Wednesday, May 25, 2011

Six tricks of highly effective corruption


Six tricks of highly effective corruption

From : An Article in the Economic Times , dt. 17th April, 2011 Abheek Barman, Malini Goyal and Binoy Prabhakar contributed to the story
As Anna Hazare and his ever-growing army of corruption busters get down to the task of developing what they think is the most lethal weapon, an all-new Lok Pal, against bribery, ET on Sunday decided to size up the strength of their enemy: the system that creates and protects corruption.
At the heart of this system is a convenient game of musical chairs played by industry and government. Each blames the other for corrupting it, and yet neither side stops. When a case of graft is exposed, e.g. the 2G scam, its beneficiaries proclaim themselves to be the victim. And then it is back to business as usual. The growth in corruption has kept pace with the record growth in the Indian economy, bigger the size of cake, thicker the slice of graft.
It also has more players because of the rise of regional parties in national affairs. But what has not changed are the tricks of the trade. They have only been revised and improved to fund the amplifying cost of politics and rising levels of greed. We present the seven tricks of highly effective corruption, a real-life example of each and a possible fix.
Trick 1: Keep it to friends
Example: The bidding rules for a government contract to build a convention centre in Mumbai are framed such that only one favoured firm, a Delhi-based realty company, is eligible.
What gets rigged: The final lineup of candidates. The aim is to ensure only one or two favoured firms make it to the final selection round. There are two ways to rig this process. One way is to tweak the eligibility criteria of who is allowed to bid by either defining the norms in suspiciously precise terms, or by being bafflingly vague. The other way is more brazen: an applicant is briefed in advance about the specifications of the tender.
How it gets rigged:
There are many ways to be precise or vague. For example, a government tender inviting bids for a big urban convention centre can have a clause specifying that only bidders with prior and proven experience of building convention centres can apply.
This sounds okay. But as close observers of the government system know, the clause is dodgy because a reputed builder needn't have specific experience in building convention centres to build one for the government, a convention centre is not a nuclear plant, let's put it that way. With a clause like this, it is easy to ensure only a few bidders, or sometimes even one bidder, is eligible.
Or, let's take a government contract for a technical service, for example, related to mobile telephony . There will be a pre-qualification round, that is, a screening process.
The criteria in that round can specify nothing more than general attributes: technical strength, track record, experience. Plus, there may not be any weights specified for these attributes. This is where huge discretion is possible. The meet-the-applicant beforehand method happens mostly with PSU work contracts. PSU management is often 'informed' that the tender should suit the favoured applicant. Railways and oil sector PSUs are the big focus of this kind of transaction.
The Fix: Bidding process must be transparent. The government has appointed a committee to review public procurement norms, to be headed by Vinod Dhall, ex-head of the competition commission.
Trick 2: Ask others to withdraw
Example: A Mumbai-based engineering and construction company complained to the Prime Minister's Office that it was asked by a minister not to bid for a road project.
What gets rigged:
This method involves 'asking' or 'requesting' applicants to step aside either at the pre-bidding stage or after the first round of bidding. Inducements, or threats, are made to ensure they comply. The purpose is to ensure the favoured bidder gets an easy passage. It narrows the field and reduces uncertainty.
How it gets rigged:
Assume the government wants to auction a piece of land. It invites bids that come flooding in, but the powers that be have already decided who will win. The strong contenders are asked to step aside, either on the inducement that they will get to win elsewhere, or on the basis of the threat that their existing projects could suddenly face hurdles in getting government clearances.
The favourite is then given sufficient inputs to put in a bid that will likely be the winner. To give a semblance of competition to the entire exercise, dummy bidders are also asked to put in bids. In some suburbs like Noida, the government acquires land from farmers and auctions it at a price lower than the market rate. The difference between the market price and the winning bid price is often 'settled' in terms of payoffs to those who rigged the process.
In other cases, road projects for example, the powers that be call the successful bidder following the first round of bidding with a request to withdraw the bid.
There is even an assurance to the bidder that the deposit or earnest money will be returned. Leading engineering and construction companies have complained to the highest levels of the government that they were asked not to bid or to withdraw their bids.
The Fix: Switch to electronic auctions. Is this happening? Some road projects are already being e-auctioned. A panel of ministers has proposed that FM radio licences be e-auctioned.
Trick 3: Ensure only one knows
Example:
Among a group of bidders for a mega thermal plant, only one reportedly knew that it could sell coal
from the plant's captive mines.
What gets rigged:
This method is typically post-bid and more complicated than pre-bid rigging. The chances of getting caught are higher, and legal spats between the government and losing bidders are not uncommon. But more the risk, better the payoff.
How it gets rigged:
Say, applicants for a huge thermal power project are being vetted. The winner is the one who bids the lowest tariff that will be charged to consumers. This seems fine. But what if the company that won the bid knew it could use the project's surplus coal supplies for other purposes? This knowledge would change, for the favoured bidder, the economics of the project by creating a new revenue stream.
Accordingly, the project can break even at a lower tariff and so the bidder can afford a lower bid. Typically, if a controversy erupts, the loser will allege this clause was not clear at the time of bidding, the winner counters this by claiming that such permissions were clear all along. Here's another example. A large real estate company is awarded a contract to build an IT park, for which the licence comes at a tenth of the price of a standard commercial licence.
The developer may have a problem of not finding enough IT companies for the park. This is dealt with by inserting a clause in the licence which specifies that any company with 15 or more computers on its premises can be termed an 'IT company'. Since the licence is so cheap, the developer can offer lease rentals at rates lower than its competitors. The most glaring example, of course, is the 2G spectrum auction.
After all the bids were in, the government retrospectively advanced the cutoff dates to ensure that only its eight favoured companies were ultimately eligible, since they were the ones to put in their bids before the 'real', rather than the official closing date.
The Fix: Empower sectoral regulators to ensure fair play between bidders. Is anyone working out the details? Ashok Chawla, ex-finance secretary, is heading a committee on natural resources.
Trick 4: Piggyback on PSUs
Example:
A Karnataka PSU jumps the queue to get a lucrative iron ore mining lease. Piggybacking on the PSU is a Delhi-based mining and infrastructure conglomerate.
What gets rigged:
In this method, mining leases are the focus of creative thinking. As government rules and regulations stand, PSUs get preferential treatment when it comes to getting mining leases. The argument is that PSUs protect the public interest. The value of mineral production is huge, Rs 1,15,981 crore in 2008-09, for example. PSU production constitutes 85% of this amount. But PSUs need private sector joint venture partners. So, who's going to be the JV partner, that's where the game is.
How it gets rigged:
Mining leases are still awarded on a first come-first served basis by state governments, with the prior approval of the Centre. Those who put in a bid first to mine in a particular area, get preference over those who bid later. This, in itself, has given rise to excellent opportunities for graft ("Mining lease applications can lie in the files for years," says a bureaucrat we spoke to. "And often there's no record of who bid for what and when.").
But what's interesting here is the role of state-level public sector units. State PSUs in the name of the public interest don't have to be in the queue, they can get preference for mining leases over everyone else, even if it's a private sector entity which has done all the hard work of prospecting and surveying the area for years. So, many private sector players get shut out of the game. But not all of them. Once the mining leases are handed out, a private firm close to the powers that be enters into a joint venture agreement with the winning PSU.
This private firm actually does much of the work, and shares the revenues of course. In many cases, the state PSU itself may be bankrupt and have little resources to do the mining on its own. This benefits all the parties. The powers that be get their cut, the private sector operator doesn't have to wait in line with all the uncertainty that it entails, and the PSU piggybacks on the JV partner. For decades, PSUs have been used by the establishment to hand out contracts to a favoured few, in many sectors.
The Fix: Remove preferential treatment for PSUs. Auction mining leases, as the new Mining Bill proposes.
Trick 5: Cook the books
Example:
A hydrocarbon major's estimates of capital costs are okayed by the regulator. Following allegations of inflated estimates, all such cost estimates invite independent audits.
What gets rigged:
This method has two variants. One, revenue shares agreed upon when a project is awarded to a private player is creatively calculated so that the private company pays less than it is supposed to. Two, cost estimates that are crucial in determining how much revenue the private company shares with the government are padded. Both these cases apply in situations when the government has taken a natural resource or something economically valuable in the government's control, for example, telecom licences, and awarded them to private sector businesses. The logic of allowing the private sector is flawless. The devil is in the detail.
How it gets rigged:
Those who win on the basis of the amount of revenue they are willing to share with the government, the winner offers the highest share, can creatively account for, or define revenues in such a way as to exclude lucrative earnings. In airport projects, for example, the developer agrees on a revenue share based on passenger traffic growth.
The money duty-free shops were to pay as deposit to the airport developer, and on which interest was earned, can be considered a cess and not included in the revenue calculation. For years, telecom operators were accused of fudging books to ensure the actual revenues they paid to the government were far lower than the revenue shares they had officially agreed. In the case of roads, the developer shows lower traffic than actual and thus gives a lower share to the government.
All this will be overlooked if there is prior 'understanding' between all parties. In petroleum, according to production sharing contracts with the government, oil firms must share surpluses with the government after recovering costs on exploration and drilling. This is an incentive to inflate capital costs to minimise the amount they must share. Again, since these costs must be cleared by the government, it gives ample scope for the powers that be to not be as diligent as they should be. Okaying revised capital costs is a favoured way to do this.
The Fix: Scrap cost-plus returns. Appoint auditors with domain expertise.
Trick 6: Be my business partner
Example:
A Mumbai-based realty firm that also has telecom and media interests advances a corporate loan of over Rs 200 crore to a media firm owned by a member of a prominent political family.
What gets rigged:
The process by which ministries and departments select private firms for allocating land or spectrum or mining leases can be tweaked to ensure the favoured ones get the goodies. The private sector beneficiary pays back via generous corporate loans to business ventures associated with the politician or his/her family. Or the politician or his/her close associates can be offered stakes in the private firm's ventures.
How it gets rigged:
This method is particularly effective when the politician doing the favour or his family has an entrepreneurial streak. Becoming 'business partners' also offers a measure of protection against inquiries. The parties involved argue that these transactions are perfectly okay in that they are corporate decisions and brazen out the allegations. Typically, such corporate funds are transferred via complicated routes, so that tracing the benefactor becomes a challenge. The same principles hold when the politician doing the favour is offered a stake in the favoured firm's business.
The Fix: Raising the expense limit during elections will abate, if not eliminate, this problem.
Political Viability Gap Funding
Do the math. For an assembly seat, you can by law spend Rs 16 lakh; for a parliament seat, Rs 40 lakh. These caps are low, as we demonstrated in an ET on Sunday story (The Great Indian Election Bait, April 3 issue). A candidate in an assembly seat needs to spend between Rs 50 lakh and Rs 1 crore.
In Tamil Nadu, with its thriving cash-for-votes culture, you might need to spend as much as Rs 8 crore in an assembly constituency. On an average, a Lok Sabha seat is made up of 7.6 assembly constituencies. So, the math suggests that you'd need anything between Rs 4 crore and Rs 40 crore to fund a Lok Sabha campaign.
Going by these numbers, the Congress and the BJP , which contested 440 and 433 constituencies respectively in the 2009 Lok Sabha elections, would have needed to mobilise about Rs 2,000 crore each. The DMK, even though a regional party contesting 22 seats in Tamil Nadu, could have splashed out close to Rs 900 crore in the Lok Sabha polls. Sharad Pawar's well-funded NCP fought 68 seats in 2009, and could have shelled out around Rs 500 crore for the campaign.
Remember, splurging doesn't guarantee a win. And this is just election spending. Parties need a lot of money to run their operations, paying workers, rent, fuel bills and so on. All this is Big Money. Big Business can give it by cheque. In fact, if businesses do not want tax breaks, there's no limit under law for political contributions. So, why isn't there a transparent system of cheque payments that would disincentivise Big Graft?
Two reasons. First, companies want the anonymity that comes with cash payments. This avoids questions on why party A was given more than party B. Second, much of India's economy is still a cash economy, and Big Graft cash payments fit nicely with this.
--Abheek Barman, Malini Goyal and Binoy Prabhakar contributed to the story
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