Public-private partnerships (PPP), the favorite choice of the Rama Government for every type of national investment, have been used in other countries as well. But as we explained before, it is a financing method that creates room for corruption. An illustrative example are the corruption affairs in Brazil, Peru, and other South American countries, discovered in 2016.
The following article was previously published by The Economist.
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Perched on a sandy hill overlooking Lima’s oceanfront is a 37-metre-high statue of Christ, a crude copy of the one that looks majestically down on Rio de Janeiro. It was unveiled in 2011 by Alan García, then Peru’s president. Now Peruvians see it as a monument to corruption. It was built with a donation of $800,000 from Odebrecht, Brazil’s biggest construction company, which has admitted that it paid $29m in bribes to secure contracts in Peru under the three governments that preceded the current one.
In the largest anti-corruption settlement in history, reached in December, Odebrecht revealed to authorities in the United States, Brazil and Switzerland that over 15 years it had paid nearly $800m in bribes related to contracts for more than 100 construction and engineering projects in a dozen countries. In Brazil, Odebrecht was at the centre of a cartel that gouged Petrobras, the state-controlled oil company; its former boss, Marcelo Odebrecht, is serving a 19-year jail sentence. The settlement showed that in nine other Latin American countries the company paid a total of $388m in bribes to government officials and their associates.
To do so it set up a Division of Structured Operations—a “bribes department”—which directed the payments through a series of offshore shell companies. Reading between the lines of the settlement it is easy to identify at least two former presidents, a vice-president, several ministers and the bosses of two state oil companies as recipients. No wonder the region has been talking about little else (apart from Donald Trump and some extreme weather) since Christmas.
Governments and prosecutors have been stung into action. Peru’s president, Pedro Pablo Kuczynski, has asked Odebrecht to withdraw from the country, where its contracts included one for a $7bn gas pipeline. A former deputy minister in Mr García’s government has been arrested. A prosecutor is poised to issue an arrest warrant against Alejandro Toledo, an ex-president who bought several expensive houses after leaving office (like Mr García, he denies wrongdoing). In Colombia a former deputy transport minister has admitted to taking a $6.5m bribe. In the Dominican Republic (bribes of $92m), Ecuador ($33.5m) and Venezuela ($98m), authorities are moving slowly, or not at all. In Panama ($59m) the supreme court is stalling a case against Ricardo Martinelli, a former president who lives in Miami and alleges persecution by his successor.
Odebrecht was not alone. Other Brazilian construction companies employed similar methods. Corruption in public contracting is common globally, says José Ugaz, a Peruvian lawyer who heads Transparency International, a Berlin-based watchdog. But, he adds, there were some unique features in the Odebrecht scandal.
The Brazilian companies targeted the decision-makers, preparing the ground by paying for the services of Brazilian political gurus in election campaigns and making political donations as well as outright bribes. Their main method was to win contracts by making low bids and then corruptly secure big increases in costs through addenda—in some cases when the ink on the contract was barely dry. This applied especially to contracts involving public-private partnerships (PPPs), which have become fashionable in the region and are typically used for big, complex projects, from highways to hydroelectric schemes.
José Luis Guasch, formerly at the World Bank, has found that 78% of all transport PPPs in Latin America have been renegotiated, with an average of four addenda per contract and a cost increase of $30m per addendum. Thus, the cost of a road linking Brazil and Peru rose from $800m to $2.3bn through 22 addenda. Such contract changes can be “fertile ground for corruption”, Mr Guasch says.
Governments have moved to tighten contracting rules. Chile, Colombia and Peru have all approved laws on PPPs that make it harder for contractors to renegotiate. More is needed. All contracts and requests for changes should be published online, urges Eduardo Engel, who headed an anti-corruption commission in Chile. And tender committees should draw members from outside infrastructure ministries.
There is a risk that the Odebrecht revelations will undermine faith in democracy and that long-overdue investments in transport infrastructure will suffer further delays. But not all is gloom. In Latin America, “we are in an era in which public opinion is playing a fundamental role” in fighting corruption, says Mr Ugaz. And that means that, this time, there is a good chance that other countries will follow Brazil in punishing it.
