Rio 2016: Innovative Tools to Finance Urban Infrastructure

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Together with the World Cup in 2014, the 2016 Olympic Games will serve as yet

another indicator of Brazil's irrefutable dynamism and increased importance on the world

stage. As the recent protests in the streets of São Paulo, Rio de Janeiro and through over

80 other Brazilian cities have demonstrated, such glamorous, large-scale mega events

come hand-in-hand with a slew of international investment. The upcoming events will play

an instrumental role in advancing Brazil's domestic development goals. In fact, if Brazil

overcomes current uncertainties, the Olympics could be the key to a fundamental

transformation in Brazil's development patterns, signaling a new era for urban development

in Brazil and around the world. Rio de Janeiro's innovative circumvention of federal

limitations on municipal finance may serve as a model for burgeoning cities in the global

south looking to secure infrastructure investment despite restrictive fiscal policies.

A History of Finance Obstacles for Brazilian Cities

In its attempt to centralize the national economy, the 1988 Constitution required that each

request for domestic borrowing by a municipal or state entity be subject to Senate

approval. Even with this safeguard, fiscal imprudence by Brazilian cities forced two

successive federal bailouts of the largest cities, followed by a debt restructuring. The

debacle ended in the comprehensive prohibition of municipal bonds for any purpose other

than debt refinancing. A law passed in the year 2000 sought to further curb credit abuses

by sub-national government through even stricter fiscal responsibility measures1.

These financial regulations have dramatically influenced the economic profiles of Brazilian

cities, and reduced the feasibility of urban infrastructure investment. Principally, the lack of

developed municipal debt issuance vehicles forces cities in emerging markets to borrow

more expensively in foreign currencies2, as evinced by the experience of Rio de Janeiro.

The city has relied on multilateral agencies such as the World Bank for capital investment

funds due to the dearth of other borrowing mechanisms. These agencies, meanwhile, can

rely on Brazil's federal government to underwrite the debt 3 . Though BNDES, Brazil's

development bank, also frequently contributes to municipal coffers, its efforts discourage 1 Zabala, R. Giovanelli, G. Subnational Capital Markets in Developing Countries. “Brazil”, Chapter 15. 2003. 2 Acevedo, P., Alberola, E., Broto, C. Local Debt Expansion and Vulnerability Reduction: An Assessment for Six Crisis-Prone Countries. BIS Papers No 36. 3 S&P. S&P Affirms State of Rio de Janeiro. Jul 2, 2012.

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private investment and long-term dependence on the bank as the sole lender is not

sustainable. Thus, despite the fact that Rio's per capita GDP is 25% higher than the rest of

Brazil, the city's exorbitant public debt continues to grow, negatively impacting its credit

rating and drawing additional scrutiny from the private sector4. Furthermore, restrictions on

the economic independence of municipalities encourage less directed investment; cities

take advantage of federal underwriting on the externally influenced projects they manage

to obtain rather than assuming responsibility for funding a more comprehensive

infrastructure investment plan.

Globally, these funding dynamics are somewhat unusual. They contrast sharply with

Chinese intergovernmental transfers, which critics claim mask indebtedness while spurring

overzealous infrastructure projects. Nor do they find precedent in the mixed model of

municipal bond issuance and federal funding on which much of America's infrastructure

was built. For the second-largest Latin American economy, Mexico, the investment

environment is also quite distinct; proximity to the U.S. and carefully monitored relationships

with private investors have been the key to infrastructure development there. The

internationally dependent nature of Brazilian municipal finance illustrates the extent to which

cities have been forced to innovate around restrictive economic policies.

Unfortunately, this innovation remains only moderately successful, at the expense of

Brazilian urban residents. Recent research has demonstrated that investments as simple as

street paving, not to mention mega-projects, can generate economic returns for low-income

residents that more than justify projects' costs5. Brazil, at this turning point in its economic

history, needs these types of investments more than ever.

Infrastructure and Development

Brazil's economy continues to receive widespread criticism, largely due to social indicators

that contrast with its level of industrialization. The halving of poverty rates over the last two

decades notwithstanding, the country ranks a mere 100th in GDP per capita, and more

4 Dos Santos, Alessandra Moraes. “Investing in Brazil’s Infrastructure: The Road Forsaken.” The Economist. Aug 11 2012. 5 Gonzalez-Navarro, Marco & Quitana-Domeque, Climent. Paving Streets for the Poor: Experimental Analysis of Infrastructure Effects. September 2012.

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than a quarter of the population remains below the poverty line6. The state of infrastructure

throughout the country parallels the socio-economic imbalance; even if it were to increase

its infrastructure investment eightfold, Brazil would still lagtwenty years behind South Korea.

A meager fourteen percent of the nation's roads are paved7 and the lamentable state of

housing in even its wealthiest cities is well-documented. The inability of local and regional

governments around the nation to improve quality of life through infrastructure and service

upgrades stems, in part, from the restrictive municipal borrowing environment.

The Olympics: A Trojan Horse for Infrastructure Investment

Having created a special governmental authority to coordinate Olympic planning and

implementation efforts among the various levels of government, as well as with the private

sector, Rio de Janeiro can now benefit from accelerated investment mechanisms. While

federal investments would not have supported meaningful improvements prior to Olympic

planning, the Municipal Olympic Company has sourced funding for city-wide bus rapid

transit systems, the construction of over 300,000 homes, and sustainable waste

management centers . The scale of investment has attracted competitive private sector bids,

successfully leveraging secured federal funds for increased results. With the goal of

representing Brazil in a positive light and executing a successful Olympics, Rio de Janeiro

has orchestrated the financing of social programs and citywide infrastructural upgrades.

Without the World Cup and Olympics to provide the appropriate political backdrop, it is

unlikely that Rio would have been able to draw as much infrastructural investment as the

city now expects to see by 2016. Increased state and federal funding, as well as the

necessary contributions of private investors attracted by projects of substantial scale, will all

have aided in the execution of a comprehensive development plan. Rio de Janeiro is

setting an important example. Through international bond markets, mega-events, or entirely

new strategies, burgeoning cities in the global south will increasingly need to build

innovative pathways around restrictions on infrastructure investment.

6 OECD, IMF. 7 Municipal Olympic Company website.

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