A Plan of Action to Save the Brazilian Infrastructure System

The oil sector is believed to represent approximately 13% of the Brazilian economy. Petrobras, the state-controlled, corruption stricken oil producer and by far the country’s largest corporation, is an important component of the current economic crisis. Due to mismanagement and embezzlement, the company has been forced to cut around 40% of all capital investments projected for this year, and such reduction will cause a 2.4% reduction in the country’s GDP.

Several suppliers, contractors and subcontractors of Petrobras are under investigation in the so-called Operation Car Wash. High executives of the oil producer are believed to have taken bribes for granting to those suppliers several contracts with abnormal prices. The magnitude of the scandal cannot be overstated and there is a real risk that the infrastructure sector will come to a halt. Petrobras has traditionally been a major source of demand for infrastructure projects, and has frozen payments and new contracts. Moreover, Brazilian Antibribery Law punishes private agents by forbidding them from entering procurement contracts with the Government for several years. The pervasiveness of the alleged bribery in the construction industry may, after these penalties are imposed, paralyze the Brazilian infrastructure sector. The contractors and subcontractors involved in the investigation control and develop the majority of Brazil’s infrastructure projects and, for that reason, they mostly orbit around the Government.

Even a temporary restraint on the construction industry may have serious consequences for the industry and financial markets. In order to be able to provide numerous infrastructure projects (oil rigs, refineries, etc.) to Petrobras, the suppliers raised financing from a variety of sources. Financing came mainly from state-funded loans advanced by the National Economic and Social Development Bank (as well as domestic and international capital markets). Now the suppliers will have to indemnify Petrobras for the inflated contracts, on the one hand, and to repay the multi-billion loans back to the government, on the other hand. As they are not being paid by the Petrobras, the suppliers are under a very high risk of default, and this would send shockwaves into the Brazilian infrastructure market, or even further into the financial market.

With this background in mind, the authors devised a plan to avoid the downfall of the Brazilian infrastructure sector and a total meltdown of the Brazilian economy. Failing to act carries grave consequences.

First, Brazilian law provides that a supplier may be found unfit to contract again with the Government under those circumstances. This, of course, will represent the demise of every single supplier in this situation.

Several of the ongoing infrastructure projects may soon collapse. The infrastructure crisis per se is very grave, but it may soon change into a full-fledged financial catastrophe, which will put in jeopardy several other industries and, inexorably, the country’s entire economy.

There is much doubt if current Brazilian law provides for the necessary tools to handle the current problems. For instance, entering plea-bargains with perpetrators may not be sufficient. It is not clear, as of today, if the Antibribery Law, which provides for such agreements, is applicable to the so-called “Big Oil” scandal. Also, the so-named Administrative Improbity Law forbids any agreements if the benefitted party is a defendant in an administrative improbity procedure, which is the case of many of those contractors. That is not all: the Antibribery Law provides that any plea-bargains may only be entered with the first entity that steps forward, and the remaining companies shall be left out. That means that there shall be no lesser penalties for everyone, and this may eventually represent their demise.

In the plan, we propose a solution where the parties involved in cases such as the Big Oil scandal may adequately reimburse the Government. Those companies entering the program we devised will pay Government in full: restitution and penalties. Those companies may make payments in kind by transferring assets to the Government, such as shares they hold in infrastructure projects. The Government shall be entitled to pick which ones it prefers, valuate, and determine the quantities, so that it is adequately compensated in full. The companies may accept or not, but if they do, they may survive, not go bankrupt and once again have the right to seek government procurement contracts. At the penal level, their managers will be entitled to present their case and defend themselves.

Why would this plan be beneficial for the country as a whole? Companies will survive, jobs will be kept, and taxes will be paid. Also, the Government may sell the assets they receive and use the cash to help control an economic crisis of monumental proportions.

In order to better and thoroughly explain our plan of action to save the Brazilian infrastructure system, we have written a book with a complete roadmap. This book may be found at: http://editoracontracorrente.com.br/.

The preceding post comes to us from Walfrido Jorge Warde Jr, Founding Partner, Lehman, Warde & Monteiro de Castro Advogados, Gilberto Bercovici, Full Professor of Economic Law at the University of São Paulo, and José Francisco Siqueira Neto, Full Professor of Labor Law at Mackenzie Presbyterian University.