World Cup, Olympics & Brazilian Corruption

Flying national colors is always a risk.

In normal circumstances, winning the rights to host either the World Cup or the Olympics would be cause for celebration in any country. Imagine, then, the plight of Brazil which is regretting having won both the 2014 World Cup and the 2016 Olympics! The winner's curse, indeed. The global situation has not exactly been helpful: the cooling of global growth--especially that of China and demand for commodities--hit Brazil hard as a major commodity exporter. There's now even talk of Brazil losing its investment-grade sovereign rating. You can probably say that matters have not been helped by the home team receiving a drubbing at home at the hands of the eventual World Cup champions Germany.

And speaking of the World Cup, this event famously elicited concerns about outsized expenditures on construction projects with limited use outside of sporting events. Ditto for the 2016 Olympics. At a time when Brazil is in recession or barely moving out of it, how can you justify such frivolity? This is always the challenge for developing countries hosting these sorts of "showcase" sporting events to make it known to the rest of the world that they've arrived. Now, though, the construction firms that have done well with all these mega sporting events have managed to embroil themselves into a national corruption scandal as if things weren't challenging enough.

Brazil's news media is all agog over the so-called "Operation Car Wash" [in English] scandal that involves the country's largest construction firms colluding to drive up bids during the awarding of construction-related projects for Petrobras, the state-owned energy giant. In turn, money is allegedly being kicked back by these construction companies to Petrobras executives and Brazilian politicians in the ruling Workers' Party [PT]:

A corruption probe in Brazil is raising questions about the need for closer oversight of projects being built for the 2016 Olympic Games, as the allegations are aimed at some of the nation’s largest construction firms. Authorities are investigating allegations that the companies formed a cartel to drive up the value of contracts with state-controlled energy giant Petróleo Brasileiro SA and paid bribes to the Petrobras executives and Brazilian politicians.

The prosecutors’ targets include Brazilian-based multinational construction companies Odebrecht, Queiroz Galvão and OAS, who together are partners in billions of dollars of contracts for the Games in Rio de Janeiro. In the past week, the three companies had executives arrested, their headquarters raided by Federal Police, or both. No executive from the three companies has been charged.

Now, "corruption" and "Latin America" are no strangers to each other. What is especially galling though with these accusations is that they come at a time when Brazil wishes to improve its international image but has been brought back to this Banana Republic-ish state of affairs in which businesspeople and politicians wallow in their own filth. The upshot, however, as far as the upcoming Olympics are concerned, is this: Since all of the implicated construction companies are essentially building those 2016 event sites and their supporting infrastructure, is it realistic that the Brazilian government can discipline them? Strictly speaking, new anti-corruption laws would bar these construction firms, if found guilty, of receiving government contracts for two years. Meanwhile, many are saying "I told you so..."

The evidence that has emerged in the Petrobras investigation has reinforced what many in Brazil have long suspected about how builders do business. “I’ve been saying for years that the World Cup and Olympics together could become the biggest financial scandal in Brazilian history if they aren’t properly monitored,” said Alberto Murray Neto, a lawyer and former member-turned-critic of the Brazilian Olympic Committee. “Now, considering everything that has happened, I think these companies should be scrutinized all the more closely.”

Brazil’s construction companies, which are major donors to political campaigns, are frequently criticized for having cozy ties to the government. Their executives regularly appear alongside top politicians to inaugurate public works. “Brazil has a construction-industrial complex in the same way that the United States has a military-industrial complex,” said Christopher Gaffney, a professor at the Universidade Federal Fluminense, who has an academic focus on mega-events. He says the construction firms wield an outsize influence on public policy in Brazil. 

Brazil's "construction-industrial complex"! It's pretty hard to beat that pun, but it's instructive. Actually, my analogy from a developed world case would be that of systemically important money center American banks. Remember they were deemed "too big to fail" because of the damage they would incur on the US economy if closed down by financial regulators. In Brazil's case of a fast-growing nation with vast infrastructure needs, how do you discipline construction firms? It's a similar problem to that of confronting Americans banks since construction lies at the heart of this developing country's immediate concerns just as banks do in the highly financialized US economy.

Ultimately, I believe the Brazilian government--whose current leadership may be implicated anyway given President Dilma Rouseff's close ties with Petrobras as its board's chairwoman prior to becoming president--will eventually cut a deal with these construction companies to minimize the damage to (a) the time schedule of the upcoming Olympics, (b) the reputation of all parties concerned, and (c) the performance of Petrobras and these construction firms that are highly reliant on the state-owned giant.

At any rate, I do believe that foreign construction firms should be welcomed into bidding processes in Brazil as suggested to limit opportunities for...questionable dealings.