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Innovation in Corruption


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Net Impact Talk May 2012

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Innovation in Corruption

  1. 1. Innovation in Corruption Sirilaksana Khoman Advisor to Commissioner National Anti-Corruption Commission Presented at the the Sasin Centre for Sustainability Management and Net Impact Bangkok Professional Chapter luncheon meeting on Thursday 17 May 2012 at Sasin Graduate Institute of Business Administration, Chulalongkorn University and how to deal with it … maybe ?
  2. 2. “When I despair, I remember that all through history the ways of truth and love have always won. There have been tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall.” Mahatma Gandhi
  3. 3. How to understand politics using cows  SOCIALISM: You have 2 cows; you give one to your neighbour.  COMMUNISM: You have 2 cows. The State takes both and gives you some milk.  FASCISM: You have 2 cows. The State takes both and sells you some milk.  NAZISM: You have 2 cows. The State takes both and shoots you.  BUREAUCRACY: You have 2 cows. The State takes both, shoots one, milks the other, and then throws the milk away...  TRADITIONAL CAPITALISM: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows.
  4. 4.  A THAI CORPORATION: You have two cows. You are lousy at what you do. You make friends with a corrupt politician and get your circle of friends to vote for him. He gives you subsidies and privileges using taxpayers' money. You get rich, multiply your herd of cows, and make more friends who will also vote for the corrupt politician. The cycle goes on.  A THAI CORPORATION: You have two cows. You buy up one thousand more from poor farmers at 4,000 Baht each. You convince the government to buy cows from poor farmers at 20,000 Baht each. The government agrees. The poor farmers have no more cows to sell. You sell your thousand and two cows for 20,000 Baht each.
  5. 5. Types of governance issues  Straight-forward, petty corruption  Complex and sophisticated networks, plundering the nation‟s resources • Example: Rice pledging scheme
  6. 6. Paddy Pledging Scheme: Policy evolution  Original Paddy pledging scheme at warehouse – provided credit to farms of 80-90% of market price to delay sale by farmers (like pawning)  1993-4 started use of pledging „receipt‟  2000-2001 Thaksin increased pledging price above market price – increased budget – transforming scheme into price support scheme  2001-2002 increased coverage to off-season rice crop  2006-2007 Surayudh government decreased price to close to market price  2008 Samak government increased price to highest level at 14,000 Baht for off-season rice  In spite of rapid fall in price, Somchai and Abhisit governments maintain pledging price above market price: main crop 2008-09 at 12,000 Baht and off-season crop 2009 at 11,800 Baht
  7. 7. Comparison of pledging price and market price of jasmine rice Pledging price higher than market price for the first time 01/02 Study period 2005/6
  8. 8. Loss for 2005/06 crop; 5.2 million tons paddy 44.8 32.6 -19.1 -20 -10 0 10 20 30 40 50 รายจ่าย รายรับ ขาดทุน Million Baht Expenses Revenue Loss
  9. 9. Agencies involved and quantities of paddy in the process 90 per cent of pledges not redeemed. Farmer’s choices Farmers barn 1.23 million tonnes Loan 11,622 MB. Participating rice mills 4.06 million tonnes Loan 33,174 MB. Disposable pledge 420,648.4 tonnes Redeem 762,904 tonnes Milling order Disposable pledge 3,662,741.6 tonnes Redeem 401,543.5 tonnes Domestic distribution of unmilled rice Central warehouse 1.73 million tonnes rice Domestic distribution of unmilled rice Domestic distribution of white rice Overseas distribution of white rice Department of Foreign Trade BAAC Milled rice Unmilled rice (Paddy) BAAC Public Warehouse Organization (PWO) Public Warehouse Organization (PWO) Public Warehouse Organization (PWO) Pledge barn Pledge Set Rice Policy Approval of project cost Registration of farmers Registration of customer BAAC Bank for Agriculture and Agricultural Cooperatives (BAAC) BAAC Branch Department of Agricultural Extension The National Rice Policy Committee Committee of Policy and Measures to Help Farmers (unmilled rice) (milled rice)
  10. 10. 10 „Rent-seeking activities‟ and corruption - inflation of registered production ₋ increase acreage for rice/reduction of other crops ₋ substitution of rights of other farmers ₋ increased number of crops to 7-8 crops/2 years ₋ put pressure on governments to continue program P differential Rent Seeking Farmers ₋higher cost ₋greater pollution ₋competition for water resources ₋ Capacity expansion/Silo to 90 million tons paddy Increased investment from 0.8 million Baht to 1.6 m per mill during 1987-2005 ₋ Lobbying to be included/pledging across district ₋ siphoning of rice for illicit sale ₋ substution of farmers’ rights/ using rice from Cambodia, Myanmar and Laos Milling profits Free rice to siphonRice mill • Rice mills in the program no longer know how to compete Consequence
  11. 11. 11 ‘Rent-seeking activities and corruption - lobbying/kick-backs ₋ collusion Bid price lower than export price exporters ₋ unfair advantage of large exporters ₋ huge investments in warehouse construction/ return in 2 years ₋ illicit sale of rice ₋ exchanging low quality for high Siphoning of rice Inflated rent Warehouse - excess warehouse capacity consequence “Surveyors” Govt official
  12. 12. Corruption and benefit-sharing (1) Collusion in bidding among exporters (2) Contracts favouring those in the scheme: 5-6 months after bidding to pay (3) Contract amendments between Govt Warehouse and President Agri Trading, winner of the export contract on 6 May 2004; standard clause: 5% deposit changed to 1% (4) At time of export, govt paid another $20 per ton to „prepare rice for export‟
  13. 13. (5) Amendment of contract No. คชก.ขข.02/47 Date 18 May 2004 removing export requirement (6) Policy change that favoured one export company that became the largest exporter
  14. 14. Innovation in corruption policy  In early 2004 President Agri Trading, a newcomer, won the bid to buy 1.68 million tons of rice from the govt at prices above market price, thereby possessing the largest amount of rice of all the exporters: 2.2 million tons  A few months later, the govt announced the pledging price for the new season paddy at 10,000 Baht (higher than market price)  Consequently market price shot up – other exporters could not compete with PAT. Many had to buy rice from PAT
  15. 15. Evidence of probable insider information
  16. 16. 16 2005-2006 loss of 19 billion Baht: Distribution of economic rent: 16 Farmers 37.3% Rice mills (323 mills) 18.1% Warehouse + surveyor 4.2% 17 exporters 23.4% Government budget 13.7% Deadweight loss 2.7% Recipients Consumers’ and taxpayers’ loss of 19.13 Billion Baht Source: Nipon (2010)
  17. 17. 1717  Beneficiaries are mostly well-to-do farmers in irrigated areas in the Central and lower Northern regions  Richest 10% of farmers received 20 % of the benefits  Poorest 10% received 1.7 %  Farmers with pledges above 200,000 Baht received 59.7% in 2008-9 season  Farmers with pledges below 40,000 Baht received 2.7% in 2008-9 season
  18. 18. 18  Top 2 largest exporters received economic rent of 2.641 billion Baht (for one crop) • Collusion becomes easy 59 Remaining 13% 20% # 3 and # 4 59% Largest two exporters
  19. 19. Rice production, export and estimated domestic consumption in 2009 Possible profit of 25 billion Baht (conservative estimate)
  20. 20. Flows of Network Relationships in Thailand B B1 B2 B1.1 B1.2 B1.3 P1.1 P1.2 C3 C C4 C1 C2 P3 N1.2.1 N1.2.2 P2.1 P2.2 P2.3 N2.2.1 N2.2.2 Bureaucracy Politicians Notes: B = bureaucracy, C = capitalists, P = politicians, N = non-politicians Por
  21. 21. Rivalry between Clans/ „Puak‟ or Sub-Clans, Choosing Clan Affiliation Fighting each other to control the resources or to be promoted higher in the clan Providing resources to the client in his own sub-clan Clan A A1 A2 Clan B B1 B2 Providing services and political support to the patron in the sub-clan The poor and the under-privileged who are not accepted into any clan are left without resources and protection People choose clans according to the perceived benefits which could depend on member size and resources of the clan choose choose People with independent source of power
  22. 22. What can be done?  Membership of the WTO‟s GPA?  Ratification of the UNCAC; membership in OECD Anti-Bribery Convention?  Integrity pacts with private sector, encouraging integrity pacts among professional and business associations, eg. medical suppliers, construction, supply chain, involving civil society.  Pro-active, pre-emptive anti-corruption action – intercepting questionable projects
  23. 23. OECD Convention – Article 8 Accounting 1. “….. each Party shall take such measures as may be necessary, within the framework of its laws and regulations regarding the maintenance of books and records, financial statement disclosures, and accounting and auditing standards, to prohibit the establishment of off-the-books accounts, the making of off-the-books or inadequately identified transactions, the recording of non-existent expenditures, the entry of liabilities with incorrect identification of their object, as well as the use of false documents, by companies subject to those laws and regulations, for the purpose of bribing foreign public officials or of hiding such bribery.”
  24. 24. Targeting corruption-friendly policies, measures, practices  Intervention schemes in agricultural markets  Targeting creation of artificial monopolies  Licensing requirements, registration practices, permits,  encouraging use of technology to reduce contact, promoting competition  Evidence-based transparency index
  25. 25. Vigilance on conflicts of interests  Data base  Disclosure requirements • More positions included • Use of technology • Streamlining forms • Business associates  Recommendations regarding appointments of officials and prosecutors to state enterprise boards  Strengthening legislation?
  26. 26. Amendment of anti-corruption law • Clarification and penalties • Provincial offices • Whistle-blower protection • Anti-money-laundering powers • Plea bargaining • Statute of limitations • Public procurement requirements/procurement legislation
  27. 27. NACC ACT 2011:  Article 103(7),(8): procurement  Publication of reference prices and method of calculation  Disclosure of accounting statements for contracts designated by the NACC  Monitoring by the NACC
  28. 28.  Design of anti-corruption measures taking into account the structure of patron-client networks/creation of monopoly rent  Strengthening of conflict of interest laws?  Incentives to make whistle-blowing worthwhile? Direction 28
  29. 29. Civil Society: • Freedom of information • Public hearings of draft laws • Monitoring by media/NGO’s • School Curriculum Good and Clean Government Competition & Economic Freedom: • Competitive restructuring of monopolies • Regulatory simplification Public Administration and Public Finance: • Meritocratic civil service, codes of conduct • Transparent, monetized, adequate remuneration • Accountability in expenditures (Budget, Audit, Procurement) • Perception index of good service by agency/service Measures for Good Government and Transparency Accountability of Political Leadership: • Disclosure of parliamentary votes • Transparency in party financing • Asset Declaration, Conflict of Interest Rules Checks and Balances: • Independent and effective judiciary • Independent and effective specialized anti-corruption agency/unit • Decentralization with accountability? Private Sector Partnership:  CSR, codes of conduct  Anti-corruption pact 29