Mopping up after the mess at Petrobras

January 30, 2015 6:12 pm

Mopping up after the mess at Petrobras

Corruption at the state-owned oil company brings chaos to Brazil

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Petrobras

Petrobras represents the best and worst of Brazil. Its technical competence is renowned and it has vast deep sea reserves. Such were the lures that drew investors to the world’s largest equity offering a few years ago when it raised $70bn on international capital markets.

But the state-controlled oil company is also awash with corruption. A skimming operation, known locally as “car wash”, that trousered 3 per cent of construction contracts over the past decade to pad the pockets of Brazil’s governing coalition has forcedthe delay of results, prompted a Securities and Exchange Commission investigation and locked the company out of capital markets.

This has not only corporate implications for the most indebted major oil company, with $170bn of outstanding loans, according to Moody’s. It is systemic for the Brazilian economy and threatens to unseat its government. Petrobras is too big to fail. But it is also too corrupt to carry on as it is.

The sums implied are mind-boggling. One lower tier executive alone has offered to repay $100m. Indeed, some estimate that as much as $20bn may have been stolen, mislaid or wasted in white elephant projects that were so poorly conceived that even Venezuela’s Hugo Chávez refused to co-invest. But nobody knows the exact number.

That is why auditors PwC refused to sign off the accounts in the third quarter last year. Petrobras has been forced to slam the brakes on one of the largest capex programmes — $221bn over five years. And this when Brazil’s recession-bound economy desperately needs to improve its international investor profile as the “Bric” story has collapsed.

The scandal is ricocheting into the rest of the economy. First, Brazil’s construction sector has been implicated, threatening mass cancellation of contracts and business collapses. This comes amid an austerity programme that seeks to sweat the macroeconomic excesses of the past 10 years that have been exposed by the commodity collapse and the halving of oil prices.

True, the government could step in with financial support. But that would imperil its wobbly investment grade rating, potentially increasing the cost of capital for Brazilian business as a whole. Blame ultimately lies with the ruling Worker’s party and its lust for power. The stolen money was allegedly used to sweeten coalition partners, finance Dilma Rousseff’s two presidential campaigns and congressional elections too.

True, political corruption is not new. Brazil’s system has always encouraged such graft and Petrobras has always been a tempting source. Ms Rousseff’s followers supposedly disdained milking it for personal enrichment. But under the Worker’s party, the scale of theft has gone up.

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Hopefully the SEC investigation will provide a stick to beat the worst practices out of Petrobras. The scandal’s exposure suggests Brazil’s weak institutions do have weight. Car wash follows the mensalão scandal, another political vote-buying exercise that led to several high-profile convictions of senior politicians — a first for Brazil. With Petrobras, however, the response must be quicker and firmer.

Ms Rousseff must give her full backing to the investigation and allow it to run its course. So far the scandal has lapped around her. There have been no accusations that she was directly involved although, as Petrobras’s chairman for much of the time in question, she needs to explain what she knew and when she knew it. But car wash is likely to claim the heads of the chief executive and the board. Ms Rousseff is defending them. The time for such indulgence is long past.

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Copyright The Financial Times Limited 2015.

 

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