As Brazil officially enters recession it appears that the nation’s annus horribilis is far from over. Corruption investigations have reached deep into Brazil’s energy sector and high-profile casualties are piling up. Moreover, there are fears that the recession could deepen as large energy and infrastructure projects are put on hold.
Still there may be a silver lining for Brazil. A clean up of politics and business - and a culture change at national oil company Petrobras - is just what the country needs. A less corrupt Brazil could bring new investment and rejuvenate the flagging economy. But it will take time.
Brazil has long had a reputation for being a difficult place to do business. In 2015, it ranked 120th on the World Bank’s Doing Business Index, though this figure provides a skewed perspective. The nation ranked 19th when it came to access to electricity but 167th in starting a business, 174th in dealing with construction permits, and a miserable 177th in paying taxes. The World Bank calculated that it takes 2,600 hours to file and pay taxes in São Paulo, compared to the OECD average of 175. Related: Why Now Is The Time For Investors To Pick Up Positions In NatGas
Corruption, bribery, inefficiency, and red tape are all factors keeping foreign investors away. Moreover, they make Brazil’s previous success seem all the more remarkable.
In 2010, Brazil was growing at 7.5 percent, the BRICS were booming, and vast oil and gas reserves in the pre-salt basins were set to catapult the nation to superpower status. Fast forward to 2015 and Brazil’s economy contracted by 1.9 percent between April and June.
The details of the latest corruption scandal are now well-known but one of the most important elements was the collusion between Petrobras and a small group of companies to overcharge for services in the energy sector. Petrobras officials received bribes for their playing their part and shared these kickbacks with politicians, many of them in the ruling Workers’ Party. Estimates price the total bribes at close to $3 billion. This is money that could have been better spent elsewhere, obviously. Related: Are “Palm Trees” The Next Step In Solar Energy’s Evolution?
The silver lining is apparent in the way Brazil is handling the crisis. President Dilma Rousseff has not intervened, in spite of single-digit approval ratings and protesters calling for her impeachment.
National institutions are working the way that they should and the investigation, known as Lava Jato, or “Car Wash,” has not baulked at high profile arrests. Speaker of the Congress, Eduardo Cunha, has been accused of accepting up to $40 million in bribes for himself and allies. Head of the powerful construction firm, Marcelo Odebrecht, has also been arrested. Even former President Luiz Inacio Lula da Silva has been implicated in the scandal.
Still, the nation must move forward. Brazil will be holding its next oil auction in October - Round 13. While early signs are not as positive as some would hope, it is important for Brazil to demonstrate that it is still open for business.
Rebuilding trust and confidence in Brazil will not come easily, nor quickly. Beyond successfully completing the Lava Jato investigations, Brazil will need to show that it is cleaning up Petrobras from the inside. This means independent oversight and breaking down the dangerously intimate connection between politics and business. Related: Midweek Sector Update: The Largest Three-Day Rally In Twenty Years, Can It Last?
As the dust settles, the crisis may catalyze a further opening of Brazil’s energy sector, creating opportunities for foreign companies not just in the oil and gas sector but also in electricity and infrastructure.
One of the main sticking points in recent upstream bid rounds has been the onerous local content requirements. The government would be wise to heed these concerns, particularly in light of the loss of trust in national firms, and make it easier and more efficient for foreign investors to come back to Brazil.
In terms of infrastructure, the government has promised a more market-oriented approach for new tenders. Major companies involved in the scandal should not be shut out completely but independent oversight will be critical in order to avoid the mistakes of the past.
Brazil could emerge from this disaster with a more competitive energy sector and certainly one that is less corrupt. 2015 may still get worse before it gets better but if Brazil is able to implement even some of the reforms that come out of these investigations then 2016 will be much brighter.
By Alexis Arthur for Oilprice.com
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