The big question now is whether governments, infrastructure procurers and providers will seize this opportunity and public momentum to stamp out corruption in all its forms. Given the impact that corruption has on the infrastructure sector, it seems clear that there is no time to waste.
The fact that corruption is still endemic around the world is, frankly, shameful. Every year, hundreds of billions of dollars are syphoned away from important projects and investments, enriching a very small few at the expense of the vast majority. What is worse is that – in many markets – these crooks and social terrorists are allowed to operate with virtual impunity.
The impact of corruption is massive; it is not just about a ‘dash’ here or a ‘tip’ there. According to the EU Commissioner for Home Affairs, about EUR120 billion is lost to corruption each year across the 27 EU member states alone. In the developing world, the damage is even more dramatic: some estimates suggest that around USD1.26 trillion is stolen from the developing markets each year.
Now consider this: the World Bank estimates that cost of redressing Africa’s entire infrastructure deficit at around USD75 billion per year – that’s less than two thirds of what is ‘lost’ each year in the EU and a tiny fraction of the money lost to corruption every year in the developing world. Very simply put, the best way to close the word’s infrastructure gap is to stop corruption.
Let us be clear: corruption is damaging for everyone involved in infrastructure. For project owners, corruption leads to wasted costs, reduced margins and – increasingly – the risk of massive civil and criminal liability. Project funders and investors risk not only the loss of their investment (there are dozens of cases of foreign investors arriving to open up a new project only to find that the asset was never built and the funds had absconded), but also reputational damage.
Recent events in Brazil have clearly demonstrated the risks raised by corruption for construction and engineering companies in particular (our interview with Artur Coutinho, CEO of Construtora Camargo Corrêa on page 14 in Insight Magazine (PDF 2.6 MB) illustrates some of the challenges facing that country’s construction industry following the Operation Car Wash corruption scandal). SNC Lavalin’s current experience in Canada suggests that companies participating in corruption overseas also risk losing out on lucrative contracts at home if found guilty.
For the public at large, corruption in the infrastructure sector has massive implications for daily life, safety and productivity. Corruption takes capital out of the public system leading to fewer assets being developed. It syphons resources from project sites leading to dangerous and unsafe infrastructure. In some markets, it allows for massive displacement of populations, creates the potential for damage to the environment and fuels criminal activity.
The particularly galling part of corruption in the infrastructure sector is that it tends to have the most significant impact on those who can least afford it. The worst offenders in Transparency International’s Corruption Perception Index are also the countries with the poorest populations and most fragile economies – places like Somalia, Afghanistan and North Korea where the average worker makes less than a dollar a day.
Estimates suggests that somewhere between 10 to 30 percent of the value of publicly funded construction projects are lost to corruption around the world. That means that someone is stealing one out of every three hospitals planned for Africa. It means that any country with a development vision for 2030 will need to wait until 2035 to achieve their goals. And it means that users may need to pay 30 percent more for their services than they should.
The impact on overall national productivity and economic growth is just as significant. According to one estimate, each dollar of road investment stolen in Indonesia reduces the economic benefit of that road by USD3.41. In an era where governments are investing heavily into economic infrastructure in a bid to drive exponential growth in GDP, even small amounts of corruption can be crippling.
The good news is that the public discourse on corruption is clearly shifting and gaining voice. In key markets such as Brazil, China and India, governments have made anticorruption a key priority. And – based on recent events in Brazil in particular – it is clear that nobody is immune from persecution. Allegations and charges of corruption are front-page news, as illustrated by recent events at FIFA and the leak of the infamous ‘Panama Papers’.
Based on the recent Anticorruption Summit held by Transparency International in London in May, all signs indicate that governments, companies and civil society are starting to demand more action to meet the challenges posed by corruption. The resulting Anticorruption Manifesto provided some clear proposals and the commitments made by governments were encouraging.
Interestingly, the growing drive to bring private sector investment into infrastructure seems to also be having a positive impact in the fight against corruption. Yes – there are certainly examples of companies and individuals that have used their influence or their capital for corporate advantage or personal gain. But, more often, the need to attract and retain private sector investors has led to greater transparency, more robust project due diligence and greater oversight.
I believe that – over the next 10 to 15 years – the public discourse on corruption will evolve in much the same way as the recent debate about tax. Just a decade ago, most companies believed it was ‘acceptable’ to avoid tax wherever possible. But today, perceived tax avoiders or (worse) tax evaders are actively being hunted down by not only tax authorities but also by the media. Over the next decade, those involved in corruption should also start to be ferreted out and brought to public justice.
Clearly, there are tremendous incentives to stamping out corruption. And we believe that governments should be redoubling their efforts to remove any opportunity for corruption in the infrastructure sector across the life-cycle, from procurement and financing through to operations and management. Companies and investors should also be sharpening their focus on spotting potential signs of corruption and be willing to walk away from projects in order to protect their investments and reputations.
Brazil’s current scandal may be highly disruptive to the economy and hugely damaging to those individuals and companies implicated, but it also makes it clear that there is a limit to how much corruption will be tolerated by a population. And all signs indicate that Brazil’s anticorruption fervor is likely to spread across the emerging markets. In the long-run, this should be good news for everyone involved in infrastructure.