Copasa May Become a Debt Vehicle — and Push Tariffs Up by as Much as 20%

Copasa (CSMG3), the state-controlled water and sewage utility in Minas Gerais, may carry an underappreciated risk in its privatization design: the company could become the platform for a “reverse IPO”-type structure — effectively using a listed vehicle to absorb a more leveraged capital structure. The result would be a higher cost of capital and, ultimately, higher sanitation tariffs.

In Brazil’s regulated utilities, tariffs are not arbitrary. They are set by regulators based on an allowed rate of return, anchored in the company’s weighted average cost of capital (WACC). In practice, that creates a direct link between the controller’s balance sheet and what households pay on their water bills.

In Brazil, issuers with stronger balance sheets typically raise funding at tighter spreads, often around CDI — Brazil’s interbank benchmark rate — plus 0.5% to 1% in the short term, and between IPCA — the country’s official inflation index — plus 3% to 4% in longer-dated or legacy issuances. The key variable, however, is the credit spread. More leveraged operators consistently borrow at higher costs, with long-term debentures around IPCA +6% to +8%.

This gap reflects more stretched capital structures and lower liquidity — a structural premium that tends to persist across cycles. In international markets, the divergence reinforces the pattern: stronger issuers price close to sovereign curves, while more leveraged names can trade at double-digit yields. As these assets are priced within the same global environment, the difference is credit — not the high interest rate backdrop, which is common to all.

More conservative simulations suggest that even a moderate increase in the cost of capital — with the pre-tax WACC rising from around 10%–12% to the 15%–16% range — could have a meaningful impact on tariffs. This reflects the fact that capital remuneration typically accounts for roughly half of the regulated tariff base, and even partial pass-through tends to be significant. In this context, the combined effect could translate into double-digit tariff increases, potentially in the order of 20%, depending on the degree of regulatory pass-through and the applicable methodology.

The absence of protective mechanisms in Copasa’s bylaws amplifies this risk. Without provisions limiting changes in control or corporate reorganizations, a shareholder with a relevant stake could consolidate control and alter the company’s capital structure — including the injection of external liabilities. In dispersed ownership structures, control can be achieved with relatively small stakes, particularly when investors coordinate, increasing the likelihood of structural shifts without a formal majority acquisition.

Mechanisms such as golden shares may preserve formal aspects — such as headquarters or corporate name — but do not necessarily prevent changes in capital structure or mergers that alter the company’s financial profile. Even significant minority shareholders, including the state itself, may have limited ability to block certain reorganizations, depending on governance design.

The contrast with Sabesp’s privatization is instructive. São Paulo treated this risk as central; Minas Gerais, so far, has not. In São Paulo, corporate safeguards such as a poison pill were adopted to deter abrupt changes in control and prevent restructurings that could materially alter the company’s financial profile, even with the state remaining a shareholder. Criticism at the time focused largely on limited competition — with only one effective bidder, Equatorial, ultimately winning the auction at what some investors viewed as a discounted price. Even so, the final design combined governance safeguards with tariff policy instruments.

Among them, the creation of FAUSP — a fund capitalized with part of the privatization proceeds — was designed to protect the capital structure and smooth tariff pressures over time.

In Minas Gerais, the absence of equivalent mechanisms — both at the corporate governance level and in tariff mitigation design — increases the risk that changes in capital structure translate directly into higher tariffs. In sanitation, whoever defines the cost of capital ultimately defines the water bill.