Lava Jato Scheme Affects Brazil’s Ship-Building Industry

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The impacts of the billion-dollar corruption scheme involving Brazil’s oil giant Petrobras and disclosed by the country’s Federal Police in 2014 have reached to the country’s ship building industry. According to officials at the Brazilian Naval Construction and Repair Industry and Offshore Union (Sinaval), the scandal, dubbed Operação Lava Jato (Operation Carwash), may lead to the layoffs of 40,000 sector employees in the next four months if Petrobras does not resume investments.

According to Sinaval’s President, Ariovaldo Rocha, one of companies with contracts with Petrobras and now under investigation in the scheme, Sete Brasil, owes billions to shipyards. “Sete Brasil has not yet paid US$ 1.5 billion to shipyards it hired to construct drilling rigs,” said Rocha last week during a Congressional hearing to discuss the effects of Operação Lava Jato in Brazil’s economy and job market.

Earlier in the month, former Petrobras technology manager Pedro Barusco, revealed to a Congressional committee that companies, including Sete Brasil, had been involved in bribing Petrobras directors for drilling equipment construction contracts.

Data gathered by Sinaval indicates that the sector provided 82,000 direct jobs at the end of 2014 and that ten thousand jobs have been lost in the first three months of 2015. According to Rocha the layoffs could affect over 200,000 people indirectly, especially in towns whose economies revolve around the petroleum industry.

The official states that the sector is uneasy about a lack of a long-term business plan by Petrobras. The oil giant is the industry’s largest client and whose main revenues come from constructing vessels to support the petroleum industry. Petrobras announced earlier this year that it was reducing investments in several segments planned to sell assets worth US$13.7 billion in 2015 and 2016 in order to cut costs and reduce its debts.

The Sinaval official told Congressional representatives that some foreign owned shipyards have used their own resources to keep their structures afloat, but that this situation cannot be sustained for much longer.

Another effect of the halt in Petrobras contracts, stated Rocha, is the setback to Brazilian manufacturers of equipment used in the exploration of petroleum and gas.

“We are competing with Singapore and China, where labor costs are twenty percent lower,” said Sinaval’s president, adding that without investments and contracts many of these companies may not survive.

The Lava Jato scheme, however, has not only affected the corporate world. Marcelo Luiz Schreinert is the mayor of São Jeronimo, a town in Rio Grande do Sul. The official told Congressmen that his small town was deeply affected by Petrobras’ decision to rescind its contract with Iesa Oil and Gas, another company being investigated in the Lava Jato operation. The company had contracts in the town that amounted to close to US$900 million, generating 4,000 jobs.

Due to Petrobras’ decision more than a thousand people in his municipality were laid off, according to Schreinert. “The main impact in small cities such as ours is seen in the local economy,” he said at the hearing. “Restaurants, hotels and even the bus company are affected.”