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The Hidden Costs...

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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.


Moreover, some in the corporate sector have found a huge gap in the way these pacts are managed. Says Infosys Technologies CEO S. Gopalakrishnan, “It is not followed uniformly. Sometimes it seems as if it depends a lot on the people who are managing it.” Others in the private sector have lauded the move, but have not yet volunteered to implement it. A bit disappointed with this lack of interest, Anupama Jha, executive director at Transparency International India, observes, “We need a CVC for the private sector to monitor or recommend this.”
Following The Leaders
Former Central Vigilance Commissioner N. Vittal laments that bribery has not come down despite government initiatives. He says the main reason for the grim scenario is the cumbersome legal process that provides a cushion to the corrupt. The only way out of this maze, he feels, is “to have a strict time limit of about six months within which any court should pronounce a verdict in a corruption case. The number of appeals in a case should also be limited to one”.

Source: Transparency International

While India struggles with the enforcement of anti-corruption laws, Singapore has successfully implemented a unique experiment to cut red tape and with it corruption. It has made public sector officials stakeholders in the process of making the government a facilitator for private enterprise. A pro-enterprise panel (PEP) chaired by the head of civil service, which comprises champions of the industry as well as senior bureaucrats, regularly reviews regulations that could hinder business. Speed Teams for Enterprises (Stent) implement the suggestions accepted by PEP. The Singapore government claims that PEP has so far reviewed 1,700 suggestions and accepted over half of them.

The topper in many anti-corruption rankings, Finland could also offer solutions. Experts say low corruption in Finland is the result of the development process that goes back two centuries, and a social order characterised by moderation and self-control. Interestingly, the country is a living validation of World Bank studies that show more women in government lead to lower corruption. About 40 per cent of members of parliament in Finland are women.

Looking Within
Despite the prisoner’s dilemma, many companies in the country have resisted the temptation to pay ‘speed money’. According to N.R. Narayana Murthy, chairman of the board and chief mentor at Infosys Technologies, “In the initial years, we very politely said Infosys does not do it [pay bribes]. In the short term, there were some difficulties, but in the long term we are highly respected.”

But TI’s Jha says it is not enough to be clean. She cites a TI survey (not been published) of the Fortune 500 companies that found most were committed to fight corruption. “But when we looked at their records we found that they hardly did any public reporting on strategies, policies and management and systems for combating bribery and corruption. If you are transparent and clean, why not report it,” she asks.

A transparent business environment seems to have become even more imperative in the current global scenario. In a recent letter to the UN secretary-general, CEOs from the world’s leading companies wrote, “The economic crisis will inevitably place severe strains on worldwide competition, threatening an erosion of ethical standards that will be hard to reverse.” The letter was written to push for establishing an effective review mechanism for the UN convention against corruption. It was signed among others by Gopalakrishnan of Infosys, R.V. Kanoria, chairman and managing director of Kanoria Chemicals, and Jamshed J. Irani of Tata Sons.

The Satyam saga has clearly demonstrated that corporate governance laws — or at least their enforcement — are not adequate to prevent fraud. In the 63rd year of independence, corporate India will do well to look within, even as it battles the corruption without.

As Olajobi Makinwa, issue manager, anti-corruption, UNGC, puts it, “The corporate sector is part of the problem and must be part of the solution.”
binu dot kwatra at abp dot in

(Businessworld Issue Dated 18-24 Aug 2009)