Two days before the World Cup began in Brazil in June this year, a clean-shaven and suited Paulo Roberto Costa was giving evidence to a parliamentary commission of inquiry.
The former senior executive of Petrobras, the biggest company in Latin America and Brazil’s oil champion, was emphatic and unequivocal.
“I vehemently deny that there was a criminal organisation in Petrobras,” he said. “I strongly reject this. Petrobras is an extremely serious and competent company. There is no money laundering in Petrobras.”
It was a final stand in defending Brazil’s most important asset, which was at the centre of a federal investigation into corruption.
Two months after his testimony, though, and agreeing a plea-bargain, Costa’s vehemence evaporated. He claimed 12 senators, 49 federal deputies and at least one governor had allegedly received money diverted from the public utility.
The allegations threatened to destabilise not only the state-controlled oil company but also the Brazilian economy, its biggest companies and senior politicians – including president Dilma Rousseff – months before the general election in October.
“Operation Carwash” uncovered a scheme in which money was creamed off from overinflated contracts and channelled to executives, as well as political parties including Ms Rousseff’s Workers’ Party. Police estimated those involved embezzled 10bn Brazilian reals (£2.5bn).
Costa and a moneychanger named Alberto Youssef were among the first 20 to be arrested in March, but almost-daily revelations exposed a web of corruption, fraud and systematic failings in transparency and compliance. “It is a symbolic case for Brazil,” Ms Rousseff said at a G20 summit last month, speaking about the company where she was chairman from 2003 to 2010. “This may change the country forever.”
The scandal has heaped further pressure on Petrobras as oil prices fell 27pc from June to October and the company saw its fortunes nosedive.
In 2008, after discovering untapped oil fields off the coast of Brazil, Petrobras was the world’s sixth largest company with operations spanning 17 countries, and worth more on the stock market than Microsoft. Profits in 2009 were £9bn.
Then between 2010 and 2012 the company experienced a series of setbacks. There were successive declines in net profit but Petrobras remained critical to the economy, employing more than 85,000 people.
LCA, a São Paulo-based market analysis agency, found that a 10pc cut in capital expenditure would hit national growth levels by 0.5pc points. Given that Brazil slipped into a technical recession earlier this year, Petrobras is too big to fail.
But the collateral damage may extend further. Among the other companies to be implicated in the scheme is engineering and construction contractor Camargo Correa, one of Brazil’s biggest privately-held firms. Intercepted calls reportedly revealed that it transferred a sum of 12m of an undisclosed currency to Youssef.
Steel pipe company Sanko Sider and construction group OAS, which helped build several World Cup stadiums, were also accused of depositing money into a Swiss account controlled by Youssef. Costa claimed that construction conglomerate Odebrecht transferred $23m (£15m) to him in bribes.
Seven other companies had contracts worth £14.5bn with Petrobras. Many of the companies are also involved in big infrastructure projects, including work for the Rio 2016 Olympic Games and hydroelectric dams.
Costa has insisted that the corruption at Petrobras was widespread throughout other public services, involving dozens of politicians. “What happened at Petrobras happens throughout Brazil – in the roads, the railways, ports, airports, hydroelectric plants,” he told the parliamentary commission.
All the while, the company and the country faces pressure to nurse its highly-prized presalt oilfields, discovered in 2007.
The challenge of extracting the oil, which can be as deep as 20,000ft, means Petrobras has needed an army of contractors, operators and expensive new technology, leaving it the most indebted oil giant in the world. In the meantime, oil production has flatlined to 2.7m barrels per day in the last three years and its protectionist local content laws have hampered its progress for the want of expertise.
Insiders have blamed Petrobras’s problems on increased political interference and the indulgent concessions granted to the company. “What went wrong was the actions of the company controllers and of the government since the discovery of the presalt fields in Bacia de Campos,” said Wagner Freire, a former Petrobras director who worked there from 1958 to 1992. “In a competitive market, you can’t privilege one of the participants in the market.”
Edmar Almeida, a respected analyst from the Federal University of Rio de Janeiro, said Petrobras “lost autonomy”. “The principle problem that happened in the last few years was doing away with this model of governance and passed increasing deference not just to the political agenda of petroleum but also in the definition of the objectives in the management of the company itself,” he said.
Similar concerns emerged from a report into Brazil’s energy policies by the British think tank, the Overseas Development Institute. The latest report into Brazil’s energy advancements found a “democratic deficit” in policymaking.
The report said: “Interviewees raised concerns over the government’s decisions to amend the legal framework so as to mandate a role for Petrobras in exploitation of all oil fields, and to require Petrobras to import and sell gasoline and diesel at a loss in order to keep fuel prices low for consumers and therefore restrain inflation in the short-term.”
It went on: “Several saw significant risks to longer-term sustainability in the government’s use of state-controlled institutions, such as [government loans bank] BNDES and Petrobras, as instruments to implement policy directly, rather than as arm’s length entities with operational independence, but acting in accordance with a broad government-defined mandate.”
As an election hot topic, pro-business candidate Aécio Neves had campaigned for the “renationalisation” of the company, accusing Ms Rousseff of “delivering our greatest company to a gang, a criminal organisation”.
In a survey carried out by research institute Datafolha, seven in 10 Brazilians believe Ms Rousseff to be responsible for the endemic corruption within Petrobras. Opposition critics argued that Ms Rousseff must have known of the kickback scheme when she was Petrobras chairwoman, and have even argued for her impeachment.
The president, re-elected by a hairsbreadth at 51.6pc, has repeatedly denied knowledge.
Opposition politicians involved in the parliamentary commission are said to be considering an alternative, parallel report, which may also include indicting the president over the scandal.
Yet even those with hindsight argued against Petrobras’s privatisation. For many, the codependent relationship between the Brazilian government and Petrobras is a double-edged sword.
“Petrobras is a public company on the stock exchange,” Mr Freire said. “The government has only 28.7pc participation in its capital. We can see it as a private company. Because the government controls the company, it also controls the accounting… so if the government pulled out it would cause real difficulties for Petrobras. I don’t see the need to privatise it as well as manage it.”
But there remain serious misgivings about the management of Petrobras. Led by one of Brazil’s most high-profile women, Maria das Graças Foster, it is said that only she and independent advisers have any real voice on the board.
“My criticism of the administrative council, what bothers me is that I don’t see the council discussing these questions,” said Silvio Sinedino, president of the association of Petrobras engineers and workers’ representative on the administration council. “Who are the people who speak inside the council? The president, Graças, and basically the independent council members.”
With the imminent publication of the parliamentary commission’s report and the re-inauguration of Ms Rousseff on January 1, more may about to be said. The key players in the scandal are speaking freely and the head of the government’s anti-corruption agency has also resigned.
Jorge Hage, head of the Comptroller General’s Office, stepped down unexpectedly this week, with a jibe at budget cuts for fighting sleaze. “We represent a very small proportion of the federal budget, especially when compared to the amount that gets wasted or diverted,” said Mr Hage, according to news website G1. “So what I maintain is that what is needed is increased investment in control systems and for those to be extended.”
For Petrobras, these changes could be its most important advance to date.
Originally published by The Sunday Telegraph