Brazil: Water Supply And Sewage Services In Brazil According To The General Agreement Of Trade And Services (GATS) Of The WTO

Paper presented to the 3rd PEPA/ SIEL Conference in São Paulo, 24-25 April 2014

I. Introduction

In Brazil, the municipality is in charge of formulating the public policy for sanitation, in order to better meet local needs. Given the importance of such services –which include water supply and sewage -they are assigned to the legal regime of public law. Hence, it is the duty of the government, responsible for social welfare, public health and environment preservation, to regulate such services ensuring quality and equitable access to the population.

Sanitation services are considered a natural public monopoly, given they depend on an existing network infrastructure –water and sewage pipes (TURK, KRAJEWSKI, 2003). However, in recent years, policies encouraging private investment (including foreign) have increased, providing new opportunities for public-private partnerships. As a result of these changes, sanitation services have gradually increased their commercial role, besides its role to meet basic population needs.

Although Brazilian law allows the municipality to delegate the organization, regulation, control and provision of such services to either public or private companies, all actions and decisions related to this delegation find limits in the legal system, in view of the unavailability of public interest principle.

Because these services can be performed by third parties, including foreign firms, they are also subject to the specific rules of the World Trade Organization (WTO), particularly of the General Agreement on Trade in Services (GATS), enacted in Brazil by Decree No. 1.355/1994, which regulates trade of services within the WTO members.

The GATS is an agreement in constant process of negotiation, especially in view of its commitment to liberalization i.e., elimination of trade barriers that prevent services for being provided by other WTO members. Several liberalization commitments have been established for each sector, either for market access or national treatment, entered in the national lists of each member. In this context, the European Community (EC) presented in 2000 requests to include certain environmental services in the GATS scope, such as water supply services1.

When a government formulates a public policy, especially regarding services related to the satisfaction of basic needs, it is expected that it contains rules aiming to ensure universal access and reasonable standards of quality of the services. However, in practice, when services become subject to the GATS rules, a conflict between liberalization and regulation may be established. That is because in view of its liberalization goal, the GATS may restrict the autonomy of governments to regulate their public policies, by eliminating national rules if they are more trade restrictive than necessary (TURK, KRAJEWSKI, 2003).

For this reason, proposals such as the EC's to take full commitments in environmental services have been criticized. Although the GATS itself provide for the possibility of limiting the provision of services for foreign companies, through the Member's national schedule or when necessary to protect human or animal life and health, for example, what would be the real impact of the inclusion of certain environmental services like water supply and sewage in its scope?

Although Brazil has not included any commitments to liberalization related to environmental services in its agenda, in view of the constant process of negotiation and political pressure of the WTO, the possibility of sanitation services to be included on the agenda and possibly liberalized can't be ignored.

This scenario gets even more complex considering there are more than 5.500 municipalities in Brazil, with great diversity in the sanitation sector. While some municipalities such as São Paulo have a complex infrastructure and a strong regulatory system, others have very poor institutional resources: some still haven't developed a system to charge users for the services and water and sewage departments count with very few human and financial resources.

There are also cases of foreign companies providing sanitation services in Brazil, such as in the municipality of Limeira, in São Paulo state, where the service is provided by the private company Foz do Brazil, together with the French Ondeo.

These services cannot be considered only for its economic value. While the inclusion of environmental services in a multilateral context can be beneficial in view of their importance to international trade, the access to new technologies and the increase of competition between providers, it is important to remain aware of the possibility of limiting the government autonomy to ensure universal access and service standards.

II . The institutional model of service supply of sanitation services in Brazil

a. Sanitation as a public service related to basic human needs

Sanitation is a public service, which has specific characteristics compared to other services, as they aim to meet basic human needs. Then, it is not always desirable to subject them to liberal market rules. Because of its importance, the government takes responsibility over such activities, assigning them under the public law regime, with supremacy and restrictions regarding other services (MELLO, 2013).

Such activities are essential to the human well-being, reason why they must be available to all, including those who can't afford it. This is why we emphasize universality principle, given that such services concern the basic needs of the society as a whole. If certain economic activity is considered a public service, it should be subject to a regulation that point unequivocally to its universalization2 (COUTINHO, 2002).

In Brazil, Law 11.445/2007 established national guidelines for sanitation, consolidating a public policy for the sector, after long discussions, in which the government is in charge to ensure efficient water supply and sewage services. According to the Law, sanitation services include water supply and sewage services, objects of this article, as well as urban cleaning and drainage services.

The referred law also opened new institutional paths for the provision of the services, by separating the functions of planning, regulating and proving them, which can now be performed by different actors. Under this new legal framework, sanitation is, as a general rule3, a municipality obligation. It is entitled to decide for directly providing the services or authorizing their delegation, determining an independent regulatory body with the capacity to supervise them and enforce appropriate regulations. The delegation depends on a concession contract, which grants a company the exclusive right to perform a service during a specific period of time, either using existing facilities or developing new ones (GELOSO GROSSO, 2007).

As mentioned, though the law allows the municipality to delegate the provision of services to third parties, such delegation finds limits in the legal system, including provisions regarding social and economic control mechanisms.

For example, an important duty of the municipality –set forth in article 9º, VII -is to intervene and take over the operation in case the provider doesn't follow the contractual or legal obligations. Thus, if the government delegates the provision of sanitation services to a third party and the provider excessively increases the price, or doesn't meet universalization goals, or decrease the quality standards, for example, the municipality is entitled to resume the provision. This is of major importance, once the concession must observe the interest of the community, and therefore, the concessionaire is on duty to provide the services in a suitable way for the public. If the concessionaire doesn't provide it efficiently, the public administration can, and must, resume it (MEIRELLES, 2013).

Furthermore, the tariffs and rates charged for the sanitation services must observe, among others, the priority for meeting the essential needs related to public health and increased access of citizens and low-income localities services. If left free to choose, private companies will naturally opt for profitable networks and will very probably invest in cities and major urban areas, leaving poor segments behind (GELOSO GROSSO, 2007). However, meeting the needs of the poorest is a priority according to Law 11.445/2007, and providers must take that into account.

While this Law is founded on the principles of universal access and social equity (redistributive characteristics), it also seeks to establish balance between the economic (potential investors, including foreigners) and social (users) interests, by defining guidelines to recover costs incurred in the provision of the services and adequate return on capital invested by service providers.

b . Institutional model for third parties to provide sanitation services in Brazil.

According to the Law 11.445/2007, the provision of basic sanitation by an entity that is not part of the public administration depends on a contract, being prohibited its discipline through other agreements, partnership contracts or other instruments.

Through the concession contracts, the municipality delegates the execution of public services to the private sector, on its behalf of and at its risk. The compensation for the private sector is ensured by the tariffs and rates paid by the users.

For concession contracts, the Law establishes additional regulatory standards like, among others, the inclusion of progressive and gradual expansion of infrastructure, quality, efficiency and rational use of water, energy and other natural resources in accordance with the services to be rendered. As mentioned, concession contract transfers responsibility to private stakeholders for operating and maintaining assets, as well as for investment. The assets remain the property of the government, which has complete right over their use, and revert to the government once the contract ends (GELOSO GROSSO, 2007). It is always subject to regulation and supervision of the public administration.

According to this brief analysis, we note that Brazil established a regulatory framework with clear redistributive nature, observing concrete targets for universal access. At the same time, it seeks to balance social interests with economic interests, establishing instruments for private sector participation, including foreign investment.

A solid national regulatory system is fundamental to support liberalization in municipal sphere, considering that, as mentioned above, Brazil counts with over 5.500 municipalities, with diverse institutional and economic resources in the sanitation sector.

Private companies can operate in the sanitation sector, always within the legal and contractual limits, taking into account the principles and guidelines established by Law 11.445/2007. The private activity is always regulated and supervised by the government, and if necessary it can resume the services in the interest of the community.

Thus, it is clear that the sanitation services, when provided by a private, national or foreign company, cannot be considered only for its economic value.

III. Water supply and Sewage Treatment Services according to the GATS

a. GATS overview

The GATS is considered to be one of the most important Agreements among the WTO4. While the General Agreement on Tariffs and Trade (GATT) sets forth multilateral rules for the trade of goods, the GATS, which came into force in January 1995, rules the multilateral system of trade of services. As a multilateral agreement, all WTO members are automatically subject to its rules and commitments. In mid-90s, the services sector's share in the Gross Domestic Product amounted to over 60% in Brazil, according to the WTO Secretariat.

The GATS is the first and only set of multilateral rules covering international trade in services. It has been negotiated by the governments themselves, establishing a regulatory framework within which parties can operate and where WTO members can undertake and implement commitments for the liberalization of trade in services (BOSSCHE, 2006). It consists of two parts: the framework agreement containing (i) the general rules and (ii) the national schedules, that list countries' specific commitments on access to their domestic markets by foreign suppliers.

GATS' structure operates on four levels: First, regarding all rules about the services sector, including principles and general obligations. Second, the annexes of specific sectors, like air transport services and telecommunications (no GATS specific annex covers water supply or sewage treatment services). The third level refers to the Commitment Lists of liberalization per sector from each WTO Member, either on the national treatment (that states that foreign service providers should be treated the same way as national ones) or on market access. Finally, the fourth (exclusively for GATS) is the list of the sectors, which the WTO Members would not apply the Most-Favored Nation (MFN) principle, meaning that they could grant favorable treatment to services and service suppliers of a Member and not extend that to others (PUPO, 2010). In environmental services, no exemptions to MFN treatment have been taken.

Services are divided in four modes, according to the GATS' first article: cross-border supply, consumption abroad, supply through a commercial presence, and supply through the presence of natural persons. As per water supply and sewage, usually the service is supplied through a commercial presence, fitting on the third mode of service supply. This service classification is important while analyzing each members schedule, in order to verify which commitment of market access and national treatment the Member has agreed to.

Services subject to the GATS include any service in any sector according to those modes, except those services supplied in the exercise of governmental authority, meaning that a service is supplied neither on a commercial basis nor in competition with one or more service suppliers. Examples of such services are health care, police protection, penitentiary services and basic education. However, some of the services that are traditionally considered to be services supplied in the exercise of government authority have recently been subject to privatization and may now fall within the scope of the GATS (BOSSCHE, 2006). The Dispute Settlement Body also understood that any measure that affects trade in services (not only those that regulate or govern) is covered by GATS5, granting it a wide coverage.

Since the trade of services are regulated by national policies and regulation from the State itself, the Agreements related to the trade of services tend to be more complexes than those related to the trade of goods, that have more evident barriers like quotas, tariffs or non-tariff barriers. As a result, the Agreements related to services, like the GATS, should have more impact in the domestic policies of the countries.

b. Negotiation and liberalization process

GATS complex structure establishes a wide commitment of the WTO Members related to successive and future negotiations (built in agenda) that lead to a gradual liberalization of the sector. Liberalization is the process that aims to establish an open and more competitive market. That requires the removal of barriers and obstacles to the entry in the market, as well as a free competition regime. In practice, this could lead to an amendment or replacement of a normative system, with a different set of rules (CELLI, 2010).

The liberalization is expressed on Part IV of the GATS, providing that Members shall enter into successive rounds of negotiations in order to progressively increase the liberalization of trade in services. The idea is to reduce or eliminate the adverse effects on trade in services of measures as a means of providing effective market access, on a mutually advantage basis and to secure an overall balance of rights and obligations.

It is imperative to highlight the recognition in GATS preamble of the right of Members to regulate, and to introduce new regulation, on the supply of services within their territories in order to meet national policy objectives, in particular need of developing countries to exercise this right. The reduction and elimination of barriers to the trade of services resulting from the liberalization process put the national regulation of the Members under pressure. The relationship between liberalization of trade of services and national regulation is probably the most important question surrounding the current negotiations concerning trade of services (KRAJEWSKI, 2003). This is because the liberalization can limit the internal regulatory or legislative autonomy of a Member, in case the GATS obligations require the abolition or the amendment of certain provisions and rules for its application, in view of the higher liberalization level on the multilateral negotiations of the trade of services in comparison to the national policies (CELLI, 2010).

Though, it is true that liberalization can bring significant benefits. The liberalization of trade in goods, for example, promoted through negotiations in the GATT over the past 50 years, has been one of the greatest contributors to economic growth and the relief of poverty in history. Those countries which chose deeper involvement in the multilateral trading system through liberalization benefited greatly from doing so6. On the services sectors, the liberalization can contribute with the economic development and poverty reduction, with studies that show that developing countries, like Brazil, will probably gain a lot with the liberalization of the services sector (CELLI, 2010). Examples of actual benefits with liberalization are economic performance, development, consumer savings, faster innovation, technology transfer, greater transparency and predictability, increase on the capacity to attract foreign investments.

For a positive outcome, the liberalization has to be done gradually and carefully, in order to be aligned with the goals of the national policies and sustainable development. In the environmental sector, including water supply and sewage services, this task is even harder, given that the goals of national policies cannot be dissociated of the goals of the international policies, and the "universalization" aspect shall not be disregarded. Considering that the current negotiations on trade of services do not discuss "if" there would be liberalization, but "how" that would take place, it's important to understand national commitments of the GATS.

c. The GATS Schedule and its specific commitments

The schedules are complex documents in which each country identifies the service sectors to which it will apply the market access and national treatment obligations of the GATS and any exceptions from those obligations it wishes to maintain7.

The commitments and limitations are entered with respect to each of the four modes of supply. Those obligations are applied only to the sectors listed by the Members in its commitments lists, that were prepared based on the United Nations Central Product Classification ("CPC"), already used as a source by the GATT Secretariat in the preparation of the GATS (PUPO, 2010). The commitments can be horizontal (applying to all sectors or sector-specific). Each member decides which service sector they wish to liberalize, under the specific sector and which conditions.

d. Water Supply and Environmental Services in the GATS

According to the WTO Secretariat, environmental services include sewage services (CPC 9401), refuse disposal services (CPC 9402), sanitation and similar services (CPC 9403), reducing vehicle emissions (CPC 9404), noise abatement services (CPC 9405), nature and landscape protection services (CPC 9406) and "other" environmental services (CPC 9409). Environmental goods and services are singled out for liberalization in paragraph 31(iii) of the Doha Declaration, which calls for "the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services" with a view to "enhancing the mutual supportiveness of trade and environment"8.

Compared with other sectors, such as tourism, the level of environmental services commitments bound under the GATS is modest. This is explained, in part, by the prevailing role played by public entities in these services. Members' policies may be more liberal in practice than what is indicated in their schedules of commitments. Brazil, for example, has not listed commitments on environmental services in its Schedule, even though there are actual examples of water supply and sewage service being supplied by a private company with foreign ones, like in the aforementioned case of Limeira.

Even though sanitation and similar services can be categorized under environmental services, there is no consistent view on whether supplying water should be classified as environmental activities. Water collection and purification services, water distribution, wastewater treatment (sewage) and services incidental to water services have not yet been classified under a specific category of the Services Sectorial Classification List in the WTO (TÜRK & KRAJEWSKI, 2003).

Maybe for this reason the EC suggested a classification of water services in the WTO. With respect to "water for human use and wastewater management", the EC proposal contains two sub-sectors: "Water collection, purification and distribution services" and "waste water services". Environmental services are a key sector for the EC companies, that are world leaders in this sector, and have been providing high-class environmental services internally and abroad. Nevertheless, a number of barriers and obstacles to trade in environmental services remain, and the main objective of the EC for the negotiations is to reduce the barriers which European operators face in third countries' markets9. Such proposal produced different reactions on WTO: some agreed it would be useful, while others did not support it.

Even though the classification of water supply and sewage services is controversial, it does not affect the sectorial scope of GATS that applies to all sectors of the service economy with the exception of services "supplied in the exercise of government authority" (neither on a commercial basis nor in competition with one or more service suppliers"). For example, if water is distributed by state-owned company or a government department on a monopoly basis and at a very low subsidized price, which prevents the distributor from making profit, it can be argued that drinking water distribution is a service that falls outside of the scope of GATS. If, however, a government chooses to introduce elements of competitiveness and commercialization, such as Brazil does, it may subject the sector to GATS provisions (TÜRK & KRAJEWSKI, 2003).

IV. Conclusion

Brazilian national regulation on sanitation services like water supply and sewage services are detailed in terms of assuring universal access, beyond its simple economic value, even though it makes clear the commercial aspects related to them. Also, there are specific rules about the delegation of these services to third parties, including private companies and the need of a contract, with the possibility of the government to intervene and take over the operation in case the service provider does not meet its obligations. However, specific regulation should also be prepared for possible further liberalization commitments to be negotiated in the scope of the GATS/ WTO.

Even though Brazil has not listed any environmental service in its national list of commitments under GATS, there is political pressure for Members to include certain environmental services in their schedule, possibly motivated by the EC proposal in 2000 (that suggested the specific inclusion of services like water supply and sewage treatment). Also, Doha Round clearly reinforces the need of liberalization of the trade in services by the WTO members.

Given the commercial aspects of these services, like the actual examples in Brazil of supply by private companies, even together with foreign ones, the application of the GATS in these services is almost certain. Thus, the need of coherence and harmonization between the national policies and the GATS regulation and potential further commitments is crucial. For example, in case any commitment is made by Brazil regarding no limitation of national treatment, for example, in case a foreign company does not receive the same treatment as a previous domestic entity that provided the service, the government of the provider company could claim a violation of a GATS commitment and initiate a possible dispute against the Brazilian government under the WTO.

Although there are benefits brought by liberalization, the openness of services market to foreign competition (especially related to environmental services) requires that Members have a national regulatory framework aligned with certain values and principles that ultimately correspond to the goals of their legitimate national policies. This implies in a regulatory framework that assures the policy space for a State to make it possible to liberalize, but also to maintain the goals of the national policy, like social inclusion and redistributive regulation, requiring coordinated actions, establishment of accurate goals, and adequate institutions to enforce them.

V. Material

BOSSCHE, Peter van den. BOSSCHE, Peter Van den. The Law and Policy of the World Trade Organization –Text, Cases and Materials. New York: Cambridge University Press, 2006.

CELLI JR., Umberto. Comércio de Serviços na OMC: Liberalização, Condições e Desafios. Curitiba: Juruá, 2009.

CELLI JR., Umberto. Os acordos de serviços (GATS) e de investimentos (TRIM) na OMC: Espaço para políticas de desenvolvimento. Available at: http://www.usp.br/prolam/downloads/gats.pdf

CELLI Junior, Umberto. Comércio de Serviços na OMC. Curitiba: Juruá, 2010.

GATS –Facts and Fictions. Available at: http://www.wto.org/english/tratop_e/serv_e/gatsfacts1004_e.pdf. Access on March-30-2014.

GATS 2000: Environmental Services. Communication from the European Communities and Their Members States, S/CSS/W/38. (22 December 2000).

GRANZIERA, Maria Luiza Machado. Direito Ambiental, 3a ed. São Paulo: Atlas, 2014. Guide to the GATS: An overview of issues for further liberalization of trade in services/ edited by WTO Secretariat. The Netherlands: Kluwer Law International, 2000.

KRAJEWSKI, Markus. National Regulation and Trade Liberalization in Services: the legal impact of the GATS on National Regulatory Autonomy. Haia, London and New York: Kluwe Law International, 2003.

MEIRELLES, Hely Lopes. Direito Administrativo Brasileiro. 39. ed. São Paulo: Malheiros, 2013.

MELLO, Celso Antônio Bandeira de. Curso de Direito Administrativo. 30a Ed. São Paulo: Malheiros, 2013,

PUPO, Rodrigo Luís. Acordo Geral sobre o Comércio de Serviços –GATS. In: CELLI Junior, Umberto.Comércio de Serviços na OMC. Curitiba: Juruá, 2010.

SALOMÃO, Calixto (coord.) Regulação e Desenvolvimento. São Paulo: Malheiros, 2002,

Summary of the EC's Initial Requests to Third Countries in the GATS Negotiations. Available at: http://trade.ec.europa.eu/doclib/docs/2004/april/tradoc_116821.pdf.

TÜRK, Elisabeth and KRAJEWSKI, Markus. The right to water and trade in services: Assessing the impact of GATS negotiations on water regulation. Paper presenter at the CAT+E Conference "Moving forward from Cancún". Berlin, 30-31 October 2003.

Footnotes

1 S/CSS/W/38. COMMUNICATION FROM THE EUROPEAN COMMUNITIES AND THEIR MEMBER STATES1/2 GATS 2000: Environmental Services.

2 Original: se determinada atividade econômica é serviço publico, deve ser objeto de uma regulação que aponte de forma inequívoca para sua universalização.

3 In metropolitan areas, established by the State, there is a discussion whether the sanitation services belong to the municipality, the state, or both.

4 GATS –Facts and Fictions. Available at: http://www.wto.org/english/tratop_e/serv_e/gats_factfiction1_e.htm. Access on March 25.

5 Apellate Body Report. EC –Bananas III. Para 220.

6 GATS –Facts and Fictions. Available at: http://www.wto.org/english/tratop_e/serv_e/gatsfacts1004_e.pdf. Access on March-30-2014.

7 Ibideim.

8 Environmental Services. Available at: http://www.wto.org/english/tratop_e/serv_e/environment_e/environment_e.htm. Access on March 30th.

9 Summary of the EC's Initial Requests to Third Countries in the GATS Negotiations. Available at: http://trade.ec.europa.eu/doclib/docs/2004/april/tradoc_116821.pdf.

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These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions