URL :
http://www.transparency.org/cgi-bin/dcn-read.pl?citID=45301 Mail Received
The economics of corruption
Business Line 17 Sep 2002
Corrupt officials distort public sector choices to generate large
rents for themselves and to produce inefficient and inequitable
public policies. The Government produces too many wrong kind of
projects and overspends even on projects that are fundamentally
sound.
THE former Chief Vigilance Commissioner, Mr N. Vittal, called for
greater transparency in the tender floatation and acceptance
process pertaining to high-value capital-intensive projects and
also 'mega' tenders for material supplies. A look at the process
reduces the element of 'sleaze' involved in a deal enriching
corrupt officials and politicians.
Recently, in a path-breaking judgment, a former Union Minister was
sentenced to a term of imprisonment for corruption in a public
utility deal, along with a senior public official. This development
is to be welcomed as an example of the dictum: "Be you ever so
high, the law is above you."
However, the economics of corruption has not been a subject of
in-depth research and it is this lacuna we seek to particularly
fill. "Grand corruption" occurs at the highest levels of government
projects programmes. Governments frequently transfer large
financial benefits to private firms through procurement contracts
and the award of concessions. Bribes transfer monopoly rents to
private investors with a share to the corrupted officials.
Privatisation processes are vulnerable to corrupt insider deals.
Corrupt payments to win major contracts and concessions are
generally the preserve of large businesses and high-level
officials. The important cases represent a substantial expenditure
of funds and have a major impact on the government budget and the
country's growth prospects. These deals are by definition the
preserve of top officials and frequently involve multinational
corporations operating alone or jointly with local partners.
Corruption in contracting occurs in every country at various ends
of the economic development scale. The Bofors case in Defence
procurement and the Tehelka episode are unravelling. Earlier, the
palm oil scam had several reverberations. 'Kickbacks' are quite
common in public construction activities, in cement procurement, in
bulk purchase of drugs and stationery and so on.
If the government is a buyer or contractor, there are several
reasons to pay off officials. First, a firm may pay to be included
in the list of pre-qualified bidders and to restrict the length of
the list. Second, it may pay for inside information. Third, bribes
may induce officials to structure the bidding specifications so
that the corrupt firm is the only qualified supplier.
Fourth, a firm may pay to be selected as the winning contractor.
Finally, once a firm wins the contract, it may pay to get inflated
prices or to skimp on quality.
The Zimbabwe collusion between senior ministers in Posts and
Telecommunication and a Swedish telecommunications company may have
circumvented local tender board procedures. Kickbacks were reported
to be as high as $7.1 million. A major scandal in Singapore
involved several multinational firms and a senior official of the
Public Utility Board. The official was paid to reveal confidential
information about tenders. The case led to the blacklisting of five
major multinationals implicated in the scandal. The official
received a 14-year jail term.
In Italy, the cost of several major public construction projects
reportedly fell dramatically after the anticorruption
investigations of the early 1990s. The construction cost of the
Milan subway fell from $227 million per km in 1991 to $97 million
in 1995. The cost of a rail link fell from $54 million per km to
$26 million, and a new airport terminal is estimated to cost $1.3
billion instead of $3.2 billion.
The most recent large-scale scandal in the US Defence Department
was Operation III Wind, a sting operation of the Federal Bureau of
Investigation that led to the conviction of 54 individuals and 10
corporations for disclosing technical specifications on competing
bids for contracts in return for money and jobs.
Goods that are used up in consumption are prime candidates for
payoffs because it may be difficult to discover whether or not they
actually were delivered.
Many corruption cases involve payoffs to obtain confidential
information about minimum and maximum price thresholds,
average-offer prices, and project evaluation criteria. Corruption
in the divulgence of information is difficult to prove in court,
but it is also difficult for a firm to be sure that it is the only
buyer.
Is there anything distinctive about these cases other than the size
of the deals? At one level, they appear analogous to cases in which
government disburses a scarce benefit. As before, systemic
corruption can introduce inefficiencies that reduce
competitiveness.
It may limit the number of bidders, favour those with inside
connections over the most efficient candidates. Limit the
information available to participants, and introduce added
transactions costs.
However, the scale of the corrupt deal and the involvement of
high-level officials introduces new concerns. First, if top people
are concerned primarily with maximising personal gain, they may
favour an inefficient level, composition, and time path of
investment. Second, investors' decisions may be affected by the
fact that they are dealing with corrupt political leaders.
In Nigeria, in 1975, the military government ordered cement that
totalled two-thirds of the estimated needs of all of Africa and
which exceeded the productive capacity of Western Europe and the
Soviet Union. The price exceeded the international market price by
a wide margin, presumably to make room for kickbacks, and freight
companies collected compensation for having to wait in the logged
Lagos harbour. The cost to Nigeria was $2 billion, or one fourth of
1975 oil revenues. In Italy, the annual per capita consumption of
cement has been double that of the US and triple that of Germany
and the UK.
For large, capital-intensive projects, the time path of net corrupt
benefits may be quite different from the pattern of net social
benefits. This will affect the choices of rulers. Suppose, as seems
likely, the benefits of bribery are relatively more concentrated in
the present than those of the overall project. At least some of the
bribes are paid upfront before the project has begun.
Then, even if the rulers and the populace discount the future at
the same rate, the rulers will support project and policies that
have an inefficient time path of net social benefits. For example,
with major construction projects, a country's leaders will extract
bribes in the present and may experience few of the future costs of
shoddy workmanship or an excessive debt burden.
Furthermore, corrupt officials may well have a higher discount rate
than the country's citizens. Even a ruler who has good short-term
control over society may not have secure long-term tenure.
The rulers' very venality may make him insecure and subject to
overthrow. This insecurity induces him to steal more, making him
even more insecure, and so forth. As a consequence, he or she will
have a relatively high discount rate for government projects and
will support project with quick short-term payoffs and costs spread
far into the future.
Paradoxically, an active pro-democracy movement that destabilises
an incumbent autocrat can lead to an increase in corruption and
insecure status. In short, corrupt policies as the ruler reacts to
his new insecure status. In short, corrupt rulers are likely to
support an inefficient time path of social benefits and costs.
The process of transferring assets to private ownership is fraught
with corrupt opportunities. Many corrupt incentives are comparable
to those that arise in the award of contracts and concessions.
Instead of bribing a state owned firm to obtain contracts and
favourable treatment, bidders for a public company can bribe
officials in the privatisation authority or at the top of
government.
When large state enterprises are privatised, there may be no
reliable way to value their assets, and the tax and regulatory
regime that will prevail ex-post may be poorly specified.
There were allegations (subsequently determined to be completely
unfounded) that Bharat Aluminium Company was sold at an
under-valued price of Rs 550 crore to Sterlite Industries. In
Brazil and Greece, heads of governments were said to be involved in
graft through privatisation.
Corrupt incentives may mean that the most efficient bidder loses
out to a corrupt insider. Even if the most efficient firm wins,
corruption in the tendering process assures that the government
receives too little from the sale. This implies higher taxes or
lower public spending.
Corruption that involves top-level personnel can produce serious
distortions in the way the government and society operate. The
state pays too much for large-scale procurements and receives too
little from privatisation and the award of concessions.
Corrupt officials distort public sector choices to generate large
rents for themselves and to produce inefficient and inequitable
public policies.
The Government produces too many of the wrong kind of projects and
overspends even on projects that are fundamentally sound.
Corruption reduces the revenue-raising benefits of privatisation
and the award of concessions.
Firms that retain monopoly power through bribery and favouritism
undermine the efficiency benefits of turning over state firms to
private owners.
-------------------------------------------------------
=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-W-E-B---S-I-T-E-=-=-=
To Subscribe/Unsubscribe from GoaNet | http://www.goacom.com/goanet
===================================================================
For (un)subscribing or for help, Contact: [EMAIL PROTECTED]
Dont want so many e=mails? Join GoaNet-Digest instead !
