On Sao Paulo subway, a leap for Brazil infrastructure

* New subway line to be built by private initiative

* Major step for Brazil's leftist government

* An answer to decades of delays on big projects

SAO PAULO, Feb 1 (Reuters) - Two hundred feet (61 metres) under Sao Paulo's most famous old-money neighborhood, home to artists, coffee barons and retired generals, a major breakthrough is about to take place in Brazil's quest to improve its dilapidated infrastructure.

A new subway line running through Higienopolis will be the country's first built almost entirely by the private sector, the government of Sao Paulo state revealed this week.

The breakthrough has for long been a kind of Holy Grail for Brazilian business leaders and foreign investors alike. It occurred after President Dilma Rousseff, whose leftist Workers' Party has traditionally opposed privatizations, quietly authorized a regulatory change over the Christmas holiday that made the project viable.

"It's very exciting. We've been wanting to do this for years," Sao Paulo state's transport secretary, Jurandir Fernandes, said in an interview on Thursday.

Fernandes said he was "overwhelmed" by queries at an investor conference in Britain two weeks ago at which banks including Morgan Stanley and Barclays PLC showed interest in participating in construction of the all-new, nine-mile-long (15 km) Line 6, he said.

"They all wanted to know if this represents a change in the way Brazil does things," Fernandes said. "I think it's very possible the answer is yes. In any case, it will mean a dramatic acceleration in the pace of construction in Sao Paulo."

Construction will cost an estimated $4 billion, to be split between Sao Paulo state and the companies that win the tender. Building is expected to begin in 2014, with completion set for 2020. The state expects the line to have an average of 634,000 passengers a day during its first year of operation.

Brazilian unions and leftist politicians had for decades insisted the public sector build and operate big-ticket construction projects such as subways, railroads and airports.

Yet the traditional inefficiencies of the public sector, plus a 20-year period through the 1980s and 1990s when the Brazilian state was effectively bankrupt, left the country's infrastructure trailing many of its Latin American rivals.

Severe transport bottlenecks are a big reason that Brazil's $2.5 trillion economy has been stagnant for the past two years, economists say.

In response, Rousseff has dramatically boosted the private sector's role in big construction projects, a move that risks alienating her political base but has become necessary as Brazil prepares to host the 2014 World Cup and 2016 Summer Olympics.

In the case of Sao Paulo's subway, the need for change was especially glaring.

The metropolitan area of some 20 million people has only about 45 miles (72 km) of mostly underground rail - barely a third the size of Mexico City's network. Sao Paulo has some of the world's worst traffic jams, with commuters sometimes needing three hours to travel about nine miles (14 km) across Brazil's biggest city and financial capital.

PRIVATE-SECTOR EFFICIENCY ON DISPLAY

Sao Paulo in 2006 created Brazil's first public-private partnership (PPP) for the subway system's Line 4. That line, which opened in 2010 and links the city's three main financial districts, is operated by a private consortium of companies including Brazil's CCR and the local unit of Japanese conglomerate Mitsui & Co.

Line 4, which has latest-generation driverless cars from South Korea featuring air conditioning, flat-screen TVs and mobile phone access, is a sharp contrast to the subway system's other four lines.

They are still operated by the state-run Companhia do Metropolitano de Sao Paulo, and their trains have frequent delays, occasional strikes and poor service. Connecting from the old system to the new one often feels like walking from a run-down sauna into a brand-new shopping mall.

Line 4 is already operating near capacity during peak hours. "I am confident we could double our number of stations and trains tomorrow, and our number of passengers would double as well," Luis Valença, chief of the Via Quatro consortium, said in an interview in December.

"That shows you the pent-up demand for quality public transport in Sao Paulo," Valença said. "It's limitless."

Yet the framework that led to Line 4 did not go far enough in its embrace of business, Fernandes said.

While the private sector operates the trains, the construction was executed by the government, similar to past projects. That resulted in years of delays as the government conducted mandatory tender offers for each building component - escalators, mirrors, and so on.

Line 4 had been in the state's building plans since at least 1969, and construction of several stations still has not been completed.

ROUSSEFF'S HELP SEALS THE DEAL

For Line 6, the government will only be charged with environmental licensing and expropriations, Fernandes said. Yet even on the latter, companies will be able to negotiate directly with property owners, which will help avoid delays from lawsuits and regulations on how much the government can spend.

"A company can come in and say, 'Look, pal, here's a million dollars, let's just be done with this.' I, the state, am prevented from doing that," Fernandes said.

Meanwhile, the long-standing ideological opposition to the private sector seems to have sharply diminished in recent years, Fernandes said. He recalled the lawsuits, strikes and other offensives launched by unions during the Line 4 construction.

Fernandes declined to speculate as to why so few protests are taking place now, but noted support from Rousseff and Finance Minister Guido Mantega has been "valuable."

Sao Paulo state is run by the PSDB, Brazil's main opposition party, which had historically clashed with the Workers' Party over how much to involve businesses in public works projects.

Nevertheless, during the last week of December, Rousseff approved a change to the law governing PPPs, which would have barred the state from disbursing funds to businesses until Line 6 was open and operating. That would have made financing the project impossible, Fernandes said.

The strongest opposition to Line 6 has actually come from residents of Higienopolis, some of whom have publicly expressed fears that a subway connection could bring criminal elements into their wealthy neighborhood.

"If that's the worst problem I have, I'll accept it," Fernandes said, laughing. "But they're changing their minds too. Everybody realizes that times are different now."