Petrobras scam allegations weigh on Brazil as blacklist fears rise Demonstrators hold a banner that reads; "Dilma out, Impeachment now!" during a protest over the Petrobras scandal in Sao Paulo on November 15 (AP Photo/Andre Penner When black money market dealer Alberto Youssef was arrested by police in March, he was carrying seven mobile phones with another 30 in a desk in his office, an officer involved in the case said. The reason the jailed conspirator in what is emerging as Brazil's biggest corruption scandal might have needed so many phones is becoming clearer after police this month raided the offices of Brazil's major construction companies, arresting scores of officials and executives in the process. The builders being investigated in the scam, in which Mr Youssef allegedly co-operated with former Petrobras director Paulo Roberto Costa to skim billions of dollars off the state-owned oil company to pay kickbacks to politicians, are responsible for much of Brazil's infrastructure projects, from airports and nuclear submarine bases to stadiums for the 2016 Olympics. The arrests have caused concern not only at home but among international investors. If the construction companies are blacklisted from civil works, the government's R$871bn in planned infrastructure projects in Brazil could grind to a halt. Existing and potential new foreign investors will be unable to do business with the companies. Add to this concern over Petrobras, which is being forced to review its finances to account for the scam, and a large part of Brazil's economy could be frozen. "I'm not sure what I will tell my board," said one foreign investor whose group invests alongside some of the construction companies targeted by police. The alleged scam surrounding Petrobras surfaced earlier this year, when police arrested Mr Youssef and Mr Costa. In return for leniency, the pair have agreed to tell all to police and prosecutors. They allege that a group of Brazil's largest construction companies paid the ruling Workers" Party, or PT, and its allies about 3 per cent of the value of large projects at Petrobras in return for receiving contracts. The construction companies collaborated with the pair to overinflate the value of these contracts, Mr Youssef and Mr Costa allege. The PT denies the allegations. President Dilma Rousseff, who was head of Petrobras before taking office in 2011, also denies involvement. Some of the construction companies also deny wrongdoing. The numbers allegedly involved in the scheme dwarf what was previously considered Brazil's largest scam, the Mensalão, or big monthly payment, scandal in which leaders of the PT were jailed last year for diverting public money to a vote-buying scheme in Congress. Brazilian police say they are investigating seven construction companies with R$59bn in contracts. Morgan Stanley estimates that Petrobras could have to write off up to R$21bn in a worst-case scenario due to the scheme, or almost all of its expected net profit this year. Worse, if Petrobras is unable to release audited financial statements by April 30 next year, it could violate debt covenants, allowing creditors of $57bn in bonds to demand immediate payment. This could spread to the banking system, with which Petrobras has loans of $66bn. "In a worst-case scenario, if the investigation extends for a long time and new accusations are presented, we believe this would also restrict Petrobras" access to funding, [and] potentially cause debt acceleration," Morgan Stanley said in a report. This is a huge problem. Infrastructure is both one of the biggest challenges to the future of the Brazilian economy and one of the biggest opportunities for investment in Brazil Jason Marczak, Atlantic Council With the police raids, the shadow hanging over Petrobras has extended to the construction sector. This week, Fitch adjusted the outlook on its ratings to negative for Brazil's six largest builders, including Camargo Corrêa, Odebrecht, OAS, Andrade Gutierrez, Queiroz Galvão and Galvão Engenharia, and downgraded one Mendes Júnior Trading e Engenharia. The action covers about $4.7bn of debt at Odebrecht alone. Fitch said the move reflected concern over the possible "financial and business impact upon these corporates of corruption allegations regarding contracts between Petrobras and multiple companies in the sector." The companies mentioned by Fitch said the rating move was a general statement on sectoral risk. Andrade Gutierrez said it was not part of the investigations. Those companies that are involved in the probe say they are co-operating with authorities. The concern is that construction companies found guilty of involvement in corruption will be put on the Brazilian comptroller general's blacklist of companies that cannot do business with the government. This happened to Delta, a politically well-connected construction company that was banned in 2012 over bribing government officials. Brazil's anti-corruption watchdog, the TCU, has suggested a compromise solution could be found under which the companies would renegotiate their contracts and continue with projects already under way. But this would not necessarily solve the problem for foreign investors unable to do business with companies found guilty of corruption. "This is a huge problem," said Jason Marczak, deputy director of the Adrienne Arsht Latin America Center at the Atlantic Council. Infrastructure is both one of the biggest challenges to the future of the Brazilian economy and the biggest opportunities for investment in Brazil. Most analysts still believe Brazilian regulators and corporate leaders will find a way out of the impasse. A report in business paper Valor Economico said the scandal could even present an opportunity for Brazil to open the door to foreign construction companies. "The country should not be held hostage [to its large construction companies]," said Mario Engler, a professor of infrastructure law at FGV, an academic institution, in the report.