By Stephen Eisenhammer

RIO DE JANEIRO (Reuters) – Brazil’s largest-ever corruption scandal threatens to slow down preparations for the Olympic Games in Rio de Janeiro next year as it engulfs construction companies responsible for the lion’s share of projects worth around $12 billion.

    Prosecutors investigating the scandal at state-run oil firm Petrobras have implicated more than 20 companies, including five that are working on Olympics venues and infrastructure.

    The investigation, dubbed “Operation Car Wash”, has pushed the companies into a tight spot as their credit lines dry up and top executives are in jail awaiting trial.

Scrambling to limit the fallout, Rio’s city government is at times being forced to act like a bank, lending companies money to prevent a slowdown in construction, a senior city government source told Reuters.

    “We are giving companies the money in advance and when the funds are freed up at the federal level they are passed to City Hall,” the source said. 

    Of the five firms, Odebrecht [ODBES.UL] is involved in over half of all Olympics projects by value. The other four account for much of the rest: OAS SA [OAS.UL], Andrade Gutierrez SA, Queiroz Galvao SA, and Carioca Christiani Nielsen Engenharia SA.

    OAS, one of Brazil’s biggest construction firms, filed for bankruptcy protection in March after its credit lines dried up.

    It is part of the consortium building a group of Olympics venues at Deodoro in northeast Rio, where 11 sports including rugby, shooting and BMX riding will be held.

    OAS said the project has not been affected.   

    Prosecutors say construction firms overcharged Petrobras  for years and that excess cash was used to bribe politicians.

    All payments from Petrobras to the companies have been suspended, so those working on the Rio Olympics face a cash squeeze with the opening ceremony just a year away.

    “Cash is king … Construction tends to have low profit margins and a lack of cash flow typically hurts a lot,” said Bent Flyvbjerg, a professor at Oxford University’s Said Business School.

    Odebrecht did not respond to requests for comment and Carioca Engenharia declined to comment. Andrade Gutierrez, OAS and Queiroz Galvao said their projects were progressing normally and City Hall said construction was being delivered on time.

   

    GIANT BUILDING SITE

    Olympics officials say the scandal has not yet resulted in delays, but it is complicating an already massive construction challenge as Rio attempts a scale of urban regeneration not seen for an Olympic Games since Barcelona 1992.

    Preparations in Rio are well behind where they were at the same point in London before it hosted the Olympics in 2012.

    The city looks like a giant building site with firms working on an extended metro, light railway, re-built port area, new highways and dozens of venues. 

    Another firm caught up in the scandal, Mendes Junior SA, backed out of a contract to fix the drainage around the Maracana soccer stadium set to host Olympic matches.

Mendes Junior said it is no longer involved in any Olympics projects, though it has not cited the Petrobras probe as the reason for that.

    Ratings agency Fitch, which last month downgraded several Brazilian construction firms due to the scandal, says fragile finances mean timely payments are crucial to keep building going.   

    “A huge part of whether the works are delivered on time will be down to funds reaching the companies promptly,” Fitch analyst Mauro Storino said. “If money doesn’t arrive, a company might have to slow down the pace of work.”

    Slow payments are a regular problem for the construction industry in Brazil, especially on government contracts.

    For example, work to repair a sewer by Ipanema beach was recently halted due to a delayed payment. Rio state government later said it was prioritizing other projects.

Rio has admitted it will fail to make good on promises it made in its Olympics bid to improve the sewage system and reduce water pollution in the Guanabara bay by 80 percent.

A report by the Associated Press on Thursday showed virus levels in the water where several Olympics sports will take place are dangerously high.

Away from the water, Rio’s mayor, Eduardo Paes, is rumored to be planning a presidential bid in 2018. That will likely ride on hosting a successful Olympic games, so he is pulling out all the stops.

So far the level of criticism of preparations for the Olympics has been less than the wave of protests and negative press that marked the run-up to the soccer World Cup in Brazil last year. That tournament was in the end hailed as a success.

“You always have to have concerns… but we will deliver things on time and on budget,” said Antonio Pedro Figueira de Mello, secretary of tourism at Rio’s City Hall, adding there has not yet been an impact from Operation Car Wash.

Still, with one year to go there remains a lot to be done and how the different levels of government manage the fallout of the Petrobras scandal will be crucial to getting the work delivered on time.

“It’s difficult enough to deliver the Olympics as it is, let alone with a scandal like this,” said Flyvbjerg.

($1 = 3.3265 Brazilian reais)

(Additional reporting by Rodrigo Viga Gaier; Editing by Kieran Murray)