A scandal involving Brazilian conglomerate Odebrecht has engulfed several leaders in Latin America and threatens to slow growth in countries like Peru.
People take part in a protest against corruption in Lima after Odebrecht scandal is uncovered
In today’s interconnected world, there is no such thing as an isolated occurrence. Brazil’s political turmoil, which resulted in the impeachment of President Dilma Rousseff in 2016, quickly engulfed several other countries in the region. After Odebrecht S.A., a private conglomerate whose holdings include the largest construction and petrochemical companies in the world, was found to have made payments to Brazilian state-owned oil company Petrobras in exchange for government contracts, additional investigations by authorities in Brazil and the US implicated numerous Latin American politicians.
Odebrecht was found to have used an euphemistically named “Division of Structured Operations” to make more than USD788 million in payments to political figures in exchange for state contracts and legislative favors over the past 15 years, obtaining more than USD3.5 billion in contracts across a dozen countries. In December 2016, Odebrecht and a subsidiary agreed to pay USD3.5 billion as part of a settlement in a US federal court, 80% of which will go to Brazil.
But that’s far from the end of the story. Investigations have continued across the region, with agencies trying to determine the extent of the scandal in their respective countries. Panama, Venezuela, and Colombia have all seen political leaders implicated in the scandals and are in the midst of trying to determine the extent of the activity and restore public trust in their political institutions.
Yet perhaps no country has been as directly hit as Peru, which is facing the very real possibility of having two former presidents indicted as a result of the revelations. In January 2017, reports emerged that Peruvian prosecutors had found evidence of payments to the campaign of Ollanta Humala, who was president from 2011 to 2016. The allegations, which also implicate Humala’s wife Nadine Heredia, state that Odebrecht’s payments were essential to winning the Southern Gas Pipeline project. Alan Garcia, who served as President from 2006-2011, has not been charged with any crimes, although his deputy minister of communications and other administration officials have been arrested and charged with receiving bribes.
In early February Peruvian prosecutors submitted an international arrest warrant for Alejandro Toledo, president from 2001 to 2006, for taking bribes in exchange for giving Odebrecht more than USD1.3 billion in infrastructure contracts. Prosecutors say that they have tracked payments of USD11 million to a London-based account owned by a close friend of Toledo’s. Both Humala, who has been barred from leaving the country, and Toledo, whose whereabouts are unknown but is believed to be in the US, have denied any wrongdoing.
These recent revelations have shaken the region and led to calls for new regulatory measures. However, Peru must urgently reassess the status of some major infrastructure projects. Odebrecht had contracts for billions of dollars worth of infrastructure, the most significant being the Southern Gas Pipeline, a USD5 billion project that would have transported gas from the Camisea gas fields to the Pacific coast.
The project was expected to boost the Peruvian economy by up to 2%, but the government was forced to cancel the contract after Odebrecht sold its majority stake in the project. Government officials do not expect a new contract to be signed until 2018 at the earliest, and the pipeline, which is only 30% ready, is likely to see route changes under a new contractor.
So what’s next? First and foremost, Peruvian government officials have lowered the country’s growth projections as a result of Odebrecht’s withdrawal from several key projects, with Minister of Finance Alfredo Thorne estimating that the scandal could lower economic growth by 0.5-1%. More than this, though, the Odebrecht scandal threatens to derail a major economic shift that had been central to the Kuczynski administration’s plans to and Peru’s economic future.
The economy grew rapidly thanks to the commodities boom of the mid-2000s, but global demand has slowed in recent years, putting the future of the mining industry into question. Kuczynski called for an increase in private investment in infrastructure from the current 4.5% of GDP to 6% by 2021 after taking office, a push that would diversify the economy.
The Southern Gas Pipeline, for example, would have drastically lowered energy costs and created a new source of economic output along Peru’s coastline, replacing the reliance on the copper and nickel mines that have traditionally been the nation’s chief export. Now, however, that is all up in the air.
Still, there is reason for optimism. Although confidence in Peru’s political system has taken a hit, the nation is still one of Latin America’s most stable and robust economies. Kuczynski’s challenge will be to reach out to a new cohort of outside investors to deliver the infrastructure upgrades his country needs, while at the same time rebuilding public and investor trust and confidence in the nation’s bidding system. It is no small task, but the former IMF economist—one of the only politicians untouched by the scandal—has little choice in the matter.