Vivendi moves to keep Brazil water company

Vivendi Environnement will today launch last-ditch negotiations to recover control of a Brazilian water company after a state government said it would take over management from the French utility.

The showdown with local authorities is indicative of growing regulatory and financial difficulties that private utilities are facing years after Brazil's privatisation boom. Investors are closely watching the federal government's reaction and its policy proposals for the energy and water sectors as a sign of its commitment to secure private capital.

The government of the southern state of Paraná on Friday said it would take over management in Sanepar, the local water company, from a consortium led by Vivendi Water.

The consortium, which includes Brazilian investors, bought a 40 per cent voting share in 1998 but had control over the company through a shareholders' agreement.

The Paraná governor, who is from the centrist PMDB party, alleges that the consortium has paid excessive dividends at the cost of infrastructure investment. Vivendi rejects the claims, saying its return on investment has been only 3 per cent in dollar terms.

Olivier Orsini, Vivendi's representative, will today seek a new shareholders' agreement, offering among other things increased technology transfer. The outcome of talks could affect the company's future in several other Brazilian projects.

However, the Paraná government said it would not backtrack on its decision, which some analysts consider a political move to gain popularity. The governor also ordered the state power company to suspend payments on a R$1.2bn (US$330m, '307m, £209m) contract, under which it buys energy for as much as US$42 per kilowatt/hour but sells part of it for only R$4.

Both cases reflect regulatory uncertainty that the federal government will have to address. "The message is: be careful what you buy in Brazil," says Wilson Passeto, director of Agua e Cidade, a group promoting public awareness on water management.

The government of President Luiz Inácio Lula da Silva, which took office on January 1, is walking a fine line between investor interests and widespread scepticism over private companies managing public services, often as a monopoly.

Mr Lula da Silva's administration has signalled its opposition to further privatisation of water companies. "Privatisation has not resolved the water problems of most of the population," Olívio Dutra, minister of cities, told Valor, the business daily. It is also seeking to revise increasing utility rates which have been fuelling inflation in recent years.

So far the government has respected contracts. "For now the new government has complied with contractual tariff adjustments. I realise there's nervousness in the market but I'm not sure it's entirely warranted," said Ricardo Kobayashi, with Banco Pactual, a local investment bank.