Ecuador, TBM, Odebrecht
C.J. Schexnayder
A TBM bores through a mountain in Ecuador in 2006 as part of the San Francisco Hydroelectric project.

The government of Venezuela demanded $282 million in back taxes from Brazilian construction giant Norberto Odebrecht this week - an action that could lead to its second expulsion from a South American nation this year.

On Tuesday Venezuela’s tax agency SENIAT ordered repayment of taxes from 2006 and 2007 and gave the São Paulo, Brazil-based company 15 days to comply or appeal.

“The ruling was due to the omission of income tax returns as well as the submission of costs and expenses, including technical assistance, which were considered inappropriate by the tax authorities,” said SENIAT in a press release.

In a statement released Wednesday, Odebrecht said it had paid all taxes and would try and work with the tax agency to resolve the matter.

“Since arriving in [Venezuela] in 1992 Odebrecht has fully complied with all legal and fiscal requirements of the country,” it read. “Odebrecht will follow SENIAT procedures to defend itself disclaimers in the relevant period as the law states.”

Contacted Thursday, officials with Odebrecht declined to comment on the matter, citing ongoing negotiations with Venezuelan officials.

The action is reminiscent of a brouhaha with Ecuador in September that resulted in the contractor being expelled from that country when the government seized all of its installations - valued at more than $800 million.

An Odebrecht-led consortium constructed the $314.6 million San Francisco Hydroelectric project near the city of Baños in central Ecuador. Completed last year, the 230 MW run-of-river hydroelectric powerplant is the second-largest hydro generator in the country.

The project consisted of boring of a 7-mile-long tunnel to transfer water from an existing hydroelectric dam to a new facility. The geography of the location was extremely difficult with no less than three major faults to contend with.

Two major collapses delayed completion of tunnel by several months but Odebrecht was awarded a bonus for completing the works prior to the deadline established in the contract.

Ecuador, TBM, Odebrecht
C.J. Schexnayder
Workers with the Brazilian firm Odebrecht work to construct the San Francisco Hydroelectric project in central Ecuador in 2006.

The hydroelectric plant was in operation for approximately a year but stopped operating after engineers detected damage to the facility during routine maintenance.

Ecuadorian officials said the damage was caused by rockfalls inside the tunnel and accused the company of not lining the route with concrete.

Some sections of the tunnel - particularly those where major faults were encountered - did feature a lining of concrete forms but not the entire length. Odebrecht officials said that the lining was not used in portions where they determined that the rock quality was sufficiently stable as outlined by the project design.

In September, Ecuador's President Rafael Correa, backed by the nation's armed forces, revoked Odebrecht contracts for three hydroelectric plants as well as for an airport valued in excess of $800 million.

For several weeks officials with Odebrecht and the government tried to negotiate a settlement. In early October Ecuadorian officials rejected Odebrecht’s offer to pay for repairs and set aside US$43 million to pay possible fines and compensation and ordered the firm to leave.

Odebrecht says it is still looking for an amenable way to resolve the situation.

“We still have the intention to solve all our matters in Ecuador in a friendly way with the government,” said Fabio Andreani Gandolfo, the director of Odebrecht’s Ecuadorian operations “But undoubtedly should that not be possible we are ready to seek the legal means to settle.”

Following the expulsion of the company, Correa publicly stated that the action was "between a sovereign state and a private company," and would not damage trade relations with Brazil.

Yet the incident rose to an inter-regional level due to the fact the San Francisco project, as well as several others in Ecuador, was partially financed by Brazil’s state development bank, BNDES.

After expelling the construction firm from the country Ecuadorian officials said they would not repay $331 million owed to BNDES to finance the plant. While Brazilian officials said they were trying to cooperate with the Correa government, Brazil cancelled an infrastructure mission to its Andean neighbor.

While the focus of the disputes is over the construction aspects of these projects, the actual target of the takeover is likely the financial assets they represent. Since all of these works were constructed as long-term concessions, the governments are now relieved of their obligations and can reap the financial reward of the contracts.

While the nationalization of such projects brings a short-term relief through the revenue stream of the contract, it creates a dismal scenario for the countries, said Anand Hemnani, senior vice president and chief investment officer at CG/LA Infrastructure.

“It is my opinion that this is the worst move these governments can make for future project developments,” he said.

The threat of such actions will dampen developer interest in the countries and the increased risk of investments will make financing future big ticket projects all but impossible, he said.