The choice of Rio de Janeiro as the host city of the 2016 Olympic Games created the concern to make huge investments in some of the city's strategic areas, called "Porto Maravilha".

The city's port area was identified as of critical importance to the Olympic Games investments as it is: (i) one of the logical entrances of tourists (cruise ships); (ii) a place of rich cultural and historical heritage; (iii) an area which could be turned into an appreciated waterfront location; and (iv) an area with good potential for real estate development, considering the current housing and office deficit near the downtown area.

However, at the time of the election of Rio de Janeiro as the host city, the port area was at a state of critical disrepair and in need of significant infrastructure interventions, especially in regard to basic needs, such as adequate public utilities (i.e., water and sewage system, natural gas distribution, underground electricity distribution, telecommunications/data cabling and fiber optic lines). So, the government focused its efforts on fuelling investments in such areas to modernize and redesign the entire port region as well as stimulate the real estate growth.

The main reason why any attempt to redevelop the port area has always failed is because the federal, state and local governments has never been able to align their political interests. However, since Rio de Janeiro was elected as the host city for the Olympic Games, this project started to move forward.

A decree enacted in 2006, permitted the feasibility studies of the Porto Maravilha and triggered the studies regarding the project finance for such a huge enterprise. The needs of improvements created an impasse: on the one side, the Government needed the private initiative to take interest in the area, as the municipal government could not disburse the entire amount of the necessary resources without putting a strain on its finances; on the other, the private capital was not inclined to make investments in an area that was so poorly kept and which presented none of the city's other attractions that might deliver a good return on the investments made (beaches, glamour, nightlife, etc.). In addition, most of the areas in the port sector were owned by governmental bodies and entities, which created legal difficulties for developments and investments.

In 2009, the Mayor of Rio de Janeiro approved the current legislation establishing the Master Plan for Porto Maravilha and put in place the project finance with the issuance of "CEPACs", that is, Certificates of Potential Additional Construction ("Certificados de Potencial Adicional de Construção"), securities that would permit to finance infrastructure improvements and set up an entity known as Companhia de Desenvolvimento Urbano da Região do Porto do Rio de Janeiro, or "CDURP" to oversee the implementation of the city's master plan for the Porto Maravilha area.

As there were not enough city funds available for infrastructure investments, such legislation was passed to fund the revitalization efforts through the sale of development air rights or CEPACs. The CEPACs arose as a viable alternative solution. Those CEPACs are almost publicly-traded securities issued by the Municipality of Rio de Janeiro and representing development air rights in the land known as "Porto Maravilha".

One of sections of the City's master plan for Porto Maravilha governs the urban operations conducted through a consortium, by a Public Private Partnership ("PPP") and defines the set of interventions coordinated by the Municipal Authority through the CDURP, with the participation of three private engineering and construction companies with specialization in large public works projects aiming at the development of structural urban transformations, social improvements and environmental appreciation.

The City of Rio de Janeiro chose Caixa Econômica Federal, the Federal Savings Bank that holds the funds for the Brazilian social security fund ("FGTS") to be the partner of the entire finance project. Due to Caixa Econômica Federal's expertise in large scale and complex financial structuring and processes, it was the only one that could ensure better control over the implementation of the City's master plan, a smoother and more organized process with maximized returns for investors, in this case the Brazilian social security fund.

The financial concept of the Porto Maravilha project is as follows. In 2011, Caixa Econômica Federal underwrote and purchased 100% of the CEPACs. Those CEPACs will be sold by Caixa Economica Federal in a series of over the- counter auctions. There will be a total of 6.4 million CEPACs sold, for a minimum of R$ 2.6 billion. The City of Rio de Janeiro will use those revenues from the sale of CEPACs to partially fund the R$ 8 billion worth of planned infrastructure improvements including street upgrades, lighting, drainage, public transportation networks, quality public spaces, green corridors, improved pedestrian access, sustainable urban rehabilitations and bike lanes.

The CEPACs are basically a financial instruments intended to attract the private sector´s investment in urban redevelopments. The private sector would purchase those air rights in those areas that will benefit from the infrastructure redevelopment. CEPACs must be purchased from Caixa Economica Federal and/or public auctions, by those private developers planning to participate in such redevelopment.

The main benefits for the use of the CEPACs program are: (i) local governments can bring the private initiative to take interest in an area and fund large urban intervention; (ii) before public interventions in the area, it can bring some upfront revenues; (iii) a liquid type of asset/security; (iv) a relatively transparent process permitting the local government to raise funds through public auction for huge infrastructure projects; (v) it is a process vesting the local government with the power to control the real estate growth in specific areas through the sale of air rights; and (vi) a way for the city´s government to capture a part of the upside valuation of the real estate appreciation resulting from the redevelopment of the area.

The Porto Maravilha project is based on several successes and challenges of precedent revitalization efforts in cities, like Barcelona and Buenos Aires, among others. Those cities have retrofitted those degraded and abandoned areas and turned its face back towards the water through the creation of public spaces, green and multifunctional areas.

These kinds of examples confirm the feasibility of large scale urban interventions. A major factor in the success of those examples was, as it is in Porto Maravilha, the existence of an obsolete and impoverished area with a tremendous size of available space next to the downtown district. If those lessons are correctly applied, the goal of creating in the Porto Maravilha area a waterfront place with residential and commercial real estate interest will certainly be achieved and Rio de Janeiro will be able to recover its identity and self-esteem.

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