The policy maker’s guide to graft

Think back to a time when your purse or wallet was stolen, or your laptop with all your files in it lifted from your bag, or any other possession taken from you. What did you feel? Probably outrage, anger and even despair, perhaps with a surprising sense of helplessness.

When corruption occurs, intense emotions rarely, if ever, result (unless you count the joys of mounds of illicitly acquired cash or the agony of incarceration). When corruption swindles the public good, the effect isn’t immediate but muted, diluted across the population, producing a signal so feeble few can feel it—directly. And this may be just what the corruptors, the skimmers, the influence peddlers, the brown-envelopers and breeders of white elephants count on.

The Integrity Forum at the OECD—"Curbing Corruption – Investing in Growth"—will expose corruption in its myriad forms, in both the public and private sectors, as part of the OECD CleanGovBiz initiative, supporting governments, business and civil society to build integrity and fight corruption.

In 2013, OECD countries spent close to US$1.35 trillion in public investment, representing 3.1% of OECD GDP and 15.6% of total investment (public and private). Sub-national governments undertook more than 60% of this investment. Wherever there is money—particularly huge sums of it—the risk of corruption runs high. This is strongest in the case of government-led mega projects on infrastructure. The cost of corruption and mismanagement, already estimated to contribute to 10-30% of large infrastructure budgets, could prove explosive over the years to come. Indicators point to a wide gap between available infrastructure and growing needs. The investment required just to keep up with projected global GDP growth has been evaluated at US$57 trillion between 2013 and 2030.

Corruption exerts a direct, detrimental effect on public investment while cheating the public out of money and value that is rightfully theirs. Corruption puts the brakes on growth by potentially denying certain multiplier effects while reducing the productivity and long-term returns on public investment. Given today’s context of anaemic public expenditures, investment efficiency couldn’t be more crucial. But corrupt practices also skew budgets away from essential services such as health and education (already diminished) and result in poor quality infrastructure or infrastructure that is a plain waste of public funds—the proverbial white elephants. Knock-on effects such as higher maintenance for shoddy construction, shorter operational lifetimes, higher prices to cover inflated costs and even injury and death add to the disparaging picture.

report by BMZ, the German Federal Ministry for Economic Cooperation and Development, provides a striking example. In 2009 the City Archive of Cologne collapsed, killing two people and destroying or damaging numerous historical manuscripts. Restoration of the documents that were saved is estimated to cost 350 million euros. The state attorney found that the building collapsed because of corruption during construction work in the subway that ran underneath it. Only every second or third steel frame was embedded after several tons of steel frames were sold to a scrap dealer, and the Kölner Verkehrsbetriebe (public transport authority) found that 80% of the reinforcements were missing.

Corruption can also create general distrust, both on the part of citizens who see their hard-earned wages wasted in corrupt, state-sponsored endeavours, and by creating an environment inhospitable to investment.

For anyone with corrupt intentions, the public investment cycle presents plenty of entry points. From the initial investment decision through to project selection, implementation and post-project maintenance and evaluation, each phase offers unique opportunities for the unethically minded. How these weak points are exploited depends on the profile of the actor(s) involved. The usual suspects: elected and non-elected public officials, lobbyists, civil society organisations, regulators, contractors, engineers, suppliers, auditors and more. If you think this sounds like a who’s who of total project participants, you’re right—which underlines the massive scale of the challenge. What’s more, fewer than half of building professionals are able (or willing?) to evaluate the annual costs of fraud or corruption to their organisation according to one report. On the other hand, global construction industry losses due to construction mismanagement, inefficiency and fraud could reach US$2.5 by 2020.

How much investment will be captured by corruption depends on whether countries, and corporations, will have the necessary safeguards in place. The Checklist to Curb Corruption in Public Investment is a new OECD tool that will assist governments in mitigating corruption risks in public investment. The checklist identifies corruption entry points over the entire investment cycle and provides real life guidance on how to prevent corruption.

For each shadowy form of corruption there seems to exist a corollary in the world of legitimate business. The enviable position of having "connections in high places" is a nuance away from influence peddling; "informed market information" is a close cousin to insider trading; a company’s "aggressive" efforts to court client loyalty might be bribery by any other name; ambitious targets could easily morph into an "ends-justify-the-means" approach to hitting year-end numbers. While those guilty of corruption may be systematic offenders operating in a corrupt environment, they are just as likely to be first-time offenders, men or women who consider themselves to be "as honest as the next person" (where one places that cursor certainly matters). Corruption can start with a minor moral compromise then crescendo into a long-term scheme for ripping off the public, as graft tends to engender follow-on ethical breaches. The enabling psychology providing the tipping point can be personal or interpersonal. It can exist in isolated pockets within an organisation, permeate whole divisions or entities, and even exist on a countrywide level. "Business-as-usual" can take on many different meanings within the ethical spectrum.

Ethical compliance is preferable to enforcement and the heavy burden it places on both private and public organisations. But in reality both are needed if trust and its enabling effect on investment are to be established. Also, the risk of non-compliance must be fully assimilated by an organisation. Increasingly, non-compliance represents a substantial risk to organisations, quickly sanctioned by markets, shareholders, stakeholders and citizens. Organisations ignore this at their own peril.

The harsh reality may be that human nature isn’t about to change anytime soon. Research has shown that past behaviour, whether an individual’s or a corporation’s, is a poor predictor of future behaviour. In the fight against corruption, perhaps that’s both the good news and the bad news.

More:

Bribery and corruption

Trust in government

©OECD Observer March 2015

This article originally appeared on oecdinsights.org on 18 March 2015. 




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