By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Imagine you work for a multinational behemoth with operations stretching the length and breadth of the planet. Now, let’s say that you are stationed in a far-flung emerging market where your company takes a somewhat pragmatic approach to certain operational procedures. In other words, not everything it does adheres to the exact letter and spirit of the law.
Naturally, if you want to survive and thrive in the business you have little choice but to engage in such practices. However, you wouldn’t talk about them over the phone — not in this age of rampant industrial espionage, and especially not with the NSA trying to track just about everything every foreign multinational says or does. And you certainly wouldn’t discuss them over an unsecured phone line; even your average two-bit mafia goon knows that!
But the Spanish construction giant OHL didn’t — not if recent allegations are to be believed! Last Wednesday, recordings were leaked to the press that appear to show executives of the firm’s Mexican division talking over the phone about massively overcharging a state government for a public works project. A day later another batch of recordings, this time showing a representative of OHL Mexico enticing Mena Vargas, the secretary of transport and communication for the same Mexican state (Estado de Mexico), with offers of a five-day stay in one of the company’s luxury beach hotels, butler included.
Blood on the Exchange
The fallout was instantaneous. On Thursday OHL’s share price plummeted 22% on the Mexican stock exchange, and eventually trading was suspended. In Spain, its shares fell 9% but rebounded 2.7% on Friday (with a little help from some friends, perhaps).
Mexico is OHL’s second largest and fastest growing market, representing well over 10% of the company’s global revenues, with more to come: the company decided late last year to shift the focus of operations away from “riskier” markets such as Eastern Europe, the Middle East and Africa to more “mature” markets in North America. Mexico is expected to account for 20% of global operations by 2020.
OHL is in no position to lose money. After costly fiascos in Algeria and Qatar and scuppered deals in Istanbul (a rail link below the Bosporus) and Eastern Europe (a doomed rail line connecting Russia and the Czech Republic), company profits collapsed a staggering 91% last year, to €23.2 million. To top it all off, OHL has serious liquidity problems, with total cash flow for its exploration activities of -€163.6 million. In other words, like most Spanish corporations, it is almost totally dependent on debt. And now its position in its second biggest market is in serious danger.
The company’s initial response to the scandal was to come out swinging, denying all allegations and describing the recordings as “industrial espionage” – which, to be fair, they almost certainly are. The company also alleged that the voices had been edited and the comments taken out of context. The problem is that OHL has a long history of such dubious practices, in particular in its home market Spain, where rampant overbilling and bribery of government officials have been standard practice in the construction sector for decades.
A Costly System
As El País reports, in the last six years alone the government has paid out €10 billion to cover excess spending on construction projects – an amount equivalent to the total cuts it made on health and education when it came into office:
In large part, the problem lies with the way these kind of large-scale infrastructure projects are organized. In simple terms, this is how Spain’s tendering and adjudication system works: the government commissions a consultant to design a project, and then puts it out to tender to the big construction companies. These put in very low bids and win. They then “rip the project apart, finding all sorts of faults and problems, and demanding all kinds of modifications to get their money back and then some,” according to one civil engineer with experience of the system.
As I wrote last year, Spanish construction companies are increasingly applying the same logic to their international operations, often with disastrous consequences for both their clients and shareholders. For example, in 2012 Sacyr put in a tender for a huge international project to double the Panama Canal’s capacity, tabling a price that was 2€ billion below the Panamanian government’s expected budget. It didn’t take long, however, for the budget to begin soaring. Within next to no time, Sacyr and the consortium it leads was asking Panama for an extra €1.6 billion, a fair chunk of which ended up being paid by Spanish taxpayers.
A similar strategy was attempted in Saudi Arabia, where a 12-company Spanish consortium that includes OHL and fellow construction giant FCC is building a high-speed train track between Medina and Mecca. As Voz Populi reported in late 2013, OHL tried to massage the €6.7 billion budget upwards, but the Saudi authorities refused to budge. In recent months serious questions have been raised as to whether the consortium will be able to meet the deadline for completion of December 2016.
Lubricating the Levers of Public Policy
The problem is not just over-billing. OHL is suspected of providing undeclared financial inducements to Spain’s governing Popular Party in order to further its business interests. According to José Luis Bárcenas, the PP treasurer at the heart of an enormous political kickbacks scandal, OHL donated over €500,000 in cash to the party. In return the company won more public work tenders than any other construction company during the headiest days of Spain’s real estate bubble.
In Mexico, OHL influence is just as pervasive, as I reported in “Spain’s Silent Reconquest of Mexico”:
OHL… is fronted by José Andrés de Oteyza, the former national secretary of industry and development. With the sort of access Andrés de Oteyza has to government OHL has managed to obtain seven public works contracts worth over €2 billion in the last 18 months – more than twice the amount in contracts awarded to Mexico’s three largest construction firms (ICA, Tradeco and Carso) combined. In one of OHL’s largest recent contracts, Mexico’s President Nieto himself is alleged to have intervened on the Spanish company’s behalf.
This kind of access and influence does not come cheap. As Oriol Malló Vilaplana, a Mexican journalist and author of The Spanish Cartel, told the Mexican financial news website Sin Embargo, if the company is willing to pay over $6,000 for a state councilor and his family to spend five nights of luxury, butler-attended bliss in a Caribbean hotel, just imagine how much it pays in under-the-table campaign contributions!
“Mexico and Spain have the same political and economic ecosystem, based on corruption, friendship, cronyism and political fixing,” he said.
For OHL, as long as it continues to grease the wheels of Mexican corruption, its business interests in Mexico should remain untouched. Indeed, the only lesson the company is likely to draw from the recent scandal is the urgent need for much tighter communications security in Mexico, a somewhat less blatant culture of corruption, and perhaps slightly more generous political kickbacks — at least until the public furor has died down!
Unless, of course, something altogether larger lies behind its recent troubles — such as, say, an extremely influential rival’s attempt to destabilize its dominant position in the country. Or perhaps even the Mexican government itself has tired of giving the company such special treatment. Perhaps it has a new suitor, one that is willing to pay out even more for privileged access.
Perhaps powerful investors, having cottoned on to OHL’s fragile financial position, are scenting blood and have decided to force the issue by hitting the company’s finances where it hurts. After all, it was just a few months ago that its rival FCC was bought out of its financial misery by Mexico’s number one oligarch, Carlos Slim, and added to his empire in Slimlandia. Could OHL be next in line? In which case, the company’s Mexican hangover has only just begun. By Don Quijones, Raging Bull-Shit.
Given the scale of recent tax-evasion scandals in Europe, including HSBC’s Swiss-based tax swindle, it’s hardly a surprise that the issue is high on the agenda these days. But now they’re putting the wolves in charge of guarding the sheep. Read… Guess Who’s Designing Europe’s New Tax System?