The Currency Rounding that Benefited Odebrecht

A solitary block of concrete, barely protected from flood by sump pumps, lies in the waters of the lower Caroní River. This is the case of the planned Manuel Piar hydroelectric plant in Tocoma, southern Venezuela, after paying US$ 10 billion —three times the budget and partly with funds from multilateral agencies— to several contractors, including the controversial Brazilian construction company. Of that amount, at least US$ 1 billion corresponded to irregularly paid foreign currencies through an administrative scheme (80-20, they called it) that an internal audit found, which was used to finance commissions to project management.

11 June 2017

"The '80 -20' must not be known; otherwise, the Tocoma project falls," warned one engineer to another in the middle of the urgency to progress with the works (once again) of the Manuel Piar hydroelectric plant, in Tocoma, Bolivar state, in the rich Venezuelan Guayana. It was 2014, and the internal auditors of Corpoelec, the Venezuelan state power holding company, had months of reviewing the work's invoices - including many issued by the Brazilian company Odebrecht - to find out the reasons for its delay and the great escalation of its cost.

In Ciudad Guayana, the industrial and commercial capital of the region, the "80-20" was an open secret. Engineers, technicians, administrators, trade unionists and lawyers working there knew that billing in bolivars had been dollarized through this mechanism that contravened the exchange control and the initial contract.

"Tocoma was, at least from 2009 to 2014, a big petty cash," said an engineer who worked on the dam. It was profitable for many. The initial cost of Tocoma was estimated at US$ 3.9 billion. Seven years later, in 2014, Venezuela had paid nearly US$ 10 billion, partly with loans from the Andean Development Corporation (CAF) and the Inter-American Development Bank (IDB). What happened?

Consulted sources indicate that its initial cost had been increased by rampant inflation, constant modifications required by Corpoelec and surcharges by contractors, but mainly because of a "comparative advantage" that Venezuela offered to foreign and national entrepreneurs in relation to the rest of the world, which blinded more than the gold of Guayana: the exchange control that gave rise to the secret audited by the audit of Corpoelec.

More than Engineering: Financial Prestidigitation

The Tocoma hydroelectric plant, the works of which started in 2007, scheduled to run from 2012, was mostly carried out by Odebrecht. Due to its size and cost, it was one of the largest hydroelectric infrastructure projects in the country and in Latin America, comparable in cost and magnitude to the expansion of the Panama Canal. A million and a half cubic meters (52,972,000.08 cubic feet) of concrete were emptied in the place.

Where there should be ten turbines generating electricity, bilge pumps work instead

Today, the block of concrete deteriorates day by day, and in the vaults intended for ten electricity generating turbines, bilge pumps work so that the waters of the lower Caroní River do not flood the few installed power systems through some cracks in its walls.

In parallel, it is known that the Prosecutor's Office silently investigates Odebrecht's irregularities in the country and the Government negotiates the project close with contractors. After being questioned by the National Assembly, neither the civil works contractor OIV consortium (made up of Brazil’s Odebrecht, Italy’s Impregio and Venezuela’s Vinccler), nor the electromechanical works contractor, Argentina’s Impsa (of the problematic group Pescarmona), explained why the works stopped. They did not answer a questionnaire sent to include answers in this report either.

From 2007 to 2012, Venezuela was in full oil boom. The original engineering plans for the work were modified by the government, which began to demand more expensive supplies, increase the payroll of workers without disregard (from 2,000 to 10,000), and force its "opening" by sections, due to political reasons. The new requirements increased year by year the cost of the work.

Corpoelec – due to non clarified reasons - started delaying payments to contractors, which were to be in bolivars and U.S. dollars under contract, depending on the component payable. Private companies faced the increase in prices in bolivars for salaries and products, and the beginning of a shortage of industrial inputs that had to be purchased in the country. "Neither cement nor rebars could be bought in the country," recalls a former construction engineer. "There were also no spare parts available," recalls another.

In 2010, in a meeting between OIV (led by Odebrecht) and Corpoelec, they discuss the effect of the constant changes to the contract and the demand for new materials and machinery. The consortium presents a claim to the government: "The initial prices fell short, the exchange control limits me, I charge peanuts in U.S. dollars and a lot in bolivars, I am spending more dollars than usual with your new demands." This is the line of argument of the contractors.

The aim was to increase payment in dollars (cheap) and lower the component payable in bolivars

The solution came as a percentage: 80-20. The aim was to increase payment in dollars (cheap) and lower the component payable in bolivars. It worked like that from 2010 to 2014. Corpoelec converted the amount in U.S. dollars of OIV's bill into bolivars at the preferential exchange rate (4.30). Then it was added to the bill in bolivars. The total was broken down into two parts, 80% and 20%. The first amount was converted into dollars at a preferential rate, and the second was in bolivars. Thus, an invoice of Bs. 2.3 billion and US$ 18.8 million became one of Bs. 491 million bolivars and US$ 456.9 million. "Over 1,000 bills were like this," says an Odebrecht engineer.

This 80-20 system was entered into between the parties in Addendum 4A of the contract, according to consulted sources, during the management of the then Minister of Electric Power Alí Rodríguez Araque. A consultation by email to the current ambassador in Cuba was not answered to the date of publication of this article. "Addendum 4A exists and provides for it. The accounts in Tocoma do not match because of this," says an Odebrecht engineer.

PRESENTACIO´N TOCOMA A JUNTA INTERVENTORIA 11-03-14 R3 (SUPERVISORY BOARD TOCOMA PRESENTATION 03-11-14) by ArmandoInfo on Scribd


There was apprehension between the middle management and Corpoelec project engineers. "Everyone knew that that would allow more rip-off," recalls another engineer. "But the top said that it would be signed. Chavez was pressing on Corpoelec. There were elections and a lot of money. " The contracted staff feared for their work if the anti-Pareto law transcended.
On that scheme, OIV charged and Corpoelec paid price increases, bonuses on meeting work completion dates, and valuations. "More than a thousand bills were paid like this," restate one of the current workers. The pecuniary losses were calculated internally. "US$ 1 billion were paid in that way, a good part in commissions for the Tocoma project management," he added.

Engineers —some still active in Corpoelec, others already outside— do not stop showing their astonishment that Tocoma has cost almost twice the expansion of the Panama Canal (5.4 billion U.S. dollars), or almost four of the cost paid by the country in dollars for the construction of a similar hydroelectric plant, Caruachi, very close to Tocoma, on the bed of the Caroní River.

In the Tocoma equation, x was always equal to extra payments in U.S. dollars

From 2007 to 2014, Tocoma experienced peaks and drops in the work rhythm. Corpoelec ‘s desperate response in several occasions —for electoral reasons, as the 2012 presidential elections— was paying for "speed-ups" that would not allow the opening as scheduled anyway.

The management of the Minister of Electric Power Jesse Chacón ran into a standstill of the work in 2013. And in reviewing the causes, a commission of auditors from Corpoelec found the exchange scam in July of that year. Its members warned the board of directors about the irregularity, suggesting that it was linked to an exchange crime in the hands of Corpoelec’s Engineering Management of Proyectos de Expansión Generación Oriente (expansion and power generation Project).

For example, they identified two bills for 363 million and 226 million payable in bolivars for works carried out in the country. Thus, they found that these and other conversions were made "without taking into account the current exchange regulations and the opinion of the corresponding legal instances" and "without having prior authorization for such change". Even so, those bills were later restructured and paid mostly in U.S. dollars, an Odebrecht engineer said.

The procedure with the 80-20 system was a pattern, they say. "The Audit Committee highlights the recurrence by Edelca (the state electric power company of the Caroní river) and Corpoelec in agreeing payments in foreign currency with the OIV Tocoma Consortium considering that the works are estimated to be carried out in the national territory," for a total of US$ 635,991,233.19. Payments made in the country, should be paid in bolivars only, under the contract.

Memo Auditoria OIV (OIV Audit Memo) by ArmandoInfo on Scribd

Alarmed, the auditors went to the legal consultancy to analyze the case. In August 2013, consultant Alejandro Carrasco gave his opinion: "The Engineering Management of Proyectos de Expansión Generación Oriente has been misinterpreting the way of converting to payment in U.S. dollars 80% of the amount of the valuation of work executed in foreign currencies and 20% in Bolivars corresponding to the same valuation, which should be corrected ".

In the document, Carrasco mentioned the limits contemplated by the Central Bank's law for the payment of projects in foreign currencies, according to the exchange agreements. The lawyer confirmed that he had studied the case and that the procedure was not in accordance with the initial contract.

Other courtesies for the contractors

In addition to the 80-20 system, the Auditors of Corpoelec found dozens of administrative irregularities, which they declared in several official reports, all revised for this report.

For example, Odebrecht, Impregilo and Vinccler obtained part of the contracts for additional (non-principal) work without bidding, in violation of the bidding law. They also received "overpayments", which affected Corpoelec's cash flow. They charged increases of up to 30% for claims without being approved by the appropriate authorities. They were paid, in some items, more than what was budgeted. They obtained month extensions for their work without submitting the mandatory supporting documentation.

For its part, Impsa, the Argentine contractor of the turbines, charged US$ 75 million from Corpoelec without having signed a contract. It also received US$ 60 million for equipment sent to the site; collected three million bolivars for labor costs that were not justified; assessed a tax at 3% instead of 34%; and it did not pay VAT. In addition, it signed a third contract without dating it, which is illegal. On one occasion it incurred in delays in the delivery of work, for which it had to pay 4.7 million U.S. dollars to Corpoelec in fines. There is no evidence that it has done it. In fact, only one and a half out of the 10 turbines that were paid are installed in Tocoma.

IDB and CAF were aware of these illegalities, sources say. Delegates attended the meetings of the board of the work periodically to verify progress against disbursements. However, they did not sign, as was appropriate, the modifications to the contracts and continued to finance the work, based on the audit. To the publication of this report, the requests for information sent by email to both institutions had not been answered.

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