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CORRUPTION
The Hidden Costs Of Business
Corruption adds one more layer to doing business in India
BINU KWATRA
14 Aug 2009
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| Illustration: Anthony Lawrence |
A and B are bidding for contract X. A decides to pay a bribe to win the tender as he expects B to do the same. Similarly, B resorts to sweetening the deal, since he cannot risk losing the contract to A. If A and B had decided to be honest, the transaction cost of bidding would be lower for both. But since both anticipate that the other would pay a bribe, they end up shelling out more than was needed. This application of the ‘prisoner’s dilemma’ to the business world in an inherently corrupt society depicts why most companies give in to rent-seeking behaviour.
According to the United Nations Global Compact (UNGC), businesses face this dilemma when they attempt to follow anti-corruption guidelines — that may be true for Indian firms more than their counterparts in about 80-odd countries, going by India’s rank based on Transparency International’s (TI) corruption perceptions index (See ‘2008 Corruption Indicators’). In fact, Indian companies tend to export a lot of this corruption — as do the Chinese and the Russians — if TI’s Bribe Payers Index, which measures the tendency to pay bribes while doing business abroad, is taken as a barometer.
“The amount involved in corruption is often a very small proportion of the business turnover. But what is a much bigger concern is the consequent ‘Culture of Corruption’. The chain of actions that it breeds has no end,” says Shinzo Nakanishi, managing director and CEO of Maruti Suzuki.
So, what is needed to break this chain? Some corporate, government and NGO initiatives over the past decade may have succeeded in creating ‘islands of integrity’ in a sea of corruption, but the road ahead is still long and bumpy.
A Baby Step Forward
Coming back to the case of contract X. If A and B were assured that no bribes would be accepted and that laws and procedures for fair and open competition would be followed, with all bidders disclosing the commissions and other expenses paid to anybody in connection with the contract, it would not have been tough for A and B to stay clean.
A handful of public sector companies — including ONGC, SAIL, NTPC, BHEL — are doing just that by signing ‘integrity pacts’ with their vendors. Recommended by TI, this document is signed in consultation with the Central Vigilance Commission (CVC). ONGC has inked thousands of contracts with domestic and foreign firms such as L&T, Gesco and Halliburton since 2005, using the integrity pact. For projects above Rs 150 crore, the company appoints independent external monitors who step in if there are allegations of violation. “We issue a pre-signed tender document and ask the bidder or the vendor to sign the same,” says Chairman R.S. Sharma. “The image (and) perception of ONGC in the vendor community has gone up.” However, this is but a drop in the ocean. The value of public and government procurement notorious for graft is estimated at more than Rs 1 lakh crore and a few white sheep may not be enough to cleanse the system. “Not many enterprises have adopted the pact as it adds extra commitment and time,” says Sharma.
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