Competition In The 'corruption Market': The Challenge In Curbing Corruption

What are the challenges and associated solutions for companies working together in Collective Action to fight corruption? By Cornelius Dube, 20 April 2009

Abstract This paper discusses corruption as referring to the offering, giving, receiving, or soliciting, directly or indirectly of anything of value to influence improperly the actions of another party. It focuses on corruption by agents at company level; implying those corrupt activities financed by the companies and intended to benefit the company rather than individuals. Participation by companies in these activities has resulted in the prisoner’s dilemma strategy, where the dominant strategy is to participate in corruption, as refraining to do so would enhance competitors’ chances of getting the associated product or service. This has resulted in the creation of another market, the ‘corruption market’, intertwined with the product or service market. The paper discusses the challenges that the existence of the ‘corruption market’ poses towards a collective action by the business in fighting corruption. These include the difficulty in getting more details on its operations; getting competitors to avoid participating when each has an incentive to cheat; challenges in initiating the collective action process; financing of the collective action process and the factors outside the business sector’s influence such as the pressure exerted by the public sector. The paper recommends the use of existing bodies and associations in the business sector in overcoming each of these challenges. This would see the establishment of a Committee to oversee the whole process, which would also be part of a national reference group to get buy-in from national stakeholders. Thus, while the efforts by the business sector in collective action would significantly reduce corruption, an initiative involving all stakeholders initiated by the business would achieve more. The starting point however would be the business sector, as they are the most active participant in the corruption market. 1. Introduction Normally, when the word corruption is mentioned, what comes into the mind is a government/public official being involved in underhand dealings with a private entity or person. This is just one facet of corruption, normally referred to as private-to-public corruption in that a private player would be paying some additional unofficial payments to the public official for some business gain. The common definition of corruption as the abuse of public office for private gain may also be taken to imply that private entities or players by themselves, away from the public offices can not be corrupt. However, focus

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on corruption has since moved to all players in the market and not only on public officials. On its website, Transparency International defines corruption as the misuse of entrusted power for personal or private gain. It becomes apparent that any individual who finds himself with some position of power can be corrupt, regardless of whether the individual is from the public or private sector. Most importantly, the private sector players may be involved in corruption on their own without public officials, normally referred to as private-to-private corruption. Thus arguably the private sector players are the more active players in the ‘corruption market’ than the public officials. While understanding the merits of the arguments presented by some authors that there could be some positive sides to corruption, such as in speeding up processes that could be delayed by bureaucratic tendencies or its role as a price mechanism to correct disequilibria in resource allocation (Clarke and Xu, 2001), the negative sides of corruption are well documented and will far outweigh any purported positives. Corruption steeply increases business costs, as it adds up to about 10% to the total cost of doing business globally, up to 25% to the cost of procurement contracts in developing countries, and its costs constitute more than 5% of global GDP (International Chamber of Commerce, Transparency International, the United Nations Global Compact and the World Economic Forum Partnering Against Corruption Initiative, 2008). Corruption scares away foreign investors, thereby preventing job creation and limiting sustainable development, and acts as a real barrier to development and business growth over time at company, industry, national and global levels (World Bank Institute, 2008). This paper focuses on the business’s role in corruption and how such actions have further made it more challenging for companies to work together in collective action to fight corruption. Its focus is on corruption aimed at benefiting the company rather than the individual, the assumption being that it would be a company sanctioned venture, as the costs to facilitate it would be financed by the company. The context therefore includes both private-to-private corruption and private-to-public corruption, and not ‘petty corruption’, which takes place at lower levels of the administration (Boehm, 2007). Corruption in this context is therefore the offering, giving, receiving, or soliciting, directly or indirectly of anything of value to influence improperly the actions of another party (IFI Anti-corruption Task Force, 2006).Thus corruption discussed here could be with respect to bribery, extortion, or even state capture but the participants would be doing so in their capacity as representatives of companies. The rest of the paper is organised as follows. Section 2 describes how business has managed to create a ‘corruption market’ and the associated challenges that this brings towards a collective approach to fighting corruption. Section 3 proposes some mechanisms through which companies, in consultation with other stakeholders, can use to address such challenges. Concluding remarks then follow in section 4.

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2. Business Challenges in fighting corruption 2.1 The ‘Corruption Market’ Companies generally engage in corruption as a way of beating their rivals to a service. In other words, corruption is regarded as a way of surviving competition albeit unfairly. As such it is business that is both the victim and the perpetrator; while one company is successful in landing a bid or service through the use of corruption; others are counting their losses due to this unfair competition. It is also apparent that companies are very much aware of instances in which they have lost out because of corruption, either because they have also participated before or because they have been informally informed. PricewaterhouseCoopers International (2008) reported that in a survey almost 45% of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks. In other words, due to fear that they can not fairly compete in the corruption prone market, the number of players is substantially lower than its potential, giving higher probability of success for corruption to the remaining companies. About 39% also said their company has lost a bid because of corrupt officials, and 42% say their competitors pay bribes. If such a high percentage is victims of corruption, it is difficult to imagine that there could only be one or two companies that have so many victims. Rather it is apparent that there are many companies that are involved, some preferring to compete all the way along. In such a process, companies are now also competing for corruption in addition to the associated service or product; hence the existence of a ‘corruption market’. It is not difficult to understand how the competition for corruption comes about even though the ‘corruption market’ can be difficult to delineate outside the associated product/service market. A firm will not necessarily know the number of firms who will be willing to participate in corruption, even though the number of firms in the market is known. Thus a prisoner’s dilemma situation would come out, where a firm has to decide whether to pay the corruption cost (say a bribe for example) or not. The firm will know that if any of its competitors pay the bribe, then its chance will decrease, hence the strategy to pay the bribe would enhance its chances. Thus it is not too off the mark to assume that in markets that are more prone to collusion such as procurement and constructions markets, a significant number would opt to pay bribes. This knowledge that competitors will also pay bribes eventually creates a platform where firms will bid up the bribe as well; hence the costs of corruption would be directly proportional to the number of players in the corruption market. This makes the competition twofold; the product competition and the ‘corruption’ competition. It can be generally argued that it is difficult to separate corruption and collusion, given that the same markets susceptible to cartels are also vulnerable to corruption. There is much in common between cartels and corruption, as both strive to create an uneven playing field for competitors in the market. It is during the process of bribe competition where awareness of competitors and the nerve for cartel activities, such as schemes for bid-rigging, price fixing or market allocation activities,

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emerge. It would not be surprising for investigations that uncover illegal payments to also uncover cartel activity involving multiple firms and their executives. As the cost of corruption goes up with the number of participants in the ‘corruption market’, there are high barriers to entry into the corruption game. This is also compounded by the fact that there are also transaction costs of corruption, which are high due to the need to avoid detection and the penalties once caught. This may lead to situations where risk averse or honest firms exit the market, leaving fewer players in the market. A combination of high entry barriers and few players in the market is a recipe for cut-throat competition; hence there is basis to assume that the ‘corruption market’ would be highly concentrated with those firms with financial muscles being able to ‘out-corrupt’ others and winning most of the corrupt business arrangements. This also leads to the same scenario normally witnessed in the goods market, where fierce competition will result in firms opting for collusive behaviour. Thus it is also not far fetched to expect to find ‘corruption cartels’ in susceptible markets. 2.2 The challenges Having discussed how the private sector actively participates in the corruption market, it may not be difficult to understand the need for the players to work together in collective action to fight corruption. Given that corruption has resulted in the creation of the secondary market, which is deeply entangled with the genuine market and hidden; ridding corruption becomes beyond the scope of individual corporations. Actions by one company will not have significant impact in the corruption market unless complemented by the others. This definitely calls for a collective approach to the situation, where both actual and potential players in the two markets (good and corruption) have to work together to be rid of the vice. The success of such an approach depends on the development of a collaborative and sustained process of cooperation in fighting corruption between all stakeholders. This is prone to several challenges, none which is fortunately insoluble. Firstly, it is difficult for firms to accept that they are participants in the corruption market, for they are not immune to prosecution, even if they admit it as part of solution seeking. Thus a more detailed disclosure on the operation of the market, which would form basis for collective action solutions, is difficult to comprehend. Secondly, getting firms who are used to working outside the competitive framework to work together is always difficult, as each has an incentive to cheat fair competition principles. Competing firms will always regard each other with suspicion if one of them takes an active role in calling and trying to organise the framework for collective action. Thirdly, it would be difficult for the firms to work together in the elimination of this implicitly defined corruption market, and avoid the same for the explicitly defined product market, give that the two markets are intertwined. Thus developing collective strategies for the corruption market may easily result in collusive behaviour in the product market, on which competition laws can descend heavily.

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Fourth, it is also important to understand that the interests of the companies can rarely converge; victims of corruption would want the practice to end while those that have benefited most have incentives to see the trend continuing. Small companies with little resources to finance corruption or to finance the compounded penalties once caught, would be interested more in participating in the collective action while big firms with deep pockets would reluctantly participate. The collective action plan therefore needs to give incentives for all companies to take part. Fifth, some resources are obviously required in mobilising stakeholders for such an approach to evolve and get buy-in by all companies and stakeholders. Such resources would need financing and the challenge is to ensure that while the resources are being sought, no big dents are made to the firms’ pockets; otherwise they would prefer to be free riders, knowing that the enjoyment of the ultimate benefit of a corruption free market would be non-exclusive. Finally, it would be difficult for business to have a strategy without taking into account the potential reactions of the other party involved; that is the public sector. As long as the public office abusers are totally left out of the process, they will continue to put spanners on the strategies, to continue getting their shares. As Mitra (2003) argues, corruption in the public office is difficult to stop as it is also a result of corruption; a cycle which is in the interest of the players to preserve. Most of the agents participate in the corruption market as a way of recouping the costs of corruption that they also paid in gaining their position. This includes examples where agents borrow money to finance corruption, and the repayment, with interest, will also have to be financed by corruption as the formal earnings would not be enough. Thus collective action not endorsed by public agents will be highly prone to sabotage. A collective action plan for companies to work together should therefore be developed with these challenges in mind. 3. Possible strategies for collective action Lack of transparency and accountability in the public sector is normally a recipe for corruption. So too is the existence of loopholes in the regulatory regime and enforcement of various laws, including the anti-corruption law. It is the private sector which has first hand information concerning the level of transparency and accountability in the public sector, as it deals with the public sector regularly. It is also the private sector which is best suited to judge the strength of the anti-corruption regulatory regime in the country, as their strategies in corruption would have been modelled taking advantage of those weaknesses. Thus efforts to improve transparency and accountability, as well as the strength of the regulatory regime in curbing corruption have a huge probability of success if the private sector views are taken into account. Similarly, it is the private sector that is more suited to expose the various economic opportunities for which corruption is being used as a tool to exploit. Thus the importance of the private sector as a player in anticorruption efforts can not be trivialized, and a strategy is required to gather this knowledge for use in the anti-corruption drive.

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The most critical requirement is for companies to speak with one voice in the fight against corruption. The business sector needs to look at itself first and put its house in order before shifting attention to its corrupt counterparts from the public sector. The private sector needs to own up to its critical role in promoting and sustaining corruption in order to understand its need to play the most critical role in nipping the vice in the bud. Corruption can easily be eradicated if players from the private sector refrain from participating in corrupt activities. However the prisoner’s dilemma situation brought about by the uncertainty on fellow competitors’ action makes this difficult. Thus companies have to collectively make the decision, through open and transparent commitments and pledges which can be easily monitored. This apparently implies that companies have to engage in discussions among themselves to outline the numerous benefits that accrue to the sector as a whole as a result of the movement of resources from corrupt officials back into the business coffers. If companies can find means of sitting together clandestinely to conspire against the consumers through illegal cartels despite strict competition laws, it can surely not be difficult for competitors to have an open meeting to fight corruption! Such meetings may be analogous to a cartel in the ‘corruption market’, the only difference being that this would be an anti-corruption cartel, with no harm to consumers but to corruption. It would be difficult for buy-in if such a platform is initiated by individual companies, but it will not be difficult if existing structures that business already has in place, through various associations and body representatives including association of small scale enterprises, are used. Thus the existing structures would be used as the avenue through which all inclusive anti-corruption meetings and actions would be devised and this can work through the following process. The bodies, through their own structures across the whole country, would each call up meetings with their constituencies and discuss the various facets through which corruption exists and some means of closing off these facets, which would form the basis for collective action. All companies would therefore get opportunities to sit together and outline the requirements for collective actions that can be undertaken to fight corruption. Selected representatives from these bodies would become members of the AntiCorruption Business Committee, which would meet to discuss the collective action strategies that each representative would table. The Committee would come up with explicit steps and action plans for the collective action approach and identify all possible concerns that have to be addressed for this to happen, including policy and paradigm shifts on the part of the government and other stakeholders. Thus the objective of the Committee would be to recommend strategies, acceptable to all players, which each business unit can adopt to instil a corruption free culture into the economic activities. The Committee would also fare better in soliciting views and first hand information on the operation of the various corruption syndicates, with firms free to give the information without fear of prosecution. There is always a limit on the extent to which anti-corruption action by the private sector on its own can succeed without the involvement of the other corrupt arm; the public

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sector. Thus collective action by the private sector has to lead to incorporation of the public sector; hence establishment of a platform where views of the public sector can be discussed and harmonized is a crucial step. The same applies to other critical stakeholders like civil society representatives and independent regulatory authorities, who can also influence positively the anti-corruption efforts. Collective action by the business also has higher chances for success if it receives buy-in from all the other stakeholders. Thus the other task of the Committee therefore would be to play a critical role in lobbying for the establishment of a National Anti-Corruption Reference Group (NARG), which would include members from the Committee and representatives from the public sector and civil society. This would also include members from the anti-corruption authorities and competition authorities in addition to the policy makers to ensure intense debate on corruption matters within the confines of other laws. The purpose of NARG would be simply to ensure that the collective action approach taken by the business receives a complementary response from other stakeholders whose action have an impact in the corruption market. Thus NARG would discuss the merits for the various concerns and recommendations made by the Committee and recommend complementary roles that the players from the public sector and civil society can play in eliminating corruption. The reference group would also make policy recommendations for the strengthening of the regulatory regime governing corruption. It is also important for a strategy to be developed to mobilise resources towards financing of the various initiatives and meetings to enable the Committee to perform its task. This might call for business to contribute to a fund in the event that donor support can not be mobilised, whose proceeds would be used strictly to facilitate the collective action programme. However, the contribution requirement has to be conscious of the different sizes of companies. Thus it is important for companies themselves to agree on the mode, preferably a fixed percentage linked to assets, turnover or profits, which can be paid as contributions towards the fund. It would also be left to business to decide whether all companies, including SMEs should contribute or there would be a size cut-off on eligible companies. Government funding can also be sourced at the NARG stage. Even though the Committee may fail to lobby for the formation of NARG, the collective efforts by the business sector alone would have a chance of success if strategies are developed to counter the pressure the public sector would continue to exert in seeking to continue with the corruption drive. As NARG is outside the control of business, more can still be done at the Committee stage as long as incentives can be developed to try and discourage firms from cheating the agreed collective action norms. Thus in the event that NARG fails to materialise, that should not be an excuse to ditch the collective action approach. 4. Conclusion Corruption is both demand driven and supply driven. While the public sector’s role in facilitating corruption through demands for extra payments and facilitations outside the normal payment schedules is well appreciated, the role of the private sector in offering to

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indulge in corrupt activities as a way of beating competition can not be ignored. In addition, while corruption among players from the public sector among themselves is negligible, the same can not be said about corruption among private sector players on their own. Thus, the most active participants in the corruption market are players from the business sector. Being the dominant players in the corruption market, no successful efforts towards the elimination of corruption can be embarked on without involving the business sector. Moreover, as they are the most corrupt player; action by the private sector that is not imposed upon them but embarked upon at their initiation, will work best in eliminating corruption. The call for collective action by the business in the fight against corruption is therefore not misplaced. Collective action towards a common objective of corruption elimination by the business sector therefore has high chances of success. But for the call for collective action to be imbibed, conviction is needed that it is in the interest of all stakeholders to pursue it. Businesses have to be made aware of the numerous benefits of a corruption free society to the business sector as a whole, and how it is in their interest to help in attaining it. Such a collective action is also not without some short run costs to some companies; the opportunity cost in terms of the potential to lose out contracts as a result of competition, which corruption was being used to shield, may be real. However these are far outweighed by the benefits to accrue to companies and the economy in general through the elimination of corruption. Costs incurred in the collective action process, through opportunity costs or directly, should therefore not be used as an excuse to shy away from the process. References • Boehm, F (2007), ‘Regulatory Capture Revisited –Lessons from Economics of Corruption’, Working paper, JEL: K42, L97, B52, D73. • Clarke, G. R.G and Xu L C (2001), ‘Ownership, Competition, and Corruption: Bribe Takers Versus Bribe Payers’, Journal of Economic Literature. • IFI Anti-corruption Task Force (2006), ‘Uniform Framework for Preventing And Combating Fraud and Corruption’, African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development European Investment Bank, International Monetary Fund, Inter-American Development Bank and World Bank. • International Chamber of Commerce, Transparency International, the United Nations Global Compact and the World Economic Forum Partnering Against Corruption Initiative (2008), ‘The Business Case against Corruption’, (a joint publication). • Mitra, S (2003) “Corruption as cascades”, Social Change, Volume 33, No. 4 • PricewaterhouseCoopers International (2008), ‘Confronting corruption: The business case for an effective anti-corruption programme’, PricewaterhouseCoopers. • World Bank Institute (2008), ‘Business Case for Collective Action Against Corruption’, World Bank.

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Cornelius Dube, April 2009