Corruption Information

Why corruption occurs

 

This section examines why corruption occurs in the infrastructure, construction and engineering sectors.

Corruption usually occurs because some individuals are willing to use illicit means to maximise personal or corporate profit. However, in order for these individuals to become involved in corrupt activity, circumstances must exist which do not prevent or discourage them from doing so. This section considers the motivation for corruption, and examines the factors which make it easier for corruption in the infrastructure, construction and engineering sectors to take place and which are, therefore, largely responsible for corruption occurring. These factors exist at project, national and international level.

As explained in What is corruption, GIACC uses the term "corruption" in the wider sense to include bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering.   Consequently, the discussion in this section applies to all such criminal activity.

The motivation for corruption

Voluntary. In some cases, the corrupt practice may be a voluntary act undertaken by the relevant party with the deliberate intention of gaining a competitive advantage or obtaining additional unjustified compensation.

To level the playing field. In other cases, the practice may be undertaken so as to “level the playing field”. For example, a contractor may feel compelled to offer a bribe during tendering if it believes that its competitors will be offering a bribe. Alternatively, a contractor may feel that it is necessary to inflate a claim artificially if it believes that the project owner will automatically and unjustifiably reduce the contractor’s claim or raise artificial counter-claims against the contractor.

Extortion. In some circumstances, a bribe may be extorted from the payer. For example, a contractor may be informed that if it does not pay a bribe, it will not receive a payment to which it is entitled. Alternatively, a police or immigration official may, in threatening circumstances, demand a bribe.

Normal business practice. Some offences are committed in the mistaken belief that practices, such as the inflation of claims or the wrongful withholding of payment, are normal business acts and do not constitute criminal offences.

Factors at project level which facilitate corruption

Absence of project anti-corruption systems: Many infrastructure projects have few or no means by which corruption during any phase may be prevented, deterred or detected. Some methods are used, but these may focus on one or two aspects of corruption, such as monitoring of the tender process, and leave the rest of the project without sufficient safeguards. Proper anti-corruption systems which are imposed on projects by government departments, implemented by project owners, and required as conditions of funding by funders are critical to the reduction of corruption. If these were introduced and properly operated then they would serve to reduce corruption on individual projects even where a large number of the other causes of corruption listed in this section remained outstanding. (See Project Anti-Corruption System (PACS)).

The nature of infrastructure projects: The nature of infrastructure projects facilitates corruption. In particular, the complex contractual structure, the diversity of skills, different project phases, the large size, uniqueness and complexity of projects, the concealment of some items of work by other items, the lack of transparency in the industry, and the extent of government involvement all contribute to an environment in which bribery, extortion and fraud can be difficult to prevent and detect. Each of these features is discussed in more detail below.

Contractual structure: Infrastructure projects normally have a large number of participants linked together in a complex contractual structure. Each link has its own contractual documentation, and particular risks and difficulties. The project owner may contract with funders, consultants and with a main contractor to construct the project. The main contractor may then sub-contract key parts of the project to major sub-contractors. Those sub-contractors may in turn sub-sub-contract parts of their work to sub-sub-contractors. These sub-sub-contractors will purchase equipment and materials from suppliers, and may further sub-contract parts of their work. The resultant contractual cascade could easily have in excess of 100 contractual links. Every contractual link provides the opportunity for someone to pay a bribe in return for an award of the relevant contract. In relation to every contractual link, works and services are provided in exchange for payment. Each such exchange provides an opportunity for bribery and/or fraud in relation, for example, to obtaining certification for work or extensions of time, obtaining payment, collusion, price fixing, or inflated claims. In the operation phase, there is opportunity for corruption in relation to the maintenance and public use of the project. An example of a complex structure in relation to the construction of a power station project is shown in the diagram below:

Diagram of corruption

Diversity of skills and integrity standards: The infrastructure industry is a diverse industry, in terms of the number of different professions, trades and specialist contractors. For example, a typical power station project may involve the following:

  • Professionals: such as architect, structural engineer, civil engineer, building engineer, mechanical engineer, electrical engineer, electronics engineer, thermal engineer, acoustics engineer, metallurgist, geologist, quantity surveyor, land surveyor, accountant, lawyer, banker. Each of these professions may have a different national professional association with different codes of conduct, and differing levels of enforcement of these codes.
  • Trades: such as machine operator, concrete pourer, steel fixer, formworker, scaffolder, erector, pipe fitter, cladder, brick layer, plasterer, carpenter, electrician, plumber, glazier, tiler, welder, driver. Each of these trades may have a different national trade association.
  • Specialist contractors: such as excavation, foundation, civil, building, erection, insulation, cladding, roofing, turbine, generator, boiler, pipework, pumps, cooling systems, controls and instrumentation.

This diversity leads to varied standards of qualification, integrity and oversight.

Project phases:  Projects normally have several different phases, each involving different management teams, and each requiring handovers of the completed phase to the contractors undertaking the next phase. For example, a power station project may have the following phases: financing, design, excavation, foundations, civil works, building works, equipment manufacture, equipment erection, power station commissioning, and operation. Even if one main contractor undertakes all the phases, it will normally sub-contract the different phases to different sub-contractors. This leads to difficulties in control and oversight.

Size of projects:  Some projects can be very large in scale. Major dams, power plants, industrial plants and motorways cost significant amounts of money. It is easier to hide large bribes and inflated claims in large projects than in small projects.


Uniqueness of projects: Projects vary tremendously in content and size.  Rates for labour, equipment and materials vary according to market demand. Many projects are unique. As a result costs are often difficult to compare. This makes it easier to inflate costs and hide bribes.

Complexity of projects: Projects can be complex. The inter-relationship between events is often uncertain. Many people working on a project appear not to know, or to disagree on, the reason why something has gone wrong, or why costs have overrun. This makes it easier to blame other participants for problems, and to claim payment for these problems, even if such claims are unjustified. It also creates a reason to pay a bribe, as decisions on cause and effect and their cost consequences can have enormous impact. Bribes and inflated claims can also as a result be more easily hidden, and be blamed on other factors, such as poor design or mismanagement.

Concealed work: Most components in an infrastructure project will be concealed by other components. For example, structural steel may be concealed by concrete, brickwork may be concealed by plaster, engineering components may be concealed in casings, and roof structures may be concealed by cladding. As a result, an enormous dependence is placed by the industry on individuals certifying the correctness of the work before it is concealed. This provides opportunities to pay bribes to these individuals to certify too much work, or to approve defective or non-existent work.

Lack of transparency: There is no culture of transparency in the infrastructure sector. There is little or no requirement for funders, project owners or project participants to make public details of the funding, the underlying project and the identity of the project participants, including the identity of the contractor, joint venture partners, sub-contractors, consultants and agents. Costs are as far as possible not disclosed, even when public money is spent. Commercial confidentiality has historically taken precedence over public interest. There may, therefore, be inadequate inspection of books and records which could uncover malpractice. Without such transparency, it is more difficult to detect, for example, suspicious funding arrangements, suspicious relationships between the participants which may facilitate corruption, projects which may have a corrupt purpose, projects which have been granted planning permission corruptly, or fraudulent contract pricing.

The extent of government involvement: The extent of government involvement in infrastructure is significant. Most major international infrastructure projects are government owned. Even privatised projects normally require government approvals, such as planning permission, or agreements with government as to the terms on which the public may use the end product. The power wielded by government officials in this regard, when combined with the structural and financial complexity of the industry referred to above, makes it relatively easy for government officials, for example, to commission projects for their own purposes or to extract large bribes in exchange for the award of contracts or for approving inflated contract prices or fraudulent claims.

Acceptance of the status quo: While there has been a significant change in attitude over the last few years, many people working in the infrastructure sector still accept the status quo, and/or make little attempt to change it. Bribery and deceptive practices seem to have become so engrained in some parts of the sector and in some territories, that in many cases they have become accepted as the norm. The following are some attempted justifications sometimes given by some participants in the sector:

  • "Corruption is an accepted part of life in the relevant country. The people in that country see nothing wrong in it."
  • "Bribery and deceptive conduct are not really crimes. They are just age old business practices. They are part of the game. Everybody does it."
  • "The cost of a bribe is merely an essential business cost. It forms part of the contract."
  • "If we stop bribing, our competitors will not stop. Therefore, we have to bribe in order to remain competitive."
  • "Corruption is only a problem for developing countries. It does not exist in our [developed] country."

Factors at national level which facilitate corruption

Corruption in government: Corruption in the governments of both developing and developed countries contributes to corruption in infrastructure. Such corruption may occur, for example, where ministers or other political figures extort bribes or require projects to be carried out for corrupt personal benefit, or where government figures ensure, in exchange for political funding or personal benefits, that favoured contractors are awarded government contracts, and that they are protected from prosecution for corruption committed at home and abroad. Such protection will foster the continuation of corruption by these companies in developing countries because they have little fear of prosecution at home or in the country where the project is located.

Lack of consistent anti-corruption policy within government: Even where governments may not be corrupt, the lack of a consistent anti-corruption policy within a government will erode attempts by any part of that government to curb corruption. For example, a department responsible for international development may endeavour to encourage companies to adopt ethical policies, to have laws against bribery strengthened, and to press for prosecution of those companies who have committed bribery or fraud. However, the department for trade, in the same government, whose interests may be primarily concerned with business profitability, may be more concerned to protect business interests, to make laws regarding corruption more lenient, to reduce requirements for disclosure and accountability, and to block prosecution for corruption. On the one hand, the government is seeking to tackle corruption. On the other hand, it is undermining such efforts. Corruption will not be reduced unless this is made an unquestioned priority by all government departments. For recommended actions for governments, see Anti-Corruption Programme for Governments.

Insufficient reporting of corruption: Inadequate reporting of corruption fuels corruption as the perpetrators do not fear detection. The reasons for inadequate reporting of corruption are as follows:

  • Lack of knowledge: There is often a lack of awareness within the industry and amongst the public as to the nature of the different types of corruption and that they constitute criminal offences. Thus, corruption often goes undetected, even by those against whom it is perpetrated, and therefore goes unreported.
  • Fear of whistle-blowing: People will often be afraid to report corruption because they fear discrimination or retaliation by the perpetrators, or that they will be implicated in the corruption.
  • Inadequate or non-existent reporting structures: Both on projects and generally in society there may be inadequate means by which individuals can safely report corruption and be confident that such reports will be properly acted upon.

Insufficient prosecution of corruption: Inadequate prosecution of corruption, both in developing and developed countries, will facilitate corruption. Unless there is clear evidence that corruption will be prosecuted, unscrupulous individuals and companies will continue to commit corruption at the expense of those ethical individuals and companies who do not do so. The lack of prosecution may be due to corruption and/or government inaction, as explained above. It may also be due to lack of resources, and lack of co-ordinated action at international level by governments, donors and industry practitioners. In addition, corruption will not be significantly reduced if there is only prosecution of low level employees and officials. It is only by prosecuting at higher levels that corruption will be significantly reduced.

The vulnerability of project owner's officials to corruption: Infrastructure projects are usually public sector projects where the project owner is a government department. The individual employees of such a department who are responsible for the selection and management of road projects may be vulnerable to corruption for a number of reasons:

  • They may have little incentive to maximise profit for the department.
  • They may have little accountability and therefore will not be concerned to minimise loss or ensure good quality work.
  • They may have unchecked control over the selection and management of projects.
  • In developing countries, such individuals may be poorly paid because of the general lack of resources or because of corruption.

The above factors encourage individuals to extort bribes in relation to the projects that they are overseeing or make such individuals obvious targets for such bribery. Even if contractors do not bribe the employee, they may be aware that the quality of their work and the claims they submit may not be subject to as much scrutiny as would be the case in private sector projects. This, therefore, encourages unethical contractors to submit highly inflated claims and to carry out sub-quality work.

The vulnerability of other government employees to corruption: Other government departments may be involved in projects for purposes of issuing visas, import permits, customs clearances, planning permissions, land clearance permits and other matters. Such employees in developing countries may have little incentive to act ethically, particularly where they are underpaid and are aware of large scale corruption higher up in government. They may therefore resort to extortion to supplement their incomes. Contractors are often placed in the predicament of having to comply with extortion demands, or suffering losses and delays on projects, or having to withdraw altogether from countries where extortion is common.

Lack of publicly available data on corruption convictions: In carrying out due diligence in relation to a prospective project, potential lenders, donors and project participants should enquire as to the extent to which the potential major project participants, their employees, joint venture partners and group companies have been investigated, prosecuted and convicted for corruption. However, it may be impossible for the party carrying out the due diligence to determine whether it has been provided with a truthful response. If countries maintained public national registers with information as to convictions and prosecutions, then this would significantly assist this aspect of due diligence. The prospect of such public declaration of corruption conviction would itself serve to deter corruption by companies and individuals who are concerned about their reputation.

Lack of sufficient data regarding national infrastructure: A type of corruption which may occur, for example, on a road project is the selection or routing of a new road for corrupt purposes. Sometimes such purpose may be easy to detect. On other occasions, it may be better disguised. Lack of comprehensive and up-to-date data regarding the state of national road networks makes it difficult for lenders, donors, project monitors, and domestic planning departments to determine whether a particular proposed road project, which may have been approved by a corrupt planning officer or minister, is genuinely in the interests of the community and not simply being carried out for a corrupt purpose.

Lack of sufficient data regarding comparative costing of infrastructure projects, materials, and methods: The lack of such data means that there may be no method of assessing a tender price other than against other tender prices submitted for the same project. Where contractors are colluding to fix bid prices, then the respective tender prices will in any case be inflated so these will not be a reliable measure. In addition, lack of such data makes it more difficult to assess the cost claimed for variations, and therefore to detect those claims which may be fraudulently inflated.

Factors at international level which facilitate corruption

Lack of inter-governmental co-operation: Insufficient co-operation between governments will facilitate corruption. There should be co-operation and the development of a consistent approach in relation to the provision of government aid to countries where corruption is widespread, the investigation and prosecution of corruption, and the enforcement of anti-money-laundering provisions. Without a co-ordinated approach on these matters, corrupt governments will continue to receive aid without sufficient controls, certain companies will continue to be corrupt because they do not fear prosecution, and corrupt individuals will continue to benefit from their corruption. Conversely, ethical companies will be unable to win work in these jurisdictions, and if they do win work, will face extortion in obtaining permits, certificates and payments. For details of the international obligations on governments to co-operate, see Conventions.

Lack of pro-active steps by funders to limit corruption on projects: As the providers of finance, funders are in a uniquely strong position to inquire closely into the merits of a project and to require, as a condition of funding, the implementation of anti-corruption measures on projects. It is not politically incorrect to impose such conditions. It is a commercial and ethical necessity. The desire to allow countries to “own” aid provided to them ignores the fact that such ownership is not in the hands of the ordinary citizens but in the hands of politicians who may be corrupt. The manner in which funds may be provided may facilitate corruption. For example, funding may be provided:

  • in circumstances where funders' officials turn a blind eye to corruption or where they may themselves be complicit in the corruption;
  • without sufficient due diligence being carried out;
  • without adequate anti-corruption measures being imposed on the underlying project;
  • without sufficient transparency as to the terms of funding and the details of the project;
  • with little monitoring by the funders to determine whether or not there is corruption on a project;
  • with little monitoring by the funders to establish that the funds have been properly used.

For recommended actions for funders, see Anti-Corruption Programme for Funders.

Lack of co-ordinated action between contractors, consultants and business and professional associations: Insufficent communication and co-operation between international and local contractors, consultants and business and professional associations with regard to tackling corruption will facilitate corruption. Without such co-operation, it will be difficult to establish a level playing field in which all contractors and consultants adopt equivalent ethical standards. As a result, ethical contractors and consultants will continue to be prejudiced by the willingness and ability of their more unscrupulous competitors to participate in corruption. Many contractors, consultants and business and professional associations are now taking a lead on this issue. For details of these initiatives, see Initiatives. For recommended actions by contractors, consultants, and other parties providing the equipment, materials and services for a project, see Anti-Corruption Programme for Companies.  For recommended actions by business and professional associations, see Anti-Corruption Programme for Associations.

Lack of sufficient debarment of corrupt companies: Governments, funders and project owners should operate a system of debarment whereby companies and project owners which have been convicted for corruption are debarred from funding or projects for a specified period. Co-ordinated action is required to ensure that this penalty is transparently, fairly and evenly applied.

 

Most recent update on 6th November 2014

Page first published on 1st May 2008



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