A Lesson from South Africa: Are Construction Cartels dramatically increasing Brazil 2014 FIFA World Cup infrastructure costs?

Transcription

1 A Lesson from South Africa: Are Construction Cartels dramatically increasing Brazil 2014 FIFA World Cup infrastructure costs? A Briefing Paper Research Team: Eddie Cottle, Paulo Capela, and André Furlan Meirinho Research Assistants: Ronaldo Valtermatias and Filipe Gomes Contact: iela@contato.ufsc.br tel: + 55 (48) User 8/15/2013

2 A Lesson from South Africa: Are Construction Cartels dramatically increasing Brazil 2014 FIFA World Cup infrastructure costs? Introduction This preliminary report of the Institute for Latin American Studies (IELA) concerns the operation of construction cartels involved in the FIFA World Cup. The 2008 report of the competition committee of the Organisation for Economic Cooperation and Development (OECD) into the construction sector found that, Unfortunately the construction industry has tended to suffer from cartel activity, as shown by the spate of well-publicised recent matters around the world. There were 19 countries included in this OECD roundtable from Europe, Asia, North America and notably South Africa that participated. Extensive cartel activity was found in the cement industry in Turkey and Germany which included price fixing and market allocation. In Holland construction companies were found guilty of keeping secret accounts in which public construction companies were defrauded 8.8% as a result of the collusion. In Japan and the UK major firms were involved in bid rigging for the construction of bridges, highways, schools, hospitals and housing developments to cite but a few examples. South Africa presented its report on the massive cost overruns in relation to the 2010 FIFA World Cup stadiums which it, at the time, suspected of bid-rigging. 1 Through the collusive practice of bid rigging and excessive overpricing, construction companies extract or attain huge financials gains for themselves at the expense of workers and the tax payers of host countries. Of concern is the fact that the construction sector is not only vital to every aspect of economic activity but also because it provides the infrastructure necessary to provide for the basic needs of people such as housing, schools, universities, hospitals and a range of government buildings and other public amenities. The construction sector also builds roads, railways, harbours, sewage systems and so on. By implication this means that the development goals that governments set themselves when hosting the World Cup are offset in part by massive transfers of wealth to private companies at the expense of job creation and income redistribution, thus stifling the economic multiplier 1 OECD. Competition in the construction industry. Directorate for Financial and Enterprise Affairs. Competition Committee. 01-Dec-2008 Page 1

3 that is intended. It is in this context that the nationwide discontent emerged in Brazil. Thousands of people across major cities legitimately expressed their anger against rising transport costs, the poor quality of health and education provision, including the soaring costs of hosting the FIFA World Cup. It is the collusive practices of construction companies that lead to exorbitant cost overruns in world cup stadium and infrastructure projects. In South Africa, which hosted the 2010 FIFA World Cup, stadium costs alone increased by 1008% 2 while Brazil s World Cup stadia cost increase is 327% by 2013 estimates and are set to increase rapidly as the stadia are completed. At the current rate of cost escalations, it is probable that Brazil could own the most expensive FIFA World Cup in world cup history. This briefing paper calls on the Brazilian government to immediately follow the example set by the Competition Commission of South Africa which investigated the operations of a construction cartel leading finally to a tribunal which fined construction companies for uncompetitive practices with the possible prosecution of non-cooperative companies. Lessons from South Africa South Africa s 2010 FIFA World Cup cost escalation was significant, and was initially attributed to the countries vulnerability to the world economic crisis. The former South African Finance Minister, Trevor Manuel, remarked in October 2008 that World Cup construction work would be affected because building costs are a huge threat to what we want to do. The Minister had failed to observe that in October 2007 the Competition Commission of South Africa set up a team to review the construction materials and services sector. 3 The initial cost estimate was calculated at R2.3 billion (R$519 million) and was to be paid by the South African government, largely to fund the stadia and related infrastructure. However, the 2010 estimated total cost (and this is likely to be much higher) for the South Africa government was R39.3 billion (R$8.9 billion) an enormous 1 709% increase from the original estimate. 4 The stadium costs increased from the initial estimate of R1.5 billion 2 Michelle Taal. Their Cup Runneth Over: Construction Companies and the 2010 FIFA World Cup. In Eddie Cottle (ed) South Africa s World Cup: A Legacy for Whom? UKZN Publishers, South Africa Ibid. 4 Patrick Bond and Eddie Cottle. Economic Promises and Pitfalls of South Africa s World Cup. In Eddie Cottle (ed) South Africa s World Cup: A Legacy for Whom? UKZN Publishers, South Africa Page 2

4 (R$338 million) to the latest cost estimate of over R17.4 billion (R$3,9 billion) representing a 1 008% increase. Five major construction companies in South Africa: Aveng, Murray & Roberts, Group Five, Wilson Bayly Holmes Ovcon (WBHO) and Basil Read were principal contractors in the building of the main stadiums for the 2010 FIFA World Cup and various related infrastructure projects, from which they have made substantial profits. In 2007 they were all under investigation by the Competition Commission of South Africa for suspected collusion and uncompetitive practices with regard to these projects. 5 Unfortunately, the commission did not investigate the actions of international companies such the German HBM Stadien-und Sportstättenbau GmbH, a specialist stadium construction company, GMP Architekten and Hightex engineers; the Italian company Cimolai; the French company Bouygues and the Dutch company BAM International, which was involved in stadium construction where huge increases of construction costs were incurred. 6 On 17 July 2013, at the tribunal of the Competition Commission of South Africa it was conservatively estimated that some R4,7 billion (R$1 billion) of unfair profits were made by construction companies for the 2010 FIFA World Cup and other projects. They were consequently fined a total of R1.5-billion (R$338 million). 7 Construction companies that did not agree to the settlement such as Group 5, Construction ID and Power Construction now face possible prosecution. 8 The Brazilian Construction Sector According to the Brazilian 2014 Portal construction companies contracted for World Cup and related infrastructure are: Odebrecht, Andrade Gutierrez, Galvão Engenharia, OAS Empreendimentos, Mendes Júnior, Via Engineering, Andrade Mendonça, Construcap, Egesa, Hap and Engevix. The two largest Brazilian construction companies involved in the World Cup are Andrade Gutierrez and Odebrecht. 5 Michelle Taal. Their Cup Runneth Over: Construction Companies and the 2010 FIFA World Cup. 6 Bond and Cottle 7 Chantelle Benjamin and Phillip de Wet The flaw that broke the construction cartel's back. M&GOnline. 19 July (accessed 22 July 2013) 8 SAPA Construction cartel faces disqualification from govt tenders. M&GOnline, 22 July (accessed 22 July 2013) Page 3

5 As the World Cup and the Olympics draw closer, Brazil's construction sector is set to move out of its unexpected slump demonstrated by its poor performance in achieving growth of 4.2% in 2011 and 2.2% in The poor performance is related to the fact that by May 2012 only 25% of the transport projects had completed the bidding process 10 ; and by the end of the same month 41% of works for the World Cup had not yet started. 11 The construction sector is to complete the construction of 13 airports, 7 ports and 37 transport projects and the building or refurbishment of 12 stadiums for the 2014 World Cup. 12 The construction sector employs 2.5 million formal workers and estimates show that there are 1.5 million informal workers. The delays contributed to the unemployment rate in Brazil which increased to 5.60% in February Table 1: Brazilian Construction companies Net Profit (R$ 000) Company % Increase 2011 % Increase Andrade Gutierrez Construcap (Grupo CONCER) Egesa Engevix Galvão Engenharia Mendes Junior OAS Empreendimentos Odebrecht Source: Information extracted from company Annual Reports and Audited Financial Statements. Many of the companies involved in the Brazil World Cup infrastructure outlay are closed corporations and therefore the company s financial information is not readily available. At the time of writing this paper most of the companies had not yet released their 2013 Annual Reports which could provide a different outlook to what is being presented here as the financial position is likely to have improved as indicated earlier. What is clear from the table above is that the sector appears to experience dramatic fluctuations in their annual net profits. Engevix, for example, had posted -85% in 2010 but posted a 256% increase in Companies such as OAS Empreendimentos which had an 9 Market Research Brazil Infrastructure Report Q Monitor-International-v304/Brazil-Infrastructure-Q / (accessed 20 April 2013) 10 Folha SP: (accessed 20 April 2013) 11 ainda-nao-comecaram-segundo-governo-federal.htm (accessed 24 April 2013) 12 Actually in Brazil there are 14 stadiums being built or refurbished, as there are two other private stadiums (accessed 20 April 2013) Page 4

6 increase in net profit of 2 244% in 2010 had a 360% decrease in Andrade Gutierrez realised a net profit increase of 23% in 2010 and 28% in 2011 while Odebrecht reported a 148% increase in its net profit in 2010, the highest profit in its history. 14 Companies no longer involved in World Cup construction projects are the Santa Barbara Consortium Construction of the Arena Pantanal who went bankrupt 15 and Delta Construction, who participated in the construction of the Maracana stadium but was found by a joint Congressional Committee of Inquiry to have been involved in payoffs to politicians and other public servants. 16 Brazilian stadia cost overruns Brazilian and foreign construction companies such as the German architectural firm GMP are the main beneficiaries of the 2014 FIFA World Cup related infrastructure outlay which is currently calculated at USD 18bn, with 78% of the total spending coming from public funds. According to the Brazilian Ministry of Sports the overall economic impact will exceed US 100 bn, creating 332,000 permanent jobs ( ) and 381,000 temporary jobs in The fact that by May 2012 about 41% of the works for the World Cup had not yet started 18 led the Federal Government to change its procedures for approving projects with an exceptionality status created to increase the speed of the approval rate for FIFA World Cup 2014 infrastructure projects 19. By implication, construction companies will opportunistically use this situation to their advantage to collude to fix the official bidding costs way above their value, resulting in enormous cost overruns which will have to be paid by the Brazilian government with public funds. 14 André Vieira Odebrecht has highest profit in its history. Economia. 19 May (accessed 12 August 2013) 15 Portal DA+ARENA+PANTANAL.html (accessed 10 August 2013) 16 Julia Michaels. Delta, corruption and leadership in Rio de Janeiro. RioReal, 25 April (accessed 10 August 2013) 17 Ministry of Sport World Cup in Brazil, Economic Impact. 31 March 2010 PowerPoint presentation. (accessed 22 April 2013) 18 ainda-nao-comecaram-segundo-governo-federal.htm (accessed 24 April 2013) 19 See and Page 5

7 Andrade Gutierrez is involved in the construction of the National Stadium, Mane Garrincha (Brasília), Arena Amazon (Manaus), Beira-Rio Stadium (Porto Alegre) and the Maracanã Stadium ( Rio de Janeiro). Odebrecht is also involved in the construction of the Maracanã Stadium (Rio de Janeiro), Fonte Nova Stadium (Salvador) and the Pernambuco Arena (Recife) and the Itaquerão Stadium (São Paulo). The two companies are responsible for 7 of the 12 World Cup stadiums. TABLE 2: PROGRESSÃO DE ESTIMATIVA DE INSTIMENTO NOS ESTÁDIOS DA COPA NO BRASIL Stadium (Host City) SINAENCO 20 July 2010 Ministry of Sports September 2011 Ministry of Sports November 2012 TCU - apud 21 Konchinski June 2013 Mineirão (Belo Horizonte) 408,3 mi R$ 684,1 mi R$ 695 mi R$ 695 mi Mané Garrincha (Brasília) 740,0 mi R$ 671,2 mi R$ 1015,6 mi R$ 1,7 bi* Arena Pantanal (Cuiabá) 440,0 mi R$ 596,7 mi R$ 518,9 mi R$ 525 mi Arena da Baixada (Curitiba) 172,1 mi R$ 220 mi R$ 234 mi R$ 234 mi Castelão (Fortaleza) 623,0 mi R$ 486 mi R$ 518,6 mi R$ 519 mi Arena Amazônia (Manaus) 500,0 mi R$ 533,33 mi R$ 583,4 mi R$ 583 mi Arena das Dunas (Natal) 350,0 mi R$ 400 mi R$ 417 mi R$ 417 mi Beira Rio (Porto Alegre) 130,0 mi R$ 290 mi R$ 330 mi R$ 330 mi Arena Pernambuco (Recife) 520,0 mi R$ 494,2 mi R$ 500,2 mi R$ 532 mi Maracanã (Rio de Janeiro) 600,0 mi R$ 859,9 mi R$ 882,9 mi R$ 1,2 bi Fonte Nova (Salvador) 589,5 mi R$ 591,7 mi R$ 591,7 mi R$ 689 mi Itaquerão (São Paulo) 335,0 mi R$ 820 mi R$ 820 mi R$ 820 mi Total R$ 5,4 bi R$ 6,6 bi R$ 7,1 bi R$ 8,3 bi Although we used reliable sources for the cost of stadiums, the figures do vary or may be inconsistent. The most reliable source for the original cost estimates of each of the stadiums is contained in the Brazil 2014 Bid Book. Since, the Brazil 2014 FIFA World Cup bid Book is not made public (as is the case with all bid books) it is not possible to review the original cost for each stadium. It is however, reasonable to assume that since, the Brazil Bid Book was submitted to FIFA by 31 July 2007 and the FIFA Inspection Team conducted their inspection visit on 23 August 2007, the figure in this report of US$1.1 billion for all the stadiums is reflective of the original Bid Book figures. 22 The FIFA Inspection Report of 20 National Association of Architectural and of Consulting Engineering Companies - See more at: FIFA FIFA Inspection Team Bid Inspection report. Page 6

8 2007, thus grossly underestimated the cost for the Brazil World Cup stadia which increased from US$1.1 billion by 327% in 2013, reaching a whopping US$3.6 bn. The cost escalations at Mané Garrincha Stadium (Brasília) and Maracanã Stadium (Rio de Janeiro) have more than doubled since 2010 and total R$2,9bn or US$1,3bn. The two stadiums alone therefore cost more than the original US$1,1bn for the entire FIFA World up stadia estimate. Table 3: FIFA World Cup Stadium costs at current USD Country Cost US$ US$ 2013 France (1998) S. Korea (2002) Germany (2006) South Africa (2010) Brazil (2014) Japan (2002) Table 3 compares total costs of stadia spend in selected countries that hosted the FIFA World Cup with costs in USD updated to current costs. In 1998 France hosted the event at a cost of US$1bn for stadium construction. In 2002 South Korea and Japan are said to have spent $2,6 billion and $5,1 billion respectively on stadiums, while in Germany stadium construction costs were $2.6 billion. South Africa has spent R17.4 billion ($2.7 billion) on the World Cup stadiums. 23 Brazil has currently spent US$3,6bn on only the stadium construction and renovations. Towards a Construction Sector Cartel Investigation This month the Brazilian Congress is to decide whether or not to probe the cost overruns of the stadiums and allegations of corruption. The call for the probe came from Senator Alvaro 23 Patrick Bond and Eddie Cottle. Economic Promises and Pitfalls of South Africa s World Cup. In Eddie Cottle (ed) South Africa s World Cup: A Legacy for Whom? UKZN Publishers, South Africa Page 7

9 Dias of the main opposition party PSDB, which initially requested the probe as a response to the demands of the Brazilian protesters. 24 We believe that there are sufficient grounds for the Brazilian government to open a full investigation into the operations of a construction cartel; the Competition Committee Report of the OECD, the overwhelming evidence of South Africa s Competition Commission Report especially in relation to the 2010 FIFA World Cup and the dramatic cost increases of Brazil stadia costs when compared to the 2007 FIFA Inspection Team Report. A further motivation for the need of such an investigation is the recent decision by the Sau Paulo State to file a lawsuit this week against Siemens AG (SI) to try to recover money the company allegedly overcharged the state for trains sold by a consortium to city and regional transportation networks. 25 This latter case should demonstrate the need to ensure that the Administrative Council for Economic Defense (CADE) involved in the Siemens investigation extends its investigation into the construction sector. Such an investigation into the affairs of the construction cartel should not be limited to Brazilian companies only but also extended to international companies involved in construction related activities. Finally, it is necessary that the Brazilian government responds to the appeal by civil society for greater transparency and accountability in the affairs of the 2014 FIFA World Cup and make public the official Brazilian Bid Book. 24 Brasilia Brazilian Congress to investigate ballooning World Cup costs Reuters, 17 July The PSDB is the Social Democratic Party of Brazil. 25 Wall Street Journal UPDATE: Brazil's Sao Paulo State to Sue Siemens Over Train Cartel 14 August. Page 8