Petty Corruption and Facilitation Payments
Petty corruption is common in the ordinary business operations of local and international corporations in Asia. Most of it takes the form of small payments to low-level bureaucrats to help speed slow-moving public ser- vices and can thus be classified as facilitation payments. Areas in which such payments are common include customs, business licenses, work visas, and police protection. It was recently reported that without grease payments, the registration of a new company in Indonesia would take at least two years (Financial Times, April 4, 2002).
In the context of international transactions, most private firms adopt a practical stance and tolerate small facilitation payments. As one company spokesman explained,
Unfortunately, if we don’t make these payments, we don’t get telephone lines when we need them. We don’t get the visas we need to go from one country to another where we have operations. Legal matters aside, if mak- ing these truly nominal payments in emerging economy locations means that we can operate in them effectively, I think our local clients, employees, suppliers, and their communities benefit. Demonstrating that a five dollar facilitating payment has the same impact as a five million dollar bribe would be difficult.
Such tolerance is reflected in the laws of most developed countries against bribery abroad. It is recognized that petty corruption is practically impossible to eliminate without first tackling grand corruption, which has more devastating consequences. A 1988 amendment to the U.S. Foreign Corrupt Practices Act was the first to grant an exception for facilitation payments, and it influenced subsequent conventions, laws, and guide- lines.2But beyond the practical concerns, facilitation payments are not uncontroversial.3 Some businesspersons recognize that facilitation pay- ments are not always inevitable and that creative solutions using techni- cal or commercial innovation may override extortive demands. In the example of phone hookups quoted above, the wide availability of cell- phone technology in East Asia gives companies a firm leverage on demands by the traditional phone company’s employees.
Petty corruption cannot be considered innocuous. Facilitation pay- ments that are readily “afforded” by large corporations can be a night- mare for a small local business (especially if harassed by local police officers) or, indeed, for the average citizen facing harassment from low- level government officials in the course of the ordinary business of life.
The impact of corruption on the poor has been widely documented (Part- nership for Governance Reform in Indonesia 2001). But even for a large
corporation, the costs of facilitation payments can mount to damaging levels amounting to grand corruption (see box 2.3).
Finally, systemic petty corruption provides fertile ground for private corruption and fraud at the expense of companies. Low-level commercial espionage can be an outcome. Indeed, in many countries it is virtually impossible to keep company information confidential. Since this strongly affects the conditions for competition, preventing fraud and commercial espionage is a major concern that is reflected in the internal codes of ethics of multinational companies.
Grand Corruption
The classic environment for grand corruption is government procurement through competitive bidding, whether international or not. Fraud and corruption mechanisms have been widely documented in this context.4 Frequent cases of extortion involving local and international firms alike are found in a variety of public services. Tax collection, customs, and police are commonly problematic areas that, along with public procure- ment procedures, are priority targets of governance reform in the public sector (see figure 2.1).
Box 2.3. Too Many Facilitation Payments—A Lost Contract
In Thailand the Customs and Excise Department asked the Société Générale de Surveillance (SGS) for a payment every time the depart- ment approved certificates. Approval simply consisted of affixing a stamp to the certificate to confirm that SGS personnel had performed the inspection work it was contracted to do.
Although each payment was less than US$100, this was not small when compared with the inspection fee. The practice became so com- mon that the payments came to represent some 30 percent of the rev- enue of the particular business and well above US$100,000 a year. SGS felt that such an accumulation of modest sums could no longer qualify as facilitation payments and that the practice had to be discontinued.
Following the enactment of the company’s Code of Ethics, SGS’s national chief executive in Thailand submitted the payments matter to the chief compliance officer. The solution was agreed on by the chief compliance officer, the Executive Board member responsible for the sector, and the area controller and was reported to the Ethics Commit- tee. It was decided to stop making the payments and consequently to lose contracts and revenues in this particular sector. The value of the lost business was estimated at around US$1 million a year.
As the private sector’s role has expanded in recent years, new types of bureaucratic interaction have created opportunities for corruption. Exam- ples include the granting of licenses (for instance, in the pharmaceutical industry), privatization, and private provision of public services. Although the greater involvement of the private sector tends to increase transparency, privatization creates opportunities for corruption because it offers the potential for asset stripping and because it requires large and financially complex transactions, consultancy work, and regulatory interventions.
It is an open secret in the international business community that in the late 1990s rates of bribery on typical government services were very high.
Payments of around 15 percent were common in many countries, and the rate could reach 30 percent. Some local corporations also have to pay very high rates, as shown by firm-level surveys in developing economies (fig- ure 2.2).5
Because bribers need to recover the cost of the bribes, grand corruption leads to other abuses. Two broad categories are fraud and bid rigging.
• Fraud. This abuse can take many forms, including inflated rates, sub- standard goods and services, and false billings, all of which require the active or passive complicity of the bribe recipients.
49.3 44.8 42.6 39.2 37.0 36.4 34.8 33.3 23.7 16.5 13.1 7.5
Traffic police Judiciary Police (excluding traffic police) Tax authority Customs authority Central Bank of Indonesia Ministry of Public Works Municipal government Electricity provider (PLN) Telephone service provider (Telkom) Armed forces Post office
Percentage of respondents viewing the service as corrupt
Figure 2.1. Degree of Corruption in Selected Public Services in Indonesia as Assessed by Private Sector Executives
Note: Number of respondents: 400.
Source: Partnership for Governance Reform in Indonesia 2001.
• Bid rigging. In essence, bid rigging reduces commercial and develop- ment costs, which can be huge in certain industries, such as public works and utilities. In some countries the designated winner of the bid compensates losers for their bidding costs. Systematic bid rigging requires a fairly high degree of organization, including cartelization of the industry at the country level at the expense of outsiders, and some form of capture of the government departments involved.
State Capture versus Cronyism
State capture occurs when a few private interests effectively control the decisions of people in power and shape government policies according to their interests, primarily to maintain a legal or de facto monopoly. Hell- man, Jones, and Kaufmann (2000) have underlined the importance of state capture in transition economies. It is an especially high risk in coun- tries that depend heavily on exports of primary commodities—from bananas to petroleum and minerals. Historically, analysts have focused on state capture by foreign investors, but attention has recently shifted to cases of capture by local interests.
In East Asia and the Pacific the economic crisis of 1997 revealed a high degree of collusion between governments and private interests. The tra- ditional Chinese business culture of guanxi puts the emphasis on the human network instead of on contractual relationships (see chapter 5 in
0 5 10 15
Percent
20 25 30
Argentina Brazil Indonesia Italy Malaysia Mexico Pakistan Philippines Poland Russia
Figure 2.2. Share of Firms Acknowledging Paying More Than 10 Percent of Sales Value in Bribes in Selected Countries
Source: World Business Environment Survey, 2000.
this volume). Indeed, personal connections are widely considered a key to the award of business in the region (table 2.1) and constitute fertile ground for cronyism and corruption. Nevertheless, even in countries affected by systemic corruption, there is little evidence of state capture in East Asia—not a surprise, given the size, diversity, and relative openness of the region’s economies.6
Legitimate Social Purpose but Improper Transactions
Some interactions, although illegal (or not clearly legal), serve some legit- imate public purpose from the recipient country’s perspective rather than merely benefiting a few individuals. They typically take the form of extra demands by government agencies outside the scope of business contracts.
For example:
• One of the companies interviewed for this study related that an Asian public agency that granted licenses had asked the company to pay tuition and expenses for government regulatory officials to enroll in a U.S. university program. The request was presented as an opportunity to enable promising young developing country bureaucrats, selected through a transparent process, to acquire expertise that neither the individual nor the country could afford. The stipend sought would improve the expertise of an agency whose support and approval was important to the company in doing business in the country.
• In Indonesia some public agencies requested additional payments according to rates that were quasi official and were used exclusively to endow a fund that paid salary supplements to all employees.
Other examples encountered by companies surveyed in this study include requests to fund a public hospital and to pay for a state funeral.
These types of socially oriented request, which are far from uncommon, are not as shocking as grand corruption cases. Nevertheless, they are problematic. Lack of transparency is detrimental to fair competition, and Table 2.1. What Is Needed to Win a Government Contract in Indonesia? (percentage of responses by businesses)
Quality of product
or services Personal connections Bribes
Important 84 66 32
Neutral 16 24 34
Unimportant 0 10 34
Source: Partnership for Governance Reform in Indonesia (2001): enterprise survey.
there is potential for abuse. The underlying concerns are ultimately better addressed through appropriate institutional or administrative changes.
Today, most international corporations consider this type of solicitation as incompatible with their codes of conduct.