PORTO

MARAVILHA
- CASE STUDY

URBAN REGENERATION KSB

URBAN REGENERATION KSB 1

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 TABLE OF CONTENT

Summary 4

Context and
Background 4

The Process 8

Organizational
Structure 10

Financing and
11
Implementing

Lessons Learned
and Replicabilty 14

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 1 SUMMARY

PROJECT & LOCATION Porto Maravhilha

LAND-BASED
FINANCING INSTRUMENT Development/air rights
USED

TOTAL PROJECT COST $2.8 billion (2012 figures)

The Porto Maravilha Urban Regeneration Project used the sale of development rights to transform a decaying
industrial waterfront in Rio de Janeiro into a vibrant mixed-use zone with renewed urban infrastructure, while
preserving its historical identity and heritage.

2 CONTEXT AND BACKGROUND

Porto Maravilha is a large-scale urban regeneration1 as do the connections between the city’s North, South,
project to restore the old port district of Rio de Janeiro and West Zones and the Metropolitan Region. Despite its
(Brazil). The district is at the heart of the Rio de Janeiro central location and proximity to two airports and popular
Metropolitan Region, the second most populated urban sightseeing spots, the area had been in decay since the
area in Brazil, with 12 million inhabitants. 1960s. Technological advances made the harbor support
facilities in Porto Maravilha obsolete, and port activities
Porto Maravilha is a strategically located and historically relocated to larger sites nearby. Economic activities in
significant zone of the city. The main roads into the Porto Maravilha started to decline, leaving behind vacant
commercial core of the city go through the port zone, buildings and low property values.

1. In this paper we are using the term Urban Regeneration to refer to a whole strategy to transform an urban area. We are using urban renovation specifically to
refer to the physical urban infrastructures and services.

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 F I GURE 1
Porto Maravilha
location.

A primary motivation behind the regeneration project would also — through improvements in the use of public
was to integrate Porto Maravilha with the City Center. space and cultural amenities —celebrate the area’s
This integration was intended to spur a densification of unique cultural heritage and history. However, the cost
the port area by improving the land use to meet demand of the large-scale infrastructure needed to connect Porto
for new housing and economic opportunities, promote Maravilha to the rest of the city presented an obstacle for
social inclusion, and help redesign the main mobility grid development and attracting investors.
and connections in the City Center to reduce traffic. It

F I GURE 2
Consortium
Urban Operation
Model

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 Sponsored by the Municipality of Rio de Janeiro’s then- from selling CEPACs in the regeneration of the area, as
Mayor Eduardo da Costa Paes, the Porto Maravilha stipulated by the law.
regeneration initiative was launched through a Brazilian
urban policy instrument called Urban Consortium In 2009, the Municipal Chamber of Rio de Janeiro
Operation (UCO), and the City of Rio de Janeiro created approved Complementary Municipal Law (CML)
a special purpose company to lead the implementation 101/2009 to create the UCO for Porto Maravilha within an
process. The UCO is a land value capture (LVC) intervention area of five million square meters and with
instrument which allows the municipality to use the a duration of 30 years. This case study focuses on the
sale of development rights to fund enabling and value- implementation of the project from 2009 to 2016.
enhancing infrastructure.
The CML 101/2009 states that “the purpose of the
The UCO, which must be created by municipal law, Urban Operation Consortium is to promote the urban
establishes an Urban Special Interest Area (USIA) – in restructuring of the [area] through the expansion,
this case the Porto Marvilha district - and its applicable articulation, and restoration of public spaces in the Port
zoning regulations. These regulations include designating Zone with the aim of improving the quality of life of its
the current land useand also the ‘additional construction current and future residents, and the environmental
rights’ which would be sold to developers (called sustainability and socioeconomic aspects of the region.”²
Certificates of Potential Additional Construction, or This law establishes a set of principles and parameters to
CEPACs). The municipality must invest the funds it raises achieve the following goals:

» Reposition the city center as place to live,

helping to increase its population
» introduce a new concept of urban mobility through:
- Public transport integration
- Pedestrian priority
» invest in the zone’s historical and cultural heritage
» Promote social inclusionn

The project’s main physical interventions focused on land for real estate development and to enhance and
infrastructure reconstruction and upgrading the capacity promote social inclusion.
of urban services. Infrastructural interventions included
the reconfiguration of the mobility grid through the Through the UCO, the municipality raised about 5 billion
demolition of a 5-km bridge and construction of 9 km of reais (USD 1.9 billion at 2019 exchange rates) from 2011 to
tunnels that improved pedestrian walkways, bikeways, 2013 and used the funds to invest in 85% of the planned
and green and public spaces. New drainage, water urban regeneration activities. These funds were secured
supply, sewage, electricity, gas, and telecommunication through the sale of all 6.4 million CEPACs to the Fundo de
networks infrastructure were constructed along 70 km Garantia do Tempo de Serviço (FGTS), the government-
of streets and avenues. The urban services included run worker’s pension fund. The Fund, in turn, negotiated
improved and expanded public lighting, garbage the on-sale of CEPACs with real estate companies for the
collection, street sweeping, and traffic control. The development of the area. Since 2012, 10 new buildings
interventions aimed to ensure the availability of serviced have been built, totaling 511,275 square meters.

2. (CML 101/2009, Article 2).

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Site Description
During Brazil’s colonial and imperial period (1500-1989), In the 1970s, when major cities around the world were
Rio’s port was a dynamic center for the city and national building large viaducts to handle increased vehicle traffic,
economy and the major point of entry for the slave trade. Rio de Janeiro built one of its own. However, the 5-km
In the beginning of the 20th century, approximately 1.2 elevated viaduct, known as the Perimetral, had a negative
million square meters of land was reclaimed from the impact on the port area - rendering it a pass-through route
sea, widening the area to its current size. The new land from outlying residential areas to the CBD. This accelerated
was used to provide additional logistical services sites to its urban and environmental deterioration with residents
the Port of Rio de Janeiro. The area thrived until the mid- and businesses gradually moving out. Major upgrades to
1900s, when technological changes in the operation of the the area’s infrastructure had already stopped in the 1960s,
port made many of the old facilities obsolete, kicking off a and as the economic activities declined, many buildings
steady degradation of the zone. Commercial port activities became vacant and the number of inhabitants stagnated.
moved to a larger industrial neighborhood nearby. By the late 1980s, traffic jams were increasingly worsening
in the port area, particularly during rush hours when the
viaduct became a chaotic choke point of converging traffic
of downtown commuters.

F I GURE 3
Porto Maravilha
Intervention
Area

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 When the Porto Maravilha UCO was created, its 5 million Ferroviária Federal, a former national railway company.
square meters had two main sections: the heritage area and Until the Porto Maravilha project, there was no plans
the reclaimed region. The heritage area, declared in 1987, for the defunct railway company’s land. On Companhia
was about 3.8 million square meters with 1,500 privately Docas’ land, several unused and vacant warehouses were
owned small- and medium-sized historical buildings, many informally occupied.
of which were underutilized and informally occupied at the
time. Within this area there were four informal settlements, According to Brazil’s 2010 Census, around 28,000 people
known as favelas, and the inhabitants had no land titles. were residing in the intervention area, mainly in the heritage
section. The majority of the residents lived in poverty with
The balance of the land – an area of 1.2 million square roughly half residing in favelas. The area’s drainage, water
meters – was made up of large plots of land with large supply, gas and electricity networks were insufficient and
warehouses and other port operations facilities. Of the land also inefficient. Parts of the area were exposed to floods
and facilities, 25% were privately owned and 75% were during the rainy seasons contributing to the pollution of its
owned by state companies. The latter included the port shores along the Guanabara Bay. Another setback was soil
authority Companhia Docas do Rio de Janeiro and Rede contamination from port activities.

3 THE PROCESS

An initiative of the Municipality of Rio de Janeiro, Porto The UCO aimed to restore the appeal of the port zone’s
Maravilha required large-scale investment using funds degraded land in order to boost property prices. To
that had to be raised through a system of additional secure rights to develop properties with higher value
construction rights (CEPACS) created by the UCO. The and density, the landowners, real estate developers,
project had three areas of investment focus: urban and other private parties had to acquire Certificates
infrastructure reconstruction and maintenance, real of Additional Construction Potential (CEPACs) from
estate development, and socio-economic development. the municipality by auction. The municipality, in turn,
had to use the proceeds from the sale of the CEPACs
To design and approve a UCO, the municipality assessed to move forward on the urban renovation program,
the urban, social and environmental impacts, determined including the major infrastructure upgrades defined
the technical and economic feasibility of the potential in the CML 101/2009. Through the sale of CEPACs, the
interventions to catalyzereal estate development, and municipality raised the funds to start the renovation
estimated the initial value of the CEPACs. The Brazilian project. Thus, the real estate sector pre-financed
Securities and Exchange Commission (CVM), through the program on the expectation of making a return in
which the CEPACs are sold, reviewed the assessments as the medium to long term while the municipality took
a part of its approval process for the UCO. steps to increase the value of the area beforehand
to help finance the area’s transformation. With Porto
Before the UCO could be approved, the municipality held public Maravilha, the additional construction potential was
hearings and engaged with stakeholders to harness the for the reclaimed land area only, while the urban
community’s support. During this pre-approval stage, regeneration covered the entire intervention area,
Porto Maravilha drew wide public participation, leading to increasing the benefits from the funding.
adjustments in the interventions and the timeline of the project.

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 F I G UR E 4
Consortium
Urban Operation
Model

THE LAND READJUSTMENT

WAS NOT A KEY ELEMENT
OF THIS PROJECT. THE
MAIN CHALLENGE WAS
ABOUT LAND REGULATION
AND THE DISPOSAL OF
THE STATE COMPANIES’
PLOTS OF LAND TO THE
REAL ESTATE MARKET. THE
EMINENT DOMAIN WAS
USED FOR GETTING PLOTS
FOR SOCIAL HOUSING
AND COMMUNITY
EQUIPMENT AND, UNDER
SPECIAL REGULATION,
FOR ALLOWING THE
MUNICIPALITY BUYING
THE LAND FROM THE
STATE COMPANIES.

To establish the relationship with the private

sector, the Municipality has created a
Real Estate Investment Fund. The Cepacs
were put there as well as the land bought
by municipality or CDURP from the state
companies. Through this Real Estate
Investment Fund, the municipality has
promoted an auction to sell those assets
(Cepacs and land) to raise funds to pay the
PPP Contract and the other CUO expenses.

To protect the existing inhabitants, incentives

were created through specific laws for the
pardon of the debts and 10 years exemption of
municipal tax, declaration of the favelas as
special areas for urbanization and land regulation.

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 Several additional initiatives were used to support the goals of the UCO:

» To attract residents to the area (a stated policy objective of the

urban intervention), the municipality granted exemptions on
municipal property taxes for real estate investments in the first
four years of the program to spur the transformation.
» In 2014, a municipal law was approved to create incentives for
housing construction in the heritage area.
» To protect the existing inhabitants from displacement due to an
anticipated rise in land values stemming from the investments
and upgrades, specific laws were introduced, intending to
pardon their municipal debts and provide a 10-year exemption
on the municipal property tax. Land regularization and titling
for the favelas was also implemented.
» The municipality structured 15-year concessions for urban
services and infrastructure reconstruction (such as construction
of light rail) using a Public Private Partnership (PPP) model,
financed by the sales of CEPACs. The long duration of the
concession contract was an assurance to investors that the
political risk for the implementation of required urban
investments would be low.

4 ORGANIZATIONAL STRUCTURE

To implement the Porto Maravilha UCO, the municipality a special purpose company. CDURP started operations
created the Rio de Janeiro Port Region Urban Development in 2010. It developed UCO’s business model which
Company (Companhia de Desenvolvimento Urbano da stipulated the creation of the Real Estate Investment
Região do Porto do Rio de Janeiro, or CDURP) in 2009 as Fund and the bidding process for the PPP contract.

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5 FINANCING AND IMPLEMENTING

Project’s costs
The cost of the Porto Maravilha for the 15 years of the historical heritage recovery, social development, and
project was estimated in 2011 at around 7.6 billion administration (CDURP and other operational costs)
Brazilian reais for the urban infrastructure renovation totaling to 8 billion reais, or about US$2.8 billion at
(the PPP contract) and about 400 million reais for the that time.

Project Funding
The funds for Porto Maravilha came from selling land and CDURP further agreed to make the remaining 15%
CEPACs created as part of the UCO, as explained above. available in 15 years or less. As part of the plan, the
The law that created the UCO established the amount of auction winner would pay the Porto Maravilha costs
CEPACs and a corresponding value for each CEPAC. In (as described above) over a 15-year period from 2011
2011, this value was estimated at 3.5 billion reais and the to 2026. That provided plenty of time for the auction
land at 400 million reais, totaling approximately 4 billion winner to recoup its investment given that the Porto
reais (or US$1.3 billion at that time). That was lower than Maravilha program runs until 2039.
the above-mentioned budget estimate for the project.
In summary, CDURP created a business model that
To close this gap, CDURP held an auction to sell all the linked the payment cash flow required by the PPP
CEPACs in a single package and committed to sell the concessionaire with the payment streams of the
land that 60% these CEPACs are linked to within three auction winner, making it possible for the winner to
years of the auction date. Combined with selling CEPACS generate profits from the purchase of the CEPACS, and
linked to the private land (25% of the package), 85% help the Porto Maravilha area to appreciate in value.
of the CEPACs would be commercialized in the first
three years.

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 FIGURE 5
PPP Scope

PPP FOR URBAN RENOVATION

Contract BR $7,6 billion / 15 years
Funds CEPAC + Land
Garantee CEPAC

INFRAESTRUCTURE
70 km of vias with new drainage, sewerage, water supply, gas,
electricit, telecom nets, bike paths and promenade

9 km of tunnes

URBAN SERVICES
Public Space Conservation, Street cleaning and Garbage
collection

Street ligthing and Traffic lights and Traffic operation

PPP FOR LIGHT RAIL

Contract BR $1,2 mil billion / 25 years
Resources Federal Government + Private
Garantee Real Estate Investment Fund bonds

28 km net

Integrating Public Transportation Hubs

Full Capacit for 320 tousands passangers/day

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Bidding process
Based on the UCO business model designed by CDURP, winner was the Porto Maravilha Real Estate Investment
the UCO implementation required two interlinked Fund (Fundo de Investimento Imobiliário Porto Maravilha
bidding processes: for the PPP contract and for the – FIIPM), owned by the Brazilian Time of Service Guarantee
auction of CEPACs. Bidding for the PPP took place in Fund (Fundo de Garantia por Tempo de Serviço – FGTS), the
November 2010, after the document preparation, public biggest infrastructure and housing investment fund in Brazil.
hearing, and public consultation period. For the CEPACs, Two days later, the initial order for the PPP contract was
the technical studies were approved first, allowing the signed, marking the start of the urban renovation process.
auction of the securities to take place in June 2011. The

Regulatory framework
To enable complex projects such as Porto Maravilha, compensation is paid to the municipality through the
several regulatory systems and instruments need to acquisition of CEPACs. In turn, the municipality use the
converge - urban and spatial planning frameworks/ resources secured through the CEPAC sale to improve,
regulations, financial market regulations, procurement renovate and restore the designated area (as approved by
law and policy, and national and/or local legislation for the same law). The concept of the CEPACs is analogous
regulating PPPs, amongst others. to that of air or development rights, or the right to use
and develop the space above a property. But in Brazil, as
Spatial planning regulations: For Porto Maravilha, mentioned before, it is linked to an urban renovation plan
the City of Rio de Janeiro is the authority regulating land for a defined area.
use, planning and zoning. In addition to these powers,
the Statute of the Cities , defines a set of urban policy Financial market regulations: CEPACS is a financial
instruments which can be applied by municipalities. One instrument which is regulated by the Security and Exchange
of these instruments is the UCO. Commission of Brazil (CVM). The CEPACS used to fund
Porto Maravilha’s infrastructure are public securities which
The UCO is a policy instrument which is used to redefine much meet standards set out by the CVM.
the urban parameters and land use of a specified area
and can therefore authorize deviations from land Public procurement regulations: Both the public-private
use plans which increase the development rights partnership and publicly-owned SPV established for Porto
within the specified area, over a set period of time. To Maravilha are regulated by national and local regulations
use the additional construction potential, financial governing their establishment and rules for operations.

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 6 LESSONS LEARNED
AND REPLICABILTY

The revitalization of Porto Marvilha has brought about The key challenge in implementing the project was aligning
significant environmental, mobility, economic, and public the goals of multiple stakeholders over a wide project area
space improvements. By December 2016, around 85% of and creating a flexible and resilient management structure
the urban renovation program had been implemented that could manage these complexities over time.
with new infrastructure for drainage, sewage, water
supply, electricity, gas, and telecom networks in place. A range of stakeholders were involved in the UCO
Sewage is now collected and treated, and a new drainage implementation, several of whom had different and
network was designed for potential floods. The new sometimes divergent interests and perspectives. These
mobility grid with 9 km of tunnels and restored routes had included public authorities from different sectors and
come into use along with a new 3.5 km promenade with government levels, as well as different private sector
bike lanes, walkways, and green spaces. The Perimetral agents, community, and civil society representatives,
was demolished and replaced by a new traffic grid and including academics. This required good communications
mobility system that includes a light rail system. The to handle a wide range of pressures and to mitigate the
changes have cut noise pollution and greenhouse gas impacts of interventions.
emissions in the area, and reduced traffic to and from
the city center. These projects totaled US$1.8 billion in The prominent role of the state and state companies
investments over five years. (they accounted for 75% of underlying land) created
complexities, as it exposes the project to other budgetary,
In terms of real estate development, 92% of the land with social and political concerns that a purely private project
additional building potential has been made available would not. The urban infrastructure renovations caused
to the market. Between 2012 and 2018, 10 new building major disruption in the center of Rio de Janeiro for five
have been built, totaling 511,275 square meters. However, consecutive years, increasing the risk of public and
the pace of absorption has been slower than originally political intervention over the project period.
anticipated, largely due to the country’s sluggish
economy. In 2019, about 50% of the new buildup area The establishment of CDURP, a publicly-owned
was occupied. The country’s economy fell into a deep development and operations company, to lead
recession in 2015-16 and the recovery has been weak implementation of Porto Maravilha project was key to its
since. This has put the brakes on the real estate market success. The company was focused solely on this project
in Rio and construction of social housing. Even so, the and, with the support of a robust enabling regulatory
Porto Maravilha business model is showing resilience. The environment, supervised infrastructure improvements,
main part of the urban renovation has been completed, area management, stakeholder engagement, and
increasing the attractiveness of Porto Maravilha. It is only implementation of social policy. The creation of a
a matter of time before an acceleration in the economy dedicated company reduced the institutional risks of this
unleashes more investment in the area. complex intervention that involved many departments

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run by different administrative sectors. While this While the recession made it harder for the FIIPM to comply
made it harder to coordinate the implementation of the with the payment plan, the adjustments mechanism
program, CDURP could focus on the holistic intervention allowed for a negotiation of the PPP program, postponing
instead of sectoral or segmented approaches that some of the interventions to adjust the payment flow.
could lead to communications failures and hamper the The contract model has therefore been resilient and
implementation process. Another key aspect of the worked well from a time and cost perspective. The
intervention was the leadership of the city mayor from concessionaire has been committed to managing costs
the start, making it a priority project for Rio de Janeiro. and while keeping the works on schedule in order to get
paid regularly. The clear regulations have also averted
A concern for any public project, of course, is the political will conflicts, easing legal and political risks. CDURP has
to sustain it after the expiration of the PPP. Porto Maravilha played a key role here as it helped negotiate solutions in
successfully survived its first transition to a new government, potential cases of conflicts of interest.
which took office in January 2017. While some changes
were made, which is considered typical, Porto Maravilha The link between the cash flows of the FIIPM and the PPP
continued despite these changes and the weak economy. made it possible to make fair adjustments for the both
sides — the FIIPM and the concessionaire — as well
Political and institutional support and engagement is as for the CDURP on behalf of the municipality. It is still
critical to success in a large urban transformation project too early, however, to gauge the sustainability of the PPP
like Porto Maravilha project which creates uncertainties because the contract doesn’t expire until 2026.
and resistance. The city’s leadership commitment, through
the mayor, is crucial for mainstreaming and legitimatizing The decision to sell all the CEPACs in a single auction was
the project. The UCO Porto Maravilha shows that LVC is an an important and unique feature of this project. In other
opportunity for municipalities to take a lead in the process CEPAC sales in Brazil, there are multiple purchasers of
with a long-term view of the city’s development. these CEPACS. In this instance, however, the rationale to
sell to one buyer was to assure that the funds would be
The use of a PPP model for constructing and managing available for the urban renovation. However, it has limited
urban infrastructure was another key success factor. The the ability of CDURP and the City Hall to negotiate with
PPPs allowed for significantly faster infrastructure roll-out, the real estate investor-led by the FII Porto Maravilha
which (1) reduced the number of public departments and Managers. This operator is focused on maximizing its
institutions involved in the process, (2) provided certainty gains, not necessarily the UCO’s long-term objectives. This
to private sector investors in the area, and therefore (3) is one aspect that should be considered in future efforts
allowed for more rapid increases in land values, which using this model. It is important for the municipality to
could be used to finance the infrastructure investments. put a priority on the goals of urban regeneration above
that of simply maximizing the financial gains when
The use of the PPP model was, however, not without its applying an LVC instrument.
complications. Despite a robust institutional and regulatory
framework supporting it, the economic recession in One challenge that remains for the project is the
2015 impacted the viability of this PPP implementation social impact. The figure bellow shows the main social
mechanism. Fortunately, some of these risks were mitigated development achievements up to December 2016. While
through the contracts between FIIPM (the purchaser of there has been some success in avoiding displacement
the construction and development rights), and the PPP of indigent residents, the CDURP was not able to
concessionaire who would build the infrastructure that implement a social housing plan. The main reason for
supported FIIPM’s ability to utilize the rights. this is that the law governing the UCO did not define the
amounts of funds to be used for this purpose. The project
In terms of financial risk, the contracts allowed for implementation is still ongoing, so there may still be an
adjustments in implementation and payment streams. opportunity for financing this plan.

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 PORTO
MARAVILHA
- CASE STUDY

URBAN REGENERATION KSB

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