SIGNIFICANCE: Evidence that Skanska paid bribes in connection with the awarding of infrastructure contracts has renewed concern over the government's failure to tackle corruption effectively. Lack of transparency in regulatory and financing procedures appears in fact to have heightened corruption risks.

ANALYSIS: In December 2005, investigation of tax evasion allegations against the Argentine subsidiary of Swedish construction company Skanska revealed that the company (and others) allegedly had acquired false receipts from a phantom company, Infiniti, for services never rendered. The investigations also revealed payment of 13.4 million pesos (4.3 million dollars) apparently in bribes by seven Skanska executives, who were sacked by the company last year. All seven were arrested on the orders of federal judge Javier Lopez Biscayart on May 8. Lopez Biscayart is in practice responsible for investigating the tax evasion allegations against Skanska; a second federal judge, Guillermo Montenegro, is investigating the bribery claims -- a division likely to complicate progress in the case.

Murky manoeuvres. The payment of bribes, admitted by Skanska, related to tenders to expand two gas pipelines operated by privatised gas transport companies Transportadora de Gas del Norte (TGN) and Transportadora de Gas del Sur (TGS). Skanska has not indicated who received the bribes, although former Infiniti head Adrian Lopez initially alleged that they had been paid to government officials (a claim he subsequently retracted). The government has rejected this, saying that the pipeline tenders represented deals between private companies. Other companies to which contracts were adjudicated are also now under investigation.

However, responsibility for the works is not clear-cut. Since the devaluation and default in December 2001, public services tariffs have been frozen, leading to a sharp fall in the income of electricity and gas companies in particular, and to a serious decline in investment. In a bid to guarantee investment, in 2004 the government of President Nestor Kirchner created a trust fund to finance the expansion of gas pipelines, funded by various public and private sources and managed by trustee Nacion Fideicomisos, a dependency of state-owned Banco Nacion. The funds contributed were to be reimbursed through a surcharge applied to industrial gas clients, some of which have complained of a 300% rise in their gas bills as a result. Under the terms of the fiduciary fund, Nacion Fidecomisos is responsible for contracting works, with the approval of the Secretariat of Energy and regulatory agency Enargas, with gas transporters assuming the role of managing and maintaining the pipelines.

Crossed accusations. This structure for financing and contracting pipeline expansions has led to mutual accusations between the government and private companies:

• While the government claims that any bribes paid were between private companies, TGN has sustained that it was obliged by the Secretariat of Energy and Enargas (both under the orbit of the Planning Ministry) to award the contracts to Skanska and other companies despite its complaints that the bids were heavily overpriced. According to TGN, the offers presented by Skanska, BTU and Contreras Hermanos, approved by Enargas, were 152% above its own cost calculations for the works.

• Moreover, two legislators who denounced the Skanska case before the courts -- Adrian Perez of the centre-left ARI and Esteban Bullrich of the centre-right PRO -- have included Energy Secretary Daniel Cameron, Public Works Secretary Jose Lopez and Enargas head Fulvio Madaro in their complaint. Public prosecutor Carlos Stornelli (whose investigations into illegal arms sales led to the 2001 arrest of former President Carlos Menem) has also asked for the three officials, together with BTU and Contreras Hermanos, to be included in judicial investigations; in early May Montenegro ordered investigations into movements in the bank accounts of the three public officials. Earlier, Lopez Biscayart had confiscated documentation from the Planning Ministry.

Stornelli is also investigating two other cases involving public works paid for through fiduciary funds, including in Kirchner's home province of Santa Cruz.

Government counterattack. For its part, the government has rejected claims of inflated pricing and the imposition of Skanska and others as contractors, although insisting that any public official found to have taken bribes would be dismissed. However, the reaction has generated suspicions among the opposition:

• Cabinet Chief Alberto Fernandez has attempted to link Buenos Aires city mayor Jorge Telerman with Infiniti, claiming his government had issued false advertising accounts via the phantom company. Telerman is competing for re-election against Kirchner's education minister, Daniel Filmus, in the city elections on June 3.

• Interior Minister Anibal Fernandez presented a formal note to the Magistrates' Council complaining of Lopez Biscayart's actions regarding Lopez, who was transferred from prison to a police station after denouncing threats to his life. The Council has rejected the complaint, seemingly a means of pressuring the judge; Lopez Biscayart has also complained that apparent agents of the security services have attempted to contact former associates.

• Stornelli has been offered the post of security minister in Buenos Aires province if the official gubernatorial candidate, Vice-President Daniel Scioli, wins the October elections.

Transparency tribulations. Regardless of whether involvement by public officials is proved, the Skanska case highlights continuing concerns over transparency. This is not the first time such concerns have been raised in connection with the Planning Ministry, whose head, Julio de Vido, is a Kirchner intimate who performed a similar function when Kirchner was governor of Santa Cruz:

• Shortly before his dismissal in November 2005, former Economy Minister Roberto Lavagna (now an opposition presidential candidate) alleged that construction companies receiving public works contracts had formed 'cartels' to fix inflated prices for government tenders -- echoing a concern already raised by the World Bank. Lavagna's criticism was implicitly directed at De Vido.

• Opposition criticism has focused on the fact that the head of the National General Syndic's office (SIGEN), responsible for auditing the transparency of government ministries, is De Vido's wife, Alessandra Minnicelli. While the government has on several occasions promised to transfer her to other duties, this has not happened. Moreover, pro-Kirchner legislators are seeking to modify the mandate of the National Auditor's Office, shifting its main function from auditing to technical assistance.

Kirchner came to office promising to take a hard line on corruption. However, in 2006, Argentina was ranked 93 out of 163 countries in Transparency International's Corruption Perceptions Index, with a score of 2.9 out of a possible 10.0. Although this was slightly better than its 2005 performance -- a ranking of 97, with a score of 2.8 -- the Argentine branch of Transparency, Poder Ciudadano, noted that government promises to root out corruption had not been matched by public policies aimed at improving transparency. Poder Ciudadano noted in particular the failure to resolve pending corruption cases, the weakening of congressional oversight vis-a-vis the executive and the lack of private sector commitment to end corruption. In this respect, one of the issues of particular concern has been the discretionary use of fiduciary funds.

CONCLUSION: In a context of continuing strong growth, the repercussions from the Skanska scandal will have no effect on the outcome of the October presidential elections. However, the government's increasingly tarnished image will weaken its position in a second term, and will provide an additional motivation for popular rejection when economic performance begins to decline. A poor international image and doubts over the investment climate are likely to accelerate this process.