Comment Pieces

Corruption: not just a public sector menace

Debilitating corruption was always considered to be the bugbear of the public sector. The private sector, on the other hand, was perceived to be more sanitized, almost immune to the menace of corruption. However this perception has been shattered in a study done by Matt Levy, Working Paper on Private Sector Corruption in India, in collaboration with Janaagraha Centre for Citizenship and Democracy, where the research student from Stanford University uses prevailing statistics to articulate the level of corruption in the private sector.  

The study referring to a survey of numerous companies conducted by KPMG, states that at least 55 per cent reported incidents of fraud.  On the other hand, Transparency International's Corruption Perception Index, gives India a score of 36 out of 100. The lower the score, the more corrupt the country is considered to be. 

The repercussions of this corruption are manifold. The study, quoting another survey points out how corruption can increase the total cost of doing business by 10 per cent.  An estimate by the World Bank Group states that corruption stops India from achieving 0.5% more in annual GDP growth.        

Matt Levy’s article has been divided into five sections. The first of the series is a candid take on the private sector and the widespread corruption gripping it.    

Is the private sector overtaking the public Sector as more corrupt?

 “India is a big market with lots of money that offers huge avenues for corruption to thrive... The private sector must act against graft as governments don't bribe themselves.”

- Olajobi Makinwa of the United Nations Global Compact Office[1]

I. Introduction

As pervasive and harmful as retail corruption is on a daily basis to most citizens of India, private sector corruption is every bit as detrimental. Critically, private sector corruption, which includes both fraud and bribery, has been shown to deter foreign investment, increase economic inequality and temper economic growth.[2] Many top analysts and business leaders identify corruption as a root problem negatively affecting India’s economy – explaining in part India’s recent economic slowdown.[3] Although economic growth alone cannot ensure equitable and sustainable quality of life for all, it is undoubtedly a key component, and thus, economic stagnation, in large part caused by endemic corruption, is a major obstacle to ensuring robust development. Thus, recognizing and understanding the causes of and solutions to private sector corruption is critical if India is to better meet the aspirations of all its citizens.

However when looking to solve the problem of corruption, the international community typically casts its attention to the role of the public sector given their discretionary control over the awarding of contracts, provision of licenses, and the enforcement of regulations. Yet, if private sector corruption is to be sustainably targeted, it is just as important to examine the role of the private sector as a key player in an endemic and worsening problem in India.  Moreover, comparative legal structures that try to tackle private sector corruption to varying degrees of effectiveness also need to be analysed. Much of this jurisprudence, coupled with more stringent enforcement, has been effective in raising the costs of corruption for many multi-national companies as well as their subsidiaries around the world.

This paper will begin by assessing the scope of private sector corruption in India including an overview of its quantifiable and non-quantifiable costs as well as some of its principle causes. The research then delves into a comparison between the existing legal frameworks in the U.S. and India to better understand what policies may be effective in curbing corrupt practices. Finally, the analysis concludes by recommending a set of policy measures to be adopted and implemented by the government, private sector and citizens in attempts to sustainably and holistically address this problem.

Scope of the Problem

What is corruption and fraud? How do they manifest in the private sector?

Corruption is most often defined as the use of public office for private gain. Acts of corruption typically take the form of bribes to “obtain government benefits and to avoid costs,”[4] or to win lucrative contracts. Government control over contracts, licenses and other regulations provide public officials tremendous discretionary power to extort bribes from the private sector. For instance, 37% of the 2010 KPMG survey respondents indicate that bribes are paid for routine administrative approvals.[5]

In environments where incentives outweigh the potential costs and where the private sector has no recourse but to comply in order to win bids or receive regular approvals, corruption in the private domain becomes factored in as an expected collateral of doing business. Cases abound in India and elsewhere of such practices in the awarding of lucrative telecom or resource extraction licenses that enable companies to profit with the government receiving little or no compensation. The Coalgate scandal in India is one such case all too familiar to those following corruption and politics  (see Box I).  Moreover, often the ability to commit fraud requires a bribe to be paid to an outside party such as the public sector. For example, Cadbury India is under investigation for allegedly dodging payment of US$ 46 million in taxes by pretending to have created a new factory, with the collusion of public officials.[6].

How big of a problem is corruption and fraud in India?

According to various international corruption rankings, India fares poorly. For instance, according to Transparency International’s (TI) Corruption Perception Index (a rigorous survey that combines citizen perception, expert analysis, and business surveys), India scores 36 on a scale of 100, with lower scores denoting higher levels of corruption, and ranks 94^th among 176 countries and territories. According to the World Bank’s Worldwide Governance Indicators, India lies in the bottom half of countries globally in regard to the control of corruption.[7] Further, TI’s 2011 Bribe Payers Index, which surveyed over 3000 companies around the world, ranks India in 19^th position out of 28 countries analysed. While none of these measures are perfect, these scores provide a better sense of the scope of the problem of corruption in India.

Corruption scandals also dominate the news cycle. Citizen frustrations are coming to a boil with nearly three quarters of citizens reporting that corruption has increased over the past two years.[8] Through its crowd-sourced IPaidaBribe online platform, Janaagraha, a not-for-profit organization based in India, has compiled evidence of over 22, 000 bribes paid in the last three years costing citizens over 57 crore. This only casts a light on the very tip of the problem in regards to the real costs to citizens. The popular protest movements, led by Anna Hazare over the last several years, best exemplify the outrage this has sparked in the Indian public. In particular, his movement has been demanding that the government enact stronger anti-corruption legislation such as the Jan Lokpal bill, which would create an anti-corruption ombudsman, as well as the whistleblower protection bill.

Honing in on the private sector, it appears corruption is every bit as rampant. Of companies surveyed by KPMG in 2012, 55% reported experiences of fraud in the last two years with 71% concurring that fraud is an unavoidable cost of business.[9] Their 2010 survey of private sector firms in India revealed that 75% agree that fraud is on the rise with 45% perceiving that fraud has increased at their place of work.[10] The results of a 2012 survey conducted by the consulting firm Ernst and Young (EY) are in line with these previous findings with 70% agreeing that corruption is pervasive in India. 28% of the respondents to the EY survey revealed that Indian firms are willing to pay bribes to win or keep business – a rate nearly double the global survey average of 15%.[11] According to KPMG’s 2010 Fraud Survey, 38% of businesses indicated that the payment of bribes is integral to their industry.[12] In this same report, KPMG notes that, “larger scams could be attributed to the willingness of the private sector to pay senior public officials to get their work done.”

While there do not yet exist perfect measures for its pervasiveness, it is evident from surveys of citizens, experts and businesses that corruption is a far-reaching problem that impacts every-day life for the country’s citizens and the businesses that operate there.

What are the costs of corruption and fraud?

Given its ubiquity, what impact does corruption have on society and the business climate? What role do bribes play in facilitating business or speeding up slow-moving bureaucracies? Are such payments simply a part of doing business?  While impossible to quantify the exact costs of fraud and corruption, there are specific examples and surveys that are able to provide us with a better understanding of the magnitude of the problem.

The Clean Business is Good Business report estimates that corruption can add as much as 10% to the total cost of doing business as well as 25% to procurement costs.[13] The Kroll 2009/2010 Global Fraud Report, in its survey of 729 senior executives from firms all over the world, reported average losses associated with fraud of $8.8 million over a three-year period – 20% thanks to vendor and procurement fraud and 19% due to corruption, including bribery. The Global Infrastructure Anti-Corruption Centre finds that, “the financial wastage in a project due to fraudulent practices such as claims inflation is often higher than that attributable to bribery.”[14]  Even if businesses and others consider bribes a necessary evil, it contributes to a culture of fraud associated with enormous financial losses for the private sector.

Estimates of the costs of corruption paint a picture of tremendous losses. The World Bank Group estimates India would achieve 0.5% more in annual GDP growth if it were not for corruption. The Association of Certified Fraud Examiners’ global survey of fraud examiners “estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion.” If utilized in regards to India’s GDP in 2012, this estimate would signify a loss of approximately 554,779 crore (or $US 92 billion[15]) thanks to fraud.[16] While an incredibly rough (and not completely reliable) estimation, this figure can bring us a bit closer to the actual sum when trying to quantify the magnitude of the costs of corruption and fraud in India.

The specific effects of corruption and fraud in the private sector have only more recently been reaching the light of day. The 2013 India Risk Survey found that businesses in India experienced losses from fraud totalling INR 66,000 crore last year (or nearly US$ 11 billion). More specifically, the Reserve Bank of India, in its Financial Stability Report, revealed that financial fraud had led to losses for Indian banks of over INR 4,448 crore – the highest ever recorded.  The most prominent scams were related to the Commonwealth Games as well as the 2008 2G telecom licensing scandal, spurring the resignation of India’s then telecom minister, A. Raja.[17]

Adding to the direct monetary losses of corruption to the state, there are many second-order costs. As highlighted by the Center for International Private Enterprise, a US-based NGO working internationally, there are six major costs of corruption: resource misallocation; lower investment; less competitive, efficient and innovative firms; unresponsive policies and inefficient bureaucracies; lower employment and exacerbated poverty. Each of these pillars is essential for the able functioning of the economy and the government that in turn can spur economic growth and alleviate poverty. Corruption inhibits many of the fundamental components comprising good governance that can help us understand, in part, today’s lagging economic growth in India and the country’s poor showing in attracting FDI and combating poverty. The next section will delve into each of these costs in the Indian context.