The Role of State-Owned Infrastructure Companies in the Development of China’s Latin America Policy

Introduction: “Operation Car Wash” and Infrastructure Projects in Latin America

Brazil’s “Operation Car Wash” bribery probe, which began in 2014, has caused major upheavals in both Latin American politics and the region’s infrastructure sector. Operation Car Wash began in March 2014 as an investigation into unusual bank transactions involving Brazil’s state-owned oil company Petrobras, with allegations that construction companies—including the Brazilian construction conglomerate Odebrecht S.A.—had given Petrobras executives bribes in exchange for awarding them contracts at inflated prices. The scandal has implicated three former Brazilian presidents (Dilma Rousseff, Luiz Inácio Lula da Silva, and Michel Temer). The political scandal has also reverberated across the region: Ecuadorean Vice-President Jorge Glas was sentenced to six years in jail in late 2017 for taking bribes from Odebrecht, and all three living former presidents of Peru have been arrested in connection with the scandal. The recent suicide of former Peruvian president Alan Garcia came as police prepared to arrest him on related charges (El Universal, April 17).

The unfolding scandal has revealed that Odebrecht S.A., the region’s biggest infrastructure builder, established its status thanks in part to the extensive use of bribery, totalling close to $800 million in hand-outs to officials throughout the region. Amid the ongoing fallout of this scandal, two trends have emerged. Firstly, Chinese state-owned engineering, procurement, and construction (EPC) contractors have attempted to fill the void, stepping in to secure contracts initially awarded to Odebrecht. The quick reaction of Chinese state-owned EPC contractors to the Odebrecht scandal shows the responsiveness of these companies to market opportunities.

Secondly, steps have been taken by the government of the People’s Republic of China (PRC) to expand and institutionalize the PRC’s policies towards Latin America. The coinciding development of China’s policy towards Latin America suggests two possibilities: that (a) Chinese state-owned enterprises (SOEs) respond to government policy signals in selecting projects; and (b) that the outgrowth of China’s Latin America policy has been shaped in part by the lobbying of state-owned EPC contractors eager to make the most of the opportunities presented by Operation Car Wash and the Odebrecht crisis. The latter idea runs against conventional wisdom, but provides a compelling explanation for observable patterns in PRC policy in Latin America.

Chinese SOEs Take Advantage of Odebrecht’s Fall

Across Latin America, there are numerous examples of Chinese state-owned EPC contractors taking over projects originally awarded to Odebrecht (as detailed below). The development of this trend results from a realization by these companies that the problems facing Odebrecht as a result of Operation Car Wash, including the payment of at least $3.5 billion in fines, presented a market opening. Previously, Chinese contractors had bid for infrastructure contracts in Latin America, but often found themselves disadvantaged by Odebrecht’s status as the region’s premier builder—as well as Odebrecht’s widespread practice of bribery, through which it nurtured favorable political relationships. The crisis faced by Odebrecht, as well as its recent reputational toxicity, has opened a vacuum at the top of the infrastructure construction food chain in Latin America. As the examples below show, this opportunity was seized upon by Chinese state-owned EPC contractors—beginning with Sinohydro’s move to secure a role in Colombia’s Magdalena River dredging project.

Colombia

In 2014, the Navelena consortium formed by Odebrecht and Colombia’s Valorcon received a $916 million contract (as the only bidders) to dredge a 908km stretch of the Magdalena River between Puerto Salgar-La Dorada and Barranquilla to a depth of 2 meters, allowing non-stop river navigability. Amid the unfolding of Operation Carwash, Navalena was unable to secure financial closure for the project. In March 2017, contracting agency Cormagdalena declared the contract void, with Navalena having failed to make any progress on dredging work. Reports emerged just prior to formal cancellation that Sinohydro—a subsidiary of PowerChina that specializes in the construction of hydropower plants, and an unsuccessful bidder on the original contract— was negotiating with Odebrecht to take over the contract, with the apparent support of Colombia’s National Infrastructure Agency (Dinero, February 10, 2017). However, the reopening of the approval process means that a new contract has yet to be awarded (BNAmericas, April 17, 2018), other than a temporary contract for interim dredging work (DredgeMag, November 5, 2018).

Peru

In August 2017, a consortium led by China Three Gorges Corporation secured a tentative agreement with Odebrecht to buy the Chaglla hydroelectric power plant from Odebrecht for $1.39 billion. This agreement was suspended by an emergency decree in February 2018, which allowed the Peruvian government to complete the drafting of a bill that would require 50% of the sale price to go to the state. Soon after, the project’s financers—J.P. Morgan and SMBC—sought the repayment of $320 million in outstanding debt owed by Odebrecht. In November 2018, Peru’s Justice Ministry announced that an agreement had finally been completed, at a reduced price of $1.2 billion. Justice Minister Vicente Zeballos said Odebrecht would have to turn over half of the sale price to Peruvian authorities as reparations for committing bribery (Energiminas, November 29, 2018).

Brazil

In September 2017, HNA Airport Holding Group (a subsidiary of the Chinese conglomerate HNA Group) won preliminary approval to purchase Odebrecht’s 60% stake in Rio de Janeiro Aeroportos—which itself holds a controlling stake in Rio de Janeiro International Airport, Brazil’s second-busiest aviation facility (Globo, September 19, 2017). Although HNA is neither state-owned nor an EPC contractor, this case adds to the track record of Chinese companies looking to strike deals on discounted terms, seizing upon opportunities in Latin America presented by the Odebrecht scandal. However, HNA was ultimately not able to complete the deal after it failed to receive necessary Chinese regulatory authorizations within the timeframe set by Brazil’s National Civil Aviation Agency (CADE, December 27, 2017).

Dominican Republic

In November 2018, President Danilo Medina of the Dominican Republic said that his government would hold a tender for investors interested in the Punta Catalina coal-fired power plant, awarded to Odebrecht in 2013 in return for as much as $92 million in bribes (Diario Libre, February 11, 2017). Medina, who was in office at the time of the original award, said “There are people interested in investing in Punta Catalina, but there what you have to do is an international tender, you have to be very transparent, and that’s what we’re doing.” While no further news on the tender has been made public, China Gezhouba Group— which made a bid at half of the cost presented by Odebrecht during the initial tendering process—may submit a proposal again (Diario Libre, February 11, 2017).

Angola

A further example of Chinese companies taking advantage of the Odebrecht crisis may be seen outside of Latin America: in Angola, where China Railway 20 Bureau Group has taken on work that was initially contracted to Odebrecht. In 2017, the government of Angola cancelled a $142.3 million contract initially awarded to Odebrecht to complete the second phase of a highway intended to connect Prais do Bispo and Corimba (two districts of the Angolan capital of Luanda). The pursuit of former Odebrecht contracts in locales distant from Latin America signifies that Chinese companies seized a market opportunity, rather than purely a political one (Dinheiro Vivo, July 19, 2017).

What Explains the PRC’s Increased Foreign Policy Focus on Latin America?

Coinciding with these deals and potential deals, China’s foreign policy engagement with Latin America has scaled-up dramatically. The first meeting of the Forum on China and the Community of Latin American and Caribbean States (CELAC) took place in 2014, where Chinese President Xi Jinping pledged $250 billion in investment over the next decade (Xinhua, July 7, 2014). In 2016, the State Council released a white paper on Latin America and the Caribbean, identifying energy resource exploration and infrastructure construction as two cooperation priorities—a potential signal as to where state-owned EPC contractors should direct their focus in an effort to develop political capital (PRC State Council, November 24, 2016). In addition, Latin American heads of state such as Argentine President Mauricio Macri and his Chilean counterpart Michelle Bachelet attended the first Belt and Road Forum in May 2017.

There is a clear precedent for the Chinese government writ large viewing SOEs as tools for policy implementation pyramid—indeed, this is a fundamental assumption of China’s “Going Out” (zou chuqu, 走出去) policy. Furthermore, there is an established institutional framework for guiding the work of central government-controlled SOEs, revolving around the State-Owned Assets Supervision and Administration Commission (SASAC). Just as SASAC and other government agencies can act as a channel through which instructions are passed down to SOEs, this same channel can operate in reverse. What remains unclear is whether the PRC Ministry of Foreign Affairs launched new initiatives in Latin America following lobbying by state-owned firms eager to tap a new market; or instead, if these same SOEs saw the Odebrecht scandal as an avenue to burnish their political capital by responding to a de facto extension of the “going out” policy.

Governments and companies can both identify and exploit opportunities presented by the market. There has clearly been a response on the part of China’s SOEs to the opportunities presented by Odebrecht’s loss of its position atop the totem pole of Latin America infrastructure construction; and taking advantage of this opportunity would seem to benefit both the commercial goals of state-owned EPC contractors and the strategic aims of the Chinese government. In this context, the most likely explanation is that of an enduring truth: that Chinese SOEs (and Chinese companies in general) maintain an ongoing quid pro quo with the government, often finding overlap between commercial and political agendas.

Johan van de Ven is Senior Analyst at RWR Advisory Group, a Washington, DC-based risk management firm where he focuses on the geopolitical dimensions of China’s international economic activity. Prior to RWR, he worked in policy consulting in Beijing. You can follow him on Twitter @Johanv91. The views expressed herein do not represent those of RWR Advisory Group.