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DE RUEHBU #0844/01 1202148
ZNY CCCCC ZZH
R 302148Z APR 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8004
RUCPDOC/USDOC WASHINGTON DC
INFO RUEHAC/AMEMBASSY ASUNCION 6132
RUEHBR/AMEMBASSY BRASILIA 5994
RUEHCV/AMEMBASSY CARACAS 1218
RUEHGT/AMEMBASSY GUATEMALA 0211
RUEHLP/AMEMBASSY LA PAZ MAY MONTEVIDEO 6404
RUEHSG/AMEMBASSY SANTIAGO 0382
RUEHSM/AMEMBASSY STOCKHOLM 0051
RUEHVL/AMEMBASSY VILNIUS 0048
RUEHRI/AMCONSUL RIO DE JANEIRO 2208
RUEHSO/AMCONSUL SAO PAULO 3266
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL

C O N F I D E N T I A L BUENOS AIRES 000844 
 
SIPDIS 
 
SIPDIS 
 
EMBASSY STOCKHOLM FOR ECONCOUNS INGRID KOLLIST 
EUR/NB FOR VICKIE MIDDLETON, RAY DALLAND 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
PASS NSC FOR JOSE CARDENAS, ROD HUNTER 
PASS USTR FOR EEISSENSTAT, SCRONIN 
TREASURY FOR TRAN 
 
E.O. 12958: DECL: 04/30/2017 
TAGS: PGOV EINV ECON ENRG PREL SW AR
SUBJECT: SKANSKA GAS PIPELINE SCANDAL ROCKS KIRCHNER 
ADMINISTRATION 
 
 
Classified By: Ambassador E.A.WAYNE. Reasons 1.5 (B,D) 
 
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Summary 
------- 
 
¶1. (C)  A blossoming corruption scandal is coming closer to 
linking kickbacks from contractors on a natural gas pipeline 
expansion public works project to senior GoA Planning 
Ministry and energy regulatory officials.  Multiple judicial 
investigations and relentless media and opposition party 
attention to the scandal have become a headache and potential 
pre-election liability for the Kirchner administration, 
prompting the President to announce last week that government 
hands are clean in this case.  The crux of the scandal 
revolves around (1) the scope of GoA control and oversight on 
half a billion dollars in project tenders to expand and 
modernize the national natural gas pipeline network by two 
private national gas pipeline concession companies; and (2) 
actions taken by pipeline expansion project contractors -- 
including Swedish construction giant Skanska -- to inflate 
their project bids, justify additional expenses with phony 
purchased invoices, and pay a portion of excess revenues in 
bribes to as yet unknown players. 
 
¶2. (C) President Kirchner, Chief of Cabinet Fernandez and 
Planning Minister De Vido insist this is a wholly private 
sector affair between private companies.  Many doubt the 
GoA,s claim, however, given close regulatory and technical 
oversight of the gas pipeline expansion project by the 
Planning Ministry,s Energy and Public Works Secretariats and 
by ENARSA, the GoA's natural gas regulatory authority. 
Subplots of the scandal include whether there has been 
adequate GoA supervision of "Fideicomiso" trusts.  These are 
privately funded but government-sponsored financing 
structures not subject to standard public tender oversight 
which have become the GoA,s vehicle of choice to finance new 
big ticket public works.  A jurisdictional dispute has 
developed between a commercial court justice aggressively 
investigating tax evasion aspects of the case and a federal 
justice investigating bribery allegations. Alleged pressures 
on the judge investigating tax evasion has raised questions 
of possible government interference.  Finally, the Chief of 
Cabinet,s recent efforts to associate the mayor of the city 
of Buenos Aires (who is running for re-election next month) 
with the use of public monies to pay similar phony invoices 
is widely seen as a "best defense is a good offense" attempt 
by the GoA to distract and confuse the public.  While it is 
hard to predict the play-by-play development of this scandal, 
it will certainly be used by opposition parties and the media 
in the run-up to October 2007 federal elections to taint the 
already dodgy reputation of powerful Planning Minister De 
Vido and, more broadly, to remind voters of the downside to 
President Kirchner,s concentration of power in the hands of 
a few "hombres de confianza" from his native Santa Cruz 
province.  Yet high presidential popularity ratings and 
continued strong economic growth leave Kirchner 
administration well positioned to ride out any corruption 
scandal storm.  END SUMMARY 
 
--------------------------------------------- - 
Scandal: Tax Evasion Investigations to Bribery 
--------------------------------------------- - 
 
¶3. (SBU) The story begins with a 2005 investigation by 
Argentina's AFIP tax authority and Commercial Court judge 
Lopez Biscayart of the Caliban-Infiniti Group (CIG), a ghost 
company whose sole business appears to have been the 
production and sale of phony invoices to allow purchasing 
 
companies to inflate costs, limit tax liabilities, and 
possibly conceal illicit payments.  According to media 
sources, CIG issued false invoices to roughly 50 companies, 
including to the local affiliate of Swedish construction 
multinational Skanska.  Skanska was then a principal 
sub-contractor in the expansion of Argentina's northern (TGN) 
and southern (TGS) natural gas pipelines, a GoA priority 
project to improve the efficiency and capacity of 
Argentina,s delivery network.  In an internal audit 
conducted October, 2005, Skanska found that a total of 
Argentine Pesos (Arp) 13.4 million (US$ 4.3 million) had been 
paid to purchase 118 false invoices from CIG and from 22 
other companies. In March 2006, Skanska authorities testified 
before the Justice Ministry that local management had 
"charged improper costs to two projects resulting in 
erroneous VAT reporting."  As a result, Skanska paid the GoA 
back VAT taxes and fired seven employees, including the head 
of its Argentina operations.  The head of CIG, who remains in 
custody, testified he was paid Arp 600,000 in exchange for 
these phony invoices and reportedly implicated (in testimony 
he later retracted) Planning Minister De Vido and his 
entourage in the operation.  Based on Skanska and CIG 
testimony, Justice Biscayat expanded his tax evasion 
investigation to a broader bribery investigation. 
 
¶4. (SBU) While Biscayart,s investigation has targeted an 
ever-expanding number of companies for selling and purchasing 
false invoices to limit tax liability, most media attention 
to date has focused on the "Caso Skanska."  This narrow case 
alleges irregularities in the bid by Skanska,s local 
Argentine affiliate to build a natural gas compressor station 
in Cordoba province as part of the expansion of Argentina's 
northern gas pipeline operated by Transportadoas Gas del 
Norte (TGN), in turn controlled by Argentina's Techint Group 
(with a minority participation by U.S. CMS Corp).  The 
expansion project was funded by a "Fideicomiso" trust.  This 
is a privately funded but government-sponsored financing 
structure which has become the GoA,s vehicle of choice to 
finance new big ticket public works.  The roughly US$500 
million pipeline expansion "Fideicomiso" was issued as 5-year 
local currency paper sold to domestic (primarily private 
pension fund) and international investors at an attractive 
variable Peso inter-bank rate plus 5%.  Repayment of these 
non-sovereign securities are guaranteed by escrow accounts 
which concentrate payments from wholesale natural gas 
customers who are paying premiums on their natural gas 
consumption bill over an 8-year period to cover the expansion 
costs.  The GoA calls "Fideicomisos" an economically 
efficient "user pays" mechanism to fund public works 
projects. 
 
¶5. (SBU) While "Fideicomiso"-funded public works projects are 
distinct from traditional sovereign-funded or guaranteed 
public works, there remains significant GoA oversight.  In 
the case of this gas pipeline expansion, GoA natural gas 
regulatory authority, both ENARGAS (headed by Fulvio Madaro 
who worked in Santa Cruz province for now Planning Minster De 
Vido) and the Planning Ministry,s Secretary of Energy Daniel 
Cameron (also a Santa Cruz province native)and, to a lesser 
extent, Planning Ministry Secretary of Public Works Jose 
Lopez have technical oversight authority over the project. 
In this case, it is alleged that ENARGAS officials made clear 
to TGN which sub-contractors, including Skanska, should be 
given parts of the project. 
 
¶6. (SBU) In March 2006, TGN advised ENARGAS that Skanska,s 
Arp 28 million bid to build the Cordoba compressor station 
was roughly 150% over the Arp 11 million originally budgeted 
by TGN.  Recent media reports document a series of letters 
between TGN and ENARGAS in which, as a result of TGN,s 
objections, the compressor station project was re-bid three 
times over four months, with Skanska ultimately lowering its 
bid by roughly 10%. TGN complained that this lower Skanska 
bid was still far above a reasonable price.  Finally, 
ENARGAS, arguing that this inconclusive process of re-bidding 
was delaying construction of GoA priority project, instructed 
TGN to accept Skanska and other bids. 
 
¶7. (SBU) According to copies of email correspondence between 
the ex-Skanska CFO and his headquarters published by national 
daily La Nacion, funds generated from this TGN contract along 
with funds generated from TGS pipeline and other contract 
over-pricings were used to pay a total of US$ 5 million in 
bribes to unknown recipients.  It also noted an aborted 
payment of US$ 10 million to Cordoba province-based 
engineering company Electroingenieria, a company that many 
have argued has won an outsized share of energy sector public 
works contracts since 2004 due to its close ties to senior 
members of the Kirchner administration.  (Note: 
Electroingeneria was also named by President Kirchner in 
January 2007 to purchase an equity stake in the regulated 
national electricity transmission monopoly Transener from 
Brazil,s Petrobras following the GoA,s rejection of U.S. 
investment fund Eton Park,s purchase contract. End note). 
Finally, the ex-CFO noted that millions in hush money were 
paid to Skanska,s own officers as the investigation 
progressed. 
 
--------------------------------------------- - 
Jurisdiction Dispute and Possible GoA Pressure 
--------------------------------------------- - 
 
¶8. (SBU) In December 2006, as Caso Skanska allegations of 
bribery of government officials became more prominent in the 
media, Federal judge Guillermo Montenegro opened a parallel 
investigation into the case  (Note: According to Argentina,s 
legal system, cases involving corruption in the federal 
government are to be investigated solely by a group of 12 
federal judges. End Note).  At the same time, Prosecuting 
Attorney Carlos Storneli recommended the indictment of 
Planning Minister De Vido, his Secretary of Public Works Jose 
Lopez, and the head of Energas Fulvio Madaro. 
 
¶9. (SBU) An Appeals court will decide shortly which of the 
two judges, Montenegro or Biscayart will continue to 
investigate the case, and media reports indicate that 
Montenegro will likely be given the nod.  Commercial Judge 
Biscayart, arguably the more aggressive of the two in 
pursuing the investigation, in April accused "unknown 
persons" of contacting ex-lovers to obtain damaging 
information.  Media reports noted suspicion of SIDE (GoA 
intelligence service) interference to try to dissuade 
Biscayart from continuing his investigation.  Subsequently, a 
magazine linked to the government, Seven Days, published an 
interview with a former girlfriend of Biscayart who said the 
judge "is a manic depressive and he wanted to punch me." 
Separately, Interior Minister Fernandez lodged a complaint 
against Biscayart over a technicality in the handling of the 
transfer for questioning of one of CIG principals currently 
under arrest in the case.  The opposition has subsequently 
attacked the government for going after the judge so that he 
would kill the Skanska investigation. 
 
------------------------------- 
Government Claims &Clean Hands8 
------------------------------- 
 
¶10. (SBU) As the scandal starts to grab front page headlines, 
especially those of agenda-setting "Clarin," media commentary 
and opposition party members have suggested ) with 
increasing intensity ) that the scandal reaches all the way 
to the top of the Kirchner administration.  In testimony 
before parliament April 25, Cabinet Chief Fernandez blamed 
opponents for turning the investigation into a political 
scandal and said the Skanska case involved corruption among 
private parties.  "If at any moment anyone in Nestor 
Kirchner's administration is found responsible for an act of 
bribery or unfaithful public administration, they will be 
immediately kicked out," Fernandez told lawmakers.  The 
Cabinet Chief also alleged before parliament that fake 
invoices were used to channel public funds from the Buenos 
Aires city government, headed by Mayor Jorge Telerman, a 
political opponent of the Cabinet Chief and candidate for 
re-election in June. 
 
¶11. (SBU) On April 24, President  Kirchner broke his silence 
on the case, repeating the GoA,s contention that this case 
does not involve the government since the 
"Fideicomiso"-funded works were not conducted under the 
regular system of public tenders.  He held up his hands palms 
outward in a public address, saying that his government is 
&like this8 (e.g. clean hands) on the case. 
 
------- 
Comment 
------- 
 
¶12. (C) The "Caso Skanska" investigation is the first big 
scandal of President Nestor Kirchner's four-year 
administration, just before his "Victory Front" faces 
re-election in October.  Many here argue that this 
developing corruption investigation is the inevitable 
consequence of a Kirchner administration that has 
progressively concentrated power among a group of officials 
whose ties to the President date from his governorship of 
small (population under 200,000) Santa Cruz province. 
Opposition leftist leader and presidential candidate Elisa 
Carrio has repeatedly said that "Kirchner,s administration 
is the most corrupt in history."  The Skanska case has been 
compared by many to the emblematic mid-1990s IBM scandal 
which branded the Menem administration as one that both 
tolerated and promoted privatization and public tender 
corruption to enrich government officials.  The media, 
barring some exceptions, was once fearful of corruption 
stories that could destabilize Kirchner's post-crisis 
equilibrium.  Today the media is proceeding with daily major 
coverage of the Caso Skanska scandal. 
 
¶13. (C) President Kirchner,s decision to break his silence 
on Caso Skanska indicates his concern about the impact it 
could have on public confidence in his administration.  But 
with the latest polls showing the President holding well over 
50% of intended votes in upcoming elections, the Kirchner 
administration remains well positioned to ride out any 
corruption scandal storm.  So long as near term economic 
growth and domestic consumption continue to rise, it appears 
unlikely that any of the current political irritants ) the 
Caso Skanska, provincial teacher strikes, accusations of 
undue executive pressure on the judiciary ) will be viewed 
by the public as significant enough to seriously undermine 
the President's high popularity ratings. 
WAYNE