Sao Paulo Drought Could Benefit Brazil

The state of Sao Paulo, Brazil's financial core, remains in a drought of historic proportions, and we expect to continue seeing reports of water shortages in the greater municipal area of the city of Sao Paulo. Further water restrictions and rationing will be necessary if the region does not receive substantial amounts of rain in the next several months. While we may see a small drop in industrial activity, wealthier consumers — residential and industrial — will be able to find and use more expensive alternative sources of water. The shortage may contribute to the slowing of Brazil's economy, but it will not cause a collapse. Rather, the drought will be a relatively short-term water stressor and has the potential to be a catalyst to solve Sao Paulo's larger structural problem of inadequate and inefficient water infrastructure. In the long run, it could even benefit the industrial viability of the city and state.

The worst drought in nearly a century continues to plague Sao Paulo state and neighboring Rio de Janeiro and Minas Gerais states in southeastern Brazil; the nearly 30 million people living in the extended municipal complex of Sao Paulo have been dealing with extremely low reservoir levels for more than a year. In fact, the water reserves have fallen so low that they are now below the dead level, the point at which the water must be pumped up to reach the pipes connecting the reservoir to the greater distribution system. In late 2014, the Cantareira system authorized the use of its second quota of dead volume. The system is at roughly 5 percent of its capacity and is considering authorizing a third quota. If usage continues and the reservoir is not replenished, projections indicate that it will run dry by September. Other reservoirs supplying the city have also declined over the past year, including the Alto Tiete, which like Cantareira has approved the use of its dead volume.

In 2014, the state government began providing financial incentives to encourage more efficient water use. Usage declined by 17 percent, but larger decreases will be needed until the drought comes to an end. Residents and industries in other states impacted by the drought are also being asked to decrease their consumption.

The measures may not be enough. We are already seeing reports and anecdotal evidence of limited water availability in Sao Paulo, from limited flow to lack of availability in whole neighborhoods. The consumer will feel the greatest impact of the water shortages, but it will not be just households that will have to adjust. Large commercial consumers of water such as the petrochemical, steel, ethanol and textile manufacturing industries in Sao Paulo state account for approximately 70 percent of Brazil's total industrial water use. These businesses have made adjustments that include reducing amenities in restaurants, rescheduling maintenance or even reducing production. So far, shifts in supply chain and production have mitigated the economic impacts of the drought. Still, the Water Resources Group, a collaboration between a variety of industry and think tank representatives, expects industrial water use to grow by about 2 percent a year through 2030. In particular, the petrochemical industry is projected to increase its water usage from 0.6 billion cubic meters to 1 billion cubic meters per year while steel-related activities double their consumption to more than 500 million cubic meters per year.

While the state governmental body in charge of managing water, Sao Paulo State Sanitation Co., or Sabesp, has been reluctant to admit that water rationing will be necessary, it is the most likely short-term solution available. On Jan. 7, Sabesp announced a contingency tariff to penalize above-average water use. The tariff rate would increase by 40 percent if a customer were to use between 0 and 20 percent more than the previous year's average consumption rate. Any additional water consumed above the 20 percent threshold would be taxed at a rate increased by 100 percent. Sabesp went further Jan. 27 when it admitted that it had already reduced water pressure in several neighborhoods from 1 p.m. to 7 a.m. The next day, the government of Sao Paulo state admitted that severe rationing, up to five days at a time, might be necessary in a worst-case scenario. However, it is still unclear when and how rationing might be implemented and if it would impact only areas served by the Cantareira system.

The news is not all bad, however. Though precipitation levels are below normal, Brazil is in the middle of its rainy season, which typically lasts from October through March. The wettest months are December through February, meaning that some relief may be on the way. The Cantareira system stabilized for seven days before falling slightly on Feb. 1, and the Rio Claro, Alto Tiete and Rio Grande reservoirs have seen slight increases in their volumes in recent days. Given the severity of the drought, full recovery will require more prolonged precipitation likely many months, if not years, away.

Short-Term Response and Implications

As long as the drought places restrictions or rationing on traditional supplies, industries and municipal consumers will seek out alternative water sources, including drilling new wells to access groundwater or building systems to reuse water. However, these solutions will be more expensive for a variety of reasons. Building new infrastructure requires capital, and some alternative sources require additional purification or transfers from other from basins, measures that increase costs.

Some of these alternative sources can be accessed more quickly than others, sometimes in a matter of weeks or months. (In 2014 alone, the greater municipal area added more than 400 new wells.) Sao Paulo's federation of industry is already conducting feasibility studies for groundwater extraction, and the mayor of Sao Paulo has said that if the drought intensifies, the city will hold auctions for groundwater extraction projects to access additional volumes. Sabesp will start receiving water from the Guaratuba River beginning Jan. 27 to partially replenish the Alto Tiete system.

Other large projects include building a 15-kilometer (9-mile) connection that will bring water from the Paraiba do Sul River Basin to the Cantareira system. Sabesp approved the $319 million project Jan. 30. Another project is a system to transfer water from the Billings reservoir system. However, these projects will take longer to implement, and they will not begin to relieve Sao Paulo's water problems until 2016 or later.

The drought will not cause a catastrophic failure, but it will put pressure on an economy that is already on the verge of recession. Many sectors, but primarily hydroelectric energy generation, will be affected. Thermal power plants have been filling the energy gap since last year, but the switch has been costly and will likely require Brazil to import more natural gas in the future, an expensive proposition. In addition to importing the fuel, maintenance is quickly emerging as a problem. Many thermal plants have been operating at or near capacity while postponing routine maintenance, further straining the aging electrical grid.

The latest polls show that 61 percent of the population blames Sabesp for the water shortages, and the threat of instability looms as long as shortages continue. Many of the short-term solutions to access alternative sources of water will be expensive and will be available only to consumers with enough money to afford the price increases, be they wealthier people or industrial firms. Social unrest could develop and the number of protests could increase in the coming months, especially because Brazil's political climate is primed for such demonstrations.

Potential Long-Term Benefits

Still, the drought is only the manifestation of larger structural problems with water management in Sao Paulo state. Even before the drought began, a gap between renewable, sustainable supply and demand for water was emerging. In order to address the problem, Sao Paulo must now implement a multifaceted approach, including resolving efficiency issues with industrial and urban water consumption in addition to increasing its supply by extracting additional groundwater and transferring supplies from other basins. Reducing the leaks in shared water infrastructure could save 300 million cubic meters of water a year, or roughly 6 percent of total municipal consumption. Wastewater reuse, primarily from industry, could save another 80 million cubic meters annually.

These long-term solutions will be costly, however. The Water Resources Group estimates that implementing these solutions — transferring water from other basins, using more groundwater, reducing pollution and improving efficiency — will cost at least $285 million a year.

While problematic, the drought and its ensuing water shortages have drawn attention to the larger structural problems of water management in Sao Paulo state. As is often the case with water-related issues, there was little impetus to implement necessary changes because there was no immediate consequence for doing nothing. Even when used inefficiently, water was available to the end user, creating little incentive to invest in improvements with little immediate return — an estimated 86 percent of the proposed solutions had a payback time of more than five years. Now, the drought may provide the necessary momentum to bring attention to the state's water problem and begin implementing a solution.

Coping with the drought will be difficult. In the short term, Brazil will likely see reduced economic output from Sao Paulo, a development that will stress its already strained economy. Failure to address structural problems with water infrastructure could contribute to further economic decline in the state. But in the long term, this could be a blessing in disguise. The drought is bringing a long-term problem to light and could act as a catalyst to direct much-needed investment to water infrastructure, especially if there is social and political pressure to do so.