Corruption Rampant in Construction Industry


On September 1, 2007, the newly constructed Sher Shah Bridge in Karachi, Pakistan, collapsed killing 14 people, and injuring many, including three police constables. The bridge was inaugurated by former President Pervez Musharraf less than a month before it fell down. Shoddy construction and corruption are suspected but the investigation has produced no results yet. Official cover-up appears to have succeeded.

In 2003, S.K. Dubey, Deputy General Manager of National Highways Authority of India (NHAI), was assassinated by unidentified gunmen after he wrote to the Prime Minister of India highlighting several instances of "loot of public money" and "poor implementation". He requested anonymity but, tragically, the confidentiality of Dubey’s letter and the identity of the ‘whistle blower’ were both violated as Dubey’s letter was passed down from file to file through the bureaucratic maze.

Earthquakes that hit China and Pakistan in the last few years have caused massive destruction. The fact that the damage was significantly disproportionate to government schools and other government buildings has raised questions about shoddy construction by government contractors supervised by corrupt officials. Majority of the victims in both nations were children.

As the need for infrastructure projects grows in both the developing and the developed nations and they commit massive funds to such projects, there is a huge concern about the waste from rampant corruption in the global construction industry. Transparency International, a nongovernmental organization that tracks corruption, reports that the construction industry is the most corrupt in the world.

A wave of government bailouts around the world and a sharp deterioration in existing infrastructure could lead to as much as $35 trillion in public works spending over the next 20 years, according to a new study by CIBC World Markets.

According to the CIBC forecasts:

* North America will spend $180 billion on infrastructure each year.
* Europe will spend $205 billion.
* Asia will spend $400 billion.
* And $10 billion will be invested in Africa annually.

Stimulus plans will figure heavily into the global infrastructure boom.

Indian Planning Commission's deputy chairman, Montek Singh Ahluwalia, recently told Reuters that his nation should be able to maintain economic growth of around 6.5-7 percent in the 2009/10 fiscal year but needs to ramp up infrastructure spending to boost growth.

While the recent US prosecution of Halliburton on corruption charges in Nigeria that resulted in a $559m settlement is welcome news, it also raises a lot of questions about how widespread and deeply rooted the corruption is in the construction industry. As a response to the deep concerns, the industry set up a Partnering Against Corruption Initiative (PACI) a few years ago. But Fluor CEO Alan Boeckmann recently told Fortune Magazine, "PACI was a cooperative effort to share best practices. But it had no teeth. We wanted to give it substance." Plenty of companies had signed on, but few had adequate programs to teach and enforce anticorruption principles.

Much of that changed four years ago, when he appointed a company lawyer, Wendy Hallgren, as the head of compliance, according to Fortune. Hallgren wanted to observe firsthand what Fluor's employees were experiencing. So she spent much of a year and a half crisscrossing the globe, talking to project managers and engineers in countries including the Philippines, Russia, and Chile.

In a Southeast Asian country (not named), Hallgren learned that local officials were demanding that Fluor hire their security details; when the company refused, the government converted the dirt road leading to Fluor's mining project into a one-way path and arrested workers as they drove home. Rather than pay up, Fluor appealed to the regional government - and then later used the story to train employees to react in the same way.

According to TI, corruption on construction projects (which includes bribery, extortion and fraud) is damaging:

* It damages the developed and developing world, resulting in projects which are unnecessary, unreliable, dangerous, and over-priced. This can lead to loss of life, poverty, economic damage and underdevelopment.
* It damages companies, resulting in tendering uncertainty, wasted tender expenses, increased project costs, economic damage, reduced project opportunities, extortion and blackmail, criminal prosecutions, fines, blacklisting, and reputational risk.
* It damages individuals, resulting in reduced morale, criminal prosecution, fines and imprisonment.

There is the potential for corrupt practices at every phase in construction projects. Research by Sohail and Cavill on corruption in construction in Pakistan describes the forms of corruption as:

* Land acquisition: land-titling arrangements land mafia or acquiring the land in illegal ways. corrupt officials within the various departments to maintain haphazard records of land and no serious effort in maintaining computerized records has been made
* Excavation e.g. bribes to police to allow heavy machinery to execute the job
* Dumping of material – bribes to dump the excavated soil
* Illegal water connection: Water is the foremost requirements for the construction. bribe paid for water tankers or by water connections e.g. to lineman of Water and Sewerage Board
* Illegal electricity connection: In the local language the illegal electricity
connection is called “Kunda”. This is pretty obvious and could be detected easily. In order for the area inspector of electricity department to turn a blind eye a bribe is paid through a middleman or agent.
* Storage of material at site: The storing of materials on site or by the roadside causes an obstruction to traffic so it is often necessary to bribe the traffic police or city government inspector.

In India, the assassinated engineer S.K. Dubey’s key complaints included:

* Tenders are called for on the basis of Detail Project Reports (DPR) by design consultants which are are badly prepared and are unreliable.
* Process of procurement ‘‘completely manipulated and hijacked’’ by the big contractors ; forged documents are submitted to justify technical and financial capabilities.
* NHAI officials are in league with big contractors and internal NHAI decisions are leaked.
*Nearly 10% of contract value is paid as ‘Mobilization Advance’ to selected contractors within a few weeks of award of work, for which the NHAI officials receive illegal gratification or “commissions”. No follow-up to ensure the actual utilization of such advances.
*Practice of subletting of contracts or sub-contracting to small petty unqualified contractors fails to ensure the requisite quality of construction.

Transparency International (TI) believes that corruption on construction projects can only be eliminated if all participants in construction projects co-operate in the development and implementation of effective anti-corruption actions which address both the supply and demand sides of corruption. These participants include governments, funders, project owners, contractors, consultants, and suppliers, and the business and professional associations which represent these parties.

TI offers a number of ideas on fighting corruption in the construction industry on its website.

Related Links:

Bhutto Convicted in Switzerland

Corruption in Pakistan

Infrastructure Corruption in India

Infrastructure Corruption in Pakistan

Transparency International Survey 2007

Is Siemens Guilty?

Fluor's Anti-Corruption Initiative

Zardari Corruption Probe

Construction, Corruption and Developing Countries

Comments

Riaz Haq said…
Here's recent Businessweek report on corruption in Japanese construction industry:

The beneficiaries of all that (post WWII) spending were the so-called zenekon, large construction companies such as Kajima, Shimizu, Obayashi, and Taisei. The strength of the zenekon ensures that Japan is ready to rebuild quickly in the wake of its latest—and still unfolding—catastrophe, just as it did after the 1995 Kobe earthquake. But the sector, while a point of pride catered to by the nation's elected leaders and bureaucrats, isn't always a force for good. Proof lies all over Japan—in mammoth tunnels and bridges to nowhere, dams built against the advice of engineers, and seawalls raised over the objections of those they were purported to protect.

The ruling Democratic Party of Japan came to power in 2009 promising an end to wasteful public works projects and the cozy relationships between zenekon and politicians. The rebuilding of northeastern Japan following the Mar. 11 earthquake and the resulting tsunami and nuclear crisis will test that commitment. "They're going to have to contract out these projects in quick order, and that means companies with really tight ties to the contracting agency get the project," says Brian Woodall, a political scientist at Georgia Tech and author of Japan Under Construction. "It may be an opportunity for interested and powerful politicians to get involved, and that to me is not a good thing."
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The zenekon have traditionally been Japan's political kingmakers. From the 1970s until the 1990s, the companies donated generously to Liberal Democratic Party candidates, supporting the party's half-century reign. In a 1992 case that exposed the role the yakuza crime syndicates played in Japan's trucking and construction industries, testimony revealed that the nation's biggest firms had each donated some 20 million yen a year to a single LDP politician. In his book, Woodall describes a construction minister from the 1960s, Kono Ichiro, who would only meet with executives at his home after they paid a kutsunugidai ("shoe removal fee"), a zabutondai ("floor cushion fee"), and a nantokadai ("something-or-other fee"). In return, Japanese administrators and legislators steered public-works contracts to favored companies. And legislators did their best to grow the pot of money set aside for public works projects, especially in their home districts.

The result of all that cronyism and graft: projects like the Joetsu Shinkansen railway, a high-speed line built in the 1970s at the behest of former prime minister Kakuei Tanaka through one of the least populated areas in the country; the Isahaya Bay Project, a controversial series of dikes built by Kajima, Obayashi, and others, to turn a bay into farmland; and the Tokyo Aqua-Line, a nine-mile bridge-tunnel spanning Tokyo Bay, built at a cost of $12 billion by Kajima, and today only lightly used.

Prosecutors have periodically taken on the big firms, most recently in 2007, when the government won convictions against nearly all the zenekon—Obayashi CEO Takeo Obayashi, a descendant of the company's founder, resigned over the investigation, and the nation's farm minister, Toshikatsu Matsuoka, hanged himself. The Democratic Party of Japan's 2009 decision to freeze construction on an immense dam in Naganohara was seen as an attempt to follow through on its reformist campaign rhetoric.

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