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BNDES 2: The Bank for Business Credit

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Brazil’s BNDES (Banco Nacional de Desenvolvimento Econômico e Social) is the largest development bank in the world. Its annual disbursements of US$50 billion in 2014 were greater than those of the World Bank and Ex-Im Bank (Export-Import Bank of the United States) taken together. Although the bank has played a key role in Brazil’s development over the decades, its hasty expansion in recent years has created widespread concern that the bank is out of control and causing damage to Brazil’s people and biodiversity.

In the second of six articles on the BNDES, LAB’s Sue Branford looks at how the bank has become embroiled in an Amazon development scheme in which an alliance of profit-hungry construction companies and unethical politicians is pressing ahead with a series of huge hydroelectric dams without considering whether those dams will make a real contribution to the region’s development, or what the cost will be to the environment and indigenous people.


  • After a period of rapid growth, Brazil’s BNDES is today the largest development bank in the Americas. It has poured billions of dollars into big infrastructure projects, including immense hydroelectric dams across the Amazon basin, seen by many critics and indigenous groups as causing great harm to local riverine communities and the environment.
  • From 2003-2011, President Lula da Silva used BNDES to make large loans to “Brazilian champions,” big companies such as the Four Sisters (a quartet of giant Brazilian construction firms), and Petrobrás (the state-run oil company). Those firms developed close ties with political parties, setting the stage for the now ongoing Lava Jato (Car Wash) corruption scandal.
  • In recent weeks, former president Lula was detained by police over possible bribes and kickbacks channeled through inflated Petrobrás contracts, while the CEO of Odebrecht SA, Latin America’s largest construction firm, was given a 19-year sentence for bribery and money laundering. BNDES has loaned billions to Odebrecht, Petrobrás and other firms accused of wrongdoing, but investigators have made no accusations against the bank. Recently, BNDES responded to critics, making positive changes to improve transparency and responsiveness.

The Belo Monte dam under construction. Brazil’s Lava Jato investigation recently decided to make this hugely expensive Amazon infrastructure project a primary focus — looking into construction company and government contracts. BNDES has provided loans totalling 80 percent of the cost of the dam, R$15.2 billion (US$3.8 billion), a bill largely footed by Brazilian taxpayers. The Bank is not part of the investigation. Photo courtesy of Lalo de Almeida/Folhapress.

Brazil’s BNDES (Banco Nacional de Desenvolvimento Econômico e Social) was created with high hopes. Nationalist President Getúlio Vargas set up BNDES in 1952, a time when the government was waking to the possibilities of turning Brazil, with its abundant natural resources, into one of the world’s economic powerhouses. BNDES was established with a dual visionary purpose: to fund the country’s economic take-off, and to ensure that the nation’s growth benefited the whole nation, rich and poor.

Now, more than six decades later, the public image of BNDES has changed drastically. It is seen by many as a bank that is making the rich richer, while disregarding the needs of the poorer sectors of the population. Among its many critics is Leonardo Sarmento, a lecturer in constitutional law in Rio de Janeiro, who said in 2015 that “the BNDES takes money from the poor to give it to the rich”.

Sarmento called BNDES “Bolsa Empresário” (or the “Businessman’s Award”) — a joke that compares the bank unfavorably to “Bolsa Família,” Brazil’s program for combatting poverty. He pointed out that in 2014 the Bank subsidized its loans to the tune of R$20.7 billion (US$5.2 billion*), a sum roughly comparable with the R$25 billion (US$6.3 billion) that the government spent that year on Bolsa Familia. He noted that, while Bolsa Família had lifted 15 million families out of poverty, BNDES had benefitted just a relatively small group of largely successful private Brazilian companies.

 

BNDES provided generous subsidised loans to Eike Batista, the son of a former minister of Mines and Energy, who for a brief while had been Brazil’s richest man. Today many of his companies are embroiled in the Lava Jato “Car Wash” corruption scandal. Photo courtesy of Wikipedia.The Bank gained the nickname after it was revealed that it had provided generous subsidised loans to Eike Batista, the son of a former minister of Mines and Energy, who for a brief while had been Brazil’s richest man. But then his empire imploded overnight and, with debts of US$2 billion, he joined Brazil’s select club of “negative billionaires”. Today many of his companies are embroiled in the Lava Jato “Car Wash” corruption scandal and subsequent investigations that are rocking the country.

When asked about Eike Batista, BNDES told Mongabay that the Bank had suffered no losses in the loans it had made to his companies. It also stressed the bank’s “impartiality, technicality and diversification” in making its loans, pointing out that 91 of Brazil’s 100 largest companies had received support from BNDES.

This leads to a question: what has led the Bank over the years to primarily channel its lending to big companies and gigantic infrastructure projects, rather than making major investments in projects that might more directly benefit the poor?

Public money feeding huge private contracts

When President Vargas founded the Bank, he wanted it to help move Brazil from a plantation-based economy — importing almost all its manufactured goods — to a largely self-sufficient industrialized nation. To that end, he set up state-owned companies in key industrial sectors — particularly Petrobras (oil), Vale do Rio Doce (mining), and Companhia Siderúrgica Nacional (steelmaking). He also created trade barriers to protect these nascent Brazilian industries from cheap foreign imports.

Brazil’s BNDES was created by President Getúlio Vargas in 1952, in the hopes of tapping Brazil’s abundant natural resources to make the country one of the world’s economic powerhouses. BNDES was established to fund the country’s economic take-off, and to ensure that the nation’s growth benefited the whole nation, rich and poor. Photo courtesy of the Brazilian government.The Bank was originally called the BNDE, with the word “Social” added in 1982. It was set up to administer a fund created by small regular salary deductions from Brazilian wage earners. This taxpayer-supported fund (which is still fed by wage earners today) was then used by the Bank to establish the economic infrastructure that the government deemed necessary. In the early days, the focus was on transport, mainly new highways; and on energy, including Brazil’s first hydroelectric dams.

Although Brazil went through considerable political upheaval over the years — notably the military dictatorship from 1964 to 1985 — the Bank retained the same approach until the 1990s, when successive Brazilian governments became enthusiastic advocates of the U.S.-driven free market ideology that was sweeping the world. It was then that the Brazilian government radically rethought the role of the Bank: giving it the new function of providing capital to large private companies, both Brazilian and foreign, so they could buy up some of the very state companies that the bank had helped create in the 1950s and 1960s.

Carlos Lessa, who became BNDES president in a later period (2003-2004), was outraged, saying that the bank had been “mutilated” and turned into “a privatizations bank” with “a totally different function from its historic task of developing Brazil’s productive forces”.

However, the infatuation with market economics did not last: in 2003 the former trade unionist Luiz Inácio Lula de Silva, the candidate of the left-of-center PT (Partido dos Trabalhadores/ Workers’ Party), became President. Tapping into the old nationalist tradition espoused by Getúlio Vargas, the new government set about turning Brazil into a regional super power, capable of standing up to the US, and becoming an equal with other emerging powers, such as China and India.

Under President Lula da Silva, BNDES was given a central role in this strategy. It was entrusted with the mission of creating “Brazilian champions” — large private companies, similar to South Korean chaebols — positioned to compete with the world’s largest multinationals. BNDES singled out economic groups, already big, that could expand rapidly and compete successfully at home and abroad.

Luíz Inácio Lula da Silva, Brazil’s President from 2003 – 2011. He used the BNDES to make huge loans to Brazilian construction companies for new infrastructure projects in the Amazon and across South America. Last week he was detained and his home raided by Lava Jato investigators. No charges have been filed to date. Photo courtesy of Agência Brasil.It provided heavily subsidized loans, with interest rates at about half the level available from traditional credit sources, to agribusiness and large construction companies, such as Odebrecht, OAS, Camargo Corrêa and Andrade Gutierrez — powerful businesses that came to be known as the Four Sisters (see article 3 in this series).

Again, just as under Vargas, the government began an ambitious program of infrastructure development — building the roads, waterways and ports needed by agribusiness and the extraction industry to export their crops and minerals. In quick succession, the government announced two big investment programs — PAC1 and PAC2 (Growth Acceleration Programs 1 and 2). BNDES funded both these programs, which were eventually spending the equivalent of 5 percent of the country’s annual GDP. To achieve this goal, BNDES needed a huge injection of capital, which the federal government provided, again at taxpayer expense.

The Bank’s assets grew fourfold from 2007, reaching R$814 billion (US$286 billion) in 2014. By then, its annual disbursements were R$190 billion (US$67 billion), compared with just R$35 billion (US$9.4 billion) in 2003.

The Bank today is immense: its annual disbursements are bigger than the total economic output of its neighbor to the south, Uruguay. It has become the second biggest development bank in the world (second only to the Chinese Development Bank), with annual disbursements well over double those of the World Bank and the Inter-American Development Bank taken together.

A lack of leadership and oversight?

In some ways, President Lula’s strategy has succeeded. BNDES has created giant companies, some of which are world business leaders. Brazil has some of the planet’s largest food processing companies, including JBS and Brasil Foods, and huge mining companies, including Vale. Agribusiness has boomed. Brazilian construction companies, including the Four Sisters, have grown apace and won big contracts around the world, and especially in Latin America.

There is little doubt that the Bank played a key role in the expansion of these companies as, indeed, it has throughout Brazil’s whole development process. “It is impossible to talk about the progress of Brazil’s economy from the 1950s to the present day without mentioning the important and strategic participation of the BNDES”, the Bank told Mongabay. “Brazil is now among the top ten economies in the world … Without a shadow of doubt, the BNDES has fulfilled its role.”

President Lula da Silva announces the PAC infrastructure program in 2010. Future president Dilma Rousseff is to his right. Both have become embroiled in the Lava Jato corruption scandal. Photo by Marcello Casal Jr. courtesy of Agência Brasil licensed under the Creative Commons Attribution 3.0 Brazil license.However, this is only part of the story, the portion which the government and leading bank officials regularly put forward in presentations at business seminars all over the world. Brazilian critics from both the left and the right of the political spectrum tell another story about what has happened in recent years: a narrative of poor planning and inadequate controls by the Bank that has led to the funding of ill-conceived and gigantic infrastructure projects, contracted through large companies. These projects, the critics say, have frequently damaged the environment and harmed indigenous people. They are also not the best use of taxpayer money, say critics.

Indeed, it is the flood of BNDES loans to once small Brazilian companies that helped turn them into global powerhouses — companies that include the Four Sisters (among the world’s biggest construction companies) and Petrobrás (Brazil’s state-run oil company). Those powerful businesses in turn developed very close ties with Lula da Silva’s Workers’ Party and other political parties, setting the stage for the now ongoing Lava Jato (Car Wash) corruption scandal.

Just last week, the former president was detained and questioned by police, and his home raided. Investigators suspect Lula da Silva and leaders of other parties of financing election campaigns with kickbacks and bribes channeled through inflated Petrobrás contracts. In recent months, several prominent construction company chief executives have also been arrested due to alleged complex overbilling and political kickback schemes. And just this week, Marcelo Odebrecht, the CEO of Odebrecht SA, Latin America’s largest engineering and construction conglomerate, received a 19-year sentence from a federal court on convictions for bribery, money laundering and organized crime. BNDES has offered billions in loans to Odebrecht, Petrobrás and other companies currently accused of corruption or being probed by Lava Jato investigators.

BNDES has told Mongabay that “concession of credit by the BNDES is not influenced by campaign donations”. The Bank also notes that “There are no findings or conclusions from the Lava Jato operation that involve the BNDES in any wrongdoing.”

Marcelo Odebrecht, CEO of Odebrecht SA and grandson of the company’s founder. This week he was sentenced to 19-years for bribery, money laundering and organized crime in connection with the Lava Jato investigation. BNDES has made major loans to Odebrecht over the years for infrastructure projects across South America, but has not been implicated in the investigation. Photo courtesy of the World Economic Forum licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.A recent study, written by four journalists from a leading Brazilian NGO, IBASE (Instituto Brasileiro de Análises Sociais e Econômicas/Brazilian Institute of Social and Economic Analysis), and entitled “The BNDES and the reorganization of Brazilian capitalism: a necessary debate”, argues that BNDES funding of big companies and infrastructure projects does not promote a coherent development strategy for the country. For instance, little attempt is being made to help Brazil become a world leader in cutting edge technologies, with fewer than 5 percent of the Bank’s disbursements invested in science and technology. Instead, the Bank is pouring resources into projects for increasing the country’s export of raw materials (such as new highways and canals) and for providing the infrastructure (such as cheap hydroelectric energy) that the exploitation of those resources requires.

The study argues that this strategy has doomed Brazil to stay stuck in its historic role as an undeveloped country that provides cheap commodities to the rest of the world. As the economist José Luis Fiori has put it, the government has accepted that Brazil’s position is in the periphery, not the center of the world stage, even if it is a “luxury periphery”.

The IBASE study contends that the government and BNDES are not building a strong, autonomous nation, in the state capitalism tradition of Getúlio Vargas. Instead, the Bank refuses to exercise the leadership role it could assume, given the level of its huge investments. The study authors say that it allows itself to be bullied by the big private groups, which are constantly demanding “a reduction in risk” and “the creation of a more favorable business environment”.

In addition, the federal government has failed to effectively monitor the companies’ behavior, and has turned a blind eye to the serious environmental and social abuses they are committing in the Amazon and elsewhere. For instance, the sugar mill, Usina Sāo Joāo, in the state of Goiás, which had received R$600 million (US$ 152 million) from BNDES, was fined in 2008 by Brazil’s labor courts, for holding 421 workers in conditions “analogous with slavery”. It is clear, say critics, that BNDES was not monitoring this mill adequately. However, these bad corporate behaviors are effectively bankrolled by BNDES and taxpayers.

The Bank responded to a question regarding the IBASE study, saying that, “The BNDES has instruments to inhibit and punish perpetrators for environmental crimes, slavery practices or those of a similar nature, child labor, as well as discrimination of race and gender if proven that beneficiaries of the Bank’s loans are guilty.” Any beneficiary of credit from the Bank that disobeys these requirements “is subject to suspension of advanced call on the loan” where the company must immediately pay off its entire Bank debt in one lump sum plus penalties. Though asked by Mongabay to provide examples of companies whose criminal actions resulted in such penalties, BNDES offered none.

Massive loans supported by taxpayer dollars, becoming unsustainable?

The Bank has always provided its clients with a low subsidized rate of interest, so today, as infrastructure projects become bigger and more costly, the burden on the state has grown heavier and heavier. In the early days, the capital for BNDES loans was almost entirely covered by the workers’ fund, called the FAT. But, because of the Bank’s explosive growth, FAT has not kept up: its share of the Bank’s annual income has declined from 67 percent in 2006 to 27 percent in 2012.

The economist Sérgio Lazzarini has calculated that there is a gap each year of R$25 billion-R$30 billion (US$6.7 billion to US$8.0 billion) between what BNDES pays to borrow money on the market and the income it gets from clients. The only way the government can cover this shortfall is through tax revenue.

Deltan Dallagnol, a public prosecutor in the MPF (Federal Public Ministry) and head of the Lava Jato investigation that is looking into corruption in the government, at Petrobrás (the state-run oil company) and within huge Brazilian construction companies regarding bribes, kickbacks, money laundering, and inflated contracts. The investigation has resulted in massive economic upheaval and political uncertainty. BNDES has responded to the crisis by moving to improve transparency and responsiveness to the public. Photo by José Cruz/ABr licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

There is considerable discussion today in the Brazilian press about BNDES, with a widespread feeling that the Bank has lost its way. Pedro Cavalcanti Ferreira, a lecturer in the Fundaçāo Getúlio Vargas, said: “There are no coherent evaluations for assessing the efficacy of BNDES loans.”

A banker told the Estado de S. Paulo newspaper, off the record: “How sad it is. BNDES spent R$450 billion (US$114 billion) for the country to end up sunk in recession, under the threat of running out of energy and petrol, and its largest company, Petrobras, embroiled in scandal and with cash flow problems.”

A study carried out by the Latin American Network of Environmental Public Ministries spoke of “fragilities, incoherencies and contradictions in BNDES norms for loans” and “the absence of environmental governance or, at least, of any transparency in environmental governance”.

BNDES rejects these charges. It told Mongabay that the Bank has a Policy on Social and Environmental Responsibility (CSR), which was approved in 2010 and updated in 2014, and this policy is applied to the bank’s financing in general, including infrastructure policies.

Payouts benefiting companies, but not Brazil?

Today’s Brazil faces daunting challenges: over 20 percent of its population still lives below the poverty line. “The participation of children in the labor force in Brazil is at least twice as high as in any other country in Latin America. In the North and Northeast regions, about a quarter of children under the age of five suffer from chronic malnutrition,” says a World Bank report.

With high illiteracy rates; organized crime and street crime; lengthy waits to see a doctor at public hospitals amid the outbreak of the Zika virus; poor sanitation, congested streets and over-crowded buses; and serious pollution due to agribusiness and the extraction industry, many feel that BNDES funding priorities need to shift away from big company handouts to build more Amazonian dams and other infrastructure.

Social movements and NGOs have long been saying that ordinary people get little benefit from the money they are putting into their nation’s big bank. BNDES’s investments in education, culture, health and sanitation regularly account for less than 5 percent of the bank’s annual disbursements.

In 2007 over 30 social movements and NGOs sent a petition to the Bank, entitled Plataforma BNDES, in which they demanded more transparency and a “reorientation” in the Bank’s policies to give more emphasis on social and environmental justice.

Since then, the Bank has made changes but, according to the IBASE study, there has been considerable resistance to opening up the Bank and reducing secrecy. On occasion, journalists have gone to court to try to obtain information. One such case occurred in 2011 when the Folha de S. Paulo newspaper tried — and failed — to obtain information about the criteria the Bank was using when it decided to make loans. The newspaper’s lawyer, Alexandre Fidalgo, said: “The Folha Group tried to obtain this information without using the law but failed. There was no other option but go to court.”

The newspaper won in court, but BNDES has appealed the ruling and the case has still not been finally settled. Guillerme Calmon, a lawyer working for the newspaper, said: “BNDES is making such an effort to revert the decision exactly because it fears the precedent it sets.” In other words, the Bank could be forced to reveal much more information if it loses this case.

A move toward greater transparency and service to Brazilians?

There have been the first signs of a slow sea change at BNDES, if only because Brazil can no longer afford to fund the Bank as it did in the past. At the end of 2013, BNDES, social movements and NGOs (including IBASE) jointly set up a website called BNDES without Secrets. While recognizing that its members may have “contradictory visions”, the website “seeks to debate the concept of development” and “to place the Bank at the service of Brazilian society as a whole”.

Today BNDES is clearly in a process of internal reorganization, made necessary by the country’s economic crisis. At the beginning of 2016, it unexpectedly abolished the facetiously dubbed ‘Bolsa Empresário’ line of credit, after using it over the years to channel R$362 billion (US$89 billion) of heavily subsidized credit to big Brazilian companies. Now, according to a report published in mid-February by the newspaper Valor Econômico, BNDES will shortly begin altering the way it raises money to gain more access to long-term credit, another cost-cutting measure.

BNDES without Secrets has welcomed these changes, saying that “at a moment of poor economic performance, BNDES demonstrates once again why it is a central actor in the Brazilian scene. Its potential to adapt to the economic reality of the country is fundamental for minimizing the harm of recessions on the country”. It continues: “For this reason it is important to fight for a just and democratic bank that acts on behalf of the most diverse social sectors, not just powerful economic groups”.

Few would doubt that.

BNDES has played a fundamental role in promoting Brazilian development at key moments throughout its history. Today both the Bank and NGOs recognize the need for BNDES to rethink the way it operates, as Brazil — along with the rest of the world — struggles to adapt to, and pay for, the impacts of climate change, and tries to achieve greater social justice.

It’s premature to declare that the process of root-and-branch transformation that many believe the bank needs is underway, yet change is clearly happening.

 

*The figures in US dollars found in this article are rough approximations of the equivalent value in Brazilian reals, using current, not historical exchange rates.

 

 


This article was first published by Mongabay on 9 March 2016. You can read the original here.