Looking for funds, São Paulo struggles to find a good model to manage its assets

. Jan 25, 2019

São Paulo turns 465 years old today. In Brazil’s largest city, everything is big, including its leisure options. Municipal venues such as the Pacaembu stadium, Anhembi sambadrome, and the iconic Interlagos racetrack host thousands of people in the city’s biggest events, but keeping them up and running is costing São Paulo millions. And the city desperately needs improvements to its transportation, education, and health systems.

Although it is also Brazil’s richest city, São Paulo is struggling to balance its accounts after being hit hard during the nationwide recession, and suffering from a broad deficit in local social security, which it tried to address with its own state pension reform.

</p> <p>In 2016, conservative businessman João Doria was elected Mayor of São Paulo, promising to run the city as &#8220;efficiently&#8221; as he would one of his companies. In office, he launched a plan to privatize SPTuris—the state-owned company that manages the Anhembi event complex and Interlagos—and put 108 municipal parks, 27 bus terminals, the Pacaembu stadium, Municipal Market, and the public transport card system (&#8220;<em>Bilhete Único</em>&#8220;) under a concession regime. Even the city&#8217;s cemeteries were on his list of &#8220;demunicipalization.&#8221; In 2017, during a roadshow for investors in the United Arab Emirates, Mr. Doria presented his project with a video calling it “the biggest privatization program in São Paulo’s history.”</p> <p>Three years later, Mr. Doria handed the reins of the municipal government to his vice, Bruno Covas, and was elected governor of the State of São Paulo. His plans continue, but after all this time, the city&#8217;s main assets remain under public control and are the center of a discussion about <a href="">how this 465-year-old metropolis deals with its public spaces. </a></p> <p>In a country hampered with corruption involving public and private sectors, privatization still carries a bad reputation, in spite of some positive experiences. People who oppose the plan fear that the population may lose their free access to spaces that are open today, such as parks, or the services may be of poor quality if the government fails to properly supervise them.</p> <p>The municipal government has been trying to diminish these fears. For instance, it has ensured that private companies will not charge entrance fees in parks and, for each large and more profitable park, the consortiums must take on five poorly-conserved ones. Representatives of the Mayor&#8217;s office told <strong>The</strong> <strong>Brazilian Report</strong> that goals will be established to ensure the quality of the services, which will be “permanently inspected by authorities and may also be evaluated by the citizens through satisfaction surveys.”</p> <p>But a process full of back-and-forths makes it harder for the population to put faith in its success. A simple search on the website of the Privatization Department shows that plenty of the tenders have been recalled and are starting again this year—a long delay for an administration that promoted itself as efficient.</p> <p>One emblematic case was the concession process of the Pacaembu stadium, which was delayed and then scrapped by the Municipal Accounting Court (TCM), the agency which oversees public tenders. One of the major problems was that the stadium was built by the municipal government on land owned by the state government, which never officialized the donation. This matter was only settled by the end of 2018. Besides the Pacaembu, the TCM has suspended privatization of cemeteries and questioned the process involving Anhembi.</p> <p>The local City Council is also joining the battle, even after approving most of the laws necessary for the plan. Last year, councilors questioned the value of BRL 713 million estimated as revenue from the sale in the city’s annual budget. Before the end of the legislative year, councilman Gilson Barreto—from the Mayor&#8217;s Brazilian Social Democracy Party (PSDB)—said that “we cannot accept that a property that’s worth BRL 2 billion will be sold by only BRL 700 million. We want TCM to be more active on this.” Mr. Barreto was referring to the Anhembi complex.</p> <p>The Mayor&#8217;s office told <strong>The Brazilian Report</strong> that the SPTuris/Anhembi sale is still undergoing, so “it has no defined value.” The representatives also said that the city “aims to manage BRL 2 billion for the city government and BRL 700 million in investments by partners.” So far, BRL 300 million was already obtained through a partnership with Cisco.</p> <p>The Municipal Goals Plan 2017-2020 projected a financial impact of BRL 5 billion from privatization and partnerships projects in July, the most recent data available.</p> <h2>Privatization v. Concession</h2> <p>Local authorities claim that a misconception of their program is disrupting the process. On August, the then-Secretary of Privatization, Wilson Poit, <a href="">told Folha newspaper that</a> “an excess of juridical procedures, the electoral calendar and the ignorance of what concession and privatization really are, have caused it to be delayed, but I’m optimistic that we’ll be able to accomplish the plan.”</p> <p>But the model chosen for it may actually be the problem, according to Mr. Valter Caldana, an architecture professor and coordinator of the Public Policies Laboratory at Mackenzie University.</p> <p>“In the cases of Anhembi and Interlagos, the city is adopting a privatization model that aims to take the public control out of every action. It was in vogue during the late 1990s, but it is already being revoked in some parts of the world. It goes against the trend of valuing public spaces as part of the urbanization of the city,” he explains.</p> <p>“On the other hand, the concession model intended for the Pacaembu is way more reasonable. You give the business to the private sector to develop, which it does best, but maintain the ownership of the land, which is important for planning the urban development of the area in the future.”</p> <p>Pacaembu’s initial concession plan estimated that the winning consortium should pay at least BRL 37 million for the right to administer the stadium and the accompanying gymnasium for 35 years. Besides renovations, the companies must continue to offer the public services currently provided by the government in the space. The municipal government believed the move would provide BRL 500 million in profits for the city during this period, including direct investments, taxes, and the end of a financial burden. This would be an important part of the process, as the city spends BRL 8.3 million each year to maintain the stadium, according to data from the Mayor&#8217;s office.</p> <p>Money is even more important when it comes to Anhembi and Interlagos. Anhembi is, in fact, a huge convention center that comprises both the Sambadrome that holds the annual Carnival parade, a space for events and one for exhibitions. The Interlagos racetrack hosts the Brazilian Grand Prix, as well as music festivals, in an area of more than 1 million square meters.</p> <p>According to Mr. Caldana, these spaces are symbols of the state&#8217;s success in encouraging the Events &amp; Entertainment industry in São Paulo, which now correspond to a huge source of income. Last year alone, the Brazilian Grand Prix generated a positive impact of BRL 334 million for the tourism in the city, a 19.2 percent increase in comparison to 2017.</p> <p>In spite of that, SPTuris is suffering from losses. The company’s third-quarter results show a loss of BRL 6.43 million, due to a fall in revenues from 2017. It would make sense for the city to sell SPTuris, as the sector is well-established. However, as Mr. Caldana points out, selling the business doesn’t mean giving up on the land.</p> <p>“When you speak of selling, you give up on controlling these areas. Interlagos and Anhembi are important and have a strategic value to São Paulo’s urban development. They will be missed in urban politics in the long term,” states the professor.</p> <p>He cites as an example the end of the use of Campo de Marte airport, located near Anhembi in the north of São Paulo. Last year, the city and the federal government reached an agreement and the municipality obtained the rights to manage the area, which it intends to turn into a park. “The entire area will be hyper-valued because of the end of the airport. You’ll be able to have taller buildings and increase population density. There’s a lot at stake for just giving up on the land.”

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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