FCPAméricas Blog

The World Cup and Olympics: Highlighting Corruption Risks in Brazil’s Construction Sector

Author: Matteson Ellis

WorldCupConstructionTwo years ago, FCPAméricas featured local perspectives on the corruption risks arising from the 2014 World Cup and the 2016 Olympics, both being hosted by Brazil. Now, with the first World Cup match occurring today, the reports of specific instances of abuse are starting to come in. Many of these reports relate to the construction of new facilities.

For example, Brasilia’s brand-new taxpayer-funded stadium is clouded in a fog of suspicion and indicators of possible corruption. A recent government audit, discussed here, determined that the projected costs for the stadium have tripled, mounting to almost US$1 billion. This makes Brasilia’s stadium the world’s second most expensive – this, in a city that does not even boast a major professional soccer team. The audit identified US$500 million in questionable spending on the stadium, such as transportation of prefabricated grandstands that was budgeted to cost US$4,700 and wound up costing US$1.5 million, or US$2.3 million in spending on materials that are listed multiple times on bills.

At the same time, an Associated Press study reports that the lead builder of the stadium increased its political donations in the most recent election almost 500-fold, suggesting a quid pro quo arrangement with those awarding the contracts.

Even more startling is the response to these allegations by government officials. The head of the government’s World Cup committee in Brasilia, which is responsible for oversight of the project, questioned the timing of the government’s audit report saying, “they’re trying to spoil the party.”

These stories highlight the corruption risks in the construction of major public works projects, like stadiums. The following are some specific factors that contribute to those risks in Brazil:

  1. Frequent permitting: Construction requires government permitting and inspections, which require interaction with government officials. In this area, Brazil’s regulatory requirements can be onerous. In The World Bank’s 2014 Doing Business Report, Brazil ranked 130th out of 189 economies in “ease of dealing with construction permits,” with 15 procedures requiring 400 days. Compared to other Latin American countries like Colombia (ranking 24th with 8 procedures taking 54 days), Ecuador (ranking 64st with 16 procedures taking 115 days), and Mexico (ranking 40th with 11 procedures taking 82 days), Brazil’s construction rules are strikingly burdensome. Because of this, it is common for companies to hire despachantes (local fixers) to help navigate processes, creating the risk of improper third party payments. Moreover, the more complicated the regulations, the more numerous the government officials involved, and the more discretion they each have. This means more room for bribery.
  2. Collusion / bid rigging: In the construction sector, it is common for expensive projects to be funded by the government. In Brazil, this often gives rise to sophisticated collusive schemes involving multiple actors to manipulate contract awards. For example, Brazil’s Administrative Council for Economic Defence (CADE), its anti-trust regulator, is currently investigating several companies, including Germany’s Siemens, France’s Alstom, Japan’s Mitsui, and Canada’s Bombardier, for price fixing related to construction of train and metro networks in the country. Siemens is reported to have first voluntarily disclosed the cartel to the authorities.
  3. Political connections: The construction sector is Brazil is known to have cozy relations with government officials. For example, Ethos Institute and Transparency International conducted a study of the 2010 elections in which it determined that 4 of the top 6 campaign donors were construction companies. One company donated more than 100 million reais in the cycle (more than US$40 million – see Table 1 of the Ethos Report).
  4. Opportunities to inflate costs: Because each construction project is so unique, costs from project to project can vary greatly. This makes it difficult to establish consistent benchmarks across projects to compare and track expenditures. Moreover, certain areas of work tend to create unique opportunity to inflate costs. For example, in “earthworks,” costs related to moving and flattening banks of soil range widely based on numerous technical factors that can be challenging to confirm. Much of Brazil’s infrastructure enhancements for the current events involve renovating highways, tunnels, bikeways, and sidewalks, making earthworks projects common. By inflating costs, companies can come up with extra funds with which to pay bribes.
  5. Modified contracts: Modification of publicly funded construction contracts is a major problem in Brazil. Under Brazilian law, the government is permitted to modify contracts unilaterally based on the public interest. When this happens, the contracted company has the right to revised prices to maintain “financial and economic equilibrium.” This creates opportunity for abuse. Companies can win initial awards based on proposed cost structures that are vetted and determined to be legitimate, only to implement a modified structure with questionable components.
  6. Contract values that dwarf bribe amounts: The expenditures related to the World Cup and Olympics in Brazil are enormous – the government has already spent over US$10 billion on World Cup improvements alone. A recent New Yorker article points out that, the larger and more lucrative the construction project, the more insignificant the cost of the bribe might seem. As a result, the business case for paying the kickback is easier to make when the bribe is relatively small compared to the financial benefit. Moreover, even if the amount of the bribe demanded is significant, the large value of the contract makes the cost of the bribe easier to hide in the overall a cost structure.

The run-up to the 2014 World Cup has been marred by protests and allegations of corruption. And while it may seem premature to talk about the 2016 Olympics in Brazil, there has already been discussion of corruption in connection with those games as well.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2014 FCPAméricas, LLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Brazil, English, FCPA, Procurement, Transparency International

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