Controversial Navy project highlights increase in Brazil’s defense spending

</p> <p>In June 2019, the Navy’s head of strategic programs Vice Admiral Petronio Augusto Siqueira Aguiar told defense news site <a href="https://www.defesaaereanaval.com.br/">Defesa Aérea Nacional</a> that the final cost of the project depended on &#8220;contractual details&#8221; and that there would be a need to pay royalties to the winning group. At present, the deal is estimated at BRL 7.6 billion, but this figure is expected to increase, as there are still eight years to go before the ships are to be completed.</p> <h2>Trade union reported alleged irregularities</h2> <p>At the same time, the Metallurgical, Mechanical and Electrical Material Industry Workers Union of Pernambuco filed a complaint to the TCU against the result of the tender. The union requested an injunction to cancel the contract with the consortium. The entity accused the competition of having been rigged, in addition to pointing out alleged technical impediments to the construction of said ships in the Santa Catarina shipyard.&nbsp;</p> <p>The trade union claimed the outcome of the bidding process violated the principles of honesty, morality, economy, efficiency, transparency, and impersonality of Request for Proposals — RFP No. 40005/2017-001 — which defined the parameters and conditions of the tender, and the Law of State-Owned Companies. &#8220;The RFP included a series of legal qualification requirements, with emphasis on the impossibility of hiring an unknown company, in line with the precedents of this court,&#8221; it argued, in its complaint to the TCU.</p> <p>The union pointed out that ThyssenKrupp was under investigation in Germany and Israel, while <a href="https://brazilian.report/power/2018/03/27/brazil-israel-trade-foreign-policy/">deals involving Embraer</a> had faced similar <a href="https://brazilian.report/business/2017/12/22/embraer-boeing-deal/">suspicion</a> in the Dominican Republic, India, and the U.S. In addition, the Oceania shipyard — where the ships were to be built — belongs to corporate group CBO, of which BNDES-Par, a subsidiary of the Brazilian Development Bank (BNDES), is a shareholder. The BNDES was in charge of classifying the domestic content requirements of the proposal, meaning this could be seen as a conflict of interest.</p> <p>In its complaint, the union also claimed that ThyssenKrupp was for sale, having disposed of its own shipyards in several countries, which would create a lack of legal security and clash with the conditions of the RFP, according to which the proposal offering the least risk would take priority. In addition, the winning bid would charge royalties for the <a href="https://brazilian.report/podcast/2019/10/23/explaining-brazil-nuclear-green-yellow-submarine/">construction of additional ships</a> and the quote given by the Águas Azuis consortium was only an estimation, which “completely violates the invitation for bids, giving rise to overpricing and contractual amendments.&#8221;&nbsp;</p> <iframe src="https://open.spotify.com/embed-podcast/episode/7HVvpWZIRlp8xlXaWTLAGy" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <p>In its defense, the Águas Azuis consortium claimed it was unaware of any irregularities in the bidding process. With regard to Israel, it claimed that &#8220;after articles published in the press, ThyssenKrupp suspended the business relationship with its local sales representative and immediately launched an internal investigation,&#8221; stressing that the firm has been cooperative with the probe. &#8220;As far as we know, neither ThyssenKrupp nor its employees are part of the investigation in Israel.&#8221;</p> <p>Finally, in several interviews, heads of the Pernambuco trade union affirmed that if the bidding process was carried out with transparency, obeying the conditions of the notice for bids, the FLP consortium — which included the Vard-Promar shipyard in Brazil&#8217;s Northeast — would have been an apt choice to build the <a href="https://brazilian.report/business/2019/07/22/seaborne-cargo-transportation-in-brazil/">frigates</a>. The union pointed out that two Pernambuco shipyards already employed a combined total of over 7,000 specialized workers. However, with the economic crisis affecting the shipbuilding industry, this number has dropped a lot and Vard-Promar now only employs 200.&nbsp;</p> <p>The construction of <a href="https://brazilian.report/environment/2020/02/15/oil-spill-brazil-navy-regulation-open-sea-vessels/">Navy ships</a> could have been crucial for the resurgence of the shipyard and the Northeast region as a whole. However, as Vard Promar did not win the auction, it is now eyeing up the next Brazilian Navy contract. This consists of a project worth approximately BRL 500 million, foreseeing the construction of an Antarctic support ship capable of operating in polar waters and supporting the Navy’s work in Antarctica.</p> <h2>Dodging the spending ceiling</h2> <p>The Pernambuco trade union&#8217;s complaint to the TCU saw a conclusion on November 27, when the judge in charge of the case, Augusto Sherman Cavalcanti, ordered it be thrown out for &#8220;lack of evidence.&#8221; He mentioned the &#8220;strategic importance of the construction of warships&#8221; — as Brazil&#8217;s fleet has been in use for 40 years — and warned of the risk of delaying a selection process that took the Navy two years to complete. Nevertheless, he ordered that the contract must be monitored by an audit, which will analyze each step of the complex process of building the vessels, including the transfer of technology between Germany and Brazil.</p> <p>But this TCU decision has not put an end to the Brazilian government&#8217;s headaches over the Tamandaré-Class project. In fact, it led to the administration’s accounts being brought into question at the end of last year. Upon analyzing government bookkeeping for 2019, the TCU classified an investment of BRL 7.6 billion in Emgepron as &#8216;irregular,&#8217; as the administration used Treasury funds to pay for the new frigates.</p> <p>Overseeing the case, TCU judge Bruno Dantas called this use of funds a maneuver to undermine Brazil&#8217;s public spending ceiling. In his view, this expense would have not been possible in any other way, as it would have been restricted by government spending rules. He also warned there were signs the operation was carried out in disagreement with the condition of the non-dependent state-owned company, a decision that will be investigated further.&nbsp;</p> <p>In response, Economy Minister Paulo Guedes opened a supplementary credit line to Emgepron earlier this month, which guaranteed the transfer of BRL 89 million to the company. This maneuver, in turn, was accepted by the accounts court. According to the TCU, the money used to capitalize the state-owned company came from the company&#8217;s own coffers and not from the Treasury.&nbsp;</p> <h2>Increased defense spending</h2> <p>The Navy squadron project reflects the spending policy of the government of Jair Bolsonaro, who himself is a former member of the Armed Forces. In the first year of his administration, the Defense Ministry saw an increase in spending greater than that of the Education, Health, Agriculture, or Foreign Affairs Ministries, which have not changed their structures in the last five years, the period used for the comparison.</p> <p>Defense spending totaled BRL 96.9 billion in 2019 — 3.86 percent of all public expenditure and a 21.3 percent increase from 2016 levels. A similar increase was not seen in the areas of education or health.</p> <p>And last week, Defense Minister Fernando Azevedo e Silva said the Armed Forces budget will be increased even further, in agreement with President Bolsonaro. According to Mr. Azevedo, the president has already signed off on the new National Defense Strategy, submitted to Congress this week, foreseeing spending of 2 percent of the GDP on the military.