, that takes longer and that is why we still don’t have it. Evidently for Sabesp, it would be impossible not to be clear about the readjustment, at least restating the tariffs in real terms, that is, maintain the purchasing power of the tariff, which I think is fundamental, and the rule was defined and we prudently maintained it and, due to the strong reaction towards the move, we went back. And this was detrimental to us since we would like to move forward, but unfortunately, we had to take a step back. As for that specific moment, since it was a short-lived, the asset base would be considered based on fixed assets or something like that. If the change is made, we will probably disclose a technical note about the basis; we will have to choose a valuation method for this basis, the way the basis will be calculated within the five or six existing methods. Our discussion today on gas is related to that since we are using a basis considering the value of the business whereas everyone wants a basis considering the value of real assets for services provided. This is the difference in the gas issue. I don’t really want to talk about that at the same time we are discussing sanitation. So, we will have to define a clear basis rule, which will cost us time and study, and there will be a study by an independent consulting firm. What


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CAESB is doing is very important: they hire an independent consulting firm and ADASA will carefully look at that and either approve it or not; that is what it is time consuming. Obviously I think this is a preliminary step. First of all, it is important to adopt a principle that will be the basis of the tariff formula, OPEX and CAPEX. Everybody understands that this is short- and medium-term financing, not only a matter of dealing with regulation via the rate of return, based on past costs, this is the most important passage and society must understand that and then we will be able to move forward. But the first steps are important and that is why we have to have public hearing. It’s no use imposing a rule because later it will be contested. What happened with the gas process is that basically it was discussed behind closed doors. When the decision was made, the players did not understand it and at based on that the complaints start. Currently, to fix that, there must be some contract renegotiation, which is not a good indicator since it reduces concession stability. So, concession stability, regulation stability is very important from the shareholders’ point of view; having a rule that only works some of the time is no good. In England it’s the opposite, since, in reality, tariffs generated by the value of business, value of shares are below the real value. So, people have changed their minds on the regulation; no one wants it to change, since this would increase tariffs. Here, everyone wants it to change, since it will lower the tariffs. The trend is always toward decreasing tariffs. The rule has to be well thought-out, discussed and documented, and that is why it will take a long time. I believe and agree with you that it takes a long time; we are thinking it will take about a year. That is why it will take all of next year, 2010, taking advantage of the fact that it’s an election year and in 2011 we will not be able to implement the rule since the management will be leaving and it cannot and will not be responsible for whatever happened. If that happens, approving this decision and then increasing the tariff, it will cause a problem, consumers will react and the new government will take the blame. Mariana Coelho, Itaú-Unibanco: I would like to know if there can be different tariffs for different municipalities or regions, since sewage coverage in the municipalities varies. I would like to know if some municipalities will continue subsidizing the growth of others or if there will be a difference in the regions. Hugo Sérgio de Oliveira: This is a key element in the reforms. To this day the system works based on cross subsidies, both in service and community. For us, and there is an unspoken institutional agreement on that, somehow stability relied on the fact the municipalities that are subsidizing others hadn’t realized it until now, or until very recently. Evidently, all new contracts already realize who is subsidizing; it shows that this excess should stay in the municipality. Meanwhile, municipalities that receive subsidies are deficient for several reasons: poverty, scale, type of system. So there can be unitary costs in small systems, which are higher and are not compatible with the community’s purchasing power.


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This is the range of existing projects, we don’t know for sure if real costs should be higher or lower, but the deficit exists. So, the system we should put together that will be more transparent is a direct subsidy system. I mean, the rule of thumb is that the Chilean model is really good, and that becomes really clear when analyzed historically. Ten or fifteen years ago, Chile’s coverage levels were good, but not as good as they are today. You build a system to guarantee a tariff that may cover the service expansion for marginal costs and you build another direct subsidy system with financing from funds that come from the sector itself and funds that come from the state, with financing based on demand, to the consumer, and not based on supply, not subsidies based on supply, but subsidies based on demand. And combining these systems results in a sustainable situation, I mean, the concessionaire is sure that it can investment it has a guaranteed tariff and a stable rule. This formula was set, which is an amazing formula because it has a rule and everything else, and it has worked. So, this is the sort of thing we should either document or discuss. If it is not discussed—and I can’t stress enough that tariffs are different from subsidies and that subsidies are matters of public policy, so they depends on community. The community as well as the population have the right to know who is going to allocate subsidies and if they will be allocated to the poor, to resource conservation, to protecting the environment, and these costs are much greater than what the consumer can bear. Considering that, there are two very important points: responsibility when using or rendering this service for the tariff and from a political standpoint, making it accessible to everyone. The government or some other public organ is responsible for universalizing access, so if poverty hinders access, the government needs to provide it. Preserving the environment is also a public matter, so if there is any subsidy for it, it should be provided by society as a whole. If we solve this public policy issue of subsidies, we can ask ourselves: who will give them? Who controls them? It has to be controlled, otherwise resources will be wasted. Once we know this, the tariff issue becomes quite simple. What will be asked from service providers is efficiency, that cost structures are efficient, and we can supervise their productivity and progress in terms of indicators, as well as impose sanctions when the law is broken. On the other hand, if population gets direct subsidies, not paying the bill cannot be tolerated. In these cases, provider is allowed to suspend service. If a person has the opportunity but has no money, then state should provide, like in Chile. If they don’t pay, they are being irresponsible and must be punished. The price sign is important. Why is the direct subsidy so strong? Because everybody pays it equally, that is, everybody pays the same tariff. If someone can’t pay it, they will receive a supplement. However, they do know that this cubic meter, both for him and his neighbor is the same. If they use too much, they will have to pay for it, and if they don’t, this service is suspended. This is the difference between cross subsidies, they hide their price tag and that leads to certain distortions. For example: concessionaires tend to raise certain types of categories, usually non-residential ones. Correcting them later is not simple, that is why this passage needs to be carefully studied. We have to look at other countries’ experiences; we have to take advantage of social control of subsidies, which should be established responsibly, it’s not a frivolous issue. I don’t know if this is the answer you were looking for.


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Gustavo Gattass, Banco BTG Pactual: I also have several questions, like Mattar. I would like to start with two questions, and then maybe I’ll ask more later. The first is: going back to this, do you think that the tariff basis will be debated for each municipality or does the regulatory agency want to look at Sabesp as a consolidated entity? If it is debated for each municipality, what are you thinking in terms of administrative costs? Will it be acknowledged that each concession would have an administrative cost and that would Sabesp keep the efficiency because it has a single administrative structure? Would this be something that is already embedded in Sabesp’s structure? My second question is about this year’s tariff adjustment. Looking at the technical note that you issued, you break down a cost structure and do not recognize part of the company’s costs. You also show a return on remunerable assets of – if I am not mistaken – around 7%. I just wanted to understand this: does what you did allow you to say that the cost that was recognized is efficient or not? Is this return seen as acceptable or not? Hugo Sérgio de Oliveira: I’m sorry I missed your questions. I didn’t get it. Could you be a little more straightforward and rephrase your first question? Gustavo Gattass: Sure. As straightforwardly as possible: will we have a regulatory basis for each city or municipality? If you conclude that each municipality is a separate concession, will Sabesp’s efficiency – due its single administrative structure – remain with Sabesp? Hugo Sérgio de Oliveira: First, I do not have an answer right now. I can imagine– It’s a dilemma, but the obvious idea is that Sabesp’s model would be similar to the one of Águas de Barcelona – AGBAR. AGBAR treats each concession as an independent entity. You have one parent company and businesses all over the world. Each isolated concession is profitable by itself. What the parent company does is to provide you with a model. The model would be this: the parent company can provide guarantees but it is the concession that goes to the market to raise funds. So for instance, the concession of Buenos Aires was made through a partnership that involved Suez, AGBAR and I don’t know who else, and raised funds like Sabesp, in the private market. Even the bank lent loan A, loan B, right? 500 million, 600 million – it raised funds. Tariffs made it sustainable, the tariffs it would charge in the concession area, in Buenos Aires, but obviously it was backed by the parent company. What happened then? The Argentines did not comply with the contract, the tariffs were frozen and the concessionaire could not pay its debt. So then there was a lawsuit between the debtor and the bank... What did Argentina do? The cash flow would come in; they would separate the cash flow of Águas de Argentina and say: “I want this excess cash flow invested in this and that, and then you pay the bank with what is left over.” At some point the situation stopped being sustainable and the parent company bore the loss. I believe that this is the ultimate model that Sabesp must achieve. But in order to achieve that – and the remuneration basis – is different in each case.


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The challenge that we face is the size of these concessions, the arrangements that need to be made for this to be achieved… Maybe it will be done through intermediate stages, by each business unit – this can be achieved – until the ultimate goal is achieved, when each concession is isolated. And the parent company, with a more streamlined and lighter structure, will undergo a difficult process of adjustment. I can’t say it’s simple, but that would be the ultimate model. We will deal with the intermediate stages as a whole. I do not believe that next year we will be able to deal with this question of the model. The model is Águas, but there are intermediate stages. You have to look at the big picture. So I have no doubt about that. It won’t happen overnight, but in 5 or 10 years – for my grandchildren – we are probably going to have that. And the second question was about the adjustment… Gustavo Gattass: Pardon me. In the technical note, you presented a cost structure for Sabesp that was smaller than the one Sabesp had presented to you, indicating that you cut some things. I would like to know if this is a vision of the regulatory agency that that is the most efficient, or if you are going to identify the direction Sabesp would have to go. And I would like to know if the return on remunerable assets, presented as 7%, is close to what you believe is reasonable or not. Hugo Sérgio de Oliveira: Obviously, the entire process– Since it’s hard to understand the regulation, what the regulatory agency does, the idea since the last adjustment was to direct it so that we could work with efficient costs. So that was the intention – a very ambitious one. In last year’s adjustment, we made a small change, which was not noticeable, because it was related to how we traditionally did the calculation. We removed the weighting. What is the adjustment today? It is a weighted average, manageable and non-manageable costs are weighted, each with its own indexer, and this weighted average, the weighting, is revenue. Generated revenues weight these indexers. Last year, I simply changed the denominator to costs to indicate that I was going to work with cost of services, and that the weighting should be an indexer, in other words, the weighting should be based on costs, not on revenues. This was a subtle change. Obviously, at that point I didn’t have enough authority and experience to make a bigger change, so I admit that the cost of services is equal to generated revenue, in other words, I accept the model’s implicit resultant remuneration rate without questioning if it is good or bad, above or not, because if not it would change. So last year’s tariff– I said, okay, it is the resultant rate, which is inherent to the system. In the end, the weighting is the same as revenue. But in the following year I was going to make a correction and work a bit more on efficient costs. The correction was small, it was not abrupt, but it is like you said, someone will look and say, “Let’s work and we have to work in terms of cost and efficiency.” This is what is going to happen to this agency in the mid- and long-terms. So right now the differences are small, but in the future we are probably going to have more elements to work on and identify what is efficient and what is not. Today we are– the famous symmetry of information is true, I work with Sabesp’s costs, which had little authority to change them.


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Mario Arruda Sampaio: We have a question sent by Anderson Frei of JPMorgan through the Internet. I think you have already partially answered it, but I am going to ask it anyway, in case anyone has any doubts. This is his question: “Since the services are municipal, do you believe there is a chance that each municipality renewing its concession contracts will demand an exclusive calculation of the asset base and tariff structure? In this case, where would cross subsidies stand?” I think this question has already been partially answered, but could you make a quick recap and then comment on an exclusive tariff structure? Hugo Sérgio de Oliveira: First of all, I think that this is legitimate. Each concessionaire has its own costs and tariffs should be based on the actual costs, so I believe that this is somehow legitimate. If a municipality – and the mayor must look from the other standpoint, which is the payment capacity, the community’s purchasing power… Today the reality of costs has been made easier by cross subsidies, in fact. Without cross subsidies, what will happen? A wealthy municipality, an average municipality, one of these that can ask for independence – these municipalities are aware of their budget surpluses. What will probably happen – and it is a question of transition – if most of these municipalities with a budget surplus demand an exclusive tariff structure, is that there will be a contribution fee. That is, today a solidarity fund is embedded in the tariff. Each municipality with a surplus contributes so that services may be provided to municipalities with a budget deficit. I think it is important to make this clear to these municipalities during negotiations. There is a small reserve, I don’t know if this reserve can be made clearly, transparently, or if the concessionaire that is responsible for all of them has to account for this in its calculation. In the free cash flow, before anything else, there is a reserve that you need to include in the tariff, which corresponds to the solidarity fund. We will have to work on this model before arriving at a final model. Unfortunately, this model is 20 or 30 years old – I am not sure how old it is – and it can’t be restructured overnight. If all municipalities with a budget surplus demand a clear account, we will see cases like in Mato Grosso, where the privatization of capital led to a loss of all services in the municipalities that don’t have the capacity to provide adequate services. In the end, the population suffers the consequences. I believe that this issue also concerns the state government and not only municipalities. Felipe Leal, Bank of America Merrill Lynch: Good morning. I would like to know about costs, OPEX. Do you have any idea of what method should be adopted, of a model company, an internal benchmark method? Looking at companies abroad, do you already have an idea about the way this should be handled? Hugo Sérgio de Oliveira:


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We are looking closely. We have our Chilean experience concerning this model company issue. The electricity sector is heading in this direction and ADASA, which has requested a review by a consulting firm specializing in the electricity sector, is pursuing this model company thing. I have spoken with the regulatory agency and the regulated company, because I have friends from both sides, so I refrain from expressing my opinion – I just give advice. Apparently, it is very hard to implement the model company model, such as CAESB. There are many complaints from CAESB’s people. I imagine that – since it concerns a company like CAESB, which is both a city and a state – putting this into practice in São Paulo must be even more challenging. I mean, I don’t have the last word, but I suspect that making this work would be difficult. Maybe later I will see that I was wrong, hence the consulting firm: obviously, the consulting firm will look at these two options. Other methods are also complex, I mean, nonparametric methods, the matter of DEA, of stochastic functions… For some things, they are very elegant, but I saw something from Aderasa… It went through the DEA model 200 times to have a border production function… Someone may question this – it was 200, not 250.... Today I prefer the benchmark methods, due to their practicality and everything, because if you choose a set of indicators, a basket of indicators that is reasonably appropriate, that is offset with the company, they are easier to implement and for people to understand. So, I think these methods have several advantages. There are some shortcomings, but from the practical point of view, this is the path that we will start pursuing. We spent about four or five months discussing with Flávio Naccache the adoption of a method that we intend to implement in municipalities. That’s where we would start from. The consulting firm is going to examine this and verify if this method has virtues, efficiencies. It is going to examine the econometric, parametric and non-parametric methods. It is going to examine the model company and then issue an opinion. This opinion, after public comments, will be put into practice. But we are going to begin with the benchmark. Sergio Conti, Banco Barclays: Following up on the first questions, I think that, about the calculation of the asset base that will be developed by the agency, going a little beyond the initial part of how it was presented in the preliminary technical note, of how the initial calculation will be, whether it will be changed or not by the consulting firm, the question is basically: how will Sabesp handle its two main challenges from now on? I mean, I’m talking about all investments in water transportation and production that are being made in distant locations – which obviously have a high cost and do not generate actual additional revenues for the company – and also about significant future investments that Sabesp will have to make in sewage treatment, which will probably not generate additional revenues either, since Sabesp already charges tariffs as if it treated 100% of this sewage. My question is: will these investments start composing the company’s base, the company’s asset base or only a portion of it? How will the agency deal with this? Because


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according to these significant investments that the company has announced, we estimate that this CAPEX plan should not generate an appropriate future return to the company within the current regulatory framework. Hugo Sérgio de Oliveira: Logically, of course they should compose the base. That’s when the subsidy issue comes in. I don’t know if you pointed this out, but there are two economies, in the case of the environment, of course, and in the treatment – we know that it is difficult to transfer the final cost of treatment to tariffs. All the effort going into cleaning up the Tietê River and everything else in the end will not add up. The transference to tariffs will not be 100%. I think that it will be difficult to have it fully passed on. That’s why a system of subsidy is necessary. The actual cost of the service will have the incorporate the base and everything that is being used. Now, on the other hand, we are going to work for the other side. That’s the initial idea, but evidently this has to be examined, calculated, estimated, and we have to see if I can afford to grant this subsidy or not. I mean, it is a whole model that has to be analyzed from all perspectives. It may be that later I’ll say, “Well, a portion of this base won’t do,” but it’s going to be difficult to judge this. The base is a very sensitive issue and we are seeing this up close and personal today. We know that it is important and that there are difficulties. Once established, the base is the foundation of the tariff. And today, if you calculate the gas base, for example, it accounts for more than 40% of the tariff of Comgás’ distribution margin. I mean, any changes to this basis have to be very well thought out. If I were to remove a portion of it, I better have a good reason to do that. From the methodological point of view of cost, it is full cost, but now, we have to see what can be done. Right now I cannot give you any guarantees, but in principle it includes everything. Sergio Conti: Let me see if I understood this: in an ideal world it would either be included in the tariff or the government would have to provide a budget subsidy, right? Hugo Sérgio de Oliveira: In principle, that’s how it is today. That’s how it should be. It’s important to understand that the government is the majority shareholder of this company and receives dividends. So, as a shareholder, the government can return a portion of these dividends to the system in the form of subsidies. What happens today in Sabesp’s case is an interesting phenomenon. And it’s not only in Sabesp’s case, but also in the case of many companies that are successful, that have a good market share. The municipal and state governments have sort of grown apart, lost their vision, their perspective that sanitation is a public necessity. The mayor doesn’t want to be responsible for the service, so he hands it to a concessionaire and charges only if the tariffs go up. The mayor wants to focus on road maintenance, improving urban areas, building parks around the city, doing things that will help him get reelected.


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On the other hand, the government--some governments look at concessionaires from the investor’s standpoint, from a perspective of investment. This is proven by the fact that the government does not provide any return, especially the state government, to the sector or Sabesp. Sometimes there are some isolated investments, but I don’t know if the amount that comes out of Sabesp in the form of dividends is equal to the amount that goes in, in terms of government actions in the sanitation sector. From the standpoint of the federal government, it’s the same thing: PIS, COFINS etc, these taxes have shown that the government withdraws funds from the sector but makes no investment. Before the PAC (Accelerated Growth Program) it was even worse. The cash flow of funds between the government and concessionaires was negative not too long ago. The federal government made things right by implementing the PAC, and I don’t know if it’s the same thing with some state governments. With reference to municipalities, I’m sure it is not. Municipalities think of withdrawing money from concessionaires to make investments in other sectors. A very clear example of this, through the bank, was the operation of DRENURBS with the municipality of Belo Horizonte. The municipality of Belo Horizonte took out a loan with the Inter-American Development Bank, and the service on this loan corresponds exactly to the amount coming from the metropolitan area. It charges Copasa this amount, so that the municipality can service the debt. So, the municipality is withdrawing funds from sanitation to invest in other sectors. Mariana Coelho, Itaú-Unibanco: I have two more questions. One of them is related to the cost of water: how does ARSESP, the agency relate with hydrographic basin committees in terms of determining this cost. We know that Sabesp has a confidentiality agreement with Emae for a future merger and that Emae has some reservoirs, so I would like to understand how the agency is involved with the issue of the price of water. Hugo Sérgio de Oliveira: Well, we haven’t started yet, but we have several plans. I think that water resources have many facets. It’s not just the price of water, but also water use and competition. We have no authority regarding the dissemination between the uses. Regarding the issue of price, we can participate in committees as active members. Basically, there is a clear distinction between an agency that governs water resources and an agency that governs services. Our focus is on consumer protection. We have to understand what a concessionaire does, that it’s a monopoly, so it has a lot of power, in order to protect consumers against it to the best of our ability, with a tariff that is reasonable and a satisfactory service quality. That is our duty. Now, on the other hand, the duty of the other regulatory agency – ANA – is to inspect the price of water, to verify that the water resources are being used efficiently, if a particular sector is being more or less privileged, if the use has been constructive or non-constructive. Those are the duties of ANA. Many people say, for example, “You never see it or have never seen it.” The only agency like that is ADASA. There should be a single agency with both duties: to inspect water resources and services. Most specialists – and I am talking about banks, I had this problem – are against a single agency because they say that there is a conflict of interest


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between the parties. But ADASA has both duties; it is the only regulatory agency in Brazil that performs both duties. I don’t know what future holds. Apparently, the World Bank is interested in the model and will study ADASA to see its implications, if this procedure is advisable. Mariana Coelho: I guess that, obviously, this line of cost to Sabesp is included in non-manageable costs, in the account of the tariff, the cost of water royalties. Hugo Sérgio de Oliveira: The problem is that São Paulo has never had clear regulation of water resources. You have a body that allocates funds – DAEE – at least takes care of the granting and everything else, there are other basin committees that do not have the clarity nor the authority to set a cost or try to charge a fee for water use. And there is CETESB, on the other hand. I think that this regulation is not set. I think this should be the next focus of the state government; it should improve the regulatory framework. Mariana Coelho: My other question is: Sabesp has been negotiating charges to renew the concessions of municipalities, and with the municipality of São Paulo it has negotiated a stake in the municipality’s share of revenues. I would like to know how the agency sees these costs for Sabesp and how it intends to deal with this issue. Hugo Sérgio de Oliveira: Well, these costs are not included in the tariff, except for those that I mentioned. Sabesp’s shareholders, who own the company, look at the cash flow. Our tariffs reach a point, generate surplus. Of this surplus, if Sabesp decides to award that municipality with that amount, that’s the company’s and its shareholders’ problem. They think it’s important that it contributes to the solidity of the company, that it can contribute to the solidarity fund that funds municipalities that cannot afford services. That is an evaluation that they have to make, and I believe that they do. Regarding these negotiations, based on a previous discussion, Sabesp’s calculation is correct, that is, I think that there is a provision for after the free cash flow. There is a provision for the issue of cross subsidy and after that, this free cash flow is split 50-50 with the partner, because he was responsible for generating this surplus, something like that. Mario Arruda Sampaio: Just to make it clear, once again, what has just been approved is not Sabesp’s negotiation; what has just been approved was the city council allowing the executive branch to negotiate within those minimum limitations. So just to make it clear that it’s not Sabesp’s final negotiation, okay? This is important. Felipe Mattar, Banco Barclays: Actually, I have two questions. The first one is about cross subsidies, not in relation to municipalities, but in relation to consumer groups. If the goal– we know that there are some differences in the tariffs according to consumers, low-income, high-income


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consumers. I would like to know if the agency’s goal is to develop tariff regulations defining the tariffs by income group and resolving part of these cross subsidies. That is my first question. Hugo Sérgio de Oliveira: Well, of course when we said, “The initial idea is...” I believe that first we have to discuss the issue of subsidies and then establish tariffs. So preferably, the best tariffs are those that are equal for everyone, residential and non-residential consumers, etc. It is the long-term marginal cost of the water, distributed and delivered at the location, how much it costs industry or consumers, everyone pays the same. That is why a system of subsides is necessary. However, since these services are supposed to be universal and everyone should have the right to them, the government supplements the services. That is the ideal world. Until we get there, we are going to go through stages. I have always said that you can get to the Chilean model, through the Colombian model, which is a more focused cross subsidy, I mean, it has a structure that lets it focus better. Because today there are people who are receiving subsidies but they don’t need them. But this requires a social registry, a series of measures that need to be worked on. We do not intend to go from one extreme to the other, from the current solution, which is the cross subsidy.... It has roots. It has the issue of financing pegged to it, and if we remove this all at once, some municipalities will not receive an appropriate service. So, the idea is to focus the subsidy better through social stratification, a social registry and everything else and slowly lay the groundwork, because structural changes can be very drastic. I am almost sure. I don’t have access to it, but Sabesp has already made this calculation with Chilean consultants, so there was no chance of passing from one system to another without undue burden on non-residential consumers. I think there’s going to be a first level that is better focused, but yet with a cross subsidy among categories. Today, for example, a lot of financing goes to the low-income group and this can’t be passed off to a direct subsidy because that will demand from the government more than it can do. So, we will still have to pass it on another level. But still, I believe that after a certain improvement in income, the calculations made by these consultants should still apply for three or four years. Mario Arruda Sampaio: It was over in 2005. Hugo Sérgio de Oliveira: In general, income has improved somewhat nationwide, whether we like it or not. I do believe income has improved and that other calculations should be made, because I still think it’s not enough. Passing from one point to another still requires passing through a focused subsidy crossed among categories. I think the industrial segment can be cleaned up a bit and that this possible by unifying it with residential, but there is the switch from industrial to non-residential that has to be done and we still need to work on it. Felipe Mattar:


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I will ask my next question, Mr. Oliveira. It is a little more subjective. Actually, I would like you to explain a little better ARSESP’s goals and dynamics when developing this tariff structure. Please, correct me if I am wrong. I have noticed some comments on next year’s election and its impact on the tariff, either by increasing or decreasing it. And, actually, when I analyze the solution for this tariff matter, I see it aiming to find balance, as you have mentioned, between consumer’s rights and the providers’ financial situation. In Sabesp’s case, it directly matches the idea of having tax payers as the company’s controller. So, there are also the dynamics of income distribution, I mean, who is going to pay for it in the end? Where is income best distributed? Is it the consumer or the tax payer? At the same time, elections take place every two years. Let’s take Copasa as an example: it had been negotiating a sewage concession with other cities. When the election period came, these negotiations stopped. So, elections will always impact this process. So, back to my question, I would like to know, considering this political context, how tax payers, consumers, and the company’s economic balance stand in this situation. What is ARPESP’s main goal? We can also consider, in this case, that in the electricity sector we have seen, in times of high inflation, positive tariff reviews which respected or tried to offer the most benefit for these three groups. How does ARSESP deal with these groups?


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Hugo Sérgio de Oliveira: I think you have a good point. ARSESP’s strategy is, shall we say, gradually being implemented within the legal framework of a segment whose legal stability is very fragile. If we were in the electricity sector, our discourse would be different. Ownership is not a problem for this segment but it is in ours, it’s our weakness. For this reason, we must establish solid rules and also consider the serious political aspect. I am considering this from the standpoint of state elections. I think this would come right after the change of power. The state government plays an important role because it is the concessionaire and holder of this large company. In a way, its deduction and most of the account can match it too. So, the idea was that by 2010, we will have discussed the rule, opened it to public comment, debated it in public forums and have a solid structure. These are the rules and we will apply them either in the first quarter or in second semester. Obviously, we will have numbers from these impacts and that will be important to help us make our decisions. If not, I could just disclose these things and have a regulation by tomorrow, but as we are not sure about them, these alternatives must be set aside for a while. If we opt for these alternatives, there will be a different kind of impact. And the decision to go one way or another will depend on these impacts. We can’t do it all; we can’t change cross subsidies into direct ones. How long will it take? If it takes more than one year, we regulate it now; a year from now costs more money. We can provide full subsidies, that is, is all treatment going to be taxed? What is the deficit for treatment today? This amount must be clear and all its possible impacts have to clear as well. I believe the agency’s responsibility is reflected a little in trying to gradually establish this strategy. Will we try changing the formula? Yes. Will we do it by showing costs? This is one way because you analysts have noticed a change in guidelines related to the sector itself. This change in guidelines should take a while before it reaches communities or population. But people can already form opinions and that is very important. Communication is also very important and for this reason, we should develop a communication plan, which we expect to pass on some of these concepts. For us to continue making adjustments, we demand efficiency, which is good for them, the community and the company as well. It is all part of the plan. After that, my duty is to set the agency on solid ground. By the time I believe it is ready, I will resign. I believe I’ll be ready to leave in a year.


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Gustavo Gattas: Considering Mattar’s question, I would like to know more about this transition from cross subsidies to direct ones. It seems the agency has thought a little about it and if we look at the electricity sector, now there is an issue of whether tariffs should be equalized or not. So, I would like to know a little bit about the long term: as this transition is made, how are these subsidies and transitions going to be? By the time it is in line with the Água de Barcelona model, in which each municipality has its tariff, asset base and the tariff costs are clear, we should have municipalities that are no longer viable and that will need subsidies. As to subsidies, do you think they would be provided from tariffs from other municipalities or directly from government and not directly related to the sanitation sector? If the resources are to be collected by the basic sanitation segment, would it happen through municipalities with surpluses? If so, how does that work legally? Because there would be municipalities holding concessions and they would be transferring resources, even if within the state, to other municipalities. Is this something that, legally, is easy to implement that is a state matter, and would this sort of distribution between municipalities of the same state be allowed? Hugo Sérgio de Oliveira: I think there shouldn’t be any interference from other municipalities. It must be something that a state fund is able to finance. It does not have to necessarily be related. When you set tariffs at the same level, you consider cost of the service in each municipality. So, you came to the conclusion that certain communities are not able to cover the costs. So the only way it’s possible is if it comes from somewhere else. If not, legality will become an issue and this discussion will continue. We are not changing anything. We have to change. This is why society as a whole has to be taxed; it has to be a tax thing coming from a general fund for this. This is why you have to know what policies are behind it, what are the public policies? Why do I have finance or subsidize those people? Because I want, as a government responsibility, to provide universal access to the service. In other words, the poor have the right to quality and quantity of services that maintain their human dignity. This is not a municipal matter, it is a state matter. So, for this to be done, I would have to have enough funding. On the other hand, how would I benefit from that? Simple: the river would be clean and population would get sick from contact with the water. So, this is not just an issue for the municipalities, but it’s a larger issue of public health. So, those benefits I get from having a preventive health, I will have to take it from the health budget and allocate it somewhere else. I am the government. I allocate resources from my investments. I see where they can be better allocated. So, this regards the state government. That is why there must be public policies, because they involve everybody and when everybody benefits from it there is no problem. Otherwise you will have the same old excuse: I am taking from municipality A to give to municipality B. I am not taking from A to give to B, first of all because the idea of a municipality and cross subsidies among communities is mistaken. These subsidies are for consumers from the same state. What happens is that some parts of this state are poorer


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than others or their economies are weaker, but the fact is that the subsidies are among consumers. Now, every mayor believes that that income is his, but in reality it’s not income generated for the municipality, but for consumers. If there is any solidarity, you can find it in people, not in municipalities. But these concepts are institutionally ingrained. Every mayor thinks he has control over the income that actually belongs to consumers. To stop that, I really think they should come up with a public policy defining either a tax or a sanitation policy to establish a subsidy regime deciding who allocates them, how they are allocated and what entity is responsible for it. It should be outside the system, if only for better monitoring, because otherwise, if it were within the system there would also be problems. So it has to be an independent activity, with all the due regulation. I think the Colombian institutional scheme used for allocating subsidies is a model to be considered. It has a large structure of entities, board members and inspection. When dealing with public money, these measures are needed. With no inspection, everybody uses it, wastes it, takes it to extremes and all these sort of things. So you have to be careful when establishing these measures, it requires a lot of effort. Gustavo Gattas: Just a quick follow up. I still have a question about it. During this transition, ARSESP is probably going to be, while this change from cross subsidies into direct ones happens, in a position of redistributing resources within the state because when you are migrating from cross subsidies—which is how the tariff is established now—to direct subsidies, over time, the agency will have to make some choices on how it goes …. Hugo Sérgio de Oliveira: The agency can support are the elements for helping the state to make its decision. A public policy has to be approved within the scope of the state government. All the interest you generate should be sent to the Sanitation Department, which will forward it to the state government, which will regulate it through decrees. From the moment I have a legal basis, I can go back to enforcing it, but first I need to set up a legal basis. To have this basis, I need to have studies, numbers, impacts, show governors what are going to be the good and bad sides and if this policy can be implemented or not. If we do not reach an agreement, we’ll move backwards. We will have not only to work with cross subsidies but also with several other things. It will be very difficult, because it’s a complex issue and the state may find it inappropriate at the time due to high costs. I am not sure about it, but it does go through the state government. The agency can send it as a policy proposal and whether or not it will be approved, only time will tell. I have the feeling that the state is willing to do it, but it also depends on governors. So timing is important. Many times, when a governor is leaving office, there is no possibility of proposing a policy that may affect resources. It is government’s responsibility to look at it and consider whether it should or should not be approved. Then, they can give the agency some feedback for it to implement the entire regulation scheme deriving from that.


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Renato Pinto, Banco Fator: Despite all its problems and limitations, the state of São Paulo is ahead concerning regulations. Do you see this happening in other states, some serious movement through consultations? Can we see the same happening to ARSESP itself? In Minas Gerais State, we have seen the creation of a regulation agency but most states are just getting started on this. Do you see a greater movement towards this? Hugo Sérgio de Oliveira: We have a reasonable relationship with people from ADASA, because Ricardo Pinheiro was my coworker at the bank so we have worked together a lot. I think sanitation regulation in Brazil is still only on paper, and this is because many agencies—some of them have been created; the oldest is in Ceará, ARCE. It was created ten years ago but it had no authority regarding both tariffs and inspection. A law was created to change this situation a little, but it has not fully taken effect. There is a lot of educational material, edited stuff and regulation on it, but it is not in full practice. There is a movement in more responsible states that are more advanced almost as question of tradition, like Rio Grande do Sul, and the agency from Goiás has a certain structure and the one in Brasília is now moving towards effective implementation. The first serious move comes from the ADASA agency, which promotes a first tariff review. This will be remarkable. I believe it will create a paradigm in the segment, that is, it will establish the first principals for reviewing tariffs and other states may take it as an example. I think it is a significant progress. On the other hand, our idea is to, shall we say, try to stimulate this discussion a little, because we work in a segment with few resources. In past decade, this discussion was driven by the government. There was no investment from any of these companies because most of them were not able to invest and ended up being dependent on both state and federal governments. By the time the PAC starts up and starts allocating resources to most of these segments, except for those that had already been working on their own like Sabesp, Sanepar and Copasa, regulation is left behind. It is neglected, completely forgotten and then it’s hard to move forward. So then we talk about São Paulo, and our goal is to establish a good paradigm within a national scope. We hope that by creating this paradigm, other companies will look at it and follow the example, which would be great. We put effort into it because if this regulation prevails, it will stimulate efficiency, duly separate functions, and oblige companies to modernize. Anyway, I believe this situation will not last for long. Our goal is to raise the bar. Is it going to be hard? I think so, because it is almost prohibited to establish regulatory fees in some states. Besides, some states believe the regulation agency is the responsibility of the federal government. The separation of powers between state and federal government is not clearly defined. I mean, it is very hard to understand the famous idea that we are the state. We are controlled even in São Paulo. It is very hard for a regulation agency to gain autonomy. There is a state attorney general’s office inside our agency, giving an opinion on every administrative or legal action we take.


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Any procedure beyond those considered normal they already veto. Even though there is some progress, São Paulo still has its limitations. Mario Arruda Sampaio: Are there any other questions? I have a simple question compared to all others made so far. It is very objective, though. How would this regulation agency deal with the so-called licensees, municipalities in the metropolitan region to which Sabesp provides services through water wholesales and sewage treatment? It is a usual question, but no one has asked it until now. Hugo Sérgio de Oliveira: This is one of the debts, one of my liabilities. I have two large liabilities I wasn’t able to implement. The secretary has already reminded me of it a couple of times. The regulatory decree says that we should, theoretically, regulate wholesale supply and the licensees, which is an interesting holdover from the old Comasp. Comasp was the first institutional agreement in the metropolitan area. It consisted of Comasp, the water-producing entity at the time, Sanesp, a company in charge of the sewage system whose headquarters were here, and Saec, the municipal service in charge of distributing water and collecting sewage. This was the agreement. And there were the independent municipalities that distributed the water from Comasp. With the creation of the Brazilian Water and Sewage Plan (Planasa), many municipalities had to adhere to it, but these municipalities, mainly from ABC, remained, even without the existence of a contractual agreement, although there was a wholesale supply rate system that practically isolated production costs of delivery to the reservoir. Distribution was the responsibility of the concessionaire. Our duty is to regulate this, to implement a structure. The flaw in the previous agreement was that sometimes there was a contract, other times, there was not a contract, and contracts did not have guarantees, did not have elements of guarantee. The lack of guarantees caused delinquency, non-payment, that the good is essential favored the continuity of the service and many mayors took advantage of that. The first move toward a social rate came in Osasco with Guaçú Piteri, the first mayor that gave up to 10 m³ of water for free, but who did not pay Sabesp. He provided the population with water, gave the subsidy, but did not pay Sabesp. It got to a point where, in the end he took over Osasco. There were other cases, but there is no such a thing as a guarantee mechanism. In my opinion, there should be a rule, a structure, since it will have to reach other municipalities. We are thinking about regulating ABC and also the existing relationships between a distribution entity and a producing and delivery entity. We are taking into consideration that there will be a toll from the source to the delivery. This toll will have certain calculation rules and a guarantee system. This is the wholesale rate. But the good news is that, since I did not have people to implement it and it was difficult to hire employees, I had to create a system to credential the experts, registering them. This list of people I can hire to create this regulation has just been ratified and these people are already hired. Soon, we expect to have draft of this resolution, a technical note with this resolution, and we will then talk to you about it.


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Angela Airoldi, Sabesp: Will these municipalities, called licensees, also be a part of ARSESP, like the other municipalities that have a contract with Sabesp? Will they have to adhere to ARSESP’s regulations or is there a project to create their own agency, a consortium? What is the status of this project now? Hugo Sérgio de Oliveira: Most of these municipalities are pretty loyal to Semae. Traditionally, and everyone at Semae knows this, they are against the state agency for their own reasons, but they have already contacted us. I think Santo André has already contacted us to explain it. I am saying that I have no plans; I think the municipality has the authority and the autonomy to create an agency if it wishes to, and I’m not worried about it. What’s important is that rules are as homogeneous as possible. I think the municipality has the right to have its own agenda. If is free to create an agency, but it should be within the limits, the consumers should have equal treatment, the consumers’ treatment to obtain similar rules and the agency is willing to contribute to the creation of the rules and procedures with these agencies. I have already said that in one of the ABC municipalities. I have said the same thing in Guarujá. On the other hand, I see there is no such a thing as a city-state dichotomy. We are already busy regulating and supervising a sector with a large scope and local specificity. So, it is possible that, to reach an agreement such as the one with the electricity sector, i.e., where the federal government is in charge of elaborating the norms and procedures and establishing the rules and states are currently in charge of monitoring these norms and procedures. What is the advantage? The advantage is that consumers would have only one rule, companies would have only one rule, and both would work together. In my opinion, there is no reason not to have a state agency establishing and enforcing the rules, whereas municipalities monitor the service provided from a technical and economic standpoint. This would be a common rule. I have been offering the municipalities with this range of possibilities for participation. Municipalities can delegate if they want, otherwise, if they do not want to delegate but to create, we have technical cooperation and I can help them to prepare the norms, advisory services and whatever is necessary. I believe that the main objective of the Secretary is to have a regulating agreement that works for the state, since consumers will benefit from that, consumer protection should be the focus of regulation. Consumers are the main objective, and other issues are related to how to deliver services. Mario Arruda Sampaio: Ladies and gentlemen, we have been talking to Mr. Oliveira for one hour and a half. I believe there are still some questions, but I would like to end this session and thank Mr. Oliveira for coming. I would also like to thank all of you for appreciating this event to align and include those of you who regularly follow Sabesp, and now sanitation, so you can


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understand our difficulties within the sector and establish contact with the agency and Mr. Oliveira. I would like to thank you and let’s give Mr. Oliveira a round of applause. Thank you. Hugo Sérgio de Oliveira: I would like to tell you that we at ARSESP are at your disposal. You can contact us whenever you need to talk or discuss issues. It is very important to be transparent. We are willing to maintain the agency’s transparency. You can call whenever you want. If I am not there, Carla will help you. If Carla is not there, you can talk to José Luiz. There is always someone there to help you, to talk to you. “This document is a transcript produced by MZ. MZ does its best to ensure the quality (current, precise and complete) of the transcript. However, it is not responsible for eventual flaws, as outputs depend on audio quality and participants’ clarity of speech. Thus, MZ is not liable for eventual damages or losses which may arise from the use, access, security, maintenance, distribution and/or transmission of this transcript. This document is a simple transcript and does not reflect MZ’s investment opinion. The contents of this document are the exclusive responsibility of the company hosting this event which was transcribed by MZ. Please refer to the respective company’s investor relations (and/or institutional) Web site for further conditions and important and specific terms related to the use of this transcript.”

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