Graft is hardly new in Latin America, but a widening bribery scandal has captured the public’s attention since December last year, when the Brazilian construction company Odebrecht confessed to making nearly $800 million in illegal payments to government officials and agreed to hand over at least $3.5 billion in fines.
Odebrecht’s admission spawned more investigations around the region, causing turmoil at high levels of business and government in a number of countries. By mid-July, Peruvian authorities had arrested one former president and sought the extradition of another one because of alleged ties to Odebrecht. Colombia arrested a senator close to President Juan Manuel Santos in August, the same month that Panama levied a historic fine against the Brazilian builder.
Now, as the bribery still roils across the region, governments are rolling out new policies for state contracts and implementing measures to ensure that companies and individuals involved in corruption pay for their crimes. But people are skeptical.
“The population has lost faith in the political class. We are now at a crossroads. We are either going to deal with this, regardless of the outcome, or as a region we are going to face long-term political and economic consequences,” says Peruvian Congressman Jorge Castro, deputy chairman of a special committee investigating corruption by Odebrecht and other companies.
Peruvian President Pedro Pablo Kuczynski said in a state of the union address in July 28 that the Odebrecht scandal has had “nefarious consequences” for the country, disrupting huge projects and knocking close to one point off the government’s economic growth forecasts. His administration now predicts the economy will grow 2.8% in 2017.
The government has responded to the scandal by instituting measures to safeguard against corrupt practices. It set up a special prosecutor’s office in January to focus on corruption cases related to Brazilian companies and has ordered Odebrecht to leave Peru.
Recently passed legislation treats companies the same as individuals involved in corruption, allowing prosecutors to go after officials and, in extreme cases, even liquidate firms. Companies admitting to or found guilty of corrupt practices cannot operate in Peru. All new contracts for infrastructure concessions and public-private partnerships (PPPs) will include an anti-corruption clause that voids the contract if fraud is detected.
The most controversial measure has been Urgent Decree 003, published in February, which creates a special fund to pay fines or other compensation levied against companies involved in corruption. It allows the government to use cash from asset sales by guilty companies to pay fines owed as a result of their crimes.
The government moved in August to apply the decree for the first time to Odebrecht, which is trying to sell the 38,000-hectare Olmos irrigation project it finished in 2014. Investment was close to $600 million. Odebrecht agreed last November — before the US court case — to sell Olmos to Canada’s Brookfield Infrastructure Partners and France’s Suez, but the sale was stalled as the state attempted to figure out how to secure the payment of fines.
One cause of the delay, and the reason the government replaced the first special prosecutor in July, was squabbling over the amount Odebrecht has to pay in fines. The Brazilian company also plans to sell the 456 MW Chaglla hydroelectric plant, built for $1.2 billion, and the $700 million contract to finish the third stage of Chavimochic, the largest irrigation project in Peru.
Guido Valdivia, executive director of the Peruvian Construction Chamber, or Capeco, says the measures adopted so far have been positive but adds that the government needs to do more to get past the scandal, which started with the Lava Jato investigation in Brazil.
“The perception of risk in public works and public-private partnerships promoted by the Peruvian state has increased as a result of the Lava Jato case. The government needs to be very proactive to change this perception,” he says.
The government also needs to “radically modify regulations for public contracts, which have shown themselves to be susceptible to corruption, introducing technological advances to reduce the opportunities for improper or criminal actions,” Valdivia says.
Congressman Castro says that the government has missed the point by focusing only on the economic cost of the scandal. “The real harm is the loss of confidence,” he says. “If the population does not trust the way projects are awarded, why should lending institutions? No one is going to offer lines of credit to projects just because the government says everything is back on track.”
The Kuczynski administration will face two tests of its stance against corruption. First, it expects to award roughly $2.2 billion contracts in 2018 to rebuild infrastructure destroyed by flooding earlier this year. It anticipates investments will rise above $6 billion through 2021.
The second test involves resuming construction of the country’s second natural gas pipeline. The 34-year PPP contract, worth an estimated $7.3 billion, was awarded to a group headed by Odebrecht in 2014. The group did not secure financing for the $4 billion construction phase, and the contract was voided in January.
The government has said it wants to finish a new tender in the first quarter of 2018, but the private investment promotion agency, ProInversión, had not yet started the process by mid-August.
Castro says that problems with the pipeline, and the perception that the government is not serious about fighting corruption, explain the huge drop in the president’s approval rating. Kuczynski’s support in southern Peru, which gave him the votes to win a narrow victory in the 2016 election, fell from 77% last August to 27% in the recent Datum Internacional poll.
Odebrecht holds fewer infrastructure concessions in Colombia, but the impact has been similar to Peru. The Colombian government said in late July that the Brazilian company had paid $27.7 million in bribes, more than double the $11.1 million in the plea agreement with the US government. Odebrecht can no longer bid for projects in Colombia.
“Odebrecht created a lot of problems for us,” says Luis Fernando Andrade, head of the National Infrastructure Agency, or ANI. “The issue is not just the impact on their concessions, but a broader, systemic impact that has generated a lack of trust. We have a problem of confidence in the construction sector and banks are being much more careful with loans. The approval process is taking much more time.”
ANI has cancelled Odebrecht’s two contracts in Colombia — the Ruta del Sol 2 toll road and the Río Magdalena waterway — but the problems continue. The government is trying to minimize the damage to the lenders for the Ruta del Sol 2 by paying $500 million in the third quarter this year and the remaining $300 million over the next five years.
The state-owned lender Banco Agrario made a bridge loan of 120 billion Colombian pesos ($40.4 million) to the Rio Magdalena project, which is one of the reasons why banks are much more cautious today, Andrade says.
The damage could have been even worse. One of ANI’s employees has been accused of receiving a bribe from Odebrecht to keep the company informed about concessions. Andrade says the institution’s checks and balances process worked, even with the mole in place. Even though Odebrecht qualified for nine projects, it did not win other contracts, he says.
“The system showed that it is difficult to manipulate. Our decisions are made by consensus, which shields us from one person trying to influence the decision-making process,” he says.
Rupert Stebbings, managing director of equities at Bancolombia, says that while the Odebrecht scandal has added to “the sense of caution as the situation plays out, very few investors doubt that the project will eventually be a success.”
The scandal “will serve to add even more governance to the 4G projects,” he adds, referring to Colombia’s fourth generation of toll road concessions, commonly called 4G.
Private investments in 4G came to around $900 million in the first half of the year, and Andrade says the investment in transportation infrastructure should reach $3 billion by the end of 2017.
ANI plans to tender six more highway concessions, along with contracts for the airports in Cartagena and San Andrés, before the end of Santos’ second term next year. The agency is also drafting a proposed concession for a second airport in Bogotá and a light rail to the existing airport, which is scheduled to open for bidding in 2018.
Panama’s forgiveness pact
Panama has also barred Odebrecht from signing new concession contracts, but authorities there have taken a slightly different approach to their counterparts in Colombia and Peru and allowed the Brazilian builder to keep working on existing projects.
Odebrecht agreed to pay $220 million in bribes after it admitted to paying $59 million in bribes to win contracts in Panama. Nearly half of the fine was related to the use of Panama’s banking system for illicit activities, Attorney General Kenia Porcell said when she announced the settlement.
Odebrecht has asked for forgiveness, but more than 40 people are still under investigation in Panama, including members of President Juan Carlos Varela’s administration and officials from two previous governments.
The company still has $3 billion in its project portfolio in Panama. It is building the second line of Panama City’s subway, together with Spain’s FCC, for $1.85 billion. That project, now about half finished, is expected to be ready in 2019. Odebrecht is also working on an $800 million expansion of the Tocumen Airport in Panama City and a $540 million urban renewal project in Colón.
Demetrio Olaciregui, a spokesperson for the Panamanian Construction Chamber, or Capac, says the impact of the corruption scandal has not put a damper on the construction sector or the project finance market. “Odebrecht continues to work on major projects that will be finished in the next few years. It would have been a much different scenario if a decision had been made to stop work or cancel contracts,” he says. LF