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São Paulo Cartel Hell | A Pre-History

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Source:  Brasilianas

Topic: The roots of the railway cartels

Author:  Luis Nassif

Coluna Econômica

Translation: C. Brayton

There is a reason why the genesis of the current scandals, involving Siemens and the subway and commuter rail cartels, goes back to the government of Mário Covas.

When Covas took office in 1995, he faced two sources of pressure. The first, moral in nature, was to respond to the disastrous public image of the São Paulo government after the return of democracy. The second was the state’s grave fiscal crisis and pressure from the federal government to sell off its state-owned companies.

These two pressure points led Covas to take a voluntarist stance, cutting costs abruptly, with serious consequences for the state. He got the principal suppliers together and personally warned them: Either you reduce all of your contracts by 20% or they will be rescinded.

This was a positive gesture that played well in the media and public opinion, but it would later produce negative consequences.

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Budget cuts  were made in linear fashion, and objectors were yanked by the ears. Rather than reduce their profit margin, service providers would reduce the quality of their services, doing the same amount of work with fewer people.

Construction firms and equipment suppliers were smarter: They made preliminary gestures of submission, among other reasons because the PSDB dominated the federal sphere. They knew, however, that very soon the state government would face political pressure to demonstrate its usefulness — and would have to provide a response.

Some contracts were abandoned. In others, cartel formation  deals were expanded.

In dealing with a governor with a difficult personality, contractors tried to approach companies that had regular dialogue with the state government.

It was in this context that service providers such as Tejofran … and Denodai joined consortia alongside such global giants such as Siemens. Companies such as Allston and Duke began to distribute bribes to political figures capable of influencing public policy.

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In the second half of the Covas administration, the government was practically at a standstill, with nothing to show for its efforts: no public works, no public services. The voluntarism of Covas — which José Serra would echo as mayor and governor — left the entire state adminstration in disarray.

This same style of cost-cutting with the use of arm-twisting affected the entire public machine, from the Secretary of Education to the  state foundations related to public planning.

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It was in this context that the star of the Secretary of the Treasury, Yoshiaki Nakano, began to rise, as Nakano put the house in order. Nakano would study statistics of services rendered, define a metric to be used in evaluating the contract, — dimensions of the service in relation to the number of service workers multiplied by the minimum salary — and then reorganize the contracts.

It was just that at that point, everyone had armed themselves to the teeth in order to prevent the future repetition of the problems they faced. This changed their modus operandi, radicalizing the formation of cartels.

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In the area of public works and equipment, an impasse, then. Even if the contractors survived the initial trauma, there was very little time in which to conduct new auctions. And so it was decided that the older model of public auctions would be followed, disrespecting deadlines, technological changes and other parameters.

It is the auctions that awarded these contracts that are now beginning to surface.

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The fact that Siemens focused chiefly on the Covas government is because that is when the impasse originated.

That is not to say that the same practices were not made use of during the state governments of Maluf, Quércia and Fleury.