Petrobras: Innovation with Party Rent--Seeking

Abstract

The Brazilian oil company Petrobras is a leader in the technically challenging offshore oil exploration and an innovation pioneer in this segment. In the last ten years it has discovered enough reserves to put Brazil in the group of oil exporters while serving as an anchor of an industrial policy focused on increasing domestic procurement of capital goods. These achievements made the company a poster child of developmentalists, an example of a state company that innovates and invests in long-term projects. However, recent corruption investigations revealed that former employees, suppliers and politicians were involved in a billionaire kickback scheme that used the company for illegal campaign financing and coalition building. This paper explains the puzzle of Petrobras’ as a technological leader at the same time that it was the center of party-clientelistic practices. It argues that given Brazil’s geological endowments, Petrobras could better serve open political purposes if the company continued to create rents through Schumpeterian innovation in deep offshore. Innovation supported Petrobras’ other activities, which later included politically-driven investments, bribe extraction, and gasoline price subsidies. Using a variety of data sources, including plea bargain statements and a spreadsheet of bribe rates of large projects, this paper shows how bribes and economic losses differed across industry segments, with the downstream concentrating more losses than the more innovative and subject to cost pressures upstream. Petrobras’ operational capabilities and a track record of innovation in oil extraction led to successful discoveries of new reserves that paradoxically facilitated political interference by easing historical constraints that had spared the company from political exchanges.