A Commentary by Sam Koim*
Corruption flourishes in secrecy and the ignorance of the people. Shedding light on corruption trends is therefore an integral part of curtailing the spread of this pernicious social disease hence this article.
Investigation Task-Force Sweep (ITFS) initially commenced its investigation into the expenditure of development budget at the National Planning Department. The investigation uncovered instances, amongst others, where shell companies (or sometimes called “K2 companies”) were used as fronts to squander public funds. Funds were expended with either no project undertaken or project left incomplete. Detecting the fraud in such simple trend of corruption is easy.
A new trend of corruption appears to be emerging in the area of expenditure of development funds. It is rather a complicated and higher level of corruption. This time, well established businesses, even multi-national corporations are used to generate illicit gains for the firms and public officials. In most cases, the projects are so huge like “white elephants” that the spill out of economic rents is obscured. At the same time, the trumpeting of the unbroken economic boom is so loud that the voices of the silent suffering majority are barely audible.
This article seeks to expound on some of the common features of high level corruption and its effects on the economy and the wellbeing of the people and the country.
CORRUPTION AND ITS TYPOLOGIES IN PNG
Corruption is a global phenomenon. Corruption can be defined as “the abuse of entrusted power for private gain”. The accepted formula of Corruption equals monopoly plus discretion minus accountability. If a system gives an official monopoly power over a good or service, the discretion to decide how much a particular client receives, and is not accountable, then the system will be prone to corruption.
In Papua New Guinea (PNG), it seems that the monster rears its ugly head in nearly all facets of the society. There are many causes, typologies, levels and effects of corruption. There are four basic types of corruption, the attributes of which are seen in PNG today and they are: petty corruption, grand corruption, political corruption and State capture. Each of them is briefly elucidated hereunder.
Petty corruption or bureaucratic corruption or administrative corruption is the everyday corruption that takes place where bureaucrats meet the public directly. Petty corruption is also described as "survival" corruption: a form of corruption which is pursued by junior or mid-level agents who may be grossly underpaid and who depend on relatively small amounts to feed and house their families and pay for their children's education.
Grand corruption is the type of corruption that takes place in higher levels of government. It is typified by the misuse of entrusted power by political leaders or senior public servants and usually involves very large amounts of public money and assets diverted for personal use.
Political corruption is corruption in, and of, the electoral and political processes including such; vote buying and selling; payments between politicians for votes on the floor of parliament; and payments for affiliation to one, or other coalition.
State capture is corruption within the legislature, executive, ministries and the judiciary where private interests significantly influence a state's law-making and decision-making processes. It is because of State capture that we see acts such as allocation of discretionary expenditure by MPs that are corrupt though not necessarily illegal.
The rest of this article concentrates on addressing State Capture, but before that, the legislative and administrative framework that breeds State Capture must be appreciated.
FAIR AND EQUITABLE DISTRIBUTION OF NATIONAL DEVELOPMENT
The Second Goal of the National Goals enshrined in the Constitution of PNG calls for the equalisation of services and development projects in all parts of the country. The annual national budget is the lawful process whereby the national wealth of the country is fairly and equally distributed. The distributive powers of the people are vested in the Executive Government. The Executive Government adopts plans and policies on how to distribute the wealth of the nation. Consistent with its policy framework, the Executive Government takes the budget initiative to raise loans and revenue and allocate funds for expenditure. After the National Executive Council (NEC) is satisfied with the budget estimates and approves it, the budget is then presented on the floor of Parliament for Parliament’s deliberation and approval. Parliamentary Approval of the National Budget takes the form of a sessional legislation called Appropriation Act.
After the legislative approval of the budget and the warrants are released by Department of Treasury, the funds are not up for grabs. The expenditure of public funds including the procurement of goods and services are regulated by the Public Finance (Management) Act (PFMA) and the Appropriation Act. The PFMA specifies a range of procurement authorities and their respective financial limits to commit expenditures. At the pinnacle of the procurement authorities is the NEC which approves all contracts above K10 million.
It goes without saying that for a project valuing K10 million and above under the current context, the Executive Government has the discretion and to greater extent monopoly on deciding the type, amount, location and the ultimate contractor of the project. Proponents of the perverse logic of political expediency would favour the existing process as it enables the Executive Government to achieve its plans and objectives within the tenure of their reign. On the contrary, having the good governance lenses on, one would see that the risks of high level corruption are very high in the current setting. There is no independent mechanism to ensure that there is correct and uncontaminated decision concerning the procurement of major projects valuing more than K10 million. That is a fertile soil for State Capture to flourish and the next topic examines how that occurs.
THE CAPTURE OF STATE DISTRIBUTIVE POWERS AND THE PROLIFERATION OF “WHITE ELEPHANT PROJECTS”
A large portion of government expenditure goes through the procurement process hence the risk of mismanagement and corruption is high if the processes are not structured and managed in a transparent, accountable and professional manner. Those risks can prevail throughout the budget and procurement cycles. When the Executive Government identifies projects, allocates funds and awards the contracts, the following are the likely risks and effects:-
Ø The Executive Government or individual ministers of the NEC may use their distributive powers collectively or individually to allocate resources where the economic rents/commissions would be plentiful and easily collected.
Ø In most cases, “white elephant projects” are identified as that would reward them with more and easy rents instead of priority projects that are needed by the majority of the people. These grand projects are too expensive to build that they exceed their usefulness.
Ø Detecting fraud in huge projects is difficult where contracts are complex and a well-established firm is involved. That is because firstly, the transaction would not raise a lot of eye brows as it would be for a K2 company; and secondly because it is difficult to sufficiently benchmark prices of certain grand projects such as roads. For instance, a K1 million diverted from teachers’ salaries would be very obvious than the same amount defrauded in a multi-million kina road project worth K10 million. Extracting K1m from the K10 million project would not make much noise so to speak.
Ø When projects identification is driven by rent-seeking, feasibility studies and costs benefit analysis are rarely carried out prior to the allocation of funds, as doing so would expose the real value and necessity of the projects.
Ø Political logrolling for rent-seeking projects would be a common occurrence in Cabinet. The race would be on in Cabinet where a common unwritten understanding would subsist –“you support my proposal, I will reciprocate when it’s your turn, let’s look after each other”.
Ø In circumstances where the Government has the numerical strength on the floor of Parliament, a budget that is otherwise contaminated with blended private interests can be sanctioned without much scrutiny.
Ø Secrecy breeds corruption. When economic rents become the motive, some white elephant projects are not publicly tendered. Instead closed tenders are preferred. In other cases, Certificate of Inexpediencies (COI) are issued on projects that do not lawfully qualify for it. Also at times, projects may be publicly tendered on a reasonable price as a smokescreen but after the contract had been awarded, ridiculous and unjustified variations are secretly executed to pour more money into the same project.
Ø Procurement officials and politicians in charge of the procurement process may influence the process to award contracts to the best briber instead of choosing the best price quality combination. The company in charge of building the new hospital may for instance not be the one representing the best price/quality-combination, but rather the most successful briber or the one with the best governmental connections.
Ø The Central Supplies and Tenders Board (CSTB) can be subjected to excessive political patronage to ensure that firms with collusive connections with the government are favourably treated. If the figure is above K10 million and the NEC is captured by private corporate interests, CSTB merely becomes a facilitator than a vetting house. The vetting is supposedly conducted by the NEC prior to awarding the contract.
Ø Selecting the best briber distorts open competitive market for State tenders. As the preferential treatment given to a few collusive firms restricts the open market to only a few favoured firms, the race for political favours would be on. More and more unwilling and unfavoured firms would then be compelled to participate and race for political favours.
Ø Together with the grand projects, the craving for quick rents would also dictate the location of the projects. For predatory firms that have collusive connections with public officials, it is time consuming and resource intensive to mobilise equipment and machinery etc to a remote rural project site which could potentially trap the firm to a single project for a whole financial year. To avoid that and extract more rents within less time, pharaonic projects are selected at locations convenient to the contractor and not necessarily based on the necessity or economic factors. The result may be construction of projects several times as costly as necessary, or the acquisition of goods not actually needed. One that fits well with this description is a particular road in the National Capital District that has been resealed a couple of times over –from two lanes to three lanes and now they are working on the four lanes, all in a space of less than three years. One wonders how much of taxpayers’ money is actually spent on that particular stretch of road.
Ø It can lower the quality of public goods and services and even threaten safety. Where the contractors and public officials collude, the need to conduct the appropriate level of monitoring and evaluation of the implementation of the projects may be conveniently overlooked. As a result, the poor workmanships and shabby constructions are rarely exposed. Most of the capital intensive projects are not properly monitored hence defects surface immediately after construction is completed.
Effects of the Captured
Ø The Appropriation Act and the Executive Government are effectively seized by corporate and personal interests to advance their greed. When the State is captured in this manner, the whole legal system becomes the opposite of what it should be, because it works to the advantage of illegal interests that are dressed up in a legal form.
Ø The trend of rent-seeking distribution would encourage crony capitalism, where those corporations that have close relationship to the Government of the day or certain politicians would succeed in many government projects. Those crony capitalists’ positions would be reinforced by the process of corruption that gives them continued privileged access to the country’s resources and thereby sustaining their importance to the elite that wishes to maintain control. If the trend of crony capitalism continues in the size and volume, it would inevitably result in the country reaching a stage of Plutocracy, where the predatory corporations will be so powerful that they would dictate the political, economic and social discourse of the nation.
Ø It would also lead to another form of political and government corruption known as Kleptocracy, where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often with pretense of honest service.
Ø The level of corruption under consideration does distort the real value and wrongly attaches elevated status of a particular project. In the end, it results in the proliferation of “white elephant projects” because those who benefit from it would compete for more of it. Predatory corporations dictate and poach upon public purpose and will have no loyalties for the nation or its population. The predatory firms and public officials would reach this understanding “let’s look after each other as long as we put up a white elephant project to keep the critics at bay”.
Ø Say if the actual cost of a road project is K20 million. The grease payments made to low level public officials to expedite bureaucratic process favourably might cost the firm about K100,000. The rents for final political approval may be K8 million. So in total, the taxpayers are paying K28.1 million on a project that is worth less than K20 million. The K8.1 million could be used to construct another much needed project but for corruption.
Modes of Rent transfer
Ø The transfers of illicit gains derived from rent seeking projects occur in many ways. Where the amount is not substantial, hard cash are being delivered to the public official. Sometimes, third party fictitious subcontracts are signed between the contractor and a company that is under the control of the public official. That is done as a vehicle to transfer the rents of the public official. At other times, the rents are kept by the contractor for a delayed benefit. Another way of transferring rents/commissions to and from is the use of offshore bank accounts. Capital flights to offshore jurisdictions are also common when there is massive looting of public funds.
PNG is enjoying its unbroken economic growth as the fastest in the South West Pacific. Be that as it may, the level of corruption in the country is an important factor to consider when projecting economic growth. Sometimes, the reality may be far from the rosy appearance.
DEBUNKING THE GDP DELUSION
Gross Domestic Product (GDP) is the market value of all final goods and services from a nation in a given year, which is calculated as the population times market value of the goods and services produced per person in the country[i]. The GDP basket contains consumption of goods and services, investments, Government purchases and exports/imports.
Although GDP is the widely recognised measure of a country’s economic performance, the GDP rating can never and does not represent the true progress of a nation. It does not measure:- equitable and fair distribution of income throughout the country; intangible valuables like feeling secure in our own country, environmental damages caused by resource exploitations, the quality of life, the atrocious living standards, quality of education and health etc. It does not measure the level of corruption either. The GDP is therefore not a comprehensive measure and does not adequately reflect the true health and progress of a nation.
There is a correlation between Corruption and GDP. Linking GDP to corruption, the GDP can be stimulated by the proliferation of high level corruption as well. The constituents of the GDP in a particular year may be fuelled by consumerism behaviour of those who swim with effortlessly gained wealth, crony capitalism investments of predatory corporations and rent-seeking expenditures of the Government. It therefore follows that corruption may help the most efficient firms bypass bureaucratic obstacles and rigid laws leading to a positive effect on economic growth.
A country can experience higher investment and growth rate with relatively high level of corruption. Studies conducted by the World Bank revealed that countries with more predictable corruption have higher investment rates. Thus, countries with endemic but predictable corruption, such as Thailand and Indonesia, have had strong investment growths. “When business people have confidence that after paying a bribe a return will be provided as promised, there is less motivation to seek legal alternatives” (Lambsdorff, 2001b:14). It is sufficient to suggest that when corruption is prevalent and predictable in a country such as PNG, investment and economy can also surge.
So the economic growth that PNG is experiencing does not necessarily mean that there are no leakages in the public purse. The more money poured into investment, the more chances of corruption it creates if transparent and good governance mechanisms are absent. The PNG GDP rating on the other hand may be building an entirely fictional image of the real progress of the nation, which keeps the unenlightened citizenry under continuous illusion.
Public procurement is the main area where the public and the private sector cooperate financially. Corruption in the procurement of major projects is not victimless as it enriches crony capitalists at the expense of the majority of the society who are denied the equal benefit. One effect of corruption is that it tilts public spending toward projects that make it easier to collect on bribes at the expense of priority programs, hence the proliferation of so called “white elephant projects”. Whilst corporations that benefit from corruption may consider corruption as a necessary evil, corruption does have deleterious effects on the economy and the wellbeing of the nation as a whole. There are other disastrous effects that have not been covered here.
Real and hard questions should be asked: Is the GDP a true reflection of the country’s economic capacity to improve living standards or is it a product of the unholy alliance between the government and predatory businesses. The boom mentality can affect the way the government behave, having grandiose plans and ideas to engage in excessive capital expenditure in anticipation of windfalls from the resource sectors such as the LNG. Some studies however, have proven that such booms can decrease the quality of public spending and encourage rent-seeking and we are already seeing signs of it. The public procurement process is long overdue for reform in order to ensure that there is transparency and accountability. The allocation of resources must be guided by the National Goals and Directive principles which a yardstick to ensure there is fair and sustainable economic growth.
The writer is not against impact projects. As a growing economy, PNG needs to invest in major infrastructural impact projects. What really matters is the cost of corruption to the nation? Having said that, it is also acknowledged that there are firms that have genuinely invested and conduct clean businesses in the country despite the risky business climate posed by corruption. In the same vein, there are public officials who do their jobs honestly and serve the people.
* Sam Koim is the Chairman of Investigation Task-Force Sweep that combats high-level corruption in PNG Government sector. The views expressed in this commentary article are that of the author. Note: References are not included in this paper but are on the original article.