Publish in Perspectives - Monday, June 20, 2016
Alex Bravo, the former chief executive of state-owned energy company Petroecuador, arrested last month. (Photo: Ecuador Oil Ministry)
Will Petroecuador’s corruption scandal taint the oil sector?
BY ENERGY ADVISOR
Police in Ecuador on May 16 arrested Alex Bravo, the former chief executive of state-owned energy company Petroecuador. Prosecutors accuse him of influence trafficking—and potentially bribery and embezzlement—stemming from his management of contracts for work at Ecuador’s main refinery, Esmeraldas. Bravo’s lawyer during the arraignment said that the sheer scale of the alleged crimes implies that he couldn’t have acted alone, Analytica Investments told clients in a research note. Is Petroecuador a corrupt state enterprise, or are the allegations unfounded, or the result of isolated “bad apples”? Will the case change the way foreign and local companies in the energy sector do business in Ecuador? To what extent will the scandal taint President Rafael Correa and his administration?
Walter Spurrier, president of Grupo Spurrier and director of Weekly Analysis in Guayaquil, Ecuador: The mainstream press in Ecuador is muzzled. It no longer investigates potential embezzlement. Courts are controlled by the executive branch, meaning there is no chance of a fair trial. Corrupt administrators are right to think they can proceed with impunity. Enemies of the regime are behind exposées, which happen through social media, so it is difficult to separate facts from fiction. The Panama Papers reveal that Bravo owned a company that earned fees from a firm owned by contractors of Petroecuador. The Esmeraldas refinery overhaul cost some $1.5 billion, including overruns. It is hard to believe Bravo could have acted alone, but courts are unlikely to dig into the case. However, a harsh sentence against Bravo would lead him to go public with what he knows. The case is bound to proceed sluggishly. Therefore, there is indeed evidence that Petroecuador is a corrupt organization. However, this does not change the business community’s appreciation. It is likely to already have experience with Petroecuador not unlike what is now being made public. The scandal is unlikely to taint Correa’s government among the broad public, as neither the press nor the courts are free. The administration is already distancing itself from Bravo: President Correa said he thinks he does not know him. However, there is a video where he refers to Bravo as ‘Alex’ and commends him for his work. Things will change if the ruling party loses the February 2017 elections, as the incoming administration is then likely to uncover any corrupt practices from its predecessors.
Laura S. Jung, research assistant at the Center for Economic and Policy Research: Alex Bravo’s arrest raised eyebrows, but suggestions that Petroecuador is a corrupt state enterprise based on his arrest alone are premature. Bravo is featured in the Panama Papers, a revelation that resulted in his immediate termination from Petroecuador by President Rafael Correa. Correa publicly criticized Bravo’s involvement, stating that his actions contradict the ethos of the cur-rent government and the political revolution Correa’s administration is working to foster. Indeed, Correa openly supported a prompt, thorough investigation to follow through on the Panama Papers revelations and determine whether Bravo’s offshore ?nancial dealings are related to his time at Petroecuador and involvement in illicit activity. It is un-likely that the case will substantively change business relationships with foreign or local companies. This is neither the largest nor most important scandal in the Americas at the moment, and foreign investors have not historically been driven away by corruption and financial irregularities in the region, especially ones as mundane as Bravo’s alleged crimes. If the allegations of manipulating contracts to benefit his family’s companies are true, then his arrest will likely make it easier for foreign and local companies to more fairly do business with Petroecuador. Some have mused that the case building against Bravo might ‘taint’ Correa’s presidency and administration. Bravo was in charge of Petroecuador for just five months, and dismissed for his misconduct. His ties to the Correa government seem to be weak and transactional at most. Nonetheless, the opposition in Ecuador will likely take advantage of an opportunity to blame the Correa administration or suggest their complicity in Bravo’s dealings, but thus far Bravo’s case lacks the any damning evidence that might make it a smoking gun.
Santiago Mosquera, head of research at Analytica Investments: The prosecution accuses Alex Bravo of the crime of influence trafficking when he managed the refurbishment of Ecuador’s main refinery, a project whose projected costs ballooned from $187 million to $1.2 billion. While Bravo denies the charges, President Rafael Correa and his chief legal advisor, Alexis Mera, have sought to distance themselves from him. The prosecution alleged that while at Petroecuador, Bravo directly benefited companies in which family members and friends are shareholders or employees. Since Bravo worked for the company from 2006, Mera alleged he might also be guilty of bribery and embezzlement. Mera denied that Bravo was ‘a political official of this government,’ which can hardly be since Petroecuador’s supervisory board, which consists only of the oil minister, the planning minister and a representative of the presidency, appointed him last November. President Correa denied knowing him; this is also disingenuous as Bravo frequently attended the president’s Saturday propaganda broadcasts, and Correa referred to him as ‘my dear Alex’ in one of them this past March. Bravo said that he had resigned after his name emerged in the massive ‘Panama Papers’ data leak. He acknowledges having created Panamanian companies, but denies using them to commit crimes. Bravo’s lawyer during the arraignment said that the sheer scale of the alleged crimes implies that he couldn’t have acted alone. Investigations are currently underway, and it is too early to determine the number of people involved in this case, their rank and how justice will be served. In the meantime, for good or for bad, it will be business as usual at Petroecuador.
Francisco X. Swett, chairman of Pallas Management Corp. and former Ecuadorean minister of finance, member of Congress and central bank president: The government’s procurement practices are designed to ?eece the state. Transactions take place under ‘rules of exception’ which avoid bidding, resorting instead to direct contracting, often under the sole authority of company managers or high-ranking bureaucrats. The alleged reason is the perennial ‘emergency’ that allows wholesale violation of proper procedure; and the best defense is to pack the courts, lest it become necessary to account for the government´s actions. Mr. Bravo is, by the words of his lawyer, a ‘very small fish’ with few connections to the powers that be. Petroecuador is the country’s largest company and has spent some $20 billion in goods and services in 10 years. To date, we have evidence of $1.2 billion misspent on a new refinery project that would not have passed muster under private sector business planning, and will probably never see the light of day. A $6 billion exploration budget was approved for the Yasuní ?elds, when it was clear that at $60 a barrel, the project was not feasible, and was ecologically irresponsible. The public sector oilfield operators have very faulty accounting that does not allow them to derive proper average and marginal costs of production. The Esmeraldas Refinery began as a $52 million repair job, and ballooned to a $2 billion reconstruction which has raised serious questions, and ended with Mr. Bravo in jail. Examples of economically doubtful ventures abound for a government that, not believing in savings, plans to continue in its unchecked and irresponsible spending spree to the very last day.