BNamericas – Repaving the path to glory: Brazil construct…

The stars are aligning for a comeback of Brazil’s construction conglomerates, which have suffered a decade of declining revenues and legal problems due to their involvement in the Lava Jato corruption scandal.

“In recent Brazilian history, it’s difficult to find an alignment of elements as positive as we have now for infrastructure companies, which combines well-structured projects with a major diversification of financing sources,” Roberto Guimarães, planning and economic director at industry and infrastructure association Abdib, told BNamericas.

“In the past, we sometimes had lots of projects, but few financing options, or the opposite, available financing but few projects. Now we have a beneficial scenario for the resumption of activities by large companies,” he added.

Conglomerates such as Grupo Novonor, formerly Odebrecht, or Andrade Gutierrez could see reduced legal obligations and an improved business outlook.

LEGAL

Earlier this month, the comptroller general (CGU) began renegotiating Lava Jato-related fines with OAS, Andrade Gutierrez, Novonor, Nova Participações (Engevix), Camargo Corrêa, Braskem, UTCand Coesa.

The negotiations were ordered by the supreme court, based on a petition filed last year by left-wing parties PSOL, PCdoB and Solidariedade to suspend payment obligations under the leniency deals the companies signed with prosecutors.

Lava Jato first focused on irregular contracts at federal oil firm Petrobras but unearthed a regional network of corruption involving construction companies, former presidents and high-ranking government officials.

The probe started in 2014 and led to a number of convictions of executives. The companies they were leading were fined and barred from signing public contracts in Brazil and some other countries.

In Brazil, the companies reached leniency agreements with authorities amounting to a combined 11bn reais (US$2.2bn) in fines.

“The companies will try to get a reduction in fines from the CGU, but the most likely scenario is that the CGU approves an extension in the payment period because this is easier to be approved from a legal point of view by government control bodies,” Alberto Sogayar, an infrastructure lawyer and partner at law firm Sogayar e Alcântara Advogados, told BNamericas.

“But even without reducing the value of the fines, an extension of the payment period provides relief for the companies’ cash flow,” he said.

BUSINESS 

With efforts by the Luiz Inácio Lula da Silva administration to increase infrastructure investments under federal investment program PAC, launched last year, business is also set to improve, since PAC involves PPPs and concessions. 

“The PAC project portfolio is immense, with many projects to be carried out in the areas of highways, rails, water, energy, among others, and the participation of these large companies will be vital,” said Guimarães.

Other opportunities could arise from Petrobras’ strategy to increase investments, including in new refineries. Between 2016 and 2022, Petrobras preserved cash and restricted investments, but the new management taking the helm last year changed course and is now focused on new projects and areas.

Construction companies also benefit from development bank BNDES‘ plans to finance more engineering works in other countries. The policy was in place previously but then abandoned. Its return could pave the way for local firms competing for contracts elsewhere.

RISKS

But to take full advantage of the scenario, these companies need to hire specialized labor and purchase equipment, both of which they lost due to the lack of contracts.

“Another point of risk for companies is that, in their eagerness to obtain new contracts now, they may opt for projects that are a little outside their area of expertise and are not as profitable,” said Sogayar, who has recently been advising major construction companies.

“So the recommendation I have for these companies is to be calm. There are opportunities on various fronts, projects. There is no need for a frantic race to obtain any contract without first having a thorough assessment of the potential returns.”