Corruption in the construction industry is an ever-present risk for contractors, consultants, financiers, and governments. It is the abuse of entrusted power for personal gain. Corruption is expected to gain more prominence as one of the elements that entities are expected to disclose under the governance pillar of Environmental, Social, and Governance (ESG) reporting. Additionally, the importance, size and scale of some of the infrastructure projects planned in the Eastern Africa region will have significant impact on the environmental and social pillars of ESG. This is because large infrastructure projects will affect communities, eg where they lead to displacements or encroach on national parks. Such projects will therefore inevitably make it to the ESG reports.
Many recent infrastructure projects in the region have been tainted by allegations of corruption. Concerns around overpricing for instance have led to the cancellation of projects at various stages of conception and award. In some cases, cancellations have happened after the award of contracts or even during execution. Besides over-pricing, there have been concerns over the necessity and sustainability of some projects or their environmental impact.
The common suspicion is that projects that should never have been commissioned are allowed, or costs of projects overstated, to allow for bribes and kickbacks. In addition to lost time and money, cancellations lead to the involved parties being perceived as corrupt. From an ESG reporting perspective, involvement in such projects would likely require disclosure.
It is therefore increasingly important for companies to avoid association with tainted projects. It is equally important for governments to ensure that projects are free of corruption, real or perceived, as this will help them attract partners.
Most efforts aimed at guarding against corruption in infrastructure have focused on the tendering process. Whereas enhanced procurement processes have helped, the concerns around corrupt or unethical dealings have persisted. This is especially so for projects perceived to be over-priced.
Infrastructure projects are complex, especially those delivered under the public-private-partnership (PPP) model. The complexity, size and multiplicity of partners, coupled with the uncertainties that come with large projects means that they will be expensive. It also means that they are hard to price. The cost of a project may therefore not be an indicator of corruption. However, costs that appear too steep should elicit concerns from those involved and warrant further scrutiny even where the procurement process seems authentic.
Many a time, corruption in infrastructure projects begins long before the tendering process - at the conception and planning stages. Corruption also affects projects after the procurement process where it manifests in poor quality delivery, unwarranted contract variations and scope extensions.
The projects that are most affected by corruption at the conception and planning stages tend to fall in the opposite ends of the ‘Return on Investment’ (ROI) spectrum. Infrastructure projects that promise the highest returns such as those connected to the extraction of natural resources (e.g. oil pipelines or coal plants) or support manufacturing are on one end. Such projects are susceptible to corruption as it is easy to justify their high cost on the basis that they will have an even higher return. In such cases, persons involved in both the purchase and supply side are less keen on the costs and more likely to allow, or incorporate, unnecessary or exaggerated costs with or without kickbacks. Project sponsors are also more likely to ignore matters such as negative environmental impact assessments.
On the other end of the ROI spectrum are projects which have no real or measurable economic value and are implemented because they are pet projects or ‘political flagship’ projects. In such cases, the people involved expect that the projects will go on regardless of their viability as they have a powerful sponsor.
Projects that are plagued by corruption at inception are more likely to suffer from further cost escalations during the construction phase. This is because the persons involved with the projects are either already compromised or not motivated to keep costs in check. They are also more likely to be poorly designed.
Corruption at the conceptualisation and planning phase takes many forms. Some will only involve the buy side, like designing and approving white elephant projects, or overstating budgets to factor in future kickbacks, or exorbitant valuations of land. Others will involve both the buyer and the preferred suppliers, such as providing information or requirements selectively and including features that can only be met by the favoured supplier are introduced to justify single sourcing. Some schemes will only involve the supply side for instance where contractors present unsolicited proposals that are hard to understand or compromise the results of feasibility studies in cases where contractors undertake the studies.
To avoid association with tainted projects, it is therefore imperative that one pays keen attention to how these projects are conceived and the processes leading to the tendering process. One should be particularly careful if the project does not seem to make economic sense or where its benefits are billed as overly good. Failure to do this may leave organisations having to grapple with poor ratings and adverse ESG reports.
This article has been republished with the permission of PWC from its Public Sector & Infrastructure Insight 2023 report.
Photo: Corruption (© Rawpixelimages | Dreamstime)
