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Peru Cancels Pipeline Contract With Odebrecht

Consortium led by tainted Brazilian construction giant to lose $7-billion deal for natural-gas pipeline/WSJ

People in Lima on Thursday hold a poster reading ‘Detain them’ in a protest against engineering group Odebrecht.

People in Lima on Thursday hold a poster reading ‘Detain them’ in a protest against engineering group Odebrecht. PHOTO: GUADALUPE PARDO/REUTERS

LIMA—Peru will terminate a contract with a consortium led by Odebrecht SA to build a $7-billion natural-gas pipeline, a government minister said Monday, the latest blow to the Brazilian construction giant amid an expanding corruption scandal into how the company secured lucrative deals.

Mines and Energy Minister Gonzalo Tamayo said the Southern Peruvian Gas Pipeline consortium, which is majority-owned by Odebrecht, would be officially advised on Tuesday that the contract will be rescinded after it failed to meet Monday’s deadline to secure financing.

Mr. Tamayo said the consortium would also be assessed a $262-million penalty for not completing the contract to build the 700-mile-long pipeline to transport cheap natural gas from the Amazon to towns across the southern highlands and on to the Pacific. Odebrecht has a 55% stake in the project. Spain’s Enagas has 25%, and Peru’s Graña y Montero has 20%.

“The project isn’t going ahead with the current partners,” Mr. Tamayo told radio broadcaster RPP Noticias. “They had to obtain this financing from the international financial community as a sign of their capacity to bring this project forward.”

The consortium said Friday it wouldn’t be able to meet the financing deadline and was preparing for the contract to be terminated. It remained unclear exactly who would finish the pipeline, but Mr. Tamayo said the government is studying options, including auctioning off the project to a new set of bidders.

In separate statements, Enagas and Graña y Montero said the contract stipulates that Peru use the funds from a new auction to compensate them for their investments. They said they expected to receive back within the next three years a significant portion of the investments they already made. Odebrecht declined to comment.

As a condition for loans, banks required Odebrecht to sell its stake in the project, for which about 10% of the construction has already been completed. The company’s efforts to do so fell apart when authorities refused to remove an anticorruption clause in the contract allowing the government to seize the project if it found wrongdoing.

The pipeline, one of Peru’s biggest infrastructure projects, was awarded in 2014, during the administration of President Ollanta Humala. Odebrecht’s consortium was the only bidder on the project after another group was disqualified.

Odebrecht, Latin America’s biggest construction company, has faced a growing backlash since acknowledging last month to the U.S. Justice Department that it paid nearly $800 million in bribes, most of it in Latin America, to secure public works contracts. Peru, Ecuador, and Panama have since banned the company from signing new public-works contracts.

Colombian authorities said last week they would look to oust the firm from the country following the arrest of a former deputy transport minister, who has since pleaded guilty of illicit enrichment for helping Odebrecht win a majority stake in a road project. A former senator also arrested on charges of receiving bribes has denied the allegations. Colombia’s attorney general’s office says it is investigating about two dozen people for possible links to the corruption scandal.

Work proceeding in October on a subway tunnel in Lima.

Work proceeding in October on a subway tunnel in Lima. PHOTO: ALONSO CHERO/EL COMERCIO/ZUMA PRESS

In Peru, where Odebrecht has admitted to paying $29 million in bribes, prosecutors are planning to question Mr. Humala and his predecessors, former Presidents Alan Garcia and Alejandro Toledo, over contracts the Brazilian firm won. All three men have denied wrongdoing. Last week, a judge said Mr. Humala would need court approval before traveling abroad as a money-laundering probe tied to Odebrecht continues.

Edwin Luyo, a member of the committee charged with awarding Odebrecht the concession for Lima’s subway system in 2009, was arrested on Friday for allegedly taking bribes paid through accounts at a bank in the tiny European state of Andorra. Mr. Luyo has publicly said he would cooperate with the investigation.

Prosecutors have also issued an arrest warrant for a former deputy communications minister accused of receiving kickbacks for the subway project in exchange for helping Odebrecht.

Write to Ryan Dube at ryan.dube@dowjones.com

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