For years, people suspected something was wrong.
In 2014, as the Gasoducto Sur Peruano (GSP) natural gas
pipeline concession wound through the bidding process, rumors
circulated that Odebrecht was not competing fairly. The rumors
gained steam when, with just two bidding teams left in the
hunt, the Peruvian government disqualified one led by
France’s Engie, previously known as GDF Suez, on
technical grounds, leaving the Brazilian builder and its
Spanish partner Enagás to take the 34-year concession
contract for the 1,000-kilometer pipeline.
As construction got underway and the project secured $4.13
billion in long-term financing, Odebrecht found itself
embroiled in a widening corruption scandal, first at home and
then in other markets in Latin America. In December last year,
as part of plea agreements in Brazil, Switzerland and the US,
the company admitted to paying some $788 million in bribes in
12 countries — 10 of them in Latin America
— over 15 years.
"I can think of three deals where our clients knew that
Odebrecht was playing dirty," a source who has helped
developers bid for infrastructure projects in Latin America
In Brazil, where the Lava Jato investigation has run for
more than two years, the corruption allegations led to the
arrest and a 19-year prison sentence for former Odebrecht chief
executive Marcelo Odebrecht. The company has since apologized
for its illegal business practices and promised not to do it
again. It also struck a deal in December last year with
Brazilian, Swiss and US prosecutors to pay at least $3.5
billion in fines. But the massive anti-corruption settlement
has not put the allegations to rest. Instead, it has led to new
investigations around the region and spurred calls for
Odebrecht to pay more fines and abandon the markets where it
once profited from bribes.
Now the investigations in Brazil and elsewhere are ensnaring
both current and former government officials and paralyzing
billions of dollars in infrastructure investments. Peru has
issued a warrant for the arrest of former President Alejandro
Toledo. Brazil has arrested the former speaker of the Chamber
of Deputies, Eduardo Cunha. Colombia has opened an
investigation into allegations that illegal election donations
may have been funneled to the 2014 campaign of President Juan
As high-ranking politicians come under fire, projects in
Peru, Colombia, Ecuador, Panama and the Dominican Republic have
either been put on hold or canceled altogether.
Peru’s President Pedro Pablo
Kuczynski has called for Odebrecht to leave the country, while
Colombia’s national infrastructure agency ANI has
publicly declared it is working towards the
company’s "definitive exit".
The scandal has put infrastructure projects in the region
under increased scrutiny and raised questions about
transparency in public works initiatives that many Latin
American leaders are touting as crucial to stimulate economic
growth. With the scandal’s aftershocks continuing
to rattle the region, some countries are scrambling to find
companies to step in to move projects forward, raising the
prospect for new investors or mid-sized firms to expand their
presence in Latin America’s infrastructure
But it has also raised questions about financing, and
whether some companies might struggle to find the money to
bring projects to fruition, or if some projects will end up
costing more than originally planned.
In Peru, Odebrecht and its partners lost the GSP contract
after the Brazilian firm failed to find a buyer for its 55%
stake in the project. Sempra Energy, which was on the Engie
team in 2014, seemed close to buying Odebrecht’s
share, but the deal fell through after the government refused
to remove an anti-corruption clause.
Brookfield appeared next, with Peru’s Finance
Minister Alfredo Thorne even appearing on television near the
end of last year to say the Canadian investor was on the verge
of taking Odebrecht’s stake. But the deadline to
reach financial close came and went in January. The government
canceled the contract and fined the Odebrecht-led consortium
$263 million for not finishing the project. The government
insists on monitoring the GSP sale to ensure that Odebrecht
pays its fines and its workers in Peru before pocketing any
Odebrecht’s teammates in the consortium,
Enagás and local developer Graña y Montero, stand
to receive 72.3% of the GSP’s net book value,
under terms agreed in the original contract, when the
government conducts a new auction for the pipeline concession.
With that money, the five lenders on the 18-month $600-million
bridge loan — BBVA, Intesa Sanpaolo, MUFG,
Natixis and SMBC — expect to be repaid, a project
finance banker in New York tells LatinFinance.
"In theory, we are covered," the source says. "We are having
discussions with the government, but let’s see
what value they recognize."
Before the lenders are repaid, however, the losing bidders
from the original auction could present a challenge in court.
One lawsuit could lead to another, and then other projects that
Odebrecht won could be called into question. Regardless of what
eventually happens to the GSP, Odebrecht may find it difficult
to finance existing projects or any new projects it has in
In late January, for example, SMBC pulled $250 million in
financing for the Río Magdalena waterway public-private
partnership (PPP) in Colombia after Odebrecht failed to sell
its controlling stake in the project. Ideal and FCC
Construcciones, two construction companies owned by
Mexico’s Grupo Carso, made a move late last year
to take 51% of the project, but Odebrecht declined the offer.
Dredging company Jan De Nul assumed a 25% stake in the project
sponsor, Navelena, but lenders still stayed away as long as
Odebrecht maintained control.
Now Sinohydro, a division of the Chinese state-owned
construction company Power China, is in talks to assume
Odebrecht’s share in Navelena. Goldman Sachs could
still provide financing, but only if Odebrecht leaves, sources
involved in the project tell LatinFinance.
Odebrecht's exit appears to be only a matter of time. The
regional waterway authority Cormagdalena has started the
process to cancel the contract. If Sinohydro does not take
control of the PPP, Cormagdalena has said it will carry on with
project through a series of public works contracts.
In Peru, Odebrecht is reviewing offers to sell the
Chaglla hydropower project, a deal that could be worth more
than $1 billion, M&A bankers have said. The potential
bidders include Brookfield, China Three Gorges, Engie, US
energy investor ContourGlobal and Italian gas and electricity
company Enel, sources tell LatinFinance. Chaglla comes
with a 15-year power purchase agreement (PPA), along with $774
million in financing that Odebrecht lined up in 2013.
"Chaglla is fine as far as we know," the New York banker
says. "They’re not saying any of the bribes were
used to pay for the license."
The Colombian government, meanwhile, is not taking any
The business regulator Supersociedades has assumed control
of Odebrecht's subsidiaries in the country
— Constructora Norberto Odebrecht de Colombia,
Odebrecht Latinvest Colombia and Navelena — and
the transportation ministry Supertransporte has taken over the
Ruta del Sol 2 toll road concession. And just as the Peruvian
government has decreed, Colombia will not allow Odebrecht to
sell any assets without regulatory authorization.
In Panama, where Odebrecht has admitted to paying $59
million in bribes between 2010 and 2014, the Brazilian firm has
withdrawn from the bidding process to build another bridge over
the Panama Canal.
Odebrecht has also lost another key project in Panama
— a $1 billion contract to build and operate the
Chan II hydroelectric project — after the government
A buyer's market
The bribery scandal is also slowing down the infrastructure
pipeline in other countries in the region as government
contracts come under examination. The most pressing projects,
however, will likely still come to market, says Alejandro
Olivo, an associate managing director at
"Specific projects will be subject to increased scrutiny and
material delays in construction," Olivo says. "We know that
most, if not all, of the projects have a rationale and a
relevance of their own… We expect those projects will
continue over time."
In Brazil, specifically, the Lava Jato investigations have
forced infrastructure developers to take closer looks at the
legal and political risks involved. But, if the end result is a
more transparent procurement process, then the
country’s infrastructure stands to gain in the
"For new projects, investors are focusing their analysis on
the legal aspects," says a banker in Brazil. "Certainly Lava
Jato has created some uncertainty, but Brazil is getting
better. Maybe Brazil will become a safer place to invest."
Geert Aalbers, who leads the Brazilian and Southern Cone
business for the consulting company Control Risks, says the
corruption probes will clean up project procurement in Brazil
and level the playing field for both local and international
firms. Until then, however, infrastructure investors will have
to deal with continued instability stemming from the Lava Jato
Just as Odebrecht strives to sell assets to raise badly
needed funds, other construction companies tied up in the Lava
Jato case are offloading projects in a rush, creating a
buyer’s market and opportunities that may outweigh
the concerns, Aalbers says.
"They’re basically living in a universe of high
risk and relatively high return," he says of infrastructure
investors in Brazil and the rest of Latin America. "The assets
are relatively cheap and they’re going to stay
that way for the next two years."
The Brazilian government intends to auction four airport
concessions on March 16, with an estimated 6.61 billion reais
($2.13 billion) in project costs, and the market anticipates a
solid response from investors. On the other end, plans to grant
three railroad concessions, involving 14.3 billion reais in
investments, have not stoked investor interest.
Feeling the fallout
Odebrecht, which already holds the Galeão Airport
concession in Rio de Janeiro with Singapore's Changi Airport
Group, is not expected to bid widely for upcoming PPPs and
concessions in Brazil and elsewhere. The scandal has added to
Odebrecht’s deepening financial troubles, and it
has been forced to undergo some rigorous belt-tightening.
Facing a cash crunch last year, Odebrecht sold nearly half of
the 12 billion reais in assets it put up for sale. From 2012 to
2015, it slashed its workforce from some 175,000 global workers
to 128,000, according to the company's annual reports.
Odebrecht officials have said they hope the asset sales will
help help steady the company, while it works to win new
construction projects in countries where its image has not been
In 2013, the project portfolio of Odebrecht Engenharia e
Construção amounted to some $34 billion. By the
third quarter of 2016, it had fallen to around $21 billion,
according to Moody's.
"These projects are good assets," the Brazilian banker says,
pointing to the $768-million deal that Brookfield struck last
year to buy a controlling stake in the water and wastewater
business Odebrecht Ambiental.
However, Odebrecht’s prospects of garnering
significant new business appears daunting, as several countries
in Latin America, including Peru, Colombia, Ecuador and Panama,
have banned the company from making bids while investigations
are ongoing. Analysts predict some of the legal probes could
take up to three years.
"The main challenge for the company right now is how does it
win contracts to maintain a healthy backlog and revenues?" says
Marcos Schmidt, a vice president and analyst at
Moody’s who covers Odebrecht.
"In Brazil, they are already a step ahead compared to what
they’re facing in the other countries," he says.
"But it does not mean it will be easy for them. They cleared
one of the hurdles in Brazil, now getting the financing and
winning the bids is another story."
In one potential bright spot for Odebrecht, the Dominican
Republic announced in February it reached an agreement with the
government to pay some $184 million in fines
— twice the amount it doled out in illicit
payments to win public works contracts from 2001 to 2014.
Under the agreement, the company will make annual payments
over the next eight years and submit reports detailing its
efforts to improve corporate governance and its interactions
with government officials as a condition to lift a temporary
ban imposed by the government barring Odebrecht from bidding on
Odebrecht’s arrangement in the Dominican
Republic might serve as a blueprint for the company to address
graft investigations in other countries.
Odebrecht hopes to keep most of its existing contracts as it
works to reach judicial settlements. "The basis of negotiation
in the countries, as has happened in Brazil, is the maintenance
of existing contracts and the possibility of participating in
future bids on equal terms with other builders," a spokesperson
for the company told LatinFinance in an
email. "It makes no sense to punish those who are seeking to do
what is right."
Odebrecht believes it could resolve all of the judicial
investigations in the region within six months, possibly
allowing it compete for new business.
"We are seeing infrastructure project opportunities in
almost every country in Latin America," it added.
If Odebrecht gets beyond its current troubles and starts
bidding for projects again, it may encounter less competition
in the market, at least in Brazil. A few firms involved in the
Lava Jato operation, such as Galvão Engenharia, Mendes
Júnior and OAS, have filed for bankruptcy protection and
they cannot afford to go after new projects.
"A lot of people are asking if infrastructure companies will
survive," Aalbers says. "The stronger ones have traditionally
been more solid in Brazil. They will survive, but in a smaller
form than before, or maybe partner with foreign firms."
Finding the funding
On the financing front, lenders and market analysts expect
new projects to have access to capital, and costs could remain
more or less the same as before. "I don’t think
spreads will go up a lot," the New York banker says. "Liquidity
is high. Lenders are interested in the region. Banks are really
competitive. We are slowly seeing higher margins, but not so
In Brazil, the national development BNDES is limiting its
cut-rate financing, capping loans at 40% of investments in
airport concessions and 50% in highway concessions.
"We’re not expecting to see a material
reduction in the availability of financing in 2017," Olivo
says. "We haven’t seen concern from banks to
provide financing for sound and relevant projects. We may see
additional layers of due diligence… and further delays
in execution overall."
Among the government’s financing plans, Banco
do Brasil aims to bring commercial banks into syndicated loans
to provide funding during construction. After that, BNDES and
FI-FGTS, an infrastructure fund managed by the federal savings
bank Caixa Econômica Federal, could ensure long-term
financing by underwriting up to 50% of infrastructure bonds
issued by the project sponsors.
The financing mix will change, and the government has the
clear intention of making the projects more accessible to
Still, bankers are optimistic that BNDES will strike the
right balance between financing infrastructure investments at
the government’s subsidized TJLP long-term
interest rate and market rates. "Everything indicates that
there should be a significant reduction in interest rates [in
Brazil], making the difference smaller between BNDES and the
market," the Brazilian banker says.
Brazil’s electricity transmission line
concessions did not come with subsidized financing based on the
TJLP, and the auctions have been a success, he says.
BNDES has also put a stop to bridge loans to finance upfront
payments for concessions and PPPs, opening another door for
commercial lenders to get involved. "It doesn’t
mean a big client can’t get a corporate loan,
rather than a project loan," the banker says. "We
didn’t have bridge loans in the past and we
won’t see them this year."
BNDES appears ready to reduce its role in financing
infrastructure projects in Brazil, as it has promised to do for
several years, but it is not going anywhere, he says. "We still
have a long way to go," he says. "We still see our resources as
a complement to BNDES financing."
But the BNDES bedrock could crumble if the development bank
comes under investigation itself for its loans to companies
involved in the Lava Jato scandal, although the development
bank has not been accused of wrongdoing. "If we throw BNDES
into the mix, it begs the question, 'Where does the financing
come from?’" Aalbers says. "There will be a need
for financing from a national development bank and pension
funds. Insofar that becomes subject to significant regulatory
inquiry, it might create a paralytic effect on public
Trouble in Peru
Odebrecht may face its biggest challenges in Peru, one of
the countries where the scandal’s impact has been
felt most sharply. Its admission of paying $29 million in
bribes between 2005 and 2014 has rippled through the
country’s political class and forced the
government to lower its economic growth forecast for the
In a sign of how deep the scandal has penetrated
Peru’s political establishment, the
country’s attorney general has issued an arrest
warrant for former President Toledo, who is accused by Peruvian
prosecutors of accepting $20 million in bribes from Odebrecht
in exchange for infrastructure contracts, including a major
Toledo denies any wrongdoing. Kuczynski, who served as
finance minister and prime minister under Toledo, has said he
was unaware of Odebrecht’s kickback schemes,
which allegedly spanned the
administrations of Toledo and the former presidents Alan
García and Ollanta Humala. Three former officials from
the García administration have been arrested in
connection with ongoing probes.
Odebrecht's former Peru head, Jorge Barata, has also claimed
that Graña y Montero, JJC Grupo and Ingenieros
Civiles y Contratistas (ICCGSA) knew about the bribes that
Odebrecht paid Toledo. Shares in Graña y Montero sank
some 33% after the news of Barata's claims hit the market on
February 24. The Peruvian engineering firm denied the
allegations and said in a statement that its executives "were
not aware of, participated in, nor made any payments in
connection with any type of bribe or reimbursement of any such
payments made by Odebrecht."
Graña y Montero's denial, however, was not enough to
deter a host of law firms from launching investigations into
possible violations of US federal securities laws. The company
has seen its shares go from 4.50 soles ($1.38) on November 23,
the day Sempra said it was withdrawing from the GSP talks, to
around 2.80 soles in late February.
After losing the GSP contract and seeing the share price
tumble, Graña y Montero announced that Mario Alvarado
had resigned as chief executive. Likewise, José
Graña stepped down as chairman of the board and Hernando
Graña left his post as a director. Chief operating
officer Luis Díaz stepped in as the new
Nationwide, as the wake of the scandal has spread, Peru has
trimmed its 2017 economic forecasts from 4.8% to 3.8%, Thorne
tellsLatinFinance. "We are devoting a lot of energy
these days to the shock we have experienced from Odebrecht," he
says. "What we have found is that Odebrecht has monopolized a
lot of these projects."
The government has terminated the $7 billion GSP contract.
Now Thorne says it wants Odebrecht to divest from other
projects, including its stake in a $500 million irrigation
project it was working on with Graña y Montero.
"Our sense is it’s going to take us a few
months to essentially induce Odebrecht to sell their stake in
their projects," he says. "We have decided that even if we
suffer on the economic side, we are committed to
Thorne says "five or six" companies have expressed interest
in taking over Odebrecht’s projects, adding he has
met with some of the prospective companies. "Most of them are
at the point where they want to buy all of the projects."
Chinese companies have also shown interest in infrastructure
projects in Peru, Thorne says.
"We are comfortable that six or nine months from now,
we’re going to be back on our feet," he says.
For some countries in the region who have been untouched by
the scandal, it has proved to be cautionary tale.
While it has been slower than its neighbors in developing
infrastructure projects, Paraguay, which recently launched two
key PPPs, although smaller in scale than many of the
region’s bigger infrastructure investments, sees
Odebrecht’s troubles as a warning sign, Finance
Minister Santiago Peña says.
"In our case, I think our typically conservative approach
has paid off," he tells LatinFinance. "In recent
years, we saw how many other countries quickly launched
projects. But today we’re seeing the