Business in partnership against corruption, out of balance


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From May 2008 ICGFM Conference, Thomas Kelly Senior Director Economic Policy , Millennium Challenge Corporation

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  • This slide illustrates population distribution and growth in 2005 (on the left) and in 2025 (on the right) in Egypt, Brazil and Italy. Italy can be used to illustrate the general reality in Japan.
  • This slide outlines the main message and structure of this presentation. Main message: Collective action can help to unlock the corruption dilemma by creating incentives to avoid corruption, thereby creating a level playing field and business environment with reduced risk of corruption. While corruption hurts public, private and civil society sector, this presentation focuses especially on the private sector and on what companies can do to fight corruption. Structure: Part I – will outline why corruption matters by highlighting the sources and cost of corruption, especially for companies. Part II – explains the corruption dilemma that companies often face when operating in a high risk environment (how to ensure and enforce anti corruption commitments). Part III – points to potential solutions to corruption dilemma, showing that multi stakeholder partnerships/collective action can create incentives and enforcement mechanism for stakeholder to avoid corruption.
  • Let’s start with a GLOBAL MAP of corruption. Which countries and regions are the most corrupt? The percentile rank, developed by the World Bank Institute, indicates the percentage of countries worldwide that rate below the selected country. Dark red indicates a country that is highly corrupt. As you can see, the map shows that corruption is perceived as “most common” in sub-Saharan Africa, Central Asia and South East Asia. The total volume of bribes paid annually, according to World Bank Institute estimates, is 1 trillion US dollars - nearly twice the gross domestic product of Africa. World Bank Institute research also shows that petty bribery hits the poor the hardest, ensuring that they stay poor. It is extremely difficult to assess the extent of worldwide embezzlement of public funds, but it is clear that it is a very serious issue in many settings. Transparency International estimates that former Indonesian leader Suharto embezzled anywhere between 15-35 billion US dollars from his country, while Ferdinand Marcos in the Philippines, Mobutu in Zaire and Abacha in Nigeria may have embezzled up to 5 billion US dollars each. This is only a part of the overall costs of corruption. Corruption can be thought of as a behavior that imposes additional costs on citizens, governments, businesses and entire economies in the long run. In other words, corruption significantly hurts both the public and private sectors. Source: World Bank Institute, Governance Indicators 2006
  • This slide shows the cost of corruption for companies (inner circle). It also shows some of the most common causes for corruption (outer circle). Some of the most common causes are associated with inefficiencies, such as red tape.
  • Corruption is a key constraint to companies. World Bank research has also shown that corruption is identified as a serious constraint to doing business by over 70% of firms in South Asia and nearly as many in Developing East Asia and the MENA region. Around 60% of firms in Africa and Latin America report corruption as a severe impediment to doing business as well. Source: World Bank Institute, Governance and Anti-Corruption Program, “Governance Matters V: Governance Indicators for 1996-2005”. 2005. World Economic Forum, Global Competitiveness Report, 2005.
  • Elites/state capture: The “purchase” of laws and policies by corporations. Public procurement kickbacks: payment made to secure procurement contract. Source: Dani Kaufmann
  • Source: Combating Corruption: A Private Sector Approach, Center for International Private Enterprise
  • Code of pharmaceutical marketing practices (IFPMA) : Initiative of the International Federation of Pharmaceutical Manufacturers & Associations is a non-profit, non-governmental Organization (NGO) representing national industry associations and 25 research-based pharmaceutical, biotech, and vaccine companies from both developed and developing countries. Key elements include more restrictive provisions on travel, gifts and scientific events, plus the establishment of a Code Complaint Procedure and a Code Compliance Network, bringing together code experts from all over the world. IFPMA shows that it is possible to bring together companies from developed and developing countries to agree on shared principles. Frankfurt waste incinerator: Initiative of AVA GmbH (publicly owned company responsible for revamp and management of waste incinerator) . A nti-corruption declaration without external monitoring with the objective to make a major step towards business environment free of corruption while modernizing the waste incinerator in Frankfurt-Nordweststadt. Declaration was not signed by all bidding companies before tender phase, but by all direct contractors after project award. Initiative aimed preventing unethical cases like contracting overpriced services in exchange for personal benefits for the AVA GmbH employees. Business pact for Integrity and against corruption: Launched in Brazil by Ethos Institute for Business and Social Responsibility, Uniethos – Education for Business Responsibility and Sustainable Development, Patri Government Relations and Public Policy, United Nations Development Program – UNDP; United Nations Office on Drugs and Crime – UNODC, and the Brazilian Committee of the Global Compact. An initiative against corruption and illegal practices in business. Today has more than 400 member companies, both local and multi-national. China business leaders forum: Launched by the International Business Leaders Forum (IBLF) in partnership with the Renmin University of China. Provides a regular quarterly Forum for Chinese and foreign business leaders to discuss the improvement of business standards both in China and internationally. The three focus areas are: Knowledge exchange, Research & Information, Training. CBLF is developed and managed as a corporate-led initiative by the collective action of all companies and organizations who have been identified as having a valid contribution to make and who have committed themselves to supporting the initiative. Pacto Etico Commercial (PEC) Paraguay: Founded in 2005 on initiative of the US ambassador and Paraguayan American Camber of Commerce. Certifying business coalition to promote business principles based upon fulfillment of current laws, ethics principles, quality management, honesty and transparency. Gather most important private business representatives covering all sectors. 150 members signed the pact and currently 100 additional applicants. EMB Bavarian construction industry: Certifying business coalition initiated as part of the Bavarian construction industry association in order to foster integrity in construction sector and to improve industry reputation. Companies can join initiative instantly by filling-in an application form. By signing this application form and thus agreeing on the charter of the initiative they commit themselves to implement an ethics management system based on the initiative’s principles and accept to be audited on the status of this system after one year of membership. Berlin Airport: Integrity-Pact initiated by Berlin-Schönefeld Airport and Transparency International Germany to establish a mandatory feature of the tender for selection of suppliers, construction companies, planners, engineering and consultancy services. Its provisions apply for the entire duration of the contracts. A total investment of ca EUR 2 billion is anticipated into the Berlin Brandenburg Airport between 2005 and the planned opening of the new airport in 2010. Mexico Suburban Train: Initiated buy the Ministry of Communication and Transport and the Transparency Mexico. Declarations of integrity stating under oath that they would abstain from any conduct that could affect an objective evaluation of bids submitted. Objective : to ensure that rules and norms are respected and to detect any deviations and secure a transparent and fair bidding process. Served as an additional element for government officials to resist political pressure and as a buffer to solve problems with less probability of public exposure.
  • Business in partnership against corruption, out of balance

    1. 1. Business in Partnership Against Corruption § Miami, Tuesday, May 20, 2008
    2. 2. Questions <ul><li>In your personal experience, have you known of instances of bribery affecting your organization or an organization you do business with? </li></ul><ul><li>Yes No </li></ul><ul><li>Imagine yourself working at an agency/organization operating in a high risk environment that decides to stand up against corruption. Do you think that your agency/organization can be successful in reducing corruption on its own? </li></ul>
    3. 3. <ul><li>… out of balance </li></ul>Our world is …
    4. 4. Our world is … <ul><li>Global Gross Domestic Product (GDP) </li></ul><ul><li>Year 2000: </li></ul><ul><li>30 trillion – 5 billion people – 20% global GDP </li></ul><ul><li>Year 2050: </li></ul><ul><li>140 trillion – 8 billion people – 40% global GDP (assuming 3.5% growth) </li></ul><ul><li>Population Growth </li></ul>1 billion 1 billion 1 billion Developed Countries 8 billion 7 billion 5 billion Developing Countries 2050 2025 2000
    5. 5. Gender Distribution
    6. 6. Data - Inequality <ul><li>The 2007 Human Development Report (HDR) from the United Nations Development Program shows that: </li></ul><ul><li>around 1 billion people living at the margins of survival on less than US$1 a day; </li></ul><ul><li>2.6 billion (40% percent of the world’s population) is — living on less than US$2 a day : </li></ul><ul><li>20% of the population in the developed nations, consume 86% of the world’s goods; </li></ul><ul><li>In 1960, the 20% of the world’s people in the richest countries had 30 times the income of the poorest 20% — in 1997, 74 times as much. </li></ul>Source pictures: United Nations World Water Development Report
    7. 7. Data - Malnutrition <ul><li>Source pictures: GAIN Website </li></ul><ul><li>In a review of 80 countries, the United Nations Children's Fund (UNICEF) and the Micronutrient Initiative found that: </li></ul><ul><li>Mental development of 40% to 60% of infants between 6 and 24 months was impaired due to iron deficiency; </li></ul><ul><li>Compromised immune systems due to vitamin A deficiency was affecting 40% of the world’s “under-fives” and was leading to the deaths of approximately 1 million children each year ; </li></ul><ul><li>Approximately 18 million babies are born with mental disabilities annually owing to iodine deficiency; </li></ul><ul><li>60,000 young women die each year during pregnancy and childbirth as a result of severe iron deficiency anemia. </li></ul>
    8. 8. Diagram - Inequality Source: “Inequality in Latin America and the Caribbean: Breaking with History?” World Bank, 2003
    9. 9. Data – Water and Sanitation <ul><li>The 2006 United Nations Human Development Report shows that water problems affect half of humanity: </li></ul><ul><li>Some 1.1 billion people in developing countries have inadequate access to water, and 2.6 billion lack basic sanitation; </li></ul><ul><li>Access to piped water into the household averages about 85% for the wealthiest 20% of the population , compared with 25% for the poorest 20% ; </li></ul><ul><li>1.8 billion people who have access to a water source within 1 kilometer, but not in their house or yard, consume around 20 liters per day. In the United Kingdom the average person uses more than 50 litres of water a day flushing toilets (where average daily water usage is about 150 liters a day. The highest average water use in the world is in the US, at 600 liters day.); </li></ul><ul><li>Some 1.8 million child deaths each year as a result of diarrhea. </li></ul>Source pictures: United Nations World Water Development Report
    10. 10. Financial Flows to Developing Countries
    11. 11. <ul><li>Of the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs); </li></ul><ul><li>The top 200 corporations’ combined sales are 18 times the size of the combined income of 24% of the total world population; </li></ul><ul><li>MNCs account for a quarter of global economic activity, they employ less than 1% of the world’s labor force, while one third of the world’s willing-to-work population is unemployed. </li></ul>Data - Inequality
    12. 12. Overview Anti Corruption Solutions Corruption Pressures Corruption Dilemma Companies <ul><li>In high risk environment: </li></ul><ul><li>How to ensure that partners and competitors are ethical? </li></ul><ul><li>How to change culture of doing business? </li></ul><ul><li>How to get competitors and stakeholders on board? </li></ul><ul><li>Collective action can help to unlock corruption dilemma and create level playing field. </li></ul><ul><li>Collective action creates incentives to avoid corruption. </li></ul><ul><li>Corruption has negative impacts on governments, companies, civil societies, economies. </li></ul><ul><li>Despite costs, some individuals/groups benefit from corruption. </li></ul>Government Civil society Part III Part II Part I
    13. 13. Map of corruption According to World Bank Institute estimates, the total volume of bribes paid annually is US$ 1 trillion …… which is nearly twice the gross domestic product (GDP) of Africa. PART I
    14. 14. Private sector side of corruption Higher costs of doing business Cost of Corruption Resource misallocations Reduced competition, efficiency & Innovation Lower investment Lower employment Loss of reputation Lack of transparency and accountability Weak enforcement of laws and regulations Complex & changing laws & regulations Low public sector wages Mistrust b/w & within sectors Lack of competition Weak enforcement of laws and regulations
    15. 15. Firms reporting constraints among top three (percent) Source: Current Survey. The question posed to the firm was : “Select Among 14 constraints the five most problematic factor for doing business in your country “ Corruption adds as much as 25% to the cost of public procurement&quot; (UNGC) “ 31% of firms in Latin America have to pay bribes to – get things done -” (WBG) Corruption as a constraint to the private sector
    16. 16. Private sector NOT just a victim, but also source of corruption Elite Capture, Political Corruption and Inequality of Influence View of the Firm, Percentile Ranks, Higher is better worse best
    17. 17. Cycle of corruption: companies are both victims and participants Once corruption becomes widespread, it becomes difficult for individual businesses to stand up to the problem. High risk environment PART II They fear that they cannot win projects on the merits of their bids alone and thus engage in corruption, thereby contributing to its spread.
    18. 18. Corruption dilemma: How can an individual company break the corruption cycle in a high risk environment? <ul><li>In high risk environment: </li></ul><ul><li>How to ensure that partners and competitors are ethical? </li></ul><ul><li>How to change culture of doing business? </li></ul><ul><li>How to get competitors and stakeholders on board? </li></ul>Few incentives to fight corruption Limited resources to counter corruption No credible enforcement Lack of cooperation between stakeholders
    19. 19. There are three main steps for companies to fight corruption Collective External <ul><li>Assess risks </li></ul><ul><li>Implement anti-corruption policies and compliance programs </li></ul><ul><li>Provide guidance to managers </li></ul><ul><li>Share internal policies, experiences, best practices and success stories </li></ul><ul><li>Reach out to industry peers, suppliers and other stakeholders via neutral facilitators and initiate joint activities to fight and advocate against corruption </li></ul>PART III Internal Each company individually Business environment free of corruption Collective
    20. 20. In high risk environments internal and external responses alone may not unlock the corruption dilemma Collective External <ul><li>How to ensure that partners and competitors are ethical? </li></ul><ul><li>How to change culture of doing business? </li></ul><ul><li>How to get competitors and stakeholders on board? </li></ul>Companies worry about corrupt competitors and fear being at competitive disadvantage Internal Business environment free of corruption
    21. 21. Unlocking the corruption dilemma … is a potential solution to the corruption dilemma. It helps to make compliance the norm and to isolate the guilty. <ul><ul><li>Strengthen corruption commitments between and among different stakeholders. </li></ul></ul><ul><ul><li>Create incentives for stakeholders to avoid bribery and corruption in transactions and eliminate cheating on commitments by individual members. </li></ul></ul><ul><ul><li>Create incentives to avoid corruption by individuals within companies and governments . </li></ul></ul>Central principles of collective action are to: Collective action...
    22. 22. Key characteristic of Collective Action is to involve various stakeholders – different types of Collective Action exist <ul><li>Different types of Collective Action </li></ul>Primary stakeholders of Collective Action Integrity pact Anti-corruption declaration <ul><li>Formal, written contract between customer and bidding companies </li></ul><ul><li>Bidding and implementation processes monitored by external monitor </li></ul><ul><li>Sanctions may apply in case of infringements </li></ul><ul><ul><li>Ethical principles bind signatories to not engage in corruption in the daily business </li></ul></ul><ul><ul><li>Public commitment leads to enforcement 'by honor' </li></ul></ul><ul><li>All stakeholders are asked to sign declaration on anti-corruption principles </li></ul><ul><li>Public commitment leads to enforcement 'by honor' </li></ul><ul><ul><li>Compliance-related prerequisites for membership </li></ul></ul><ul><ul><li>Adoption of membership requirements checked by external audits </li></ul></ul><ul><ul><li>Members get certified or will be excluded </li></ul></ul>Principle-based initiative Certifying business coalition XXXX ProjectName MM/YY – FileName.ppt Project / trans-action based agree-ment Long-term-initiative Companies Collective Action Government Civil society
    23. 23. All stakeholders can benefit from anti-corruption Collective Action <ul><li>Benefits of anti-corruption Collective Action from different stakeholders' perspective </li></ul>Bidding companies Customer <ul><ul><li>Enhanced competition in bidding process – most efficient, not best connected bidder wins bid 1) </li></ul></ul><ul><ul><li>Enhanced reputation </li></ul></ul><ul><ul><li>Avoid time consuming lawsuits / blocking points after decision on supplier company </li></ul></ul><ul><ul><li>Focus of business relationships on quality and reliability of goods and services </li></ul></ul><ul><ul><li>Increased chance of fair selection as a supplier and enhanced access to markets </li></ul></ul><ul><ul><li>Protection from legal penalties </li></ul></ul><ul><ul><li>Saving of finances formerly paid as bribes </li></ul></ul><ul><ul><li>Enhanced reputation </li></ul></ul><ul><ul><li>Ensure employees and competitors behave ethically and responsibly </li></ul></ul>Government <ul><ul><li>Incentives to be transparent </li></ul></ul><ul><ul><li>Strengthened rule of law, increase credibility and political stability </li></ul></ul><ul><ul><li>Higher investment levels from domestic and foreign investors </li></ul></ul><ul><ul><li>Improve image of country </li></ul></ul><ul><ul><li>Effective governance mechanisms and more effective procurement </li></ul></ul>Civil society and NGOs <ul><ul><li>Improved access to essential resources, such as health care and education </li></ul></ul><ul><ul><li>Increased trust and confidence in business </li></ul></ul><ul><ul><li>Consistent and fair enforcement of regulations </li></ul></ul><ul><ul><li>Social development if money / taxes are used for social projects instead of bribery </li></ul></ul><ul><ul><li>Civil society part of government-business anti-corruption efforts </li></ul></ul>
    24. 24. Collective Action can be successful! <ul><li>Examples of existing collective action initiatives </li></ul>Integrity pact Anti-corruption declaration Principle-based initiative Certifying business coalition Mexico suburban train Frankfurt waste incinerator China business leaders forum Business Ethics Pact Paraguay EMB Bavarian construction industry Berlin airport Project / transaction based agreement Long-term initiative 1% Code of pharmaceutical marketing practices Business pact for Integrity and against corruption Brazil Business coalition Collective Action Organi- zation A Company C Company A Independent facilitator
    25. 25. Results of selected collective action initiatives BERLIN AIRPORT PACI IFPMA <ul><li>Introduction of transparent bidding procedures </li></ul><ul><li>Suppliers have to adhere to anti corruption principles </li></ul><ul><li>Raising awareness about corruption </li></ul><ul><li>Company commitment to be solution to corruption problem </li></ul><ul><li>Development of sectoral code of conduct </li></ul><ul><li>Introduction of compliant mechanism </li></ul><ul><li>Creation of incentives to abstain from corruption </li></ul><ul><li>Introduction of certification </li></ul>EMB
    26. 26. Collective actions are not a panacea for corruption challenges <ul><li>Common challenges of collective action initiative </li></ul>Collective Action is difficult, it can fail. Common challenges include: Common Challenges Finding facilitator as neutral party to initiate and implement a Collective Action Agree upon clear consequences in case of infringement / non-compliance Agreeing upon enforcement and sanctions mechanism Creating public awareness Getting top-management commitment of participating companies Securing funding for the initiative Building confidence among stakeholders
    27. 27. Demand for guidance and tools <ul><li>Collective Action Initiatives; </li></ul><ul><li>Joint effort of Companies, NGOs and Multi-laterals; </li></ul><ul><li>25 case studies, 50 country profiles, 15 industry profiles; </li></ul><ul><li>Implementation guidelines. </li></ul><ul><li>Joint effort of : </li></ul><ul><li>World Bank Institute; United Nations Global Compact; Center for International Private Enterprise (US); Global Advice Networks (Denmark); Grant Thornton; Siemens; Transparency International USA; and as a supporting partner: InWEnt Capacity Building International (Germany) </li></ul>
    28. 28. GUIDE: FIGHTING CORRUPTION THROUGH COLLECTIVE ACTION - A practical guide for business - <ul><li>Classification and definition of Collective Action </li></ul><ul><li>Decision trees </li></ul><ul><li>Process steps </li></ul><ul><li>Highlighted topics and issues to consider (e.g. anti-trust) </li></ul><ul><li>Contract templates </li></ul><ul><li>Profiles of initiatives </li></ul><ul><li>Contact list </li></ul>Basis Find the right approach for your situation Benefit from various real life examples and templates Follow detailed process steps Examples XXXX ProjectName MM/YY – FileName.ppt <ul><li>Definition of corruption, dangers of corruption </li></ul><ul><li>Overview on various ways to fight corruption </li></ul>
    29. 29. Web Portal: Tools for practitioners Lessons learnt Case studies Country and industry profiles Country and Industry Profiles Events and workshops
    30. 30. Three key questions for panel: <ul><ul><li>How can the private sector participate in collective actions and governance reforms to create a business environment with reduced risk of corruption? </li></ul></ul><ul><li>What are the biggest challenges in achieving and sustaining results through collective actions? </li></ul><ul><li>How can key stakeholder, such as government officials, business, NGOs and international organizations, partner to more successfully promote transparency and accountability? </li></ul>
    31. 31. Djordjija Petkoski World Bank Institute § THANK YOU