Petrobras’s Lesson for Latin America

We Ignore Cronyism at Our Peril.  In the wake of the scandal surrounding Brazil’s state-run oil company Petrobras, we would do well to analyze the role of state enterprises in the Americas.

In the wake of the scandal surrounding Brazil’s state-run oil company Petrobras, we would do well to analyze the role of state enterprises in the Americas.

Codenamed Lava Jato, or “car wash,” the investigation into Petrobras operations by police and public prosecutors revealed a colossal corruption scheme involving former top executives, construction companies, and prominent politicians from the governing coalition dominated by the Workers’ Party (PT). Evidence uncovered so far suggests the privileged club of racketeers pocketed billions of dollars under the cover of public contracts.

Twenty-three of some of the richest and most powerful businessmen in Brazil have been arrested so far, among them current and past heads of the country’s largest construction companies. Federal prosecutors allege that, in cahoots with senior Petrobras managers, they established a vast network of bribes and money laundering, funnelling US$3bn through the scheme between 2004 and 2012 alone.

Augusto Ribeiro de Mendonça Neto, of the Toyo Setal engineering consortium executive, admitted that the misdealing goes back as far as 1990. For contractors, bribes to the Petrobras elite have been a common practice ever since. Renato Duque, former Services Director at the state-run firm, was apparently in charge of coordinating the scheme.

It worked as follows: select contractors received special instructions as to how to win the bidding process, and in exchange they made political contributions through legal channels to the PT party, but also to its allies the Democratic Movement Brazilian Party (PMDB) and the Progressive Party (PP.)

In the months prior to 2014’s disputed elections, in which President Dilma Rousseff won a second term, those companies currently under investigation donated US$49 million to the PT and incumbent allies PMDB and PP, making up 62 percent of all their campaign contributions.+

It doesn’t require a huge amount of intelligence to realize who’s benefiting from the kickbacks and corruption emanating from state companies in this case.

But the Petrobras case isn’t an isolated incident; it happens all over Latin America. But no matter how overwhelming the evidence is for the devastating effects of state-run enterprises, Latin Americans still love them. They distrust anything coming from the private sector and naively believe the government has their best economic interests at heart. Many still believe the almighty state is what drives the economy, and not the laws of the market.

When a scandal like that involving Petrobras emerges, people react by demanding more “honest” administrators. They seem not to realize that the root of the problem lies not with individual politicians but in the system itself. As the apocryphal saying goes, “the definition of insanity is doing the same thing over and over and expecting different results.”

Private Sector Medicine

The reason why the Petrobras scandal surfaced at all is because the private sector owns shares in the company — it’s mostly owned by the Brazilian state but has several foreign investors. It was precisely that private participation which allowed for the investigation and punishment of the endemic corruption. For years, the Brazilian government misused the oil company as a financial and industrial resource at the expense of minority shareholders, who refused to tolerate this state of affairs any longer.

Further proof of this is the fact that current Petrobras directors, under Graça Foster’s administration, were well aware of all this years before the official investigations began. In 2008, a top manager warned Foster about irregularities she had stumbled upon — but instead of addressing the issue, Petrobras transferred her to a company office in Asia and eventually fired her.

Having to trade shares in the market and be accountable to shareholders is what will probably allow a way out for Petrobras, and offer some hope that those found guilty of misdoings, no matter how powerful, will be duly punished. The United States Securities Exchange Commission (SEC) is conducting a promising independent investigation.

The SEC investigation has already led to consulting giant PricewaterhouseCoopers (PwC) refusing to sign off on Petrobras’ audited accounts until the investigation is over. If the Brazilian firm doesn’t put PwC’s fears at rest and release audited financial records by April 30, it could enter a technical default, estimated to be worth US$170 billion by credit rating agency Moody’s.

A Continental Concern

Fully state-owned companies are a whole different story. For instance, the late Hugo Chávez and his successor Nicolás Maduro have abused Venezuela’s PDVSA at will, for the political and economic gain of their crony friends at home and abroad.

Chávez, an ambitious young politician who arrived to power by promising to fight the corruption that infested traditional parties, ended up taking it to whole new levels. As reported by Transparency International, Venezuela is the most corrupt country in Latin America and among the worst ranked in the world: it occupies the 161th position out of 175 countries surveyed. But in Venezuela, we’re still a long way off from any form of investigation into state oil companies.

Another government-run petroleum firm, Uruguay’s ANCAP, went US$276 million into the red during President Raúl Sendic’s administration (2008-2013) and incurred debts worth over $1.5 billion. A controversy also erupted with private consulting firm KPMG over the use of different criteria to record ANCAP’s liabilities.

As a result of this, and despite the high oil prices during that period, 2013 was the fourth consecutive year that ANCAP reported losses. Legislators from the opposition demanded an investigation, but the ruling party majority in Congress blocked it.

In the last presidential elections, Sendic was the grand surprise. A high voter turnout during the primaries won him the vicepresident ticket for the ruling Broad Front coalition, and he was duly elected. So, his handling of ANCAP was a big loss for the country, but not for him. Despite his lousy administration, he received a prize at the polls.

Is there any doubt left as to who really benefits?

Panampost | Hana Fischer

We use cookies to improve our website. By continuing to use this website, you are giving consent to cookies being used. More details…