Reports are coming in about abusive practices and possible corruption in the World Cup stadium construction projects in Brazil. With fresh memories of angry protests by Brazilians prior to the start of World Cup and Brazil set to host the 2016 Olympics, we have a unique opportunity now to learn.

ELLIS

For example, a recent government audit reportedly found that the project costs for the state of Brasília's brand-new taxpayer-funded stadium have tripled, to almost (U.S.) $1 billion. This makes Brasília's stadium the world's second most expensive—in a city that does not even boast a major professional soccer team. The audit identified $500 million in questionable spending on the stadium. In one instance, transportation of prefabricated grandstands that was budgeted to cost $4,700 reportedly wound up costing $1.5 million. Another part of the report said some materials had been listed multiple times on bills.

At the same time, the Associated Press reported that the stadium's lead builder increased its political donations in the most recent election almost 500-fold, suggesting the possibility of a quid pro quo arrangement in the contract award.

What was the response from the head of the Brazilian government's World Cup committee in Brasília? He questioned the timing of the audit and said, "They're trying to spoil the party."

While the accuracy of these initial audits and reports are still unconfirmed, there are many reasons to worry because Brazil has several of the conditions that increase the risk of corruption. They include too-cozy relationships between the construction industry and the government, with four of the six top campaign donors in the 2010 election coming from the industry.

Brazil's regulatory requirements can be onerous, requiring frequent permitting. In the World Bank's "Doing Business 2014" report, Brazil ranked at No. 130 out of 189 economies in "ease of dealing with construction permits," with 15 procedures requiring 400 days to accomplish. Compared to other Latin American countries such as Colombia (ranking at No. 24, with eight procedures taking 54 days) or Mexico (ranking at No. 40, with 11 procedures taking 82 days), Brazil's construction rules are strikingly burdensome. Because of this, it is common for firms to hire "despachantes," or local fixers, to help navigate processes, creating the risk of improper third-party payments.

Room for Bribery

The more complicated the regulations, the more numerous the government officials involved and the more discretion exercised by each one. This arrangement means more room for bribery; as we know, the contract values for stadiums dwarf the amount of possible bribes.

With the government funding expensive projects, Brazil is prone to sophisticated collusive schemes involving multiple actors to manipulate contract awards. For example, Brazil's Administrative Council for Economic Defense, its anti-trust regulator, currently is investigating several firms, including Germany's Siemens, France's Alstom, Japan's Mitsui and Canada's Bombardier, for alleged price-fixing in the construction of train and metro networks in the country.

Opportunities abound to inflate costs because the work is varied and benchmarks are few. As well, certain areas of work tend to create unique cost-inflation opportunities. For example, in "earthworks," costs related to moving and flattening banks of soil range widely based on numerous technical factors, which can be challenging to confirm. Inflating costs also creates the funds used for bribery.