Social Value Investing: A Management Framework For Effective Partnerships

As we discussed in chapter 9, a massive corruption scandal plunged the Brazilian economy into one of its worst recessions in decades. Since 2004, Brazil had been among the rapidly growing BRIC economies (along with Russia, India, and China). Brazil developed and instituted important and interesting innovations in the application of the public-private partnership model. Prior to the rapidly unfolding economic and political crises of 2012, Brazil had been the darling of international investors and enjoyed an average growth rate of 4.4 percent from 2004 to 2010, peaking at 7.5 percent in 2010, a time when many other major world economies were in deep recession.¹

A key figure in the rise and fall of Brazil’s economic fortunes and international reputation was the controversial mayor of Rio de Janeiro, Eduardo Paes. Elected in 2008, Paes championed Rio’s successful bid in 2009 to host the 2016 Olympic Games over strong competing bids from Chicago, Tokyo, and Madrid. The mayor rode the winning bid to national and international attention and fame, delivering a widely viewed TED Talk in 2012² and succeeding Michael Bloomberg as chair of the C40, an international organization of cities advocating for urban solutions to climate change.³ Paes’s strategic plan was based on a vision to create a twenty-first-century Rio to debut when the Olympic Games arrived in the summer of 2016.

Using the approaching Olympics as a driving force, Paes developed a set of projects to launch his vision for the future of the city. The mayor laid out his plan between 2010 and 2012, and we can see reflections of a cross-sector partnership approach in it. For example, he articulated a long-term investment strategy realized through several related development projects. These projects were designed to unlock intrinsic community value—in this case, the revitalization of a deteriorated city neighborhood, creation of new public spaces, commercial building construction, and projects such as new schools and clinics and major upgrades to the mass transit system intended to create better opportunities for all of Rio’s residents. Some limited aspects of a comprehensive cross-sector partnership model were used to accomplish the projects, leveraging private investment with improved public infrastructure, and financing the projects with a mix of capital. These collaborations, however, ended up more reminiscent of the twentieth century public-private partnership (PPP) model discussed in chapter 1.

As with some of our other case studies, the long-term successes and failures of the Olympic-based revitalization of Rio cannot yet be determined. At present, the results are mixed, and the process is under a cloud of investigations. In this chapter, we examine how the city of Rio used a number of PPPs to develop and modernize the city to handle the 2016 Summer Olympic Games, including the redevelopment of the derelict and dangerous Porto Maravilha neighborhood in the downtown area near the original seaport. The city also built an edgy, environmentally themed Museum of Tomorrow in that same neighborhood, along with an Olympian participant housing project, transportation upgrades, and the Olympic Park itself.

Although these partnerships were successful in the sense that the Rio Olympic Games themselves took place without any major catastrophe, it subsequently became clear that there had been widespread corruption with private sector payoffs to public officials. Corruption in public contracting is all too common in Brazil, and large public-private partnership projects are clearly vulnerable. Failure to follow some key aspects of collaborative and inclusive partnership planning may explain how these problems developed.

As you will see, the Rio process did not include enough transparency, and there was almost no community participation in decision making. The government of Rio and the private developers worked independently with limited mutually developed operations or collaboration. There was an established strategic plan, but the focus was on getting done what needed to be done in time for the Olympic Games. The short-term goal was achieved, but the long-term planned objectives have languished since the games concluded and Paes’s term in office ended.

Rio de Janeiro’s modern history dates back to January 1, 1502, when Portuguese explorers landed on the shores of Guanabara Bay. The bay lies at the opening of a river, which in English is called the “River of January.”4 Prior to its independence in 1822, Rio’s economy was based on agriculture, gold, diamonds, and coffee exports. After independence, Rio became its nation’s capital, busiest port, and the political, cultural, and economic center of Brazil. After World War II, Rio transitioned into an industrial economy, headquarters for domestic and international businesses, and a major population center, including a large group of low-income families concentrated in what are now widely known as favelas.

In 1960, the nation’s political capital was moved inland to the new planned city of Brasília. The 1960s and 1970s saw São Paulo’s rise as the new center for Brazilian business and industry. With a population of more than twelve million in its metro area, against Rio’s six million, São Paulo is South America’s largest city and the undisputed leader for Brazilian industry and finance.

Today, Rio, like many global cities, has focused on its role as a service center. It is home to international businesses and a cultural center. It is the hometown of the bossa nova and its most famous song “The Girl from Ipanema,” was a global hit in the 1960s and a theme song for the 2016 Rio Summer Olympic Games. Rio is a major tourist destination and an emerging technology hub with university-business joint research ventures. For people around the world, Rio is synonymous with a complex mix of Carnival, crime, creativity, beautiful beaches, and corruption. Rio’s famous landmarks include Cristo Redentor; the nearly hundred-foot-tall statute is the largest Art Deco–style sculpture anywhere5 and was voted one of the New Seven Wonders of the World. It overlooks Rio from the top of Corcovado Mountain amid the Tijuca forest preserve.⁶

Rio, indeed all of Brazil, has been going through difficult times. A major corruption scandal at the country’s oil giant Petrobras,⁷ declining oil prices, impeachment of the nation’s president in a related corruption scandal, exchange rate depreciation, and inflation have combined to dig a deep recession since 2015.⁸ Gross national product declined for six consecutive quarters, and 2.8 million jobs were lost (7 percent of total employment).⁹ But these recent troubles followed a period of significant economic and social progress. According to the World Bank, between 2003 and 2014, approximately twenty-nine million Brazilians moved above the poverty line, and Brazil’s inequality index rating improved by 11 percent.¹⁰ Brazil has been a leader in international negotiations for climate change, including the successful 2015 COP 21, and voluntarily committed to reduce greenhouse gas emissions by at least 36.1 percent by 2020.¹¹ Brazil remains committed to universal coverage in primary education, although the quality and outcomes of the system leave much to be desired.¹²

Under the pressure of long days and nights working on the World Cup, the Olympics, and their renewal projects, the mayor was known to throw things at staffers, insult other elected officials, and once even punched a citizen in the face.¹⁵ Elected in 2008, and reelected with 65 percent of the vote in 2012, Paes nevertheless faced ongoing criticism for his vision of a modern and efficient Rio for the twenty-first century: street protests, accusations of favorable deals for developers, construction delays, and battles between police (run by the state government) and street gangs (and residents) over renewal in the favelas.¹⁶

Paes sought progress at almost any cost, never retreating in the face of protesters, whom he called “morons.”¹⁷ As he said in a 2015 interview, “if you look at Rio now, at least we are looking toward the future. The discussion in Rio was about what governments are not doing. Now people are complaining about things that we are doing. So, I love that.”¹⁸ Early on, the Olympic excitement was a unifying force, providing a sense of pride and general optimism about how Olympic-driven investments and tourism would benefit Brazil. Unfortunately, each individual Olympic project involved winners and losers, at least in the short run. Unlike Narendra Modi, who planned Digital India to be in everyone’s interests, Paes often dismissed or fought his opponents, and did not stress enough the convergence of interests between all parties, as well as shared risk and potential rewards.

When we consider this case through our definition of successful cross-sector partnerships, we can see signs of trouble. Successful partnerships rely on strong leadership from the people involved, and Paes did not possess the collaborative mind-set required to inspire and coordinate with private partners, community representatives, and advocates for affordable housing. Nor did he follow important place-based principles and engage the relatively large and vocal group of Rio’s citizens and members of the local community affected by the partnership’s projects. The partnership process appeared to be seriously flawed. There was almost no opportunity for true collaboration, and the absence of transparency in the contracting negotiations allowed the now apparent corruption to go undetected until the projects were completed and the games were over. Presumably to meet the extremely tight schedule required by the International Olympic Committee, the city chose a closed process with minimal comprehensive planning and little opportunity for citizen participation. And with few official performance measures other than on-time completion and functionality while the Olympics were under way, assessing success and holding partners accountable became very difficult.

In the downtown port area is a project, some say the largest of its type in Brazil,19 to revitalize deteriorated buildings and vacant land in a Rio neighborhood called Porto Maravilha. The city managed the partnership through a port development authority that engaged private companies to prepare the site, develop the projects, and manage many of the public services in the area, including street lighting, garbage collection, and landscaping. The largest private partner was a consortium headed by Brazil’s construction giant Odebrecht Infraestrutura and Carioca Engenharia.²⁰ Much of the land was previously under an elevated highway that the mayor tore down to create over fifty million square feet of new office, retail, residential, and cultural space—not dissimilar to Battery Park City in lower Manhattan.²¹ If the project is completed between 2020 and 2025, as called for in the plan, it is expected to reach $2.9 billion in investment. The development has achieved some significant effects, although there is still much work to be done.²²

For example, the project demolished three miles of elevated highway called the Perimetral and replaced it with a pedestrian walkway now open to the bay (figure 13.1). The area’s heavy, deadlocked traffic is now rerouted through two tunnels. New roads, sidewalks, electric, sewage, drainage, and fiber optic cable will bring the entire area up to twenty-first-century standards. Under the current plan, a private consortium known as Porto Novo is managing the development until 2025.²³ The project design met a number of aspects of our definition of a cross-sector partnership. The city entered a formal agreement with one of the country’s most successful development companies. They brought in experienced teams to lead the revitalization and maintain public spaces and amenities in return for private development rights. And there was some degree of accountability for partner performance by requiring the private consortium to maintain the public services and spaces for fifteen years into the future.²⁴

Figure 13.1 People gather to observe the Perimetral overpass, after its partial demolition as part of Rio's Porto Maravilha (Marvelous Port) urbanization project, in Rio de Janeiro April 20, 2014. The project was for the city's redevelopment ahead of the 2016 Olympic Games. REUTERS/Ricardo Moraes

Initially, thirty-two commercial projects committed to the site, including Nissan Motor Company and L’Oreal SA. The infrastructure improvements and prime location are designed to lure major private companies, and the city is planning to pay for those improvements primarily with fees received from an auction of the rights to build higher than the existing zoning limits.25 Paes argued that the PPP approach—a public plan and infrastructure with private financing and management—would enable Rio to redevelop much quicker and more cheaply than either the public sector alone or private development (which generally occurs site by site and negotiation by negotiation, without a comprehensive vision for the neighborhood).²⁶

In the early phases of the project, this approach worked quite well—private contractors funded by the city quickly removed the antiquated, elevated highway that divided and blocked sunlight from the area. They also installed the modern infrastructure necessary to attract new office space for international and large domestic companies. But failure to guard against corruption by using a transparent and rigorous public bidding process has led to several ongoing investigations.

In addition, the project’s progress has been slowed by the very large Petrobras scandal and its damage to the nation’s economy, political stability, and international reputation. Petrobras is a huge, government controlled petroleum company that controls most of the country’s oil, all of its refineries, wholesale distribution, and pipelines, and the nation’s largest chain of service stations.²⁷ The company was rocked by charges of massive corruption uncovered by a police investigation now widely known in Brazil as Operation Car Wash. In essence, executives from Petrobras and its many subcontractors overbilled the company and then used the excess cash to pay bribes to elected and appointed government officials.

In 2015, economists estimated that Petrobras and its subcontractors accounted for as much as 10 percent of the entire nation’s output, and cuts in their spending as a result of the scandal might reduce the nation’s growth rate by three-quarters of a percent.²⁸ In 2015 alone, Petrobras wrote off about $20 billion related to the corruption scandal and reduced its investment spending by $25 billion compared to 2013.²⁹ The corruption scandal continued to unfold in 2016, and Brazil reported its worst economic performance in twenty-five years.³⁰

Nevertheless, the work at Porto Maravilha continued despite the scandal due to the pressure of the start of the Olympic Games in the late summer of 2016. Both vehicle tunnels are operating, buildings are going up, and more than thirteen hundred units of private housing are built or under construction. The city’s goal is to bring at least sixty thousand new residents to the area, up from the thirty thousand living in the port area in 2010.³¹ At the same time, one of the most spectacular components of the Porto Maravilha is open and already attracting local and international praise and criticism: the Museum of Tomorrow.³²

Designed by world-renowned Spanish architect Santiago Calatrava (who also designed the subway station at the rebuilt World Trade Center in New York City), the Museum of Tomorrow (figure 13.2) opened in December 2015. Already it is attracting a great deal of positive attention in the media, in Brazil, and internationally. For example, “Rio de Janeiro’s new museum, focusing on ideas rather than objects, ecology more than technology, is a little trippy, a little hippy, very worthy, but rarely dull,”³³ and “its design is bold—it looks like the exoskeleton of a pre-historic fish. Its aim is ambitious: to raise consciousness on the future of our planet.”³⁴

The museum’s theme is sustainability and the consequences of ignoring climate change. Its exhibits are designed to advocate for immediate sustainability efforts, which is the reason it is called the Museum of Tomorrow instead of the Museum of the Future.³⁵ The main exhibition is digital and asks visitors to ponder where we came from, where we are, and where we might go as a society. It includes audio, visual, film, and data describing the origins of the planet, through evolution, and into the present and future of climate change, including burning forests, melting ice caps, choking auto emissions, growing population and consumption, acidification, and rising greenhouse gas concentrations. It also includes interactive games that enable visitors to evaluate a variety of future scenarios depending on how humans behave. The exhibits are constructed and maintained with data and analysis flowing in from Brazil’s best universities, global scientists, international space agencies, the United Nations, and a wide array of expert consultants.³⁶ The museum also raises awareness about the urgency of adopting sustainable practices, creating pressure on other developments in the neighborhood and around the city. The museum building itself is said to use 40 percent less energy than a conventional building and is powered by solar and cooled by water from the adjacent Guanabara Bay.³⁷

The museum’s beautiful appearance, provocative presentations, and location in the newly developing Porto Maravilha neighborhood has made it a must-see destination for visitors and local residents alike; it is already the most visited museum in Brazil.³⁸

Financed with public money and philanthropic contributions, particularly from the Roberto Marinho Foundation, and some well-known international corporate sponsors, the museum pooled funding from various sources for its development and exhibits. Philanthropic support helped develop the plan for the museum, provided the initial risk capital, and added prestige and gravitas to the project. This helped justify and leverage public and private investment in the museum and the surrounding neighborhood, turning around what was a dangerous and dilapidated area in the heart of downtown Rio. Each of the partners made substantial, tangible contributions, and without public sector–financed infrastructure, the developments would not have been possible.

The museum project illustrates the important effects of blending different types of capital for social good. It is a joint initiative of the city of Rio de Janeiro, the Marinho Foundation, Banco Santander, and other corporate supporters. It has received financing from the state government of Rio and the federal FINEP program. It is part of a museum network that receives funding from the Rio Local Cultural Office, and support for the project’s administration is provided by the Institute of Development and Management (IDG), a nonprofit cultural organization.³⁹

The museum has attracted rave reviews and won numerous awards, including the Leading Culture Destinations of the Year Award from the UK and the International Design & Communication Award in Canada.40 However, community activists have criticized the museum’s cost (estimated to be about USD $100 million) and other new developments in the port area for using scarce public dollars during a deep national recession. They say that the museum ignores the area’s important history,⁴¹ and claim the developments are gentrifying the surrounding neighborhood and pricing the current poor residents out.⁴² Criticisms aside, the grand scale and beauty of the museum and its early popularity as a destination for tourists and locals foretell a future icon that may one day rival Christ the Redeemer as a global identifier for Rio.⁴³ In its first year of operation, the Museum of Tomorrow attracted around 1.4 million visitors.⁴⁴

It will be years if not decades before anyone can accurately assess whether the award of the Olympic Games to Rio de Janeiro ignited a process that helped make Rio a twenty-first-century, world-class city (as former mayor Paes dreamed it would be), or whether it wasted city money on projects that made the city’s rich richer, exacerbated the already extreme inequality, and gentrified favelas, as its critics now say. Future generations will likely look back at it as somewhere in between. Six months after the games ended, reports profiled abandoned “White Elephant” projects in the Olympic Park—stadium entrances boarded up, an empty pool filled with dirt and garbage, and arenas promised to be converted into schools still vacant and untouched.⁴⁵ City and state officials maintain that numerous improvements to the city’s infrastructure and transport systems as part of the Olympic project are already benefiting all residents and promised that reuse of the so-called White Elephants would happen.

The international media forecast just before the Rio Olympics opening ceremony in August 2016 was universally negative. As a writer for Forbes predicted, “a few things are hard to imagine about Brazil right now. One is that the Olympics in Rio can possibly be anything but horrible judging by the headlines.”46 The months, weeks, and days leading up to the Rio Olympics were dominated by media headlines and stories about unfinished facilities, the dangerously polluted Guanabara Bay, street protests (figure 13.3), violent confrontations between protestors and the state police, and top athletes canceling because they feared what the media characterized as an out-of-control outbreak of the mosquito-borne Zika virus.⁴⁷

Worse, in May 2016, Brazil’s president Dilma Rousseff was suspended by the federal Senate on charges that she manipulated the federal budget to conceal the country’s rapidly deteriorating economy, in part as a result of the growing Petrobras scandal and associated Operation Car Wash investigation.⁴⁸ On August 31, 2016, ten days after the closing ceremonies of 2016 Rio Games, the federal Senate voted 61–20 to convict Ms. Rousseff, and she was impeached and removed from office.⁴⁹ The Petrobras scandal (Rousseff had been chairman of the Petrobras board before being elected president of Brazil) also implicated several of the country’s largest construction companies under contract to build much of the Olympic infrastructure and facilities. The promises of Brazil’s Olympic bid-book to clean up Guanabara Bay and improve life in Rio’s favelas were dramatically scaled back.⁵⁰

This new reuse of the Olympic participant housing could serve as a positive example of project adaptation for post-Olympic, post-Paes Rio. The city of Rio, the private housing developer, government employers, and a finance company are collaborating to find a financially sound and socially beneficial purpose for the site. These new partners are seeking to offset financial risks and are leveraging each other’s resources to make affordable workforce housing financially viable since the intended high-end market-rate housing plan failed. Without all four partners, the new plan could not work.

Some observers are more positive in their assessment of the Olympic “effect” on public transit in Rio. The mass transit system is now twice the length promised for the games (from 47 to 97 miles), there is a metro line extension from 2.5 to 10 miles, and a new light rail line, which was not part of the Olympic promise.⁵⁴ Rider surveys indicate travel time has decreased significantly, and transit costs have declined or remained the same; however, the entire system must still be fully integrated.⁵⁵

The current state of the Olympic Park is much less promising. According to local reports, the park hosted its first sports event six months after the games, and visitors described it as “beautiful” but “abandoned.”⁵⁶ Federal and city officials acknowledge the slow start of programming but maintain that a full agenda of training, competition, and social programs for children and young people are forthcoming. Current Rio mayor Marcelo Crivella has committed to partner with the federal government to ensure that “every weekend we can have an event.” In September 2017, the Olympic Park hosted a seven-day rock spectacle (called Rock in Rio 2017), with a follow-up concert not scheduled until 2019.⁵⁷ Some reuse is happening, but the pace thus far is slow.

The estimated costs of the Olympic games range widely, from $3 billion to $20 billion.58 The budget is a major issue, even if it ends up being lower than the estimated $15 billion spent by the previous summer games in London.⁵⁹ The cost is not generally offset by the revenues generated from the games, where again, estimates range widely, with some as high as $9 billion.⁶⁰ Supporters of the games also see the funds that were spent on rapid bus, light rail, and highway projects as long-term investments in the future of Rio. They stress that Rio used PPPs for most of the projects, with 60 percent of all costs paid for with private funds.⁶¹

Others see the Olympics as ultimately bad for Brazil. In Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup, Andrew Zimbalist was very negative in his assessment of the value of the World Cup to Brazil and only slightly less pessimistic about the long-term impact of the Olympic Games on Rio.⁶² His book was published before the games actually took place, and many of the disasters he anticipated did not occur. He also predicted that, ultimately, the games themselves would be “delivered with few blemishes” but without improving the lives of the average Rio citizen.⁶³

In a New York Times op-ed following the games, Brazilian journalist Vanessa Barbara wrote about how she was attacked in social media for criticizing the Rio Olympics. She called the Olympics “a public calamity for many citizens, especially those affected by the evictions, by police brutality and by the antidemocratic shakedown of an unequal and segregated city.” She concluded, “after the final ceremonies, when the last fireworks have been launched and all the foreign journalists have returned home, a bankrupt state of Rio will be left to pick up the pieces. And neither patriotism nor the love of sports will entitle us to overlook our reality.”⁶⁴

Failure to clean up Guanabara Bay, crime, low-paid and unpaid government teachers and doctors, little improvement in the favelas, and unabated inequality are major negative results from the Rio Olympics. At the same time, the number of tourists exceeded the plan’s goal, sales targets were met, Zika fears proved to be exaggerated, and the housing, transportation, and facilities were up to par and without serious incident.65 Writing in the New York Times, reporter Andrew Jacobs said, “But the criticism aside, the 2016 Summer Olympics in Rio have profoundly altered this city of six million, yielding a revitalized port; a new subway line; and a flush of municipal projects, big and small, that had long been on the wish list of city planners.”⁶⁶ Jonathan Watts of The Guardian wrote of Mayor Paes, “His proudest boast was the Olympic Boulevard near Praca Maua—the revamped port area, which thronged with visitors, food trucks and street artists. It was a remarkable transformation from the ugly overhead expressway that once dominated a district known for crime.”⁶⁷

A strong argument can be made that the Olympic Games catalyzed a public-private partnership process that completed important infrastructure projects that would have otherwise taken decades.⁶⁸ There seems to be agreement that the Porto Maravilha renovation, on the drawing board since the 1980s, was perhaps the most important achievement of the Olympic-related investments. Currently estimated at $2.5 billion, much of the financing came from the city’s sale of air rights and tax incentives to private developers, embodying some limited aspects of a cross-sector approach.⁶⁹ The port project and its centerpiece, the Museu do Amanha, are already crowded with locals and tourists day and night. Once derelict and dangerous, the area is now “a must-see tourist destination for its historical landmarks, sophisticated cultural activities, charming squares and waterfront views.”⁷⁰ And even five hundred affordable residential apartments to house those living in a nearby favela are in the plan.⁷¹

In April 2017, stunning allegations that Mayor Eduardo Paes himself pocketed millions of dollars in kickbacks cast a dark shadow over the potential benefits of the 2016 Olympic Games to Rio. The investigation of the Petrobras oil giant that began in 2014 expanded into both the World Cup and the Olympic Games. Brazil’s supreme court subsequently opened investigations into nearly three hundred politicians,⁷² including Paes, based on the testimony of executives from the construction giant Odebrecht, the firm contracted to build many of the Olympic-related projects.⁷³ A separate police investigation opened into possible fraud in the construction of the new subway line.⁷⁴ As part of a plea bargain, the chairman and the chief executive of Odebrecht suggested that two former presidents of Brazil and a former speaker of the parliament colluded with potential bidders in the pay-to-play contract award process during the build-out of the World Cup and Olympic projects.⁷⁵

Some of the partnerships associated with the Rio Olympics may have helped fuel corruption between willing public officials and greedy private companies. It is difficult to determine whether the corruption originated from those leading organizations in the private sector, the public sector, or both. As discussed in chapter 5, successful leadership requires not only vision and drive but also integrity, respect for stakeholders, and admirable ambition. Unlike leaders from our other cases (Doug Blonsky and Betsy Rogers of New York’s Central Park Conservancy, former NYC mayor Bloomberg, and India’s Prime Minster Modi), leadership in Rio was unable to maintain the commitment to collaboration, engagement, and integrity partnerships require to achieve success, both financially and in terms of social value.

Perhaps the conditions in Rio were at least partially to blame. Similar types of corruption associated with the Porto Maravilha and the Olympic Park projects were happening at Petrobras, involving many other partnerships and leaders. Another major corruption scandal broke in 2017, indicating that Brazil’s president Michel Temer (the former vice president who succeeded impeached President Rousseff) took $4.6 million in illegal campaign contributions from executives of JBS SA, one of the world’s largest food companies.⁷⁶ Temer ultimately avoided trial,⁷⁷ but in 2018, he remained under investigation by police for separate corruption allegations.⁷⁸ A national poll showed his approval rating at just three percent—the lowest in Brazil’s modern history.⁷⁹