“Megaprojects” Can Destroy Reputations in Brazil

By Mario Osava Reprint | | Print | |En español

Scale model of one of the offshore oil platforms exploiting Brazil’s “presalt” reserves, on exhibit in the research centre of Petrobras, Brazil’s state oil company, in Rio de Janeiro. Credit: Mario Osava/IPS

RIO DE JANEIRO, May 18 2015 (IPS) - Megaprojects are high-risk bets. They can shore up the government that brought them to fruition, but they can also ruin its image and undermine its power – and in the case of Brazil the balance is leaning dangerously towards the latter.

As the scandal over kickbacks in the state oil company Petrobras, which broke out in 2014, grows, it is hurting the image of former president Luiz Inácio Lula da Silva (2003-2011) and his successor, President Dilma Rousseff, both of whom belong to the left-wing Workers’ Party (PT).

In its 2014 balance sheet, the company wrote off 6.2 billion reais (2.1 billion dollars) due to alleged graft and another 44.6 billion reais for overvalued assets, including refineries.

But the real magnitude of the losses will never be known. The company lost credibility on an international level, its image has been badly stained, and as a result many of its business plans will be stalled or cancelled.

The numbers involved in the corruption scandal are based on testimony from those accused in the operation codenamed “Lava-jato” (Car Wash) and in investigations by the public prosecutor’s office and the federal police, which indicated that the bribes represented an estimated three percent of Petrobras’ contracts with 27 companies between 2004 and 2012.

The biggest losses can be blamed on poor decision-making, bad planning and mismanagement. But the corruption had stronger repercussions among the population and the consequences are still incalculable.

It will also be difficult to gauge the influence that corruption had on administrative blunders, which are also political, and vice versa.

Two-thirds of the devaluation of the assets was concentrated in Petrobras’ two biggest projects, the Abreu e Lima Refinery in the Northeast, which is almost finished, and the Rio de Janeiro Petrochemical Complex (COMPERJ), both of which began to be built when Lula was president.

Petrobras informed investors that COMPERJ, a 21.6-billion-dollar megaproject, abandoned the petrochemical portion of its activities in 2014 as they were considered unprofitable, after three years of waffling, and was downsized to a refinery to process 165,000 barrels a day of oil.

It will be difficult for Petrobras, now under-capitalised, to invest millions of dollars more to finish the refinery, where the company estimates that the work is 82 percent complete. But failing to finish the project would bring much bigger losses.

Thousands of workers laid off, economic and social depression in Itaboraí, where the complex is located, 60 km from the city of Rio de Janeiro, purchased equipment that is no longer needed, which costs millions of dollars a year to store, and suppliers that have gone broke are some of the effects of the modification and delays in the project.

The Santo Antônio hydroelectric plant on the Madeira river, in the northwest Brazilian state of Rondônia, during its construction in 2010. Credit: Mario Osava/IPS

The Petrobras crisis is also a result of the crash in international oil prices and of years of government fuel subsidies that kept prices artificially low to help control inflation.

It also endangers the naval industry, which expanded to address demand from the oil company.

Shipyards may dismiss as many as 40,000 people if the crisis drags on, according to industry statistics.

The industry was revived in Brazil as a result of orders for drills, rigs and other equipment to enable Petrobras to extract the so-called presalt oil reserves that lie below a two-kilometre- thick salt layer under rock and sand, in deep water in the Atlantic ocean.

The Abreu e Lima Refinery, which can process 230,000 barrels a day, has had better luck because the first stage is already complete and it began to operate in late 2014. But the cost was eight times the original estimate.

One of the reasons for that was the projected partnership with Venezuela’s state oil company, PDVSA, which Lula had agreed with that country’s late president, Hugo Chávez (1999-2013).

PDVSA never made good on its commitment to provide 40 percent of the capital needed to build the plant. But the agreement influenced the design and purchase of equipment suited to processing Venezuela’s heavy crude. The project had to be modified along the way.

Plans to build two other big refineries, in the Northeast states of Ceará and Maranhão, were ruled out by Petrobras as non-cost-effective. But that was after nearly 900,000 dollars had already been invested in purchasing and preparing the terrain.

The disaster in the oil industry has stayed in the headlines because of the scandal and the amounts and sectors involved, which include four refineries, dozens of shipyards and major construction companies that provided services to Petrobras and have been accused of paying bribes.

But many other large energy and logistical infrastructure projects have suffered major delays. These megaprojects mushroomed around the country, impelled by the high economic growth during Lula’s eight years in office and incentives from the government’s Growth Acceleration Programme.

Railways, ports, the expansion and paving of roads and highways, power plants of all kinds, and biofuels – all large-scale projects – put to the test the productive capacity of Brazilians, and especially of the country’s construction firms, which also expanded their activities abroad.

The majority of the projects are several years behind schedule. The diversion of the São Francisco river through the construction of over 700 km of canals, aqueducts, tunnels and pipes, and a number of dams, to increase the supply of water in the semi-arid Northeast, was initially to be completed in 2010, at the end of Lula’s second term.

But while the cost has nearly doubled, it is not even clear that the smaller of the two large canals will be operating by the end of this year, as President Rousseff promised.

Private projects, like the Transnordestina and Oeste-Leste railways, also in the Northeast, have dragged on as well.

Resistance from indigenous communities and some environmental authorities, along with labour strikes and protests – which sometimes involved the destruction of equipment, workers’ housing and installations – aggravated the delays caused by mismanagement and other problems.

The wave of megaprojects that began in the past decade was explained by the lack of investment in infrastructure suffered by Brazil, and Latin America in general, during the two “lost decades” – the 1980s and 1990s.

After 1980, oil refineries were not built in Brazil. The success of ethanol as a substitute for gasoline postponed the need. The country became an exporter of gasoline and importer of diesel fuel, until the skyrocketing number of cars and industrial consumption of fuel made an expansion of refinery capacity urgently necessary.

Nor were major hydropower dams built after 1984, when the country’s two largest plants were inaugurated: Itaipú on the border with Paraguay and Tucuruí in the northern Amazon rainforest.

The energy crisis broke out in 2001, when power rationing measures were put in place for eight months, which hurt the government of Fernando Henrique Cardoso (1995-2003).

The return of economic growth during the Lula administration accentuated the deficiencies and the need to make up for lost time. The wishful thinking that sometimes drives developmentalists led to a mushrooming of megaprojects, with the now known consequences, including, probably, the new escalation of corruption.

Not to mention the political impact on the Rousseff administration and the PT and the risk of instability for Latin America’s giant.

Edited by Estrella Gutiérrez/Translated by Stephanie Wildes