A study on importance of privatization to reduce corruption

Submitted in partial fulfillment of the requirements for the award of the degree of

Bachelor of Business Administration (BBA) Semester III (Paper Code BBA 211 ) To Guru Gobind Singh Indraprastha University, Delhi

Guide : Ms. Renu Sharma

Submitted By : Gaurav Khurana 12790301710

Certificate

I Mr Gaurav Khurana Roll No. 12790301710 certify that the Minor Project Report (Paper Code BBA 211) A study on importance of privatization to reduce corruptionentitled is completed by my collecting the material from the referenced sources. The matter embodied in this has not been submitted earlier for the award of any degree or diploma to the best of my knowledge and belief.

Signature of the Student:

Date:

Certified that the Minor Project Report (Paper Code BBA 211) entitled A study on importance of privatization to reduce corruption done by Mr Gaurav Khurana, Roll No. 12790301710, is completed under my guidance.

Signature of the Guide :

Ms. Renu Sharma

Acknowledgement

I thank My project guide Ms. Renu Sharma for the help. I thank the authors whose books I have consulted. I thank the internet community for freely distributing valuable knowledge. I express my debts of gratitude to all of them. Without the help from such people, this project would not have been a success.

Contents

S.no

Table Of Contents

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Chapter 1 Introduction Chapter 2 Definition of Privatisation Chapter 3 Definition and Problem of corruption Chapter 4 Rationale and Types of Privatisation in Infrastructure Chapter 5 The Actors in a Privatisation Policy

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Chapter 6 Corruption Aand Infrastructure Privatisation Chapter 7 Competition against Corruption Chapter 8 Privatisation as an Opportunity for Corruption Chapter 9 Corruption (most recent) by country

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Summary Bibliography

Chapter 1 INTRODUCTION

Since the beginning of the 1980s a general trend towards privatisation policies can be observed world wide. Indeed, privatisation policies have been promoted as a solution to the often highly inefficient situation of state owned enterprises (SOE) failing to provide the infrastructure service according to the quality and in the quantity needed. In industrial countries, privatisations are usually introduced in the context of New Public Management (NPM) reforms. In developing countries, they were for example fostered under the World Banks Structural Adjustment Programmes (SAP), and now within the Poverty Reduction Strategies Papers (PRSP).

However, because of many examples throughout the world, the question arises whether corruption may not weaken the outcome of this reform. For example, the UNDP (1997, p. 25) raises the question whether the efficiency rationale for privatisation may not be undermined by corruption. Increases in prices after the reform despite obvious efficiency gains through restructuring, new management methods etc. may indicate other inefficiencies or unintended consequences (as investigated by New Institutional Economics)for example corruption.

Besides, the privatisation of infrastructure is usually not only justified by efficiency aspects on the one hand, but also by equity issues on the other. Increases in efficiency are supposed to benefit the poor through lower prices, better access, and higher quality of service. These aspirations should be used as benchmarks, when the outcome of privatisation is assessed. While the efficiency aspect has been analysed in detail,
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additional research is necessary concerning the distributive and equity implications of private sector participation (PSP) in infrastructure. The analysis of corruption during the process is part of this effort, since a statement on the winners and losers of PSP seems not possible without taking into consideration the effects of corruption.

In the 1990s, the issues of corruption and privatisation both became growing fields of research, and many articles on corruptions are touching the issue of privatisation, and vice-versa.

However, an analysis and overview of the special case of infrastructure privatisation is lacking. A systematic quantitative measurement of corruption in infrastructure privatisation is difficult due to the general problem of measuring corruption because of its illegality and the problem of getting specific data in relation with privatisation of infrastructure. Anyhow, such a quantitative cost-benefit analysis is beyond the scope of this paper. Here, we rather analyse at a general level the links between privatisation and corruptionat one hand asking whether privatisation may actually be a cure to corruption, and at the other hand taking a closer look to the corrupt opportunities in a PSP process. We do not state that public ownership and operation of infrastructure is always superior to privatisationindeed, the provision of infrastructure services by the government has its own problems of corruptionwe wish however to point to the underlying risks of corruption associated with a privatisation policy.

Also, it is important to identify correctly the causes and consequences of the issue: is it privatisation that is offering room for corruption, or is it a corrupt environment that is making privatisations outcome problematic? Further, an inefficient and unequal status
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quo should not be legitimised because of corrupt opportunities. But since corruption is a threat to democracy and, as we will argue, to the outcome of a PSP, these opportunities should be controlled carefully before and during the process. Thus, the papers main intention is to raise questions on the issue and criticise some findings in literature in order to foster discussion and further research, as well as elaborating some staringpoints for the development of anti-corruption policies during privatisations in infrastructure.

Generally, corruption may occur in two parts of a privatisation policy. First, in the privatisation process itself, beginning with the decision-making process and ending with the signing of the contract. Second, corruption might occur in the process of implementation and regulation that follows a privatisation. This paper deals with the former opportunity for corruption in infrastructure privatisation, including the decision to privatise, the tender, bidding, award, and contract negotiations.

In this context, two main questions arise. First, what kind of incentives a privatisation in infrastructure sets to corrupt behaviour by the actors involved? And second, what about the arguments saying that privatisation might actually reduce corruption in an economy?

Chapter 2 DEFINITION OF PRIVATISATION

Privatization is a fuzzy concept that evokes sharp political reactions. It covers a great range of ideas and policies, varying from the eminently reasonable to the wildly impractical. Yet however varied and at times unclear in its meaning, privatization has unambiguous political origins and objectives. It emerges from the countermovement against the growth of government in the West and represents the most serious conservative effort of our time to formulate a positive alternative. Privatization proposals do not aim merely to return services to their original location in the private sphere. Some proposals seek to create new kinds of market relations and promise results comparable or superior to conventional public programs. Hence it is a mistake to define and dismiss the movement as simply a replay of traditional opposition to state intervention and expenditure. The current wave of privatization initiatives opens a new chapter in the conflict over the public-private balance.

The Political Meaning of Privatization

The term privatization did not gain wide circulation in politics until the late 1970s and early 1980s. With the rise of conservative governments in Great Britain, the United States, and France, privatization has come primarily to mean two things: (I) any shift of activities or functions from
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the state to the private sector; and, more specifically, (2) any shift of the production of goods and services from public to private.16 Besides directly producing services, governments establish the legal framework of societies and regulate social and economic life, and they finance services that are privately produced and consumed. The first, broader definition of privatization includes all reductions in the regulatory and spending activity of the state. The second, more specific definition of privatization excludes deregulation and spending cuts except when they result in a shift from public to private in the production of goods and services. This more focused definition is the one that I shall use here. It leaves open the possibility that privatization may not actually result in less government spending and regulation--indeed, may even unexpectedly increase them.

Several further points about my definition need clarification. First, the public sector here includes agencies administered as part of the state and organizations owned by it, such as state enterprises and independent public authorities like the British Broadcasting Corporation (BBC) or the Port Authority of New York and New Jersey. In the private sector I include not only commercial firms but also informal and domestic activities, voluntary associations, cooperatives, and private nonprofit corporations.l7 Second, in the definition I am using, privatization refers to shifts from the public to the private sector, not shifts within sectors. Thus the conversion of a state agency into an autonomous public authority or state-owned enterprise is not privatization, though it may well put the enterprise on a commercial footing.l8 This was the objective, for example, of the conversion of the United States Post Office into a public corporation, the United States Postal Service, in 1971.19 Similarly, the conversion of a private nonprofit organization into a profit-making firm also is not

privatization, though it, too, may orient the firm toward the market. Both of these intrasectoral changes might be described as commercialization; in the case of public agencies, commercialization is sometimes a preliminary stage to privatization.

Privatization as Community Empowerment

A different set of arguments, not chiefly concerned with efficiency, comes from a more sociological theory of privatization that emphasizes the strengthening of communities. In the most noteworthy exposition of this position, Peter Berger and Richard Neuhaus propose that government "empower" voluntary associations, community organizations, churches, self-help groups, and other less formal "mediating" institutions that lie between individuals and society's "alienating megastructures."43 In their view, the modern liberal state has undermined these "value-generating," "value-maintaining," "people-sized institutions" by establishing service bureaucracies that take over their functions. Berger and Neuhaus are not opposed to the provision of social welfare, but they urge that, wherever possible, public policy rely on mediating institutions for the delivery of publicly financed services.

The view of privatization as community empowerment stands in sharp contrast to the conception of privatization as an extension of property rights. Berger and Neuhaus emphatically reject a narrowly individualistic view of human motivation. Indeed, they criticize liberalism precisely for defending individual rights over the rights of social groups to assert their own values; for example, they defend the capacity of neighborhoods to sustain "democratically determined values in the public sphere" by exhibiting religious symbols in public places.44 They also suggest that attacks on the ideals of voluntary service "aid the expansion of the kind of capitalist

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mentality that would put a dollar sign on everything on the grounds that only that which has a price tag has worth."45 Their concern is not to expand the domain of the profit motive but rather to strengthen local, small-scale forms of social provision.

Privatization as a Reduction of Government Overload

A final theory justifying privatization holds that privatization is desirable for its likely political effect in deflecting and reducing demands on the state. In the 1970s, some critics suggested that the Western democracies were suffering from an "overload" of pressure, responsible for excessive spending and poor economic performance. I9 In that framework privatization represents one of several policies encouraging a counterrevolution of declining expectations. In a similar vein, Stuart Butler of the Heritage Foundation has argued that privatization can cure budget deficits by breaking up the kind of public spending coalitions described by public choice theory. Privatizing government enterprises and public services, in this view, will redirect aspirations into the market and encourage a more entrepreneurial consciousness.50 The political theory of privatization has several different, overlapping elements. First, the privatization of enterprises is a privatization of employment relations. The advocates of privatization hope to divert employees' wage claims from the public treasury, with its vast capacity for taxing and borrowing, to private employers, who presumably will have more spine in resisting wage demands. Moreover, the proponents hope for a trickle-down of entrepreneurship from the newly privatized managers to the workers; for that very reason, privatizers often are perfectly willing to sell to the workers, at an advantageous price, whole enterprises or at least some proportion of the shares. In addition, by shifting to private contractors even in a few selected areas, government might signal a harder line on wage

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concessions and thereby weaken public employee unions. Second, the advocates of privatization hope also for a privatization of beneficiaries' claims. Instead of marching outside of government offices when things go wrong, the privatizers want them to direct their ire to private service providers--or better yet, simply to switch to other providers. In other words, privatization could mean a wholesale shift, in Hirschman's terms, from "voice" to ''exit" as the usual and preferred tactic of coping with dissatisfaction.

Third, the privatization of public assets and enterprises is also a privatization of wealth. Advocates such as Margaret Thatcher want privatization to increase the proportion of the population who own shares of stock and therefore take a more positive view of profitmaking.52 "People's capitalism" is an old idea, but using privatization of public assets to bring it about is new. Moreover, by privatizing other assets such as public housing and Social Security trust funds, privatizers hope to turn public claimants into property owners and engender in them a deeper identification with capitalism. They expect the worker who receives a retirement income from a private pension or individual retirement account to have a more conservative view of the world than that of the worker who depends on rent subsidies and a government check every month.

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Chapter 3 Definition and Problems of Corruption

Definitions of corruption abound in literature. Corruption as defined by Bardhan (1997, p. 1321) is: the use of public office for private gains, where an official (the agent) entrusted with carrying out a task by the public (the principal) engages in some sort of malfeasance for private enrichment which is difficult to monitor for the principal. The most common definition is that corruption consists in the misuse of public power for private benefits. The survey by Andvig et al (2000, 15 ff.) identifies six forms of corruption: (i) bribery, defined as the payment (the bribe) interchanged in a corrupt transactionaccording to Rose-Ackerman (1996) bribes are paid to receive benefits or to avoid costs; (ii) embezzlement, which is theft of resources by those who have the responsibility to administer themdescribed in Shleifer and Vishny (1993) as corruption with theft; (iii) fraud, defined as an economic crime involving trickery, swindle or deceit, like deliberate falsification, manipulation or embezzlement of information; (iv) extortion, that is money or resources extracted by the use of coercion, violence or threats; (v) favouritism, is the abuse of power which implies a corrupted distribution of resources and thus a violation of allocative efficiency, and (vi) nepotism, as a special form of favouritism, where decision are biased in favour of family or clan members. To the forms of vertical collusion between politician or bureaucrats and firms, one has to add the phenomenon of illegal horizontal collusion between private actors,
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i.e. the coalition of bidders in order to influence the price of an auction or to divide the market.

In the end, all forms are used to avoid institutional processes (avoiding costs), or to create advantages over others using irregular ways (enhancing benefits).

It is now widely accepted that corruption involves external effects, i.e. repercussions on at least one third party that is not directly implicated in the corrupt transaction. In a principal-agent-client model, this signifies that the corrupt deal between the agent and the client has negative effects (at least) on the principal. Furthermore, even if the existence of weak institutions and red tape might lead to the perception that corruption is a cure to these inefficiencies

Corruption may also distort the decision-making of economic actors, affecting not only the distribution of income and power, but also the efficiency of resource allocation. According to Shleifer and Vishny (1993), these distortions may for example arise since corruption opportunities may bias the decision of bureaucrats towards transactions offering more opportunities to corruption. Also Lambsdorff (2001, p. 10 f.) points out that the firm able to pay the biggest bribes may not be the most efficient firm.

Further, on the macroeconomic level, an empirical study by Mauro (1995) reveals that corruption has significantly negative impacts on growth and investment rate. These

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findings seem to falsify the theory of corruption as speed money or as greasing the wheels. Indeed, Lambsdorff (2002) emphasises that corruption will rather be the cause for bad regulations as the cure against them.

Rose-Ackerman (1999, p. 21 f.) further warns against the argument often put forward by firms saying that corruptionparticularly in developing countriesis the only way to keep a business going faced with unfair or inefficient laws. She asks whether firms or individuals only have to obey laws that they consider being just and efficient, and notes that such a conduct would certainly not be tolerated in industrialised countries. Indeed, most environmental or health and security regulations are regarded as unfair, conferring competitive disadvantages etc. Also, she points out that it seems strange indeed to tolerate business firms judgements that a well-placed pay-off isjustified because it increases their profits. Just as the UNDP (1997, p. 23), RoseAckerman considers such justifications for corruption as harmful for the development of a credible and strong state in developing countries. Even if it is inevitable that certain laws may be inefficient and even unfairwhere and who to draw the line?

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Chapter 4 Rationale and Types of Privatisation in Infrastructure

We define infrastructure as the material infrastructure of an economy and the services provided through this material. The definition comprises roads, railroads, transport services, the provision of water, electricity and gas, and communication networks. At first glance, there are no compelling reasons why infrastructure should be in public hands. Infrastructure is typically a toll good, i.e. exclusion is possible and feasible, and there is no rivalry in consumption, making it stand between public and purely private goods. Also, private firms are considered to work in a more efficient way than SOE, often considered to be characterised by X-inefficiency. However, infrastructure also involves important externalities, such as environmental and health issues, and network externalities.

Sometimes, like in the water sector, the market structure is characterised by a natural monopolywhich is one of the reasons for market failure together with external effects and public goods, and an argument in favour of government intervention. This is why infrastructure services are traditionally provided by the state.

If the rationale to privatise a SOE may be based on economic theory, the political decision is mainly driven in function of internal and external pressures, as well as by ideological views. Internal pressures may arise because of an inefficient provision of the services with repercussions on the voting behaviour, fiscal budget constraints and/or pressure from interest groups favouring an expansion of the private sector. Pressure
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groups traditionally against privatisations are the labour unions of the public sector. External pressure may come from foreign governments, multinational enterprises, or international financial institutions such as the International Monetary Fund (IMF) or the World Bank. Hall and Lobina (2002, p. 4) further observe that multinationals often make use of political connections to their home government in order to gain contracts. The decision to privatise can further be centralised or decentralised. Privatisations are often part of a wider reform where the central government opens the possibility for privatisation. But the choice whether to privatise or not may fall to municipalities or regions.

This corresponds to the principle of subsidiarity, stating that the higher level may only intervene if the lower level is not able to fulfil a task on its own. Also, the principle of fiscal equivalence states that responsibilities should be allocated at the level where all spill-over effects are internalised, i.e. where the circle of users of a service or a policy measure corresponds to the circle of those who bear the costs. This is for example the case for water services, but not for telecommunication. Decentralisation is supposed to allow local governments to take into consideration the needs of the population to a greater extend as the central level could dobut makes them also more vulnerable to capture by local pressure groups.

Roughly, the possibilities to PSP can be divided into three categories: (i) divestiture, (ii) concessions and investment models (e.g. the Build-Operate-Transfer model, BOT) and (iii) service contracts for management, operation, and maintenance. The latter two can both be described as forms of delegation. They can also be achieved through joint ventures between the state and a private firm. All three types require a positive act by
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the governmenta political will.

In a divestiture, the SOE is sold entirely to a private firm, the property rights of the assets are changing from public to private hands. According to Savas (2000, p. 129) a divestiture is typically a one-time transfer, as opposed to the other forms of privatisation. Following such a divestiture, the government may only assume a role as regulatorin this case some control rights remain to the government. Concerning the privatisations in infrastructure, especially in the water sector, divestments are rare. This can be explained by the market structure (natural monopoly) and by the reluctance to give up infrastructure with high external effects entirely to the private sector. Delegation strategies consist in out-sourcing parts of the service (e.g. billing, meterreading, management) or the entire service through contracts to a private firm. They are limited in time and generally also in space (e.g. to a municipality). The division between concessions and service contracts results from two main differences. At one hand, the contract term of service contracts is typically limited to up to ten years, while concessions are rewarded for up to 30 years.

At the other hand, service contracts may require investments for maintenance of existing assets, but they usually not include investments for expanding the network, leaving this to the state. In contrast, BOT-type models and most concessions require the private firm to provide capital for investments as specified in the contract, including the expansion of networks.

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Chapter 5 The Actors in a Privatisation Policy

The actors involved in PSP have to be characterised according to their incentives and benefits (or costs) issuing from privatisation. As Rose-Ackerman (1999, p. 113) notes, the relative bargaining power of these groups determines both the overall impact of corruption on society and the distribution of the gains between bribers and bribees. Hence, the analysis must include the bribe takers (i.e. politicians and bureaucrats) as well as the bribe payers (i.e. the firms) to understand all the causes and effects of corruption. To complete the whole cycle, it is necessary to keep in mind one third actor affected, but not directly involved in the process: the consumers. Indeed, in the end they will receive the outcomes and assume the costs and benefits of a privatisation.

The Public Side

The politicians take the decision to privatise. The new political economy defines them as individuals maximising power and income. Following Downs (1957), in an indirect democracy with political competition, these payoffs are depending on the votes received. Other important points to explain political decisions are coalitions, pressure groups (Olsen, 1965) and logrolling strategies.

In a principal-agent-client model, the politician could be seen as the agent serving the public interest. In this case, the citizens

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are the principalswith however far less control over the agent as usually supposed in principal-agent models. In the literature, it is argued that politicians will prefer to remain in control of SOE instead of privatising them, since they can benefit politically from the power they are in charge. They can keep tariffs inefficiently low in order to gain votes or, as for example supposed by Shleifer and Vishny (1994, p. 999), benefit from over-employmenteither in order to appease unions or, again, to gain votes. However, a politician could also benefit from privatisation.

For example, the decision of a politician may be influenced in favour of privatisation in exchange for financial aid from international financial institutions, or if pressure groups in favour of privatisation are particularly strong. Pressure groups may also try to influence the politicians through corruption if this strategy appears to be more fruitful than traditional rent-seeking.

Not at least, as already noted by Rose-Ackermann (1978, p. 18 ff), in many cases politicians may not just seek for votes, or trading off votes against personal income and/or power. Indeed, many politicians are also investorssometimes in the first place. Easterly (1999, p. 267) observes that especially in developing economies, politicians are often part of a local business elite, and clearly may have strong personal interests which may conflict with their function as elected representative of the citizens.

This situation may easily lead to embezzlement as defined in section 2.1. According to RoseAckerman (1996), a privatisation would then only strengthen the elite at the costs of the majority. The decision to privatise may hence also depend on the politicians personal
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interests. In this context, Rose-Ackerman (1999, p. 117) notes that kleptokratic rulers will be particularly eager to privatise monopolies enabling them to extract benefits from firms or directly participating at the dealin person or through family or clan members.

The Private Side

Considering the other side of a corrupt deal, i.e. the private sector, it is important to take into consideration not only the firms or the individual managers, but also the market structure and the environment in which they are operating. The firm is providing the infrastructure service, and in some cases may build a plant or make other types of investments. We suppose here that the managers are serving the objectives of the firm, leaving aside the classical conflict of interest between managers and owners. In private hands, firms will typically maximise cash flow (profits) or shareholder value. These benefits will depend directly on the market characteristics and regulations in place. In infrastructure, one has to differentiate between a market with competition (e.g. telecommunication) and without competition (e.g. water services). In a market where competition can be introduced, firms will typically face the pressure to lower prices; consumers will gain while the benefits of the firms will tend to shrink. However, in the case of a monopoly without regulation, the firm will be able to make monopoly rents and differentiate prices in order to maximize profits.

In general, monopoly power lowers the consumer surplus while the producer surplus becomes higher, and has negative consequences for the poor if no redistribution is provided.

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Hence, a firm in natural monopoly situation will tend to benefit from privatisation without regulation since they can get rid of political interference and control pricing as well as all operational and strategic decisions concerning for example employment or investments. The UNDP (1997) notes, that if firms pay to preserve the monopoly after privatisation or to avoid regulation, the result would just be a transfer of profits from the state to the private sectornegative effects for the poor then seem highly probable. Hence, firms will try to extract those monopoly rents. This is well described and analysed by the rent-seeking literature. Bhagwati (1982, p. 997 f.) coined the expression of Directly Unproductive, Profit-seeking (DUP) Activities. He further describes the double welfare-loss in case of monopoly-seeking: First, the wastes due to the resources spent on rent-seeking and second, the losses due to the monopoly situation afterwards. Lambsdorff (2002, p. 121) argues, that corruption is even more detrimental to welfare than traditional rent-seeking, since corruption motivates the creation of rules and regulations that generate rents and has hence an impact on the size of these rents. As the infrastructure sector usually remains regulated after a privatisation in order to prevent monopoly abuses, space is left for political interference and corruptioneven though economic theory clearly indicates that regulators should be free of political interference. Further, the more the regulations are lacking of transparency, the more opportunities for corruption remain. This paper, however, does not analyse corruption in regulation, but rather concentrates on corruption in the privatisation process itself.

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Chapter 6 CORRUPTION AND INFRASTRUCTURE PRIVATISATION

Privatisation: Instrument against Corruption?

Some authors argue that privatisation actually reduces corruption in an economy. For example, Savas (2000, p. 223) states that privatisation leads to less corruption because the government controls fewer resources, and Torres (2000, p. 145) argue: By privatizing, the space in which corruption may occur diminishes as the states commercial involvement declines. Also, an empirical study by Clarke and Xu (2002) focusing on characteristics of bribe payers in the infrastructure sector suggests that corruption can be reduced by privatising and increasing competition. In the following, we present and discuss the arguments in favour of pursuing a privatisation in order to limit corruption. They are centred on two ideas: the reduction of political interference and the benefits of competition introduced by private sector participation.

Reduction of Political Interference

One major argument in favour of privatisation is that political interference is expected to decline. Indeed, one could argue with Savas (2000, p. 223) that due to the simple fact that the discretion of politicians and bureaucrats decrease with the amount of resources under their control, the possibility for corruption will decrease at the same time. This point has something attractive and is regularly put forward by the advocates of
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privatisation. Indeed, one of the mayor problems of state owned enterprises has been identified as the political interference in the management and the misuse of these enterprises for other policy goals, not at least for politicians personal benefitsbe it political power or personal income, or both. This is certainly true. However, the logical step to call therefore for privatisation in order to reduce corruption may be flawed. Indeed, it neglects at one hand the complicated relationship between investors and politicians, and at the other hand the special characteristics of the infrastructure sector requiring regulation afterwards. In many cases, as noted above, the politician and the local investor might be one and the same person, which would open the way for embezzlement. Without going that far, it can be observed that especially in developing countries the local economic elite is strongly tied with the politicians, which in turn may lead to favouritism. Also, Hawley (2000, p. 18) points to the large opportunities for interest parties to engage in insider deals and political manipulation. Indeed, to say that politicians will always be against privatisation because this would signify a loss of power is contrary to the reality of many municipalitiesnot only in developing countries.

Further, a study from Esguerra (2002) on the water privatisation in Manila showed that the two companies bidding in the process were both in hands of two of the wealthiest families of the Philippines, one backed by Suez Lyonaise des Eaux (now Ondeo) and the other by Bechtel. Esguerra (2002) argues that the companies wanted to win the bid at all costsfinancing the losses due to the involved corruption later for example through increased tariffs. The losers of such a strategy are the poor and the credibility of the government. Such behaviour indicates the existence of considerable rents in the water sector, at least under the perspective of multinational enterprises.
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The case of water privatisation in Grenoble is another example of a politician involved in corrupt practices (Center for Public Integrity, 2003). The water services have been privatised in Grenoble under Mayor Alain Carignon in 1989. As it turned out, the private company COGESE, a subsidiary of Lyonnaise des Eaux paid bribes in form of campaign contributions. Both, the mayor and two Suez executives, were sentenced in 1994 for accepting and paying bribes. Later, in 1999, a French court found that COGESE also overcharged the consumers and ordered to return all water fees from 1990 to 1998 to the city of Grenoble. Referring also to this case, Lobina (2000, p. 3) points to the increasing body of evidence concerning the irregularities of the French delegation system and warns therefore against using it as a global model. Going much further than just corruption, Hall and Lobina (2002, p 17) report the case of Daniel Lopes, city councillor of Tangar da Serra in Mato Grosso (Brazil), who has been assassinated in July 2001 the same day a vote was held to approve a water concession. Police investigations in this case led to the imprisonment of 14 people in 2002, among them eight city councillors, confessing having received bribes in exchange for votes in favour of the privatisation.

Regarding the issue of political interference, one could however argue that despite the corrupt opportunities in a privatisation process, the reform will be able to reduce the interference in the long run, thereby facilitating a change. Under this perspective, the examples quoted above would only represent costs limited in time and scopeexcept indeed in cases of violence. However, there are at least three aspects questioning this argumentation. First of all, the perception of corruption will considerably weaken the confidence of citizens in their government, leading to less political participation, political apathy, and thereby weakening the monitoring function of the citizens. This
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aspect may be particularly crucial regarding some developing countries, where the participation of the public in a democratic manner is only at its beginnings. Corruption may then lead to disillusionopening the way to an even greater concentration of the political and economical powers. Second, corruption is a cost for the firm, and these costs have to be recovered for example through inefficient tariff increases. Once these costs are included in the prices, it is highly improbable that the firm will reduce them once the costs of corruption are recovered: they will rather remain inefficiently high. Additionally to this overcharging, corruption might lead to intransparent accountability (e.g. to hide fake jobs) and overinvoicing. Third, it can be questioned whether political interference will stop at all, even in the long run. If the argument of the existence of a local elite controlling as well the government as the economy holds, then the firm will need to keep on paying bribes. Also, a close contact between the firm and the government will remain because of renegotiations and regulation. These three arguments are particularly strong, when the private firm remains in a monopolistic situation (first of all water services).

Not at least, in infrastructure, and in particular in the case of water, Finger and Allouche (2002, p. 15) argue that the recent evolutions in the sector (liberalisation, privatisation, and decentralisation) will rather increase the role of the state than decreasing it, thereby also increasing the need for new regulations and maintaining the role of politicians and bureaucrats. In the context of franchise bidding for natural monopolies as an alternative to regulation as put forward by the Chicago School, Williamson (1985, p. 326 f.) notes that under some circumstances which are relevant for most public utilities (viz. asset specificity and uncertainty), the bidding alternative requires at least as much regulation and control mechanisms as traditional regulation.
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Chapter 7 Competition against Corruption

There are various arguments in favour of introducing competition in order to reduce corruption. Rose-Ackerman (1978) already modelled the benefits of competition between bureaucrats: if demand is able to choose between honest and dishonest bureaucrats, competition will drive dishonest ones out of the market. But, the crucial question is: Does privatisation in infrastructure really enhance competition? Indeed, privatisation usually is supposed to introduce competitionbe it through competition for the market (in case of monopolies) or through competition within the market. The case of competition for the market through bidding processes is considered in section 3.2. Where competition within the market is possible, e.g. in telecommunication, transport or energy provision, Clarke and Xu (2002, p. 5) argue that consumers could switch to other providers competing in the market when faced with low-level corruption by the agents of the firm. This story fits in the model from Shleifer and Vishny (1993, p. 607) where agencies are competing for the provision of one single government good, leading to a Bertrand competition and thereby reducing bribes to zero.

However, analysing the form of corruption occurring at the considered level, this argument is questionable. This type of low-level corruption is usually not induced by the agent of the service provider, as it would be the case when a bribe has to be paid in order to obtain some government permit (be it from a private operator or a public operator). In the cases considered here, the initiative comes from the consumers not able or not willing to pay for the quantity consumed. Especially in the electricity and the
27

water sector, consumers will tend to bribe the agent responsible for the reading of the meter or the tariff collection. This risk is particularly high in cases where the consumer does not have a bank account, and thus has to pay the tariff directly to an agent of the firm. This further implies, that the ones faced to corruption, willing or somehow forced to pay a bribe, are the poorest households among the consumers of the service. Indeed, considering cases of privatisation in many developing countries, it can be observed that the prices for the service rise after the reformthereby rather increasing the incentive to bribe than reducing it. The corrupt incentive therefore rather comes from the budgetary restrictions of the consumers, and not only from the discretionary power of the agents. But Clarke and Xu (2002, p. 4) argue that with a privatisation, the private owners become residual claimants on the income of the company, giving them large incentives to reduce this type of corruption through better monitoring. Privatisation thus would raise the marginal benefit of internal monitoring without affecting the marginal cost.

This effect would contradict the argumentation in the previous paragraph: because of increased internal monitoring it would be more difficult for consumers to bribe the agents of the firm and thereby reducing the overall amount of this low-level corruption. However, considering cases of privatisation in developing countries and especially the labour implications of the reforms (lay-offs, wage cuts, and moves to short term contracts), it can be argued that pressures on workers increase after a privatisation. Facing the bribe-offer, the agent would trade-off this additional income, which will have a higher value than before privatisation, with the probability of getting caught, which not necessarily has to increase. Indeed, at this level, bribes are often paid by consumers in order to make the agent turn a blind eye on fraudulent activity by the consumer, e.g. some kind of manipulation of the meter.
28

This, however, is beyond the scope of monitoring by the firm, except precisely by the agent that is bribed. This may question the argument saying that corruption will decrease through privatisation because of an increased monitoring. Further, in such situations, the agent of the firm has a good bargaining position, since it is usually not him who is proposing the bribe. Not at least since both parties are benefiting from the deal, it is highly improbable that the consumer will denounce the agent.

Other arguments state that privatisation will reduce bribes by removing capacity restrictions, and that privatisation reduces the speed-money phenomenon of corruption through better and faster service provision, as put forward for example by Clarke and Xu (2002, p. 4 and 6). Here, corruption could indeed be reduced through privatisation. This can be observed for example in telecommunication, where privatisation removed waiting-lists and hence the necessity to pay bribes in order to get a connection.

However, it has to be kept in mind that in some cases privatisation only replaces a public monopoly by a private one (UNDP 1997, p. 26). Then, the outcome is less clear, since monopolies usually keep lower quantities than under market situation to charge higher prices, and much will depend on contract specification, regulation and control.

To conclude, the argument saying that competition in the market through privatisation will reduce low-level corruption is not as convincing as usually put forward. And finally one may ask whether this petty corruption is really the type of corruption that matters in infrastructure privatisations. One could further notice that even authors defending privatisation as actually a cure to corruption agree that the privatisation process needs to
29

be transparent and guided by clear regulations. The question remains whether these assumptions are not too heroic in most situations, especially in developing countries. For example, UNDP (1997, p. 26) notes that endemic corruption in an economy may undermine the introduction of competition even in sectors where competition could be possible.

30

Chapter 8 Privatisation as an Opportunity for Corruption

In the following, we ask for the corrupt opportunities in privatisation processes. The market structure and the general environment will definitely have an effect on the corrupt opportunities, just as the type of privatisation envisaged. But privatisation is also a process in time, with different stages and different opportunities for corruption. We differentiate between three phases: (i) preparation, including ideally an analysis of the status quo, ending with the decision to privatise, (ii) tender and bidding, ending with the award, and (iii) contracting, where the details and conditions of the contract between the firm and the government are negotiated. The phase of implementation, control, and regulation is left to further research.

Phase 1: Preparation and Decision Making

According to the Colombian experience with Integrity Pacts in public contracting, Transparency International (2002, p. 64) notes that: The circumstances that surround the making of political decisions on public resource investments are of fundamental importance in terms of being able to generate confidence about the manner in which the subsequent contracting process itself will be conducted. As noted above, politicians may have personal interests involved since they could become owners or participants in the benefits of the privatisation. Hence, the decision to
31

privatise a public utility could be taken without considering the public interest. It helps, that usually the decision whether to privatise or not is not submitted to vote. The risk of a flawed decision in favour of privatisation is particularly strong when there is a biased distribution of political powers in favour of local economical elites.

Then, other alternatives to privatisation may not be considered adequately as part of the strategy t overcome the problems of a SOE. Among these alternatives are, for example, the introduction of a cost-benefit-analysis in order to make a better decision over reliable and objective information, the introduction of transparency through civil society participation, or the implementation of strategic planning and management in the public institutions to enhance efficiency and to establish clear and specific objectives. Even though corruption could be present in any contextprivate and publicit is important to consider and evaluate the different scenarios in order to reduce the possibilities and opportunities to corrupt behaviour present in the different alternatives. This failure to consider alternatives to privatisation (for example contracting-in instead of contracting-out) could be labelled as a special ideological form of favouritism. A politician might favour on ideological grounds per se a liberalisation and privatisation policy without considering other reform options. The decision might also be leaded by the prejudgement establishing the private sector as corruption-free over the more corruptible public sector. Even though such ideological favouritism would not constitute a case of corruption from the traditional point of view, it can however be argued that it would represent a misuse of the political powers of the politician in favour of the private benefits of a special group obtaining benefits from the privatisation. This situation moreover incentive these groups either to pay bribes to the politician in order to ensure the decision-makings outcome in favour of privatisation, or may lead the
32

politician to embezzle the expected benefits from the policy himself. Both, the bribe and the embezzlement, could additionally be covered by some fraudulent practices in order to obfuscate the transactions.

As a general objection to this ideological favouritism argument, it could be countered that the politicians have been elected knowing about their ideological background, and would thus represent the opinion of the general public at that time. First of all, one may question the political process in many developing countries, and thus the legitimacy of the election and the political programmes. But even in correct democratic elections, the question of privatisation will usually not be at the top of the list, since the subject has traditionallyespecially in Latin Americaa negative connotation.

The decision to vote is usually rather driven by other factors, such as unemployment or security Even if the politician includes privatisation in his programme, he will tend to use euphemistic expressions such as state reform or strengthening of the private sector. Politicians may further try to influence the public opinion in favour of privatisation by discrediting the SOE in their speeches. By doing so, they may act in their own interest, hoping to extract benefits through privatisation, or in the interest of the private sector, which in exchange could pay bribes to the politician. Both cases are an illegitimate enrichment at the cost of the general publicthe definition of embezzlement. International financial institutions such as the World Bank may also bias the decisionmaking processvoluntarily or not. Sometimes it is even argued that the World Bank actively pushes the privatisation of infrastructure by exercising pressure on the governments. However, it is also obvious that without alleging such behaviour, the simple fact to tie financial aid to the privatisation of infrastructure could favour the
33

implementation of a privatisation policy without having alternative reforms being considered seriously by the politicians seeking to get financial support. The amounts of this financial aid create considerable room for corruption in the process of privatisation. According to Hawley (2000, p. 18), corruption further arises because of the inflexible and hasty deadlines set by the IMF and World Bank. These deadlines often leave no time to set up a regulatory framework ruling the privatisation process. Even though Savas (2000, p. 223) counts a speedy process as a guard against corruption, it seems however, that under such circumstances firms will be able to extract higher benefits, raising thus their incentive to pay bribes in order to get the deal. Moreover, as Manzetti (1999, p. 327) underscores, the need to act quickly may often rather serve as an excuse to cover illegal practices, as that is really following economic reasons.

Further, Rose-Ackerman (1999, p. 86 f.) warns about pushing privatisation when the government does not have the capacity to provide effective oversight of public contracts. Otherwise the result will simply be the creation of new sources of private gain at the expense of the general public. It is questionable whether the majority of developing countriesand even industrialised onesreally dispose over an appropriate institutional framework in order to limit corruption and such new sources of private gains at the moment the decision to privatisation is taken.

Phase 2: Tender and Bidding

Once the decision to privatise is passed, the government needs to call for a tender and specify the requirements of the project. The tender specifications usually include
34

requirements concerning the outputs and services, prices and quality, the risks associated with the project and its delivery and their allocation, and issues of financing. In order to specify these requirements, the government first needs to evaluate the assets of the SOE and its market. In this context, Rose-Ackerman (1999, p. 35 f.) points to the existence of uncertainties in the process of valuation of the assets to be privatised, which can create considerable room for corruption. At one hand, an insider (politician or bureaucrat) could give information about the real value of the assets not available to the public to one bidder in exchange for bribes or favours. This way, the bidder could react in its offer and win the tender of a firm that finally is not as bad as the other bidders thought, enabling profits afterwards. At the other hand, the assessment process itself can be corrupted by multinationals or local investors in order to influence it in a favourable way. The assets could further strategically be estimated under their real value to explain the necessity to privatise to the citizens and political groups, and to disincentive some competitors to participate, thereby enabling a firm with insiderinformation to win the contract at low costs. Also, the riskier the project appears at the first place, the better the bargaining position of the firm concerning the negotiation of the contract. This is creating incentives to bribe politicians as well as bureaucrats in order to underestimate the assets or to discredit in public the efficiency and effectiveness of the SOE. Again it appears straightforward to assume that the higher the remaining monopoly power after the privatisation will be, the higher will be the incentive for such corrupt behaviour. Painter (2000, p. 170) notes that: because of the commercial stakes involved and the once-off nature of the decision to award a contract, the incentives and opportunities for bribery and other irregularities are particularly high. The idea is to avoid competition by any means necessary, in order to be able to win the
35

opportunity to make benefits without being the most suitable firm for the fulfilment of the contract requirements. For that purpose, two forms of collusion can arise during the tender and the bidding process. First of all, a firm competing for the contract can collude with a politician or other decision-makers (vertical collusion). The most obvious type of vertical collusion is a firm that pays a bribe or confer some kind of other favours to get the award. Such kind of favours may for example consist in putting the politicians or public officials on the firms pay-roll for real or fake jobs. For instance, Friends of the Earth (2001, p. 3) reports the case of the mayor of Angoulme in France, JeanMichel Boucheron, who has been sentenced for receiving fees for a job that did not exist by Compagnie Gnrale des Eaux (now Vivendi). But to a lesser degree, the politician or tender-official could also accept bribes from a firm that just wants to be included in the list of candidates (a priori without consequences for the competitive process) or in order to restrict the length of the list (with consequences for the competitive process).

Further, a firm could also bribe the decision-makers to influence the tender conditions or to get insider-information concerning the requisites, in order to have an advantage in the bidding process. Even fraud is possible, when the firm provides false information in order to win the contract. Here, it could be argued that the firm might be induced to bribe the responsible public agent in order to prevent further investigations or the questioning of the information provided by the firm.

Second, there is further the danger of horizontal collusion between thetheoretically competing firms. Klitgaard (1988, p. 140) identifies at least four varieties of collusive bidding: (i) price fixing, and the division among suppliers (ii) of the bid; (iii) of geographical regions; and (iv) of government agencies, which all aim at the creation of
36

monopolies or oligopolies. Indeed, in privatisation, one strategy could be an arrangement of the firms, which are supposed to be competing against each other, aiming at a lucrative division of the national or international market between them. This strategy may come along with bribing the tender official in order to install and stabilise such a cartel, and prevent from further investigations. If there are by now any evidence for this scenario (even though to our knowledge an analysis is lacking on the subject), the infrastructure sectoragain in particular the water sectorcould become prone to such behaviour if the concentration process in this market, which is only controlled by a few big players, goes on. Not at least, such a high concentration in the international market of utility providers also leads to an unequal distribution of power. This market power of multinationals has not only consequences concerning the bidding by eliminating de facto any competition, but also for the bargaining position in the contracting phase. In the case of water privatisation, following Finger and Allouche (2002, p. 91 and 148 f.), this concentration is the logical consequence of the principles of considering water as an economic good, and the adoption of the French private sector participation model.

Both forms of collusionvertical and horizontalundermine the rationale of the introduction of a bidding process in order to create competition for the market. Signs for collusion could be for example non-competitive bids, a small number of contractors, or bids that are very close to the estimates of the government.

Further, incentives for corruption may arise because of the conflict of interest as described in section 2.3.1. For example, a politician could consider a tender and award the contract to a firm of which he is shareholder. Accordingly, Rose-Ackerman (1999,
37

p. 75) writes that politicians could unduly favour the businesses in which they have a personal interest at the expense of other firms that could perform public tasks more inexpensively or competently. In such cases, there is no bribery but only the personal interest of the politician in place that conflicts with the public interestand the politician may be induced to follow these personal interests instead of those of the general public. This may be one of the mayor problems in infrastructure privatisations.

It arises in particular concerning joint-ventures between multinational firms, local investors and the local government. Similarly, the process offers room for a great variety of possibilities to favouritism (or nepotism). Here, the politician uses his power in order to favour individuals or firms according to his personal affiliations (e.g. party political, ethnical or religious affiliations).

Phase 3: Contracting

In general, contracts in their aim to be accrual and highly detailed may become too complex, extended and therefore too difficult to carry out. Then, there is an open gate that gives pass to corrupt opportunities and to hide those corrupt activities among the extension of requirements and unclear specifications. If one adds to these circumstances the discretionary power of the public agents, and in some cases the unclear distinction between firms and politicians, the result might be a situation with a systematic corruption affecting the levels of governance and legitimacy of the political system. Contracts in infrastructure provision include specifications of the provision of the
38

service or the investments. One should differentiate between cases where the firm comes to run a natural monopolyas in the case of waterand contracts where the firm will enter into a competitive environmentas for example in telecommunications. In the phase considered here, the firm has already won the tender based on the specifications, and the negotiations will be about detailswhich may nevertheless be of great importance for the profits. Bribes at this stage will be paid in order to design the contract as to minimise or avoid costs of regulation or, for example, get tax reductions. Firms in natural monopoly situations have an incentive to make favourable contracts, enabling them to extract the rents. Operation and maintenance (O & M) contracts with a contract term of more than 20 years are particularly questionable concerning this aspect, as they involve high incentives for corruption and insider deals with local elites. As Bardhan (1997, p. 1321) notes, such corruption may at one hand take the form of postretirement jobs in private firms for bureaucrats or regulators. At the other hand, the negotiations outcome concerning the contract may be very lax because of the strong bargaining positions of the private firms. This strength has different roots, among them, as noted by Finger and Allouche (2002, p. 106 and 149), the pressure from the World Bank to foster privatisation, the oligopolistic character of the international market for privatisation contracts, but also because of corrupt behaviour, such as the voluntary (politicians having an interest in the privatisation) or induced (through bribes from the firms to the politicians) discrediting of the SOE as described in the previous section. The consequence, as Hall (1999, p. 5) observes, is that the public service will be far more costly than it would have been with fair contracts and without corruption undermining thereby the aim of the privatisation. Rose-Ackerman (1999, p. 19) notes further, that after a competitive bidding process (without corruption) a firm could be induced to pay bribes in order to increase its gains.
39

Chapter 9 Corruption (most recent) by country

Rankings
Worldwide Corruption Perceptions ranking of countries published by Transparency International

Ra nk 20 10

Index Countr y

Ra nk Country

Index 20 20 20 20 20 20 20 20 20 10 09 08 07 06 05 04 03 02

2010 200 200 200 200 200 200 20 20 201 [18] 9[19] 8[20] 7[21] 6[22] 5[23] 4[24] 03 02 0

1 Denma rk

9.3

9.3

9.3

9.4

9.5

9.5

9.5 9.5 9.5

91 Swazila 3.2 3.6 3.6 3.3 2.5 2.7 nd

1 New Zealand

9.3

9.4

9.3

9.4

9.6

9.6

9.5 9.5 9.4

91 Guatem 3.2 3.4 3.1 2.8 2.6 2.5 2.2 2.4 2.5 ala 91 Sri 3.2 3.1 3.2 3.2 3.1 3.2 3.5 3.4 3.7 Lanka 3.2 2.9 1.9 2.3 2.5 2.7 2.8 2.5

1 Singap ore 4 Finland 4

9.3

9.2

9.2

9.3

9.2

9.3

9.4 9.4 9.4

91 9.2 8.9 9.0 9.4 9.6 9.6 9.7 9.7 9.9

Gambia

Sweden

9.2

9.2

9.3

9.3

9.2

9.2

9.3 9.3 9.0

91 Kiribati 3.2 2.8 3.1 3.3 3.7

6 Canada

8.9

8.7

8.7

8.7

8.5

8.4

8.7 9.0 8.9

98 Burkina 3.1 3.6 3.5 2.9 3.2 3.4 Faso 98 Mexico 3.1 3.3 3.6 3.5 3.3 3.5 3.6 3.6 3.6 98 3.1 2.8 2.8 2.9 3.3 3.4 3.2 3.3 3.4

7 Netherl ands 8

8.8

8.9

8.9

9.0

8.7

8.6

8.9 9.0 8.8

8.7

9.0

9.0

9.0

9.1

9.1

8.8 8.5 8.4

Egypt

40

Switzer land

101 8.7 8.7 8.7 8.6 8.7 8.8 8.8 8.6 8.5

Domini 3.0 3.0 3.0 3.0 2.8 3.0 2.9 3.3 3.5 can Republic 3.0 3.0 2.4 1.7

8 Austral ia

101 Tonga 8.6 8.6 7.9 8.7 8.8 8.9 8.8 8.5 8.6 101

10 Norwa y 11

Zambia

3.0 3.0 2.8 2.6 2.6 2.6 2.6 2.5 2.6

Iceland

8.5

8.7

8.9

9.2

9.6

9.7

9.6 9.4 9.2

So Tom 101 3.0 2.8 2.7 2.7 and Prncipe

11 Luxem bourg

8.5

8.2

8.3

8.4

8.6

8.5

8.7 9.0 8.7 105 Moldov 2.9 3.3 2.9 2.8 3.2 2.9 2.3 2.4 2.1 a

13 Hong Kong 14 Ireland 15

8.4

8.2

8.1

8.3

8.3

8.3

8.0 8.2 7.9 105 Senegal 2.9 3.0 3.4 3.6 3.3 3.2 3.0 3.2 3.1

8.0

8.0

7.7

7.5

7.4

7.4

7.5 6.9 7.5 105 Argenti 2.9 2.9 2.9 2.9 2.9 2.8 2.5 2.5 2.8 na

Austria

7.9

7.9

8.1

8.1

8.6

8.7

8.0 7.8 7.8

15 Germa ny

7.9

8.0

7.9

7.8

8.0

8.2

105 Kazakhs 2.9 2.7 2.2 2.1 2.6 2.6 2.2 2.4 2.3 tan 7.7 7.3 7.4 105 2.9 2.8 3.2 3.0 3.1 2.8 2.7 2.6

Algeria

17 Barbad os 17

7.8

7.4

7.0

6.9

6.7

6.9 110 Benin 2.8 2.9 3.1 2.7 2.5 2.9 3.2

Japan

7.8

7.7

7.3

7.5

7.6

7.3

7.0 7.1 7.1 110 Gabon 2.8 2.9 3.1 3.3 3.0 2.9 3.3

19 Qatar

7.7

7.0

6.5

6.0

6.0

5.9

5.6 110 Indonesi 2.8 2.8 2.6 2.3 2.4 2.2 2.0 1.9 1.9 a

United 20 Kingdo m 21

7.6

7.7

7.7

8.4

8.6

8.6

8.6 8.7 8.3 110 Bolivia 2.8 2.7 3.0 2.9 2.7 2.5 2.2 2.3 2.2

Chile

7.2

6.7

6.9

7.0

7.3

7.3

7.4 7.5 7.5

110 Solomo 2.8 2.8 2.9 2.8 n Islands

41

22 Belgiu m

7.1

7.1

7.3

7.1

7.3

7.4

7.6 7.1 6.6

110

Kosovo

2.8

116 Ethiopia 2.7 2.6 2.4 2.4 2.2 2.3 2.5 3.5 22 United States 7.1 7.5 7.3 7.2 7.3 7.6 7.5 7.7 7.6 116 6.9 6.7 6.9 6.7 6.4 5.9 5.5 5.1 5.1 Mali 2.7 3.1 2.7 2.8 2.9 3.2 3.0

24 Urugua y 25

116 Mongoli 2.7 3.0 3.0 2.8 3.0 3.0 a 116 2.7 2.7 2.6 2.6 2.6 2.6 2.4 2.4

France

6.8

6.9

6.9

7.3

7.4

7.5

6.9 6.3 6.7

Vietnam

26

Estonia

6.5

6.6

6.6

6.5

6.7

6.4

5.5 5.6 5.6

116 Guyana 2.7 2.6 2.6 2.5 2.5

27 Sloveni a 28 Cyprus

6.4

6.6

6.7

6.6

6.4

6.1

5.9 6.0 5.2

116 Tanzani 2.7 3.0 3.2 2.9 2.9 2.8 2.5 2.7 a

6.3

6.6

6.4

5.3

5.6

5.7

5.4 6.1 116 Mozam 2.7 2.6 2.8 2.8 2.8 2.8 2.7 bique

United Arab 28 Emirate s 30

6.3

6.5

5.9

5.7

6.2

6.2

6.1 5.2 123 Armeni 2.6 2.9 3.0 2.9 2.9 3.1 3.0 a

Israel

6.1

6.1

6.0

6.1

5.9

6.3

6.4 7.0 7.3

123 Madaga 2.6 3.4 3.2 3.1 2.8 3.1 2.6 1.7 scar

30

Spain

6.1

6.1

6.5

6.7

6.8

7.0

6.9 7.1 7.0 123 Niger 2.6 2.8 2.6 2.3 2.4 2.2

32 Portuga l

6.0

5.8

6.1

6.5

6.6

6.5

6.6 6.3 6.3

123 Eritrea

2.6 2.6 2.8 2.9 2.6 2.6

33 Puerto Rico

5.8

5.8

5.8

127 Belarus 2.5 2.0 2.1 2.1 2.6 3.3 4.2 4.8 127 2.5 2.1 2.4 2.9 3.4 3.4 3.4

Syria

33 Botswa na 33

5.8

5.6

5.8

5.4

5.6

5.9

6.0 5.7 6.4 127 Lebano 2.5 3.0 3.0 3.6 3.1 2.7 3.0 n

5.8

5.6

5.7

5.7

5.9

5.9

5.6 5.7 5.6

42

Republi c of China 36 5.7 5.0 5.4 5.0

127 Nicarag 2.5 2.5 2.6 2.6 2.6 2.7 2.6 2.5 ua 127 2.5 2.0 2.1 2.3 2.5 2.4 2.2 2.2

Bhutan

Ecuador

37

Malta

5.6

5.2

5.8

5.8

6.4

6.4

127 TimorLeste 127

2.5 2.2 2.6 2.6

38 Brunei

5.5

5.5

Uganda

2.5 2.6 2.8 2.7 2.5 2.6 2.2 2.1

39 South Korea

5.4

5.5

5.6

5.1

5.1

5.0

4.5 4.3 4.5

134 Azerbaij 2.4 1.9 2.1 2.4 2.2 1.9 1.8 2.0 an

39 Mauriti us 41 Oman

5.4

5.4

5.5

4.7

5.1

4.2

4.1 4.4 4.5 134 Nigeria 2.4 2.7 2.2 2.2 1.9 1.6 1.4 1.6

5.3

5.5

5.5

4.7

5.4

6.3

6.1 6.3

134 Hondur 2.4 2.6 2.5 2.5 2.6 2.3 2.3 2.7 as 2.4 2.7 2.3 2.4

41 Costa Rica 41

5.3

5.3

5.1

5.0

4.1

4.2

4.9 4.3 4.5 134 Togo

Poland

5.3

5.0

4.6

4.2

3.7

3.4

3.5 3.6 4.0 134 Banglad 2.4 2.1 2.0 2.0 1.7 1.5 1.3 1.2 esh

44 Domini ca

5.2

5.9

6.0

5.6

4.5

3.0

2.9 3.3 3.2 134 Philippi 2.4 2.3 2.5 2.5 2.5 2.6 2.5 2.6 nes

45 Cape Verde 46

5.1

5.1

5.1

4.9

134 Sierra Leone 6.6 134

2.4 1.9 2.1 2.2 2.4 2.3 2.2

Macau

5.0

5.3

5.4

5.7

Ukraine

2.4 2.5 2.7 2.8 2.6 2.2 2.3 2.4

46 Lithuan ia 48 Bahrain 49 Seychel

5.0

4.9

4.6

4.8

4.8

4.8

4.6 4.7 4.8 134 Zimbab 2.4 1.8 2.1 2.4 2.6 2.3 2.3 2.7 we 5.8 6.1 4.4 143 143 2.3 2.5 2.4 2.2 2.1 2.1 2.5 2.6 2.3 2.8 3.3

4.9 4.8

5.1 4.8

5.4 4.8

5.0 4.5

5.7 3.6

5.8 4.0

Pakistan

43

les

Maldive s 4.7 5.1 5.1 5.3 5.2 5.0 4.8 4.8 4.9 143 Maurita 2.3 2.8 2.6 3.1 nia 4.7 5.0 5.1 4.7 5.3 5.7 5.3 4.6 4.5 146 Camero 2.2 2.3 2.4 2.3 2.2 2.1 1.8 2.2 on 146 2.2 2.7 2.5 2.5 2.5 2.8

50 Hungar y 50 Jordan

50 Saudi Arabia

4.7

4.3

3.5

3.4

3.3

3.4

3.4 4.5

Nepal

53

Czech Republi c

4.6

4.9

5.2

5.2

4.8

4.3

4.2 3.9 3.7

146 Libya

2.2 2.6 2.5 2.7 2.5 2.5 2.1

54 Kuwait

4.5

4.1

4.3

4.3

4.8

4.7

4.6 5.3

146 Cte d'Ivoire

2.2 2.0 2.1

1.9 2.0 2.1 2.7

54 South Africa

4.5

4.7

4.9

5.1

4.6

4.5

4.6 4.4 4.8

146 Paragua 2.2 2.4 2.4 2.6 2.1 1.9 1.6 1.7 y 2.2 2.3 2.5 2.6 2.7 2.4 2.6 2.4

56 Malays ia

4.4

4.5

5.1

5.1

5.0

5.1

5.0 5.2 4.9 146

Yemen

56 Namibi a 56

4.4

4.5

4.5

4.5

4.1

4.3

4.1 4.7 5.7

146 Haiti 146

2.2 1.4 1.6 1.8 1.8 1.5 1.5 2.2

Iran 2.2 2.3 2.5 2.7 2.9 2.9 3.0

Turkey

4.4

4.4

4.6

4.1

3.8

3.5

3.2 3.1 3.2 154 Comoro 2.1 2.5 2.6 s

59 Latvia

4.3

4.5

5.0

4.8

4.7

4.2

4.0 3.8 3.7 154 Russia 2.1 2.1 2.3 2.5 2.4 2.8 2.7 2.7

59 Slovaki a 59

4.3

4.5

5.0

4.9

4.7

4.3

4.0 3.7 3.7 154 Kenya 2.1 2.1 2.1 2.2 2.1 2.1 1.9 1.9

Tunisia

4.3

4.2

4.4

4.2

4.6

4.9

5.0 4.9 4.8 154 Papua New Guinea 2.1 2.0 2.0 2.4 2.3 2.6 2.1

62 Croatia 62

4.1 4.1

4.1 3.9

4.4 3.9

4.1 3.7

3.4 3.3

3.4 3.5

3.5 3.7 3.8 3.6 3.3 3.9 154

2.1 1.8 2.0 2.1 2.3 1.5 1.3 1.2 Cambod

44

Ghana

ia

62 Maced onia 62 Samoa

4.1

3.8

3.6

3.3

2.7

2.7

2.7 2.3

154

Central 2.1 2.0 2.0 2.4 African Republic 2.1 2.0 1.9 2.6 3.3

4.1

4.5

4.4

4.5 154 Laos

66 Rwand a 67

4.0

3.3

3.0

2.8

2.5

3.1 154 Tajikist 2.1 2.0 2.1 2.2 2.1 2.0 1.8 an

Italy

3.9

4.3

4.8

5.2

6.2

6.2

5.2 154 Republi 2.1 1.9 2.1 2.2 2.3 2.3 2.2 c of the Congo

68 Georgi a 69 Cuba

3.8

4.1

3.9

3.4

2.8

2.3

2.0 1.8 2.4

3.7

4.4

4.3

4.2

3.5

3.8

3.7 4.6

154 Guinea- 2.1 1.9 2.2 Bissau

69 Monten egro

3.7

3.9

3.4

3.3

69 Romani a 69

3.7

3.8

3.8

3.7

3.1

3.0

Democr atic 164 2.0 1.8 1.9 2.0 2.1 2.0 Republic of the 2.9 2.8 2.6 Congo 3.9 3.9 4.0 164 Guinea 2.0 1.6 1.9 1.9

Brazil

3.7

3.7

3.5

3.5

3.3

3.7

73 Bulgari a El 73 Salvado r 73

3.6

3.8

3.6

4.1

4.0

4.0

4.1 3.9 4.0 164 Kyrgyzs 2.0 1.8 2.1 2.2 2.3 2.2 2.1 tan

3.6

3.4

3.9

4.0

4.0

4.2

3.7 3.4 3.2 164 Venezu 2.0 1.9 2.0 2.3 2.3 2.3 2.4 2.5 ela 3.7 3.4 3.0 168 Angola 1.9 2.2 1.9 2.2 2.0 2.0 1.8 1.7

Panama

3.6

3.4

3.4

3.2

3.1

3.5

Trinida 73 d and Tobago

3.6

3.6

3.6

3.4

3.2

3.8

Equatori 1.9 1.7 1.9 2.1 1.9 4.2 4.6 4.9 168 al Guinea

45

73 Vanuat u 78

3.6

3.2

2.9

3.1

170 Burundi 1.8 1.9 2.5 2.4 2.3 171 1.7 1.6 1.8 2.0 1.7 1.7

Greece

3.5

3.8

4.7

4.6

4.4

4.3

4.3 4.3 4.2

Chad

172 Sudan 78 Colom bia 78 3.5 3.7 3.8 3.8 3.9 4.0 3.8 3.7 3.6

1.6 1.6 1.8 2.0 2.1 2.2 2.3

172 Turkme 1.6 1.8 2.0 2.2 1.8 2.0 nistan 3.5 3.7 3.6 3.5 3.3 3.5 3.5 3.7 3.4 172 Uzbekis 1.6 1.8 1.7 2.7 2.2 2.3 2.4 2.9 tan 3.5 3.6 3.6 3.5 3.3 3.2 3.4 3.4 3.5 175 Iraq 1.5 1.3 1.5 1.9 2.2 2.1 2.2

Peru

People' s 78 Republi c of China

176 Afghani 1.4 1.5 1.8 stan 3.5 3.4 3.5 3.3 3.6 3.8 3.6 3.3 3.2 176 Burma

2.5

78 Thailan d

1.4 1.3 1.4 1.9 1.8 1.7 1.6

[2 78 Serbia 5]

3.5

3.4

3.4

3.0

2.8

2.7

2.3

178

Somalia

1.1 1.0 1.4

2.1

78 Lesoth o 85 3.5 3.3 3.2 3.3 3.2 3.4

Belize

2.9 3.0 3.5 3.7 3.8 4.5

Grenada Malawi 3.4 3.3 2.8 2.7 2.7 2.8 2.8 2.8 2.9 - Saint Lucia 85 Morocc o 87 3.4 3.3 3.5 3.5 3.2 3.2 3.2 3.3 3.7 Saint Vincent and the Grenadin es

3.4 3.5

7.0 7.1 6.8

India

3.3

3.4

3.4

3.5

3.3

2.9

2.8 2.8 2.7

6.4 6.5 6.1

87

Albania

3.3

3.2

3.4

2.9

2.6

2.4

2.5 2.5 2.5

87 Liberia

3.3

3.1

2.4

2.1

2.2

46

87 Jamaic a

3.3

3.0

3.1

3.3

3.7

3.6

3.3 3.8 4.0

Bosnia and 91 Herzego vina

3.2

3.2

3.3

2.9

2.9

3.1

3.3

91 Djibout i

3.2

3.0

2.9

47

SUMMARY

Rose-Ackerman (1999, p. 42) writes that privatisation is both an anti-corruption policy and an opportunity for corruption, underscoring the role of the process design. In this paper, we argued that the process of privatisation in infrastructure, and especially under natural monopolies, is more likely to offer room for corruption than the opposite. First, regarding the two main arguments for privatisation as anti-corruption measure through the reduction of political interference and the introduction of competitionit can be noted that these arguments are not convincing under the circumstances prevailing in infrastructure privatisation, especially in developing countries. The first one does, at one hand, not take into consideration the problem of local elites controlling both the economic and political sphere and thereby distorting political decisions in favour of their own interests. At the other hand, in the case of infrastructure, political interference will not stop with PSP because of the needs to regulate or renegotiate. Rather, the opposite is probable: due to the difficulties in the sector (for example the market structure or social and environmental concerns), the state will have to assume an even more important role after privatisation than before. The second argument concerning the introduction of competition may apply to low-level corruption, when waiting-lists are removed through capacity extensions. However, the argument stating that privatisation introduces competition for bribes between agents, reducing the bribes to zero, is flawed. Indeed, the bribe is offered by the consumer in order to cover fraudulent activities, and is not extorted by the agent as would have to be supposed in the bribe-competition argument. The supposed increase in monitoring by private firms can hence be questioned. Further, the costs of grand corruption may be passed on to consumers
48

through price increases, thereby rather increasing the propensity especially of poor households to offer bribes. Second, the process of private sector participation itself is replete with corrupt opportunities. We divided the process into three subsections since all involve different possibilities to corruption. The decision-making phase is particularly prone to corrupt pressures in favour of privatisation by neglecting alternatives in order to enable the extraction of private rents through the provision of the public service. During the tender and bidding phase, corruption may occur at one hand from politicians wishing to participate at the possible gains from privatisation, and at the other hand from firms wishing to influence the list of specifications, to be included in the list of bidders, to get insider-information, to induce the award through payments to politicians, or through the exercise of pressure by their home governments. Horizontal collusion might be another problem at this stage. During the contracting phase, the firm will try to bargain over the contract conditions in order to maximise their ex post revenues in the business. These negotiations, aside the bargaining strength of multinationals vis--vis local and even national governments, may offer high incentives for corrupt behaviour. Furthermore, problems arise because of conflicts between PSP and decentralisation, allowing for fiscal equivalence and the realisation of the principle of subsidiarity, but also leaving discretionary room for local politicians and bureaucrats. This is especially the case when local elites are profiting from privatisation (insider deals)either because they may exercise pressure on the local politicians or because they are themselves directly involved in the political process. Hence, decentralisation can facilitate corruption in PSP projects. Even there is a regulator on the national level, the municipalities may have the responsibility to provide infrastructure services such as water and sewerage and may choose whether they want private participation or not.
49

However, most of these municipalities lack knowledge in contracting, monitoring and regulation, thereby making them also more vulnerable to corruption and regulatory capture from multinational enterprises or from local elites. These points should be considered ex-ante in any planned privatisation and in ex-post evaluations of private sector participationsin developing countries as well as in industrialised ones. Thus, some general policy options may be suggested through these findings. First, it seems important to include alternative reform possibilities to privatisation, and discuss them seriously. This discussion should be public since citizens are directly concerned by the reform of the infrastructure, and should include an analysis of the corrupt opportunities involved by the different alternatives. The discussion should further involve all stakeholders, as well as national scientific institutions aside the assessment of the World Bank or other development institutions and non-governmental organisations. In order to reduce corruption, the World Bank should insist on transparent decision-making rather than on privatisation per se. If the outcome of such a decision-making process is a decision to privatise, then this process should be accompanied from the beginning on by transparency enhancing measures (e.g. Integrity Pacts from Transparency International) and citizen participation. The decision-making process may be time-consuming, but its results will provide a deeper understanding of the sector to be privatised and therefore enable an adequate design of regulationsamong them anti-corruption measures. Such a procedure would break the information monopoly of politicians and bureaucrats, and enhance community involvementthereby giving credibility and sustainability to the political process and its outcomes. In general terms, administrative reforms are processes which take time to be designed, implemented, evaluated and corrected, not only because they change the organisational
50

structures, but also because they implicate an institutional renovation in ethos, practices and values. Appropriate and feasible planning, value for money, open channels of participation, transparency, a widespread sense of accountability, leadership, and finally, a strong commitment of politicians, civil servants and citizens towards the reforms, are key elements in the success of new administrative models and are the main challenge in institutional transformation such as privatisations.

Finally, we wish to point to the lack of quantitative data on corruption in privatisation, which is due to the general problems concerning its measurement. However, research efforts should be made in order to get reliable data on corruption in PSP and regulation. Indeed, a deeper knowledge concerning costs and effects of corruption in privatisation could facilitate the assessment of past reforms and the planning of future privatisations. Further, the analysis of corrupt opportunities and the results of anti-corruption policies could be included in Regulatory Impact Assessments (RIA).

Privatisation, despite its shortcomings and problems, will remain the major reform policy in the infrastructure sector world-wideone strong reason to control those weaknesses and strengthen the regulatory role of the state in a transparent way.

51

Bibliography

1) 2) 3) 4)

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