Odebrecht's Submarine Dreams Threatened by Brazil Spending Cuts

  • Lower funding has forced builder to cut 38% of shipyard jobs
  • Budget trimmed as government faces crises such as Zika

The jailing of the top executive of Brazilian conglomerate Odebrecht SA last year took a toll on all parts of Latin America’s largest builder. Now, its defense unit faces another obstacle: a 50 percent cut in government funding for its nuclear submarine.

Odebrecht Defesa e Tecnologia is falling victim to Brazil’s worst recession in a century, which is causing tax revenue to plunge. With social programs all but untouchable, Brazil is cutting spending on discretionary programs such as the submarines, for which outlays were chopped by about half in the last three years.

The shrinking funding has already pushed Odebrecht’s building unit to cut 38 percent of the jobs at the shipyard and operation base for the submarines near Rio de Janeiro. More reductions may be coming as Brazil shifts money to shore up defenses against other clear and present dangers in the developing nation, such as the Zika virus.

"As long as the budget constraints continue, the Brazilian government will have to decide on which programs they want to put money on," George Ferguson, an analyst with Bloomberg Intelligence, said in an interview. "The submarine program could face larger cuts as there aren’t imminent maritime threats to the country."

The government chopped about 80 billion reais ($20 billion) in spending from the budget in 2015, and is expected to freeze another 25 billion reais this year, according to an official familiar with the discussions who’s not authorized to speak publicly about the plans and asked not to be identified.

The solution for now is to rely on foreign partners. Odebrecht Defesa e Tecnologia is close to selling a stake of its unit Mectron, according to ODT’s Chief Executive Officer Andre Amaro, in order to capitalize the company. The submarine program is handled by another one of ODT’s units, ICN, which owns a 59 percent share in the submarine alliance, called Prosub, while DCNS holds the remaining 41 percent, according to ODT’s website.

Brazil’s spending cuts are "inevitable, necessary, and urgent," Amaro said by telephone. "Selling a stake in Mectron to a technological partner allows me to continue offering solutions to my client in the current scenario."

DCNS is confident about the Brazilian submarine program in the medium and long term, a spokesman for the French company said in an e-mail. Mectron "has acquired consistent experience in a number of fields interesting potentially numerous defense player in Brazil and outside," according to the e-mail.

About 14 billion reais from the 32 billion reais estimated for the submarine project, which includes four conventional vessels and a nuclear-fueled one, have already been spent, according to the Navy.

The basic project of the nuclear submarine is being developed now, spokesman Rear Admiral Flavio Augusto Viana Rocha said. It was expected to start being built in 2017 and concluded in 2027. "The current schedule is going through a careful analysis in order to be adjusted to the available budget and to reflect the future perspectives for the economy."

ODT isn’t the only company hurt by lower defense spending. Embraer SA had to delay by one year the development of its KC-390 military transport aircraft, and will deliver the first planes by the first half of 2018. The planemaker’s defense unit and its partners shut down a 2011 venture to develop drones due to budget constraints.

Embraer’s press office said in an e-mailed response to questions that its defense programs "were already re-sized in 2015 due to the Brazilian scenario, as informed to the market," and that the schedule for its KC-390 program was agreed on with the nation’s air force and remains as planned.

ODT parent Odebrecht announced a freeze in new investments in Brazil last year, as a credit crunch tightened access to financing after then-CEO Marcelo Odebrecht was arrested in June as part of Brazil’s biggest-ever corruption scandal. Odebrecht stepped down from his position to focus on his defense and remains in jail. He has denied wrongdoing through lawyers.

Odebrecht’s press office said in an e-mailed response to questions that it was already planning for a scenario of less available credit in 2015, and prioritized current investments over new ones. "Despite the restriction of credit that all Brazilian companies have been dealing with, the group’s business got over 15 billion reais in contracted operations with financial institutions in 2015 -- business is still ongoing for Odebrecht."

(Corrects sixth paragraph to say ICN is the ODT unit responsible for the Prosub submarine program of story originally published Feb. 12.)
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