The real cost of corruption in Brazil

By Maira Martini, Knowledge Coordinator at Transparency International

Earlier this year, Brazilian conglomerate Odebrecht admitted to paying bribes to politicians and public officials in order to win public procurement contracts in Brazil and abroad. While negotiating its plea deal with Brazilian, US and Swiss authorities, the company denied that the contracts it was awarded were overpriced. For anyone who has ever read anything about the Lava Jato investigations, such a statement is difficult to believe.

Too often, we have heard stories about how the largest construction companies in Brazil formed a cartel to fix the price of Petrobras contracts. These companies even referred to each other as members of the “club”. Bid rigging is known to be an “efficient” way to eliminate competition and drive up prices. As a result, the government (and consequently the population) pays more than it should for projects and services.

A year after the plea-agreement with the US Department of Justice was signed, the truth about the real cost of corruption in Brazil has started to come out.

An investigation conducted by the Brazilian newspaper Folha de São Paulo reveals that there is evidence of over-billing in the 15 Brazilian infrastructure projects that have already been subject to technical reviews and audits by the courts and federal police.

According to Folha, irregularities in these projects cost the public coffers at least US$3billion (R$10billion). This amount is likely to go up, as not all public works have yet been reviewed. It is already a significant amount, particularly when compared to the US$2billion (R$6.8billion) that Odebrecht agreed to pay as compensation to the Brazilian State for its involvement in corrupt deals.

In one project alone — the controversial construction of the Belo Monte hydropower station — which cost Brazil more than US$6.2 billion (R$21 billion), the audit revealed overpricing of US$1.5 billion (R$5billion) — money that would have been sufficient to cover the costs of the construction of at least three soccer stadiums (Maracanã, Arena Fonte Nova and Arena Pernambuco), an airport, and two large highway projects.

That is, at least six of the 15 audited projects could have had their full costs covered by what was overcharged in a single construction project.

Public Prosecutors in Brazil say they opted not to include the issue of overpricing in their investigations because technical evaluations could overly delay the cases. Instead, damages were calculated based on the amount of bribes paid, and the amount the company could pay without going bankrupt.

Odebrecht didn’t go bankrupt. It continues operating in Brazil, elsewhere in Latin America, and in Africa and Europe. In fact, based on the numbers shown above, corruption was still very profitable for the company.

It makes me wonder whether construction companies in Brazil are also “too big to fail”.