Skip to content

Operation Car Wash and Its Impact in Peru

by Natalia Mori

Operation Car Wash, or Lava Jato as it is called in Portuguese, has become the largest bribery case in the history of Brazil and Latin America. In this article, we will describe the bribery scheme, outline the measures taken by the Peruvian government, and then evaluate their efficacy. Specifically, we will focus on the prohibition to include addendums to PPP contracts during the first three years of the contract for bankability purposes as a response to the corruption scheme that used such addendums as a mechanism to formalize the bribes.

The Lava Jato Bribery Scheme

Lava Jato consisted of payments by Brazilian-based companies of hundreds of millions of dollars in bribes to government officials at all levels in many countries. Because of the scale of this wrongdoing, its high complexity, and long-lasting scheme, Operation Car Wash has caught the attention not only of the public but also of the T.V. industry. Indeed, this sprawling corruption investigation has made its way to Netflix through the recently released series, “The Mechanism.”

Authorities began investigating Lava Jato in July 2013[1] as an investigation of the parallel market of exchange in a gasoline grid, which led authorities to Alberto Youseff, a professional money launderer in charge of cleaning Lava Jato’s corrupted money. His testimony, along with the testimony of ex-Petrobras executive Paulo Roberto Costa, led to the discovery of the biggest scheme of corruption. It initially operated in Brazil through Petrobras, the biggest state-owned company in Brazil and Latin America, and has now spread into almost every country in Latin America.

In a fair depiction, a Brazilian prosecutor described the operation as a system of “companies enriched at the expense of the State, Petrobras executives who sold favors, professional money launderers who paid bribes, and politicians who supported Petrobras executives and in exchange received most of the bribes to enrich themselves and finance their campaigns.”[2]

How did it exactly work? The massive bribery and bid-rigging scheme involved paying bribes to Petrobras’ executives through a complex network of shell companies, off-book transactions, and off-shore bank accounts in exchange for the grant of several concessions and public works that were being bid on by the state-owned company.[3] This system is estimated to have operated for more than a decade and to sum of 8 billion dollars of stolen money.[4] Lava Jato involved all the major construction companies in Brazil[5], the most notable being Odebrecht, whose CEO, Marcelo Odebrecht, was sentenced to 19 years in prison for having paid 30 million dollars in bribes to Petrobras.[6]

According to Odebrecht’s testimony, the company paid 788 million dollars in bribes in twelve countries in Latin America and Africa. Venezuela received the most money in bribes, followed by Dominican Republic and Argentina.[7] Although Peru did not receive the biggest bribes[8] from Odebrecht, it is the country with the highest number of high government officials, including former presidents, directly involved in the case.

Indeed, Peru’s former President Ollanta Humala and First Lady Nadine Heredia are being prosecuted for allegedly having received 3 million dollars from Odebrecht to finance their political campaigns.[9] Other former presidents of Peru are also involved in Operation Car Wash investigation.[10] Perhaps the most surprising case to discover was that Pedro Pablo Kcuzinski, Peruvian President until March 23rd, 2018, was involved in this scandal. Following an impeachment initiative by the Congress in response to his involvement in the scandal, he was forced to resign from the presidency.[11]

Moreover, several public-private partnerships (“PPP”) projects and public procurement contracts were awarded to Odebrecht and other Brazilian companies involved in Lava Jato. While some projects were finished when the Lava Jato scandal was discovered, others are still on going, including the South Pipeline and Chavimochic Phase III, the largest irrigation PPP project in the world.[12]

The Measures Adopted by the Peruvian Government

Operation Car Wash presents a problem for the procuring authorities dealing with PPP contracts awarded to Odebrecht and other companies involved in Lava Jato. Apart from the potential criminal liability, how should the Government respond to a situation where the concessionaire has pleaded guilty for having bribed public authorities? Authorities needed quick and clear legal measures on dealing with these tainted projects.

To this end, the Peruvian Government adopted several legal reforms in the past year mainly addressed to amend both the Public Procurement legal framework, composed of Law 30225[13] and its Regulations, and the PPP regime, composed of Legislative Decree 1224[14] and its Regulations.[15] In addition, a special regime for the on-going projects awarded to companies that have pleaded guilty or have been convicted for corruption was approved by Emergency Decree No.003-2017[16], recently replaced by Law 30737.[17] The regime specifies restrictions on the transfer of money from these companies abroad and other measures on securing payment to the State and the conclusion of the works.

In March 2017, the Peruvian Government enacted the Supreme Decree No. 068-2017-EF, which modified Article 54 of the PPP Regulations on the possibility of including bankability amendments. According to the newly updated Article 54 of the PPP Regulations, no bankability amendments may be signed during the first three years of the contract. Bankability amendments are addendums requested by private investors to modify certain terms of the contract which are considered essential to obtain the necessary financing for the project (e.g. allocation of risks, restrictions to the transfer of the project, definitions of the permissible lenders, etc.).

Although there has always been a general prohibition for allowing amendments to PPP contracts during the first years of the project, bankability amendments were one of the exemptions to that rule, allowing investors to request these kinds of amendments right after the contract was executed.

However, once Operation Car Wash was uncovered, authorities found that many of the projects awarded through bribes to Odebrecht used bankability amendments as instruments to increase the value of the concessions and to recognize additional payments in their favor, in exchange of the bribes that were paid to the highest authorities. This was the case of the “IIRSA Sur” Phase 2 and 3 Highways which were awarded to Odebrecht in 2005. Within four years (2006-2010), eight and nine amendments were signed to each contract respectively.[18] These addendums were addressed to modify the methodology of the payments, to recognize additional expenses and costs, and ultimately, to increase the value of the concessions and pay more money to Odebrecht.

This practice became common in the industry. According to a recent study of the National Public Controller (Contraloria General de la Republica), bankability was the second-most used reason for amendments of PPP contracts.[19]

The Adequacy of the Prohibition to Subscribe Bankability Amendments to PPP Contracts

The adequacy of the legal reform in question must balance the necessity of imposing blocks to corruption schemes through addendums to the contracts with the efficiency of the State to promote private investment for reducing the infrastructure gap.[20] Indeed, despite the economic growth, Peru experiences an infrastructure gap estimated to be 160,000 million for 2016 to 2025.[21]

As it has been recognized by the OECD’s Secretary, corruption damages a country’s domestic economy, weakens the growth and development of a country, and destroys trust in institutions, the market, and companies.[22]  According to the IMF, a country without corruption could increase its private investment by 5% overall.[23] The World Economic Forum estimates that corruption increases  the costs of doing business by 10% and up to 25% for the cost of entering into contracts with developing countries.[24]

However, eradicating corruption must be balanced against the ability of governments to promote private investment.[25] Although the prohibition to add bankability amendments addresses the issue of corruption in PPP contracts, one might question whether the remedy is worse than the disease. It is important to consider that these measures affect not only Odebrecht and other companies involved in Lava Jato but every potential investor that enters into a PPP contract with the Peruvian Government. As such, this measure may risk the feasibility of PPP projects since it adversely affects the capability of private investors to obtain funds for the execution of the projects.

On the one hand, PPP contracts are awarded after a bidding process conducted by a government entity. Private investors are only entitled to propose modifications to the contracts drafted by the authority during the bidding process, without having any right to demand a modification of a certain clause. This situation very often leaves the bidders with no other option than to accept the terms of the original contract, hoping that if awarded, they may be able to modify the contract through amendments.

On the other hand, most PPP are financed through project-finance.[26] In these ventures, lenders carry out a detailed analysis of the project’s risks and, specifically, of the way they are allocated between the parties through the contracts.[27] Since PPP contracts are not the product of a real negotiation between the Government and the private party, but  are unilaterally drafted by the former, it is usual to find gaps, contradictions, and unclear definitions in the contracts. All of this makes the understanding of the projects and their risks an even harder task.

Moreover, prohibiting these addendums will not stop corruption in PPP projects. Investors could potentially use other instruments to recognize additional costs and increase the value of the projects – for example, the colluded supervisory authority may enact “Acts” that complement or regulate the contract. Peru needs more than a legal reform to avoid corruption, including behavioral and cultural norm change in the PPP markets, as well as an independent, strong, and impartial judicial system that ensures the enforcement of the law. Therefore, the prohibition on adding bankability amendments is not an appropriate measure if one considers both the purpose of the measure and the need of efficiency in awarding PPP projects.

Bankability amendments are not negative per se. It is the way in which they have been applied which causes the issues that the government is trying to avoid. By prohibiting these kinds of addendums, the government fails to recognize that the underlying cause of the wrongful use of the bankability amendments is not their existence itself, but the lack of control on their implementation. The design of the bidding process makes it necessary to modify certain terms of the contract in order to make its financing feasible. Without proper financing, projects will not be able to be executed and the people will continue to lack basic public infrastructure.

Conclusion

Although well intended, the legal reforms adopted by the Peruvian government to the PPP regime as a response to Operation Car Wash may have severe negative effects on the economy and people. They may disincentivize private investors to take on public infrastructure projects that are indispensable for the development of the country and the well-being of its people.

Corruption is a problem and should be avoided. However, the solution to corruption is not to prohibit everything that has been used as a means for the wrongful practices, but rather to reinforce the controls and supervision over these practices. The developing world faces other problems that are as big as corruption and, thus, governments should not prioritize one over the other at a point that the achievement of one means the failure of solving the other.

Natalia Mori is a Quorum Editor and an L.L.M., Class of 2018, at N.Y.U. School of Law.

[1] http://rpp.pe/mundo/latinoamerica/que-es-la-operacion-lava-jato-6-claves-para-entender-este-caso-noticia-943263

[2]  https://www.lainformacion.com/policia-y-justicia/delitos-corporativos/Lava-Jato-investigacion-historia-Brasil_0_955706135.html

[3] http://rpp.pe/mundo/latinoamerica/que-es-la-operacion-lava-jato-6-claves-para-entender-este-caso-noticia-943263

[4] http://rpp.pe/mundo/latinoamerica/que-es-la-operacion-lava-jato-6-claves-para-entender-este-caso-noticia-943263

[5] This is the case of Techint, Camargo Correa, Andrade Gutierrez, Mendes Junio, Promon, MPE, Skanza, Queiroz Galvao, IESA, Engevix, SETAL, GDK, and Galvao Engenharia. https://www.lainformacion.com/policia-y-justicia/delitos-corporativos/Lava-Jato-investigacion-historia-Brasil_0_955706135.html; http://rpp.pe/mundo/latinoamerica/que-es-la-operacion-lava-jato-6-claves-para-entender-este-caso-noticia-943263

[6]http://www.bbc.com/mundo/noticias/2016/03/160308_brasil_marcelo_odebrecht_condena_corrupcion_petrobras_ab

[7] Venezuela received 98 million dollars between 2006 and 2015, Dominican Republic received 92 million dollars between 2001 and 2014, and Argentina received 35 million dollars between 2007 and 2014.  http://rpp.pe/mundo/actualidad/como-afecta-el-caso-odebrecht-a-cada-pais-de-latinoamerica-noticia-1029652

[8] It is estimated that Peruvian authorities received a total of 29 million dollars from Odebrecht between 2004 and 2014. https://elcomercio.pe/mundo/actualidad/ee-uu-odebrecht-pago-sobornos-us-29-millones-peru-230684

[9] https://www.nytimes.com/es/2017/07/14/el-caso-contra-ollanta-humala/

[10] This is the case of former President Alejandro Toledo. https://www.nytimes.com/es/2017/02/08/el-caso-odebrecht-alcanza-a-lideres-de-peru-y-colombia/

[11] http://www.bbc.com/mundo/noticias-america-latina-43481060

[12] https://www.proyectosapp.pe/modulos/JER/PlantillaStandard.aspx?are=1&prf=2&jer=8186&sec=30

[13] http://portal.osce.gob.pe/osce/content/ley-de-contrataciones-del-estado-y-reglamento

[14] https://www.proinversion.gob.pe/RepositorioAPS/0/0/arc/ML_APP_DL_1224/DL%201224.pdf

[15] https://www.mef.gob.pe/contenidos/inv_privada/normas/DS410_2015EF.pdf

[16] http://busquedas.elperuano.pe/download/url/decreto-de-urgencia-que-asegura-la-continuidad-de-proyectos-decreto-de-urgencia-n-003-2017-1485019-1

[17] http://busquedas.elperuano.pe/normaslegales/ley-que-asegura-el-pago-inmediato-de-la-reparacion-civil-a-f-ley-n-30737-1624757-1/

[18] https://gestion.pe/economia/hay-adendas-iirsa-sur-tramo-2-3-128143?foto=3

[19] Contraloria General de la Republica. “Estudio sobre las causas de la renegociación contractual de las Asociaciones Publico Privadas en Perú”. 2015. p. 282. Available at: http://doc.contraloria.gob.pe/estudios-especiales/estudio/2015/Estudio_renegociaciones_contractuales_APP_.pdf

[20]http://www.proinversion.gob.pe/modulos/LAN/landing.aspx?are=0&pfl=1&lan=10&tit=proinversi%C3%B3n-institucional; see also https://pppknowledgelab.org/countries/peru

[21]http://www.afin.org.pe/images/publicaciones/estudios/plan_nacional_infraestructura_2016_2025_2.pdf

[22] https://larepublica.pe/impresa/economia/812646-advierten-que-la-corrupcion-dana-la-economia-y-debilita-el-crecimiento

[23] http://www.imf.org/external/pubs/ft/sdn/2016/sdn1605.pdf

[24] https://medium.com/world-economic-forum/5-lessons-on-fighting-corruption-352681bba841

[25] https://www.oecd.org/corruption/putting-an-end-to-corruption.pdf

[26] PPP projects are carried out by a special purpose vehicle, also known as the “project company,” which is created as a separate entity from the original bidders and whose only mission is the performance of the project. The use of this vehicle explains one of the reasons why PPPs are financed through project-finance, as the company in charge of the execution of the project, commonly known as the “concessionaire,” does not have many valuable assets other than the rights conferred by the contract, including the returns it is entitled to obtain from the performance of the project.

[27] Delmon, Jeffrey. “Understanding Options for Public-Private Partnerships in Infrastructure.” January 2010, p. 10. Available at: https://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-5173