In this month’s issue, we release the first of a two parts series that focus on the impact of violence on businesses in Brazil. We begin highlighting the critical case of Rio’s energy distribution company, which filed for bankruptcy after billionaire losses driven by the organized crime. We also discuss the scenario of violence in the country that directly affects its attractiveness to businesses; the risks of working with public services; the fact that micro and even multinationals are hampered; and the escape of companies.
Next month, we will we approach the extra expenses and losses commonly caused by violence; the alienation of investments and skilled professionals; the costs of violence in Latina America and the Caribbean and in Brazil – focusing on the social, private and public costs -, and close with the importance of reviewing security policies and strategies and of planned protection.
Summary
The cost of high crime rates in Brazil is significant, people change their behavior to avoid crime, households and companies spend high amounts to protect themselves against crime, companies reduce their investment and incur productivity losses and governments allocate a big part of their budget to public security. Understanding the direct and indirect impact of crime can allow companies and the government to take more efficient and effective measures to fight violence, while allowing the economy to grow.
Light’s Case
On 12 May, Light, Rio de Janeiro energy distribution company, filed for bankruptcy. One of the main reasons was the interference of the criminal organizations in the company’s business, which led to a mismatch between expenses and revenue, and a consequent increased loss of cash flow up to the point that, on the long run, the company could no longer sustain debts that now total R$ 11 billion.
Light is one of the largest of its kind in the country, it provides energy to 4.5 million clients and 11.6 million consumers across 31 cities in the State of Rio de Janeiro. However, 20% of its coverage area is in areas dominated by drug trafficking and armed militia control. In some places, such as the West Zone of the city of Rio de Janeiro, where the militia controls most of the territory and even connects their illegal real estate projects to Light’s system and charges the final consumer as if they produced the energy. In areas where the cables come from the distributor, the militia charges an additional fee, which ends up encouraging the customer to give up the official service.
The company also faces many other issues, such as defaulting clients, theft of energy not connected to organized crime. However, the losses imposed on the company by organized crime are the most evident aspect of the energy distributor’s extensive indebtedness, which led the holding company to file for judicial recovery.
All solutions that are debated must face the same problems. Thus, market experts believe it will be necessary to create a particular concession model for crime-ridden areas in Rio de Janeiro. The specialists’ assessment is that the standard regulation model does not work, and the losses are so high that they are considered unsustainable for the private investor.
Losses from energy theft harm both consumers and companies. In the case of Light, 70% of the financial losses are passed on to the customer’s tariff and the remaining 30% are assumed by the distributor.
The same problem is seen all over the country. The regulatory agency Brazilian Electricity Regulatory Agency (Aneel), calculated that, in 2022, the loss with thefts of electricity reached R$ 5 billion, which represents about 3%, on average, of the value of the tariff paid by the consumer.
Violence – Homicides, Organized Crime and Property Crimes
Light’s case is a consequence of issues caused by violence in Brazil that directly affects the country’s attractiveness to investors; to qualified professionals; to companies and even its capacity to increase investments in needy strategic sectors, such as infrastructure, education, health. Crimes also create related or consequent costs – with security, health, insurance, extra planning, losses etc. –, expanding financial risks and reducing profits.
Key factors propelling this scenario of violence include the number of intentional homicides, the generalized presence of organized crime groups in all states, and the high numbers of property crimes, especially those that have high impact on businesses, like cargo robbery.
The total number of intentional homicides in Brazil is quite high, even for Latin America standards. In 2022, 40,824 deaths were reported, which is a small reduction of 0.8% in comparison to 2021, and a great decrease of 30,9% when compared to the historical peak, reached in 2017 – 59,128 deaths –, amidst a gang war concentrated in the North and Northeast regions. According to Insight Crime, a foundation dedicated to the study of the principal threat to national and citizen security in Latin America and the Caribbean, the most recent results represent a rate of 19 homicides per 100.000 inhabitants in 2022, when the population was estimated at 214 million. After the Census 2022 revealed that the nation has only 203 million people, this rate went up to 20.1, the seventh worst figure in this region that is considered the most violent in the world – 76% (38) of the 50 most violent cities across the Globe are in Latin America, according to the Citizen Council for Public Security and Criminal Justice of Mexico (CCSPJP).
One of the major driving forces behind violence is organized crime; it is connected to a large part of the crimes against life and to the crimes against property. The Brazilian Public Security Forum (Forum Brasileiro de Segurança Pública – FBSP) has confirmed the presence of at least 53 gangs, in the country, for the most part, with activity limited to their state of origin. However, the major ones have established themselves in other states. For example, the First Capital Command (PCC), has illicit activities in at least 24 states and in the Federal District.
The influence of these groups can be measured, for example, in the number of murders recorded. Research concluded in 2022 by Stephanie Gimenez Stahlberg, at the Stanford University (US), revealed that there is an increase of up to 46% in the homicide rate of states where there is a gang dispute between at least two of the three largest criminal factions in the country: PCC, Red Command (CV) and the Northern Family (FDN). The study reinforces the common understanding that a large part of homicides is directly connected to organized crime.
While a country’s homicide rate is the main index to measure criminality and violence, especially due to the possibility to trace parallels with other nations, other types of crimes are also important to understand the impact of violence on the economy. Brazil has high rates of property crimes. For instance, in 2019, according to the United Nations on Drugs and Crime, the country had 561 robberies per 100,000 inhabitants (973,219 in total), among the top four results in South America, behind Argentina (1,069 per 100,000 inhabitants), Uruguay (885) and Chile (652), but quite ahead of developed nations, like the US (81), France (44) or Japan (2).
TOTAL NUMBER OF SCAMS IN BRAZIL
In the past years, robberies have been falling, but other types of crimes against property have been on the rise. In 2021, data from the Brazilian Public Security Yearbook 2022, demonstrate that the robbery rate fell by 18.7% (456.2). On the other hand, scams have reached levels never seen before, with a rate of 593 per 100,000 inhabitants, which represents a 129.9% increase, when compared to the rate from 2019.
Working for Governments
Light is a large company in a specific relationship with local governments to provide a public service to the local population. Thus, it deals with challenges connected to its nature: wide area of operation, wide public, various security scenarios. Under these circumstances, problems proliferate, therefore, many other companies in this sector suffer from the same issues. Energy distribution companies in Amapá and Amazonas face even worse conditions, with bigger financial losses. In 2021, non-technical losses – illegal connections to the supplying networks –, popularly known as “cats” in Brazil, represented 122% of the energy distributed by Amazonas Energia to the regular consumer.
Still in the segment of public services, transportation companies are also quite sensitive to the level of violence. A survey disclosed by the National Association of Urban Transport Companies (NTU), in December 2019, showed that from 1987 to 2019, 4,488 buses were torched by criminals in various situations and during protests. Only in 2019, this represented a loss of R$ 49.9 million to companies across the country that had to replace vehicles, could not transport thousands of passengers, and remained unproductive for days. Nevertheless, the damage goes beyond this value. Since 1987, 20 lives were lost, 77 people were injured, and millions remain traumatized, and many stopped using the service due to its bad reputation.
From Local to Multinational Companies
Extortion is another recurrent expression of violence that hurts small and big companies in Brazil. This category of crime is normally perpetrated by gangs and corrupt members of the security forces. A very interesting case was revealed last June, in São Paulo central area. A little over a year ago, hundreds of drug addicts that form the “Cracolândia” left the surroundings of Júlio Prestes station and changed to an itinerant behavior. Since then, residents and merchants from the central area began to complain about increasing security problems. Individuals that identified themselves as drug traffickers began to charge for removing the crowds of addicts from the front of the stores.
Later, it was reported that civil policemen, military policemen and city guards would have charged protection fees to merchants.
In 2022, according to a survey by the Union of Restaurants, Bars and Similar, 40 restaurants closed in the center of São Paulo due to the increase in violence in the region. A 137-year-old school, the Liceu Coração de Jesus, closed too. Fearing the same destiny, many business owners decided to pay for the protection services, now authorities believe that this may lead to the formation of a militia in the area.
Militias are feared for their connections with members of the local law enforcement forces. Rio de Janeiro is quite famous for having some of the most violent and powerful ones. In the areas under their control, they meddle with almost all local activities, charging companies to allow them to operate and establish a monopoly over certain services. They are also known for extorting companies hired to carry out construction works for public and private projects.
While the micro, small and medium businesses, like restaurants and stores, are hit more easily and deeply, due to their smaller resources, even the huge international companies are hampered by violence. In a recently reported case in Rio’s West Zone, a multinational company whose identity cannot be revealed in this article, was the victim of a militia.
The company acquired a plot of land for a millionaire value to complete a project, but the security conditions of the neighborhood was not evaluated beforehand. In the end, the entrepreneurs had difficulties finding contractors that would accept the work. Only one offered service, presenting itself as a company that “did works in the region”. Later, it was found that the firm was, in fact, owned by the local militia and would not allow competitors to operate there.
Flight of Companies
Between 2013 and 2017, the number of cargo robberies rose strongly (+70.7%), and companies started to leave one of the most affected neighborhoods in Rio city, Pavuna, where several industries and logistics centers were located. According to media sources, 10% of the companies from the region’s business center left at that time. In the same period, São João de Meriti and Belford Roxo, cities in the Metropolitan area, had companies leaving too.
In 2022, the country’s Southeast region, where São Paulo and Rio de Janeiro states are found, accumulated 85.18% of the robberies of the 13,089 cases reported, as data from National Association of Cargo Transport and Logistics (NTC&Logistics) show. São Paulo alone had 45.23% of these cases, while Rio had 31.32%. The companies attacked had an estimated loss of R$ 1.2 billion.
