* Rio investing heavily to integrate slums into city
* Favela clean-up likely to boost Rio economy
* Residents wary after broken promises, violent tactics
By Stuart Grudgings
RIO DE JANEIRO, Dec 22 (Reuters) - A sparkling Christmas tree atop a hill in Rio de Janeiro’s Alemao slum is a powerful symbol of the community’s recent liberation from gun-toting drug traffickers.
The fact that the tree was funded by a major bank symbolizes something less obvious -- that Rio’s heavily-populated slums, or favelas, are open for business after years being partly shut out by the city’s drugs war.
Nearly a month after troops drove traffickers out of Alemao and nearby areas, banks, utility firms and telecoms companies have joined government officials rushing to fill the void in this long-neglected favela of more than 100,000 people.
The operation, part of Brazil’s most determined drive yet to bring the rule of law to its slums, raises the prospect that the one million or so residents of Rio’s favelas will come much more fully into the formal economy in coming years.
The incentive for firms is clear -- one telecoms executive told a newspaper that the equivalent of a small city of customers had been created overnight in the middle of Rio.
While trappings of modern life like credit cards, cellphones and even high-end televisions have become common in Rio slums, residents’ access to services and jobs has been complicated by the lack of security.
The recent economic renaissance of Brazil’s former capital -- property prices are rocketing and the city is preparing for an offshore oil boom -- also stands to get a further boost as the number of bill- and tax-paying citizens rises.
Officials say they intend to expand police occupations to all of the remaining major gang strongholds by 2014, when Rio will be a World Cup host city and two years before it showcases itself to the world again as host of the Olympic Games.
“The benefits of the integration of favelas are exponential, it’s huge,” said Andre Urani, an economist at the Rio-based Institute for Studies on Work and Society.
Take energy costs. Urani says that electricity firm Light (LIGT3.SA) loses $200 million a year to the theft of its energy in Rio’s slums -- one reason why electricity is more expensive in Rio than in Sao Paulo, Brazil’s financial capital.
The legalization of slums should enable Light to cut its bills and make Rio more attractive for firms to invest here, he said. That will also require a change of culture in favelas where cheap, pirated services such as cable television and telecoms are common.
Alemao’s Christmas tree was funded as a goodwill gesture by Banco Santander (SANB11.SA)(BSBR.N), one of several banks that are planning to expand in the favela. Bradesco bank (BBDC4.SA) (BBD.N) and state-run Caixa Economica also plan to operate in Alemao for the first time. Telecoms firm Oi TNLP4.SA said it would invest 15 million reais ($8.8 million) in Alemao to expand its telephone, broadband and TV services.
Workers have been rushing to fix tangled telephone and power lines and put the final touches on a cable car system -- mostly built before the invasion -- which outgoing President Luiz Inacio Lula da Silva inaugurated on Tuesday.
“People are understanding that the state is not something that is distant,” an emotional Lula said after riding the cable car. “When we pacify the Alemao complex, all the favelas in Rio de Janeiro and Sao Paulo ... Brazil will be a different country.”
Yet there is a long battle ahead to win back the trust of residents who have long been treated as second-class citizens in the self-styled “Marvelous City.”
“In this phase it’s really about winning hearts and minds,” said General Fernando Sardenberg, who will command a 2,000-strong “peace force” in Alemao mostly made up of army troops who served in Brazil’s United Nations mission in Haiti.
An afternoon downpour in Alemao last week showed how much work remains. Water surged up through broken drains, sending raw sewage into the narrow streets.
“It’s too early to say anything,” said Ester Avanci, the owner of a hole-in-the-wall clothes store, echoing a common view among residents. “We lack a lot of investment, there are a lot of poor people. The government has to invest a lot for it be a real neighborhood.”
A pervasive fear is that the government and the police could abandon Alemao and leave residents vulnerable to gang reprisals.
Officials say the state is now here to stay -- specially trained police have already occupied about a dozen of Rio’s hundreds of slums over the past two years, slowly improving the police’s reputation for brutality and corruption in favelas.
Urani said it is vital that the government follow up on security measures with a second wave of investments to ensure “income-generating” opportunities for residents.
“This is only the first step,” he said. “The day after the police gets inside the community, you still have all the fundamentals that have thrown those communities into the hands of the gangs.”
The crucial next stage of transforming the slums will fall to urbanists like Luiz Carlos Toledo, a 67-year-old who has dreamed of bridging Rio’s vast social divide since he was a young architecture student.
His firm was one of 40 chosen to redesign 582 slums by 2020 with initial public investments of 8 billion reais ($4.7 billion).
Beyond installing basic services like sewage, the plans envisage planting trees to create more green spaces, funicular railways for steep hillsides and the construction of sports and leisure centers. First, Toledo said, planners need to win residents’ trust by listening to them and making small changes that improve the quality of life, such as cleaning up garbage.
“Architecture can accompany a revolution in these places,” said Toledo, who has already led a partial remodeling of Rio’s biggest slum, Rocinha, that includes a sweeping walkway designed by famed Brazilian architect Oscar Niemeyer.
“The biggest barrier I found in Rocinha was the huge disbelief of the population. They didn’t believe in anything after so many years being fooled by politicians’ promises.”
Rio’s mayor, Eduardo Paes, has already promised Alemao and the neighboring Penha complex an invasion of services including day-care centers, health centers and even a cinema.
With the new benefits come obligations and costs that will come as a shock to many residents who are used to receiving services cheap or free. If that’s what it takes to be a real neighborhood, so be it, said clothes store owner Avanci.
“People are too used to using things without paying the real cost. When it hurts in the wallet people will have to economize,” she said. (Editing by Kieran Murray)