Highlights: Corruption in the construction sector – The nature and scale of the problem
Surveys repeatedly reveal corruption to be greater in construction than in any other sector of the economy. The scale of corruption is magnified by the size and scope of the sector, which ranges from transport infrastructure and power stations to domestic housing.
Corruption affects both private and public players as they vie for their share of the global construction market of around 3.200 billion US dollar per year. This market represents 5–7 per cent of GDP in developed and advanced developing countries and around 2–3 per cent of GDP in lower-income developing countries.
Corrupt practices are found at every phase in construction projects. Some projects would not have passed the planning stage without the motivation of corruption; the awarding of construction contracts is too often tainted with corruption as are the operation and maintenance of projects after construction is finished.
The tender process may be corrupted by international pressure. Through offers of arms or aid the government of a developed country may influence a developing country to make sure that a company from the developed country is awarded a project, even if it is not the cheapest or best option.
Certain characteristics make the construction sector prone to corruption: the fierce competition for “make or break” contracts; the numerous levels of official approvals and permits; the uniqueness of many projects, which makes it difficult to compare pricing; the opportunities for delays and overruns; and the fact that the quality of work is rapidly concealed by concrete, plaster and cladding.
Projects are executed by dozens, sometimes hundreds, of small-scale subcontractors creating a maze of transactions that are difficult to monitor. Corruption in construction also has a direct cost in lives. Sub-standard construction projects, tainted by bribery, injure and kill when they are built in earthquake zones.
The corrupt are all too often willing to put their personal gain before the welfare of others, as is no more clearly demonstrated than by TI Integrity Awards 2004 winner Satyendra Dubey, who was killed shortly after communicating his concerns about corrupt practices within the National Highways Authority of India.
The role of international finance
Some 250 billion US dollar is spent annually on infrastructure in the developing world alone. Much of this money comes from commercial banks and multilateral development banks (MDBs) such as the World Bank, while privately invested (but government-sponsored) export credit agencies (ECAs) often underwrite large scale projects.
The impact that all these groups can have on corruption is enormous and the influence of MDBs goes beyond the vast sums of money they actually invest (the World Bank plans to spend 7 billion US dollar on infrastructure projects in 2005) since they act as a catalyst for further financial support from the private sector and help set developing countries policy on infrastructure.
While MDBs have begun the process of blacklisting companies that have been proven to engage in corrupt behaviour, MDB involvement in a project is no guarantee that it will be free of corruption. ECAs have shown even less inclination to tackle corruption, often failing to apply with any diligence anti-corruption measures even in the rare instances where such measures exist.
Major strides in recognising the problem of corruption have been taken by both MDBs and ECAs – partly as a result of external pressure from NGOs. Measures taken include debarment of companies found guilty of fraud and corruption, stricter procurement guidelines, and improved financial management and oversight.
There is considerable room for improvement, however. Supervision needs to be increased, safe channels for whistleblowers are needed, disclosure and transparency should be improved and public participation needs to be promoted. Companies that bribe to win international business should risk punishment and blacklisting, irrespective of where they commit the crime.
Even where the international and national legal architecture is in place to prosecute bribery, companies have escaped prosecution. The tenacity (indædthed with which prosecutors in the impoverished African country of Lesotho have challenged large Western companies for paying bribes for contracts to build a 8 billion US dollar hydroelectricity plant has bucked (brudt) that trend.
Following a court case conducted in Lesotho, the World Bank reversed an earlier decision not to debar one of the companies involved, Canadian engineering firm Acres International, and may respond with similar debarment proceedings against other companies that are now facing prosecution, including the German company Lahmeyer, Spie Batignolles of France and Impregilo of Italy.
The costs of corruption
Corruption in the construction sector not only plunders economies, it shapes them. Recognising the problem of corruption in the construction sector, budget decision-makers may skew (skævvride) spending away from the sector to avoid losses. Alternatively, if the decision-makers are themselves corrupt, they may decide to spend more on infrastructure in order to increase opportunities for personal gain.
At the installation stage, corruption lowers expenditure on infrastructure and reduces the productivity of that expenditure. Corruption also raises the operating cost of infrastructure services, and reduces the quality of services and access to them, especially for the poor.
The costs of corruption in the construction and engineering sector are not limited to money. The damage caused by natural disasters such as earthquakes is magnified in places where corrupt building practices flourish, such as where inspectors are bribed to ignore building and planning regulations. The result, when poorly built homes collapse, is that lives are lost and thousands are injured.
Corruption in the construction sector also ravages the environment. Many projects have progressed only because bribes were paid to ignore environmental and social hazards, often with the collusion of consultants who risk forfeiting future projects if they fail to endorse their clients interest in promoting new greenfield investments.
Corruption and post-conflict reconstruction
The challenges faced by conflict-affected countries are formidable. The need for anti-corruption measures is particularly acute in the first years after war. One of the main dangers corruption poses is that infrastructure projects may be designed according to the needs of empowered officials and institutions, rather than of needy populations.
This risk is particularly high with bilateral assistance, when major projects are sought to maximise capital return to the donor country through the use of construction companies from the donor country.
The adverse affects of corruption on the reconstruction process go beyond the physical rebuilding of a country. Less corruption in post-conflict reconstruction means not only better targeted, higher quality, and more efficient assistance, but also a greater contribution to the transformation of the local political economy, as well as the consolidation of more effective state institutions and legitimate political parties.
Less corruption can help build a stronger peace. Corruption in many cases figures among the factors that triggered political unrest or facilitated conflict escalation in the first place. In Cambodia, for example, the corruption of local and regional authorities as well as the participation of ordinary people in the logging sector benefited the Khmer Rouge, helping to sustain the conflict for several years.
The lack of a systematic commitment to transparency in the reconstruction process has put Iraq at risk of corruption on a massive scale as aid money floods in unrestrained by institutional safeguards or even simple inventory systems at ministries and state companies.
Another factor is the legacy of corruption left by the former regimes control over the economy and the speed at which new economic policy is being introduced. Rapid privatisation, if enforced by the IMF and the Paris Club of official creditors as a condition for reducing and rescheduling some 120 billion US dollar of foreign debt, could magnify opportunities for corruption.
The credibility of the international community to play a role in curbing corruption in Iraq has been dented by the “oil-for-food” scandal, and the secrecy surrounding the allocation of lucrative contracts by the US government.
Contracts have been “bundled” such that smaller companies cannot compete; many lucrative deals have gone to companies such as Halliburton and Bechtel with close links to individuals in government; and there have been suggestions of excessive profiting by the prime US contractors who subcontract jobs to local firms at a fraction of the price they themselves are paid.
Corruption around the world
Africa
There were significant setbacks in the fight against corruption in certain countries in Africa, and many challenges remain for the continent. The African Union Convention on Preventing and Combating Corruption is still eight ratifications short of the 15 needed for it to enter into force.
The credibility of Kenyas coalition government to make good on its anti-corruption campaign was dented by a series of high-profile scandals in 2004 including an alleged 10 million US dollar stashed in bank accounts by a cabinet minister and US 24 million dollar reportedly overpaid to Anglo-Leasing to upgrade passports.
The donor communitys confidence in the governments strategy to fight corruption through a series of laws and offices has been severely damaged by the scandals.
Zimbabwes chaotic land reform process has crippled the agricultural economy and stripped the country of basic commodities such as fuel and food, as well as foreign currency. Informal markets have emerged to satisfy the need for basic items and foreign currency. Few people, businesses or even government institutions can survive without recourse to these illegal markets.
More positively, new powers and a new governor at the reserve bank appear to be making headway in cleaning up the financial sector.
Institutional, legal and judicial reforms are urgently needed in the Democratic Republic of the Congo, but will be difficult to achieve given the precarious post-war political situation. Many of the leaders of todays transition government have been accused of embezzlement to fund the conflict.
A key area for reform is government contracting. Anti-corruption measures are applied to contracts funded by international donors but only 3 per cent of contracts entered into by the Congolese authorities involve a tendering process.
The creation of Burkina Fasos new High Commission for the Coordination of Anticorruption Activities was met with optimism, and the success of the countrys broader anticorruption strategy is closely tied to the ability of this new body to take on high-profile corruption cases and ensure that its work is visible.
The insistence by the commission on publicising progress reports on corruption cases is positive, as is the national anti-corruption policy it released in April 2004.
Studies by various international organisations into corruption in Cameroons forestry industry prompted the government to create a new unit to fight corruption in the sector. However, the fact that the unit was created within the under resourced forestry ministry – the very site of many of the alleged corrupt acts – has dented expectations that the new team will be effective.
Police corruption continued to be a major concern in the period under review. In March 2004 taxi drivers went on strike, denouncing police harassment and demanding that the state defined rate set for fines be respected.
Asia/Pacific
Corruption in elections was a concern in several countries of the region. At national elections held in July 2003 in Cambodia, there were reports of widespread vote buying, violence and intimidation by all contesting parties, particularly in rural areas.
The ruling Cambodian Peoples Party accounted for the larger share of these allegations. The elections interrupted protracted discussions over an anti-corruption law, a key demand of civil society, though the draft currently under debate is weak and falls well short of the requirements of the UN Convention against Corruption.
Vote buying was also a problem in Indonesias July 2004 presidential elections, according to reports by the general election supervisory committee and watchdogs such as Transparency International Indonesia. The weak campaign finance law of 2003, which lacks sanctions for failing to present accounts or disclose donors, did little to deter parties from attempting to bribe the electorate.
There is evidence that corruption has been decentralised along with power since the end of the Suharto administration in 1998.
Independent monitoring of election spending in Sri Lanka uncovered a multitude of irregularities at the April 2004 ballot, including the abuse of state resources – particularly state media – for campaign purposes.
In India, state parliamentary elections in November 2003 provided the first extensive test of a requirement for all candidates contesting elections to declare their educational levels, criminal records, assets and financial liabilities. The information was widely publicised by the media and monitored by NGOs.
Political instability and an apparent lack of concern by the electorate about the criminal history of aspirants to elected positions have contributed to high levels of corruption and impunity in Vanuatu (in the Pacific).
Former prime minister Barak Sope was sentenced in 2002 to three years imprisonment for forging government guarantees, yet a year later he was elected in a by-election. President Alfred Maseng Nalo was elected in 2004 as he was serving a two-year suspended sentence for corruption.
Several countries issued whistleblower regulations in 2003–04. The Indian government issued a resolution on whistleblowers in April 2004, which, though welcome, is weaker than the draft law written by the Indian Law Commission and currently under examination by the government. Whistleblower protection was also approved in Japan in June 2004 and will come into force by 2006.
The judiciary came under scrutiny in Sri Lanka, where a survey of acting and retired judges carried out by the Marga Institute gave substance to the public perception that corruption is widespread in the judiciary. Of 50 judges questioned, 41 reported 226 incidents of bribery within the judiciary.
There have been two attempts to impeach chief justice Sarath Nanda Silva on charges including obstruction of justice, violation of the constitution and abuse of power. On both occasions the president dissolved parliament before proceedings could be completed.
The Vietnamese government has repeatedly affirmed its determination to tackle corruption and, as evidence that it is serious about this goal, has prosecuted several prominent figures. With tight state control over the media, there is little independent investigation into the wrongdoing of senior officials, however, compounding the risk that investigations will remain selective rather than comprehensive.
An anti-corruption commission was created in Bangladesh in 2004 to replace the discredited anti-corruption bureau. The commission has wide-ranging investigative powers, but its autonomy is limited. The commissioner is appointed by the president and the government controls its budget.
New procurement regulations that promote transparency and accountability were introduced at the ministry of planning, but, significantly, exceptions are allowed on matters of state security, including military spending.
A new presidential decree on public procurement was issued in Indonesia in December 2003, creating a national oversight office and requiring full disclosure of all bidding information.
New guidelines on procurement were also introduced in China in line with the 2003 Government Procurement Law. A key area of concern is corruption in the construction sector, especially given the massive spending on infrastructure for the 2008 Olympic Games.
An auditing and supervision department has been set up by the Beijing government and the organising committee for the Games to oversee an estimated 16 billion US dollar of business opportunities for domestic and foreign investors.
(Afsnittene om Europa og Nordamerika, som stod her, er udeladt)
Latin America
Corruption was centre stage in the May 2004 Panamanian elections, with all four candidates promising concerted action to fight graft. It remains to be seen whether the winner, President Torrijos, has the political will to translate his promises into actions. High levels of voter fraud and accusations of irregularities in the financing of the 2004 electoral campaigns have pushed electoral reform high on the public agenda.
The judiciary was a topic of concern in several countries. In Nicaragua, despite pressure from the G8, the main political forces failed to approve a new law that would introduce transparent and competitive recruitment procedures and would require the supreme court to relinquish its current powers to administer appointments and salaries.
The weakness of the judiciary relative to the executive and legislative branches of government was evident in Bolivia where parliamentary immunity and a compliant congressional commission responsible for investigating high-profile corruption cases allowed five-year old allegations of corruption against former defence minister Fernando Kieffer to continue to stall.
Also in Bolivia the misuse of state funds was evident at various levels of government. An accusation that a government minister had embezzled ministerial funds prompted a debate over a new law that would give the auditor general and a legislative commission oversight over the use of the funds.
Corruption at local level was the focus of initiatives in Colombia. Governors and mayors were asked to sign transparency pacts with civil society organisations in an effort to tackle corruption at the regional and sub-regional levels. Success of the scheme has been limited, however, because the terms of the pact are too vague for compliance to be effectively monitored.
In Peru, corruption at local level also came into focus as the central government set in train its process of devolution of power to the regions. The speed with which the operation was implemented, however, meant there was no time to put control mechanisms in place to supervise the new local government institutions, and a year later eight of the 25 regional presidents had been investigated for corruption and one had been deposed for bribery and embezzlement.
Failure of the new institutions to provide watchdog bodies and their constituents with information about their operations is a major failing.
The Brazilian governments fight against corruption continued to be characterised by knee-jerk reactions to scandals rather than a concerted effort to tackle the problem branch and root. Corruption in gambling and football was a big topic in the period under review, which saw the president of the Brazilian Football Confederation and a former coach of the national team under investigation for embezzling fraud and misappropriation of funds.
Corruption scandals in Costa Rica served to underscore the importance of independent monitoring of government contracting. The social security administration was accused of accepting bribes for the award of a lucrative medical equipment contract, which prompted the legislature to revive discussions over a six-year-old anti-corruption bill.
One effective oversight agency, an academic institute charged with overseeing the highway agency, was hampered by a lack of financial independence.
Please refer to the country reports section of the Global Corruption Report 2005 for detailed country-specific information on the following:
Argentina, Azerbaijan, Bangladesh, Bolivia, Brazil, Britain, Burkina Faso, Cambodia, Cameroon, Canada, China, Colombia, Congo (DRC), Costa Rica, Croatia, Czech Republic, Georgia, Germany, Greece, India, Indonesia, Ireland, Japan, Kenya, Latvia, Nicaragua, Norway, Palestinian Authority, Panama, Peru, Poland, Romania, Russia, Serbia, Slovakia, Sri Lanka, Turkey, Vanuatu, Vietnam, Zimbabwe.
Transparency Internationals 2002 Bribe Payers Index, and Control Risks Groups “Facing Up to Corruption”, summarised in the Global Corruption Report 2003 and 2004, respectively. UNCTAD, Regulation and Liberalization in the Construction Services Sector and its Contribution to the Development of Developing Countries (UNCTAD, 2000), available at www.unctad. org
Kilde: www.transparency.org
