Strategies to Prevent Corruption in Construction Industry

1. INTRODUCTION A general definition of corruption is the violation of established rules for personal profit and gain. Corruption is the behaviour which deviates from the norms, rules and duties governing the exercise of a privileged role for purposes of private gain. Corruption around the world is believed to be endemic and pervasive, and a significant contributor to the low economic growth, inhibition of the provision of public services and increase in the inequality. This has led to international organizations such as the World Bank to identify corruption as the single greatest obstacle to economic and social development. The World Bank has estimated the cost of corruption to the global economy at US$1.5 trillion a year. Corruption is likely to occur in procurement of works by governments, public authorities and other public entities due to large amount of money involved and the difficulty in monitoring the processes of money spending. Globally, the construction industry has been criticized for many years neither for its inability to innovate nor to adapt to modern management methods. The global construction market is worth around US $3,200 billion per year. The construction industry has a world wide reputation for incidences of corruption, asset misappropriation and bribery. The American Society of Civil Engineers (2004) claim that corruption accounts for an estimated $340 billion of worldwide construction costs each year. Construction industries are particularly susceptible to corruption in licensing, taxation and obtaining government contracts. Estimates regarding the cost of corruption in infrastructure suggest that five to twenty percent of construction costs are being lost to bribe payments. In most of the cases, corruption is a result of the nature of construction projects and that of the process itself. The characteristics of the construction sector make it particularly prone to corruption: complex technical requirements of projects, competition for ‘make or break’ contracts, the large number of contractors, providers of goods and services, the numerous levels of official approvals and permits, the uniqueness of many projects, complex contractual and project implementation structures, the opportunities for delays and overruns, and the simple fact that the quality of much work is rapidly concealed as it is covered over by concrete, plaster and cladding.

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Corruption in the construction industry is initiated by project participants at every level and in every phase of the process, and the professional advisers and consultants are the first line of attack as well as defence. The situation has been compounded by the fact that a low level of capital investment is required to set up construction companies, which in turn, allows easy entry into the industry by new, and sometimes, unscrupulous players. To overcome this problem, some governments have developed and implemented procedural guidelines on procurement of services, goods and works to ensure the contracting of government funded works and services are transparent and fair, in order to achieve value for money and to prevent corruption risks from happening. According to Dreyer (2004), there were many grey areas in the transition between a planned economy and a market economy, and some people sought to take advantage of a situation in which the rules were unclear. Speculation, profiteering and bribery became accepted norms for doing business. Newly built bridges and dams collapsed, and just-finished highways developed cracks soon after completion that subsequently rendered them unusable. Paying bribes raises the cost of doing business, and because inspectors are regularly bribed, the quality of the goods sold is adversely affected. However, in many cases, although the legal systems, checks and balances appear to be in place to inhibit corrupt practices and risks, these systems, checks and balances byand-large, do not seem to be fully effective. Consequences of corruption in the construction field are severe. Corruption not only eats into profit but also leads to poor quality of the construction work which would cause accidents and endanger human life. Even when these construction defects can be discovered at an early stage, extra budget and time for remedial work are incurred which means higher construction costs. Besides, the reputation of the company involved will be affected too. Therefore, it is necessary to develop strategies to minimize any corruption risks and corrupt behaviour in procurement of construction projects.

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2. CAUSES OF CORRUPTION The construction sector is estimated globally to be worth US$3,200 billion per year and US$250 billion is spent annually on infrastructure in the developing world alone. However, worldwide, the construction sector is known for its association with corruption. Corruption in the construction industry covers new build contracts refurbishment contracts, as well as maintenance contracts. Corruption in the sector includes all forms and can be found at all levels from high ranking officials diverting funds and international companies offering bribes for contracts. Transparency International’s Global Corruption Report highlights the devastating impact of corruption in construction industry such as wasted tender expenses, tendering uncertainty, increased project costs, economic damage, blackmail,

criminal

prosecutions, fines, blacklisting, brand damage, and reputational risk. Corruption in the construction industry often results from a combination of:

• Deregulating the infrastructure sector. • Large flow of public money. • Highly competitive nature of the tendering process. • Lack of transparent selection criteria for projects. • Political interference and discretion in investment decisions and the cost of sector assets. • Monopolistic nature of service delivery • Tight margins • Close relationships between contractors • Subcontractors and project owners and • Complexity of institutional roles and functions the asymmetry of information between user and provider, or cronyism in the industry.

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3. FORMS OF CORRUPTION Forms of corruption in the construction industry can be summarized in two groups: (1) contractor related and (2) professional consultants, clients or government officers related. The forms of corruption related to consultants, clients or government officers include administrative interference, illegal award of contract or subcontract of construction projects, disclosure of confidential project baseline price information to some companies prior to tendering, and clients or government officers asking for money or in-kinds from contractors. The forms of corruptions related to contractors include, for example, the construction company offer bribes to client or the tender evaluation committee members in order to win the project; purposely lower the tendering prices or collusion in the tendering prices among construction companies using of substandard materials or workmanship, submitting false reports of project expenditure, forging and altering original invoices, non-compliance with contract, and supervision and construction companies colluding together. Corruption can be collusive- the willing and planned cooperation of the giver and taker; or anticipatory- paying a bribe in anticipation of favorable actions or decisions from an authority; as well as extortionary- which is the forced extraction of bribes or other favors from vulnerable people by those in authority Corruption can include bribery, extortion, fraud, embezzlement, kickbacks and other equivalent criminal offences. 3.1 BRIBERY Bribery can be defined as the demanding, receiving, offering or giving of an undue reward by or to any person in order to influence his behaviour. The perpetrators of bribery will include both those who demand or receive the bribe and those who offer or give it. Demand-side bribery refers to those who demand or receive the bribe and supply-side bribery refers to those who offer or give the bribe. A bribe may be a cash payment, or a non-cash advantage. It may be paid and received directly or indirectly. A bribe may be paid or received with the full approval of the organisation which is known

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as institutional bribery. On the other hand, it may be paid or received by a representative of an organisation without the approval of the organisation which is known as personal bribery. Normally, the payment of a bribe in relation to a construction project is an institutional act, and the receipt of the bribe is a personal act. A bribe paid to win a project will normally be concealed with the aim that the project appears from the outside to have been won on a genuine arms length basis. 3.2 EXORTION Extortion is a form of blackmail. Extortion is a criminal offense, which occurs, when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercion. It is the term applied to the process of demanding a bribe where the demander uses some form of physical or financial pressure, and where the person from which the payment is demanded may feel that he has little choice but to comply. 3.3 FRAUD Fraud is theft through misrepresentation. A representative of one party may try to deceive a representative of another party. The party using the deception will normally be attempting wrongfully to extract payment or advantage from another party, or to deny another party a due payment or advantage. These practices can also be referred to by various different names such as deception, anti-competitive practices or claims inflation. 3.4 EMBEZZLEMENT Embezzlement is the misappropriation of corporate or public funds. Embezzlement is a term used to describe the act of dishonestly misappropriating funds by an individual to whom the funds have been entrusted. Embezzlement may range from the very minor in nature, involving only small amounts, to the immense, involving large sums and sophisticated schemes. More often than not, embezzlement is performed in a manner that is premeditated, systematic and methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their 5

knowledge or consent. Often it involves the trusted person embezzling only a small proportion or fraction of the funds received, in an attempt to minimize the risk of detection. If successful, embezzlements can continue for a long time without detection. It is often only when the funds are needed, or called upon for use, that the victims realize the funds or savings are missing and that they have been duped by the embezzler. 3.5 KICKBACKS Kickbacks refer to sweeteners or rewards for favorable decisions. A kickback is effectively a bribe; a collusive agreement designed to help or influence an individual, company, or government entity. When a contractor promises to “kick back” some of the proceeds from a contract to the hiring decision-makers, a kickback has been offered. If the official suggests such an arrangement, a kickback has been solicited. Kickbacks can be in the form of money, credits, gifts, gratuity, offering of services, or anything of value.

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4. CONSEQUENCES OF CORRUPTION Corruption is harmful and as such it has become increasingly unacceptable to a broad range of stakeholders, including businesses, governments, academics, and ordinary citizens (World Bank 2000). Corruption is a significant barrier to economic, social, and political development, and poverty reduction. Generally corruption lowers investment and growth, lowers foreign direct investment, and leads to an underinvestment in education and over-investment in public infrastructure. Data from the Global Competitiveness Report (of the World Economic Forum) suggests that the frequency with which firms have to make undocumented extra payments or bribes to gain public contracts is, on average, negatively correlated with the income of the countries. Thus the poorer a country is, the bigger the corruption problem in infrastructure. It is not uncommon for corrupt officials to direct resources towards large capital-intensive infrastructure projects rather than operations and maintenance; corruption can also create the incentive to build sub-standard infrastructure in the wrong place and to operate it poorly. Corruption in the construction sector typically results in: • Lower economic growth rates. • Ineffective government. • Infringement of civil and political rights. • Decrease in investment of foreign and domestic investors. • Lower quality of public infrastructure due to the loss of revenue, diversion of public funds, and evasion of taxes associated with corruption mean that governments have less to spend on infrastructure and • Reduced effectiveness of provision of public goods as sectors that do not lend themselves to grand corruption, such as social services, are given less emphasis than those that offer greater opportunities for corruption.

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5. STRATEGIES TO PREVENT CORRUPTION Corruption delays and reduces expenditure on infrastructure investment, reduces the growth generated by a given expenditure on infrastructure investment, raises the operating cost of providing a given level of infrastructure services, reduces the quality of infrastructure services and limits access, especially for the poor. World Bank Institute research shows that countries that tackle corruption and improve their rule of law can increase their national income by as much as four times in the long term. Efforts at international and national levels are being made to curb corruption in construction and to promote transparent public contracting processes. In most major construction projects, the state is involved as the owner of utilities, as implementing agency and through regulation; the private sector designs, implements and often operates the projects. Broad reform approaches to reduce the extent and impact of corruption include transparency, participation, competition, reduced discretionary powers, removal of unnecessary regulation, improved financial management and extended auditing. Tools for a broad approach to improved governance in the sector highlight improved and more transparent processes for budgeting, project selection and implementation processes, oversight, including community-driven approaches. There has been very little direct anti-corruption activity in the sector earlier; however recent initiatives include suggestion of strategies which focus on the following: Awareness Raising: Greater transparency can make a significant contribution to reducing corruption and embezzlement. Promoting greater transparency around the actions of officials creates disincentives for them to engage in corrupt transactions and also raises citizens’ awareness of the goods and services they should receive. Increasing the amount of information such as public accounts, budgets, contracting arrangements, and annual reports available to the public can also reduce corruption in the sector by making it difficult for public officials to make decisions that misallocate resources, or tap into limited budgets. Strengthened Professional Institutions: Professional institutes have a key role in regulating the conduct of members on the basis of peer judgment. Efforts are currently

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being made to develop ethical standards for the construction sector, as well as to ensure due diligence actions by construction companies to ensure that their business partners e.g., agents, consortium and joint venture partners, and major subcontractors do not engage in corrupt activities. The four fundamental ethical principles which engineers should achieve in professional life are accuracy and veracity; honesty and integrity; respect life, law, and public good; and responsible leadership. Adequate site supervision and physical audits: Consultants and companies have instituted a number of measures at both the sectoral and project level to ensure due diligence in the supervision and execution of their projects including monitoring physical inputs and costs, surveying labour inputs and costs, and instituting clear sanctions for non-compliance and, most importantly, effective enforcement procedures. In particular, independently verified physical audits of outputs have been used to combat corruption. Integrity Pacts: These are agreements signed by all parties both the public and private sectors during the bidding process, in which they undertake not to engage in corrupt activities, accept that their financial and other records will be subject to independent external scrutiny, and subscribe to an arrangement whereby they can be punished for breaching the conditions of the pact.

To prevent corruption, the strategies suggested are: •

Development of honest and ethical construction culture.

•

Institution of random and regular checks and

•

Supervision of processes and work over project life cycle.

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5.1 DEVELOPMENT OF HONEST AND ETHICAL CONSTRUCTION CULTURE In addition to laws and regulations, another important issue is the construction culture at both corporate and industry levels. Regardless of how good the laws and regulations are, people are root causes of any corruption; and therefore people are the key to make sure the construction operation is honest, ethical, healthy and clean. Corporate which may include statements, visions, customs, slogans, values, role models and social rituals set the moral tone for an organization and can be used to resist corrupt practice (Luo, 2004). It is suggested that the Chinese government pays more attention to the development of a healthy construction culture. The government should put more effort into promoting honest and healthy rights all the time, not only technically, but also morally, ethically and culturally. When taking actions in promoting healthy and ethical construction culture, the following issues should be considered: a. political leadership and top management commitment is crucial b. assess vulnerability and identify corruption risk factors, and educate staff about these risks and actions to minimize the risks c. improve the level of employees' awareness and understand the conduct of corruption, and promote employees' positive attitude to report corruption d. management should create an atmosphere of trust and feeling of safe to report corruption; and e. link contract award to best practice. 5.2 INSTITUTION OF REGULAR AND RANDOM CHECKS It is important to review the conduct of the officials involved in the construction industry through regular and/or random checks. The regular checks include detailed review of the entire procurement process on selected projects. In this process a supervisory official can be assured that the officials' responsibilities have been fully 10

and properly discharged. The random checks include the review of a number of different projects chosen randomly. The benefits of random reviews and inspections include: a. it is a fair process; no individual official or company is singled out or vicitimized; b. the random nature of the process ensures that it cannot be anticipated and avoided by corrupt officials; c. consequently, officials are less likely to participate in corrupt conduct or deliberate maladministration as they cannot be confident that their conduct will not be detected by detailed scrutiny of supervisory officials; and d. it maximizes the use of supervisory resources. As a consequence of these random and regular reviews or checks, may be a pattern of misconduct can be identified at one or more specific stages during the construction process. If this occurs, it would be appropriate to target that particular aspect of the process for review over as many projects as possible. This way, patterns of conduct or impropriety, or institutionalized misconduct, may be identified which will in turn facilitate the targeting of specific officials or eradication of shortcomings in the systems. Further, where corrupt conduct or maladministration by individuals is identified, all projects with which that particular official has been associated should be targeted for detailed review in order to identify the extent of the official's corrupt conduct, corrupt associations and any associated risks to public safety. It is considered that by the use of the above processes, the effect of supervision can be maximized. 5.3 SUPERVISION OF PROCESS AND WORK DURING THE PROJECT LIFE CYCLE The supervisory officials have a role and responsibility in respect to the conduct of public officials involved in the construction industry. It is not sufficient nor is a complete discharge of duties for supervisory officials to simply rely on reports and documents prepared or provided by officials. The supervisory officials must also 11

identify and recognize areas in the construction processes where corruption has the potential to occur. Having identified the appropriate areas of corruption risks, it is the officials' responsibility to carry out focused and detailed supervisory activities at random or on a targeted basis. The supervisory activity must also involve detailed personal scrutiny of individual projects, with independent expert technical assistance if necessary, and examination of relevant documentation for the project, or projects under review. According to Zhou (1998), the strategy of corruption prevention should be comprehensive, consisting of precaution, relief and warning, and combine sanctions and education, together with a constant reminder to the public servants of their duties and reputations, and the penalties for breaches of the laws and regulations. In order to carry out regular or random checks effectively, a supervision checklist is developed here. This checklist provides guidelines for supervisory officials to undertake random and targeted examinations at specific stages of a construction project, and specifically addresses the areas of corruption risks or conduct. It highlights "areas of risks or concerns” for supervisory officials to direct their attention and strategies for supervisory inspection or review. This supervision checklist is designed according to the procurement stages of a construction project from inception to completion. 5.3.1 Project conception stage – land use, urban planning and approval At this stage, the areas of concerns and risks are project application documents provided to the Bidding Office of the Construction Commission. Areas of risks and associated strategies to mitigate corruption risks are provided in Table 1. Table 1. Key Areas of Corruption Risks and Strategies at Project Conception Stage Areas of concern

Actions or Strategies

1.Unauthorised use of land

Check that project design confirms with land usage conditions and city plan

2.Failure

to

obtain

all Examine all relevant approvals and receipts to ensure 12

necessary approvals or failure they were properly obtained and relevant to the project to comply with planning and under review land usage conditions 3.Avoidance of fees and taxes Check if appropriate fees have been paid to the land occupants with the pre-agreed amount of money or inkind. It is necessary to check with the developer and the land occupants on their agreement and the actual fees transaction history 4. Unauthorized changes to Review project design documents and drawings to the scope of the project

ensure that project under review is not part of a larger project (project splitting) and has not been otherwise altered. Check for any other projects associated with the same land by the same client

5.3.2 Tendering stage – call for tender and tender evaluation Project tendering stage is a critical stage as it determines which construction company will be awarded the contract. Therefore, there is a high level of corruption risk at this stage. As such, supervision officials should pay special attention at this stage. Table 2 provides areas of risks and associated strategies. Table 2. Key Areas of Corruption Risks and Prevention Strategies at Tendering Stage Areas of concern

Actions or Strategies

1. Appropriateness of tender

Check if the tender evaluation criteria was prepared

evaluation criteria

strictly in relation to the nature and scope of the project, and the preparation of the criteria was completed prior to call for tender

2. Preferential treatment of

Check if the tender teams and conditions favour any

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tenderers

individual tenderer

3. Invitation of unqualified

Ensure that original tendered qualification conditions

tenderers

are attached to the invitations to tender. Check qualification of tenderers and current project commitment of the proposed project managers. Review tenderers’ and project managers' past performance reports for validity and completeness. If necessary, review previous project completion reports involving tenderers to confirm accuracy of past performance reports

4. Collusion between

Review contract to ensure conformity with design

tenderers

documentation and consistency with tender documentation, especially in ensuring that the contract does not provide additional benefits or rewards to either party that are not included in the design or tender documentation

5. Tenderer offering bribes

Check to ensure only appropriate information is provided to tenderers. Review tender prices to ensure that prices provided are adequately supported by documentation. Check and audit the work done by committee members to see if any preference has been given to particular tenderer

6. Technical competence of

Check if the members of the committee have met the

evaluation committee

requirements set by the government. Review the selection process of evaluation committee to ensure that selection is truly random and experts chosen do not have a relationship with individual

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tenderers or client. Review adequacy of time allocated to tender evaluation by evaluation committee. Review evaluation report provided by tender evaluation committee to ensure scoring is consistent with pre-determined criteria and scale; review scoring scale for suitability to project and impartiality. Check tender documentation to ensure that the recommendation of the tender evaluation committee has been signed off by the Director of the Tendering Office. 5.3.3 Construction stage – conduct of contractor and on-site supervision company The supervisory check actions are to be carried out during project construction particularly at the critical points of construction such as part-way through the concrete pour and material testing reports. Areas of risks and strategies to mitigate corruption risks are provided in Table 3.

Table 3. Key Areas of Corruption Risks and Prevention Strategies at Construction Stage Areas of concern

Actions or Strategies

1. Qualifications and

Review selection process of supervision company with

suitability of on-site

particular emphasis on qualifications, capacity and

supervision company or staff.

experience of the company and staff employed on the project.

2. Appropriate checks and

Examine supervision company diaries for detail and

monitoring of supervision

conformity with project progress, including

undertaken by the on-site

construction progress, day-to-day supervision

supervision company.

activities, quality testing and safety checks. Check to ensure project manager’s attendance is

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appropriate to the nature of the project and that he is discharging his responsibilities properly. Check to ensure that supervision team complies with timetable outlined in project design and contract, and that any variation from the timetable is justified. 3. Collusion between on-site

Examine previous projects to identify unusual or

supervision company and

suspicious relationships between on-site supervision

contractor

company and contractor. Confirm by on-site inspection that construction was carried out according to design and specification.

4. Substitution of second-

Examine materials utilized during construction to

hand, substandard and

check if there was use of unauthorized materials.

unauthorized materials

Independently confirm with testing laboratories that quality testing was properly conducted.

5.3.4 Project post-construction stage – contract compliance, design variations, final cost and quality evaluation The post-construction stage is one of the most critical stages to check for any possible corruption. A detailed and careful review on the completed project is essential because the corruption would be purposely hidden. Table 4 provides key areas of corruption risks or concerns and actions to be taken at this stage. Table 4. Key Areas of Corruption Risks and Strategies at Post-Construction Stage Areas of concern

Actions or Strategies

1. Whether the contract price Compare the tender price, contract amount and the is the same as the one final cost. determined during tendering Review the sources and causes of design variations. and the final cost aligns with Review the contract price.

variation

authorizations

to

ensure

that

variations were necessary and unavoidable, cost

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estimations were detailed and independently verified, clear instructions were provided to contractor as to extent of variation and financial approval prior to variation work being commenced. 2. Contract compliance by Ensure that progress has been completed in accordance the client and construction with the contract. company

Review client's and on-site supervision company's reports on contractor performance to ensure adequacy, accuracy and fairness. Review approvals for extension of time to ensure they are appropriate in liability and extent in terms of the contract. Check to ensure there is no illegal subcontracting or improper transfer of contract to another contractor.

3. Improper commission of Check if all electrical and hydraulic equipment or electrical

and

equipment or plants.

hydraulic plants have been properly tested and signed off by licensed engineers. Check completed project, with appropriate professional assistance, to ensure that the project is of adequate quality.

4.

Process for approving Review documentation to ensure there has not been

progress payments and final undue delay or impropriety in final cost evaluation and cost evaluations.

approval. Examine contract price and final price to ensure that any variation between the two prices has been properly authorized

and

is

reasonable

under

circumstances.

6. STAKEHOLDERS IN COMBATING CORRUPTION

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all

the

It is perhaps commercially impossible for one company to unilaterally combat corruption. Successful reforms to combat corruption in the construction sector must combine top-down government monitoring with private sector motivation and grassroots oversight. All stakeholders have a role in combating corruption: •

The government: Corruption cannot be overcome without political will. The government has a key role in preventing and detecting corruption in construction projects and regulation of services in their role as owners of utilities and implementing agencies.

•

Staff: Training both of consultants and staff of construction companies, would contribute to raising awareness of what practices are normal business acts and which are corrupt practices and thus constitute criminal offences. This training should stress the potential loss of credibility, compromising of professional standards and the risks to the individuals reputation, of condoning corruption and include the actions to be taken by the construction company to ensure that their business partners such as agents, consortium and joint venture partners, and major sub-contractors do not engage in corrupt activities.

•

The private sector: The role of the private sector is preventing corruption in the design, operation and management of contracts. Business and customer surveys can play an important role in uncovering and measuring corruption.

•

Professional trade bodies: These organizations could foster a zero tolerance approach to corruption by raising awareness of the problems amongst their members and in the wider industry. For example, the British Consultants & Contractors Bureau (BCCB) is working with the Institute of Civil Engineers, the Association for Consultancy and Engineering, the Institution for Structural Engineers and Transparency International as part of the Anti- Corruption Forum with the aim of promoting industry led action to eliminate corruption.

•

Civil society organizations: These organizations helps in combating corruption by monitoring their actions to check that they keep their promises and hold

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them to account, supporting consumer voice and engaging in advocacy for transparency i.e. public expenditure tracking surveys that track the flow of resources, physical auditing of the status of built services. •

Donors: Implementation of adequate accountability arrangements, research and diagnosis are to be performed by the donors as part of arrangements to combat corruption.

7. CONCLUSION •

Corruption can increase the costs of delivering a particular service or else means that sub-standard infrastructure is built and then operated badly.

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•

The challenges of corruption in the construction sector are significant: corrupt practices, such as bribery, embezzlement, kickbacks, and fraud can occur at every phase of a construction project.

•

In recent years, there has been a growing commitment to the anticorruption agenda in the construction sector.

•

It is necessary to strengthen the management of the construction market through the development of laws and regulations, and development of a transparent work process as well as providing ethical education to the related personnel.

•

The most promising strategies against corruption focus on awareness raising, strengthening professional institutions, adequate site supervision and physical audits and integrity pacts.

•

With improved accountability and reduced corruption, it will be possible to construct, operate, and maintain adequate quality and quantity of projects on a more sustainable basis and thereby improve construction practice.

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