Business in partnership against corruption, out of balance

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Business in Partnership Against Corruption

Miami, Tuesday, May 20, 2008

Questions

- In your personal experience, have you known of instances of bribery affecting your organization or an organization you do business with?

Yes No

-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?

… out of balance

Our world is …

Our world is …

Global Gross Domestic Product (GDP)

Year 2000:

30 trillion – 5 billion people – 20% global GDP

Year 2050:

140 trillion – 8 billion people – 40% global GDP (assuming 3.5% growth)

Population Growth

2000 2025 2050

Developing Countries 5 billion 7 billion 8 billion

Developed Countries 1 billion 1 billion 1 billion

Gender Distribution

Data - Inequality

The 2007 Human Development Report (HDR) from the United Nations

Development Program shows that:

around 1 billion people living at the margins of survival on less than

US$1 a day;

2.6 billion (40% percent of the world’s population) is — living on less than US$2 a day :

20% of the population in the developed nations, consume 86% of the world’s goods;

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.

Source pictures: United Nations World Water Development Report

Data - Malnutrition

Source pictures: GAIN Website

In a review of 80 countries, the United Nations Children's Fund (UNICEF) and the Micronutrient Initiative found that:

Mental development of 40% to 60% of infants between 6 and 24 months was impaired due to iron deficiency;

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;

Approximately 18 million babies are born with mental disabilities annually owing to iodine deficiency;

60,000 young women die each year during pregnancy and childbirth as a result of severe iron deficiency anemia.

Diagram - Inequality

0

10

20

30

40

50

60

LAC Asia OECD Eastern Europe

1970s 1980s 1990s

Source: “Inequality in Latin America and the Caribbean: Breaking with History?” World Bank, 2003

Data – Water and Sanitation

The 2006 United Nations Human Development Report shows that water problems affect half of humanity:

Some 1.1 billion people in developing countries have inadequate access to water, and 2.6 billion lack basic sanitation;

Access to piped water into the household averages about 85% for the wealthiest 20% of the population, compared with 25% for the poorest 20%;

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.);

Some 1.8 million child deaths each year as a result of diarrhea.

Source pictures: United Nations World Water Development Report

Financial Flows to Developing Countries

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);

The top 200 corporations’ combined sales are 18 times the size of the combined income of 24% of the total world population;

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.

Data - Inequality

Overview

Anti CorruptionSolutions

Corruption Pressures

Corruptio

n

Dilem

ma

Government Companies Civil society

In high risk environment:

How to ensure that partners and competitors are ethical?

How to change culture of doing business?

How to get competitors and stakeholders on board?

Collective action can help to unlock corruption dilemma and create level playing field.

Collective action creates incentives to avoid corruption.

Part IIIPart IIPart I

Corruption has negative impacts on governments, companies, civil societies, economies.

Despite costs, some individuals/groups benefit from corruption.

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

Private sector side of corruption

Higher costs of doing business

Cost ofCorruption

Resourcemisallocations

Reducedcompetition, efficiency &Innovation

Lower investment

Lower employment

Loss of reputation

Lack oftransparency

and accountability

Complex & changing

laws & regulations

Low public

sector wages

Mistrust b/w &

within sectors

Lack of competition

Weak enforcement

of laws and

regulations

0

10

20

30

40

50

60

OECD East AsiaNICs

East AsiaDeveloping

South Asia Sub-Saharan

Countries

Transition LatinAmerica

Infrastructure

Bureaucracy

Corruption

Tax regulations

Fir

ms

rep

ort

ing

co

nst

rain

ts a

mo

ng

to

p t

hre

e (p

erce

nt)

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" (UNGC)

“31% of firms in Latin America have to pay bribes to – get things done -” (WBG)

Corruption as a constraint to the private sector

Private sector NOT just a victim, but also source of corruption

0

10

20

30

40

50

60

70

80

90

100

OECD East Asia NICs Sub-SaharanAfrica

New EUAccessed

Latin America

Elite Capture (trough Bribes)

Undue Political Influence

Elite Capture, Political Corruption and Inequality of InfluenceView of the Firm, Percentile Ranks, Higher is better

worse

best

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.

They fear that they cannot win projects on the merits of

their bids alone and thus engage in corruption,

thereby contributing to its spread.

High risk

environment

PART II

Corruption dilemma: How can an individual company break the corruption cycle in a high risk environment?

In high risk environment:




Few incentives to fight corruption

Limited resources to counter corruption

No credible

enforcement

Lack of cooperation between stakeholders

There are three main steps for companies to fight corruption

Collective

External

Internal

1. Assess risks

2. Implement anti-

corruption policies and

compliance programs

3. Provide guidance to

managers

4. Share internal policies,

experiences, best

practices and success

stories

5. Reach out to industry

peers, suppliers and

other stakeholders via

neutral facilitators and

initiate joint activities to

fight and advocate

against corruption

Each company individually Business environment

free of corruption

Collective

PART III

In high risk environments internal and external responses alone may not unlock the corruption dilemma

Collective

External

Internal

Business environment

free of corruption




Companies worry about corrupt competitors and fear being at competitive disadvantage

Unlocking the corruption dilemma

… is a potential solution to the corruption dilemma. It helps to make compliance the norm and to isolate the guilty.

Strengthen corruption commitments between and among different stakeholders.

Create incentives for stakeholders to avoid bribery and corruption in transactions and eliminate cheating on commitments by individual members.

Create incentives to avoid corruption by individuals within companies and governments.

Central principles of collective action are to:Collective action...

Primary stakeholders of Collective Action

Key characteristic of Collective Action is to involve various stakeholders – different types of Collective Action exist

Different types of Collective Action

Integrity pact Anti-corruption declaration

Formal, written contract between customer and bidding companies

Bidding and implementation processes monitored by external monitor

Sanctions may apply in case of infringements

Ethical principles bind signatories to not engage in corruption in the daily business

Public commitment leads to enforcement 'by honor'

All stakeholders are asked to sign declaration onanti-corruption principles

Public commitment leads to enforcement 'by honor'

Compliance-relatedprerequisites for membership

Adoption of membership requirements checked by external audits

Members get certified or will be excluded

Principle-basedinitiative

Certifying businesscoalition

CollectiveAction

XXXX ProjectName MM/YY – FileName.ppt

Project/ trans-action based agree-ment

Long-term-initiative

Companies

GovernmentCivil society

All stakeholders can benefit from anti-corruption Collective Action

Benefits of anti-corruption Collective Action from different stakeholders' perspective

Bidding companies Customer Enhanced competition in bidding process – most efficient,

not best connected bidder wins bid1)

Enhanced reputation

Avoid time consuming lawsuits / blocking points after decision on supplier company

Focus of business relationships on quality and reliability of goods and services

Increased chance of fair selection as a supplier and enhanced access to markets

Protection from legal penalties

Saving of finances formerly paid as bribes

Enhanced reputation

Ensure employees and competitors behave ethically and responsibly

Government

Incentives to be transparent

Strengthened rule of law, increase credibility and political stability

Higher investment levels from domestic and foreign investors

Improve image of country

Effective governance mechanisms and more effective procurement

Civil society and NGOs

Improved access to essential resources, such as health care and education

Increased trust and confidence in business

Consistent and fair enforcement of regulations

Social development if money / taxes are used for social projects instead of bribery

Civil society part of government-business anti-corruption efforts

Collective Action can be successful!

Examples of existing collective action initiatives

Integrity pact Anti-corruption declaration

Principle-based initiative

Certifying business coalition

CollectiveAction

Mexico suburban train

Frankfurtwaste

incinerator

China business leaders forum

Business Ethics Pact Paraguay

EMB Bavarian construction

industry

Berlin airport

Project / transaction based agreement

Long-term initiative

Code of pharmaceutical marketing practices

Business pact for Integrity and against corruption

Brazil Business coalition

Organi-zation A

CompanyC

CompanyA

Independent facilitator

Results of selected collective action initiatives

BERLINAIRPORT

PACI IFPMA

Introduction of

transparent

bidding procedures

Suppliers have to

adhere to anti

corruption

principles

Raising

awareness about

corruption

Company

commitment to

be solution to

corruption

problem

Development

of sectoral code

of conduct

Introduction of

compliant

mechanism

Creation of incentives to

abstain from corruption

Introduction of certification

EMB

Collective actions are not a panacea for corruption challenges

Common challenges of collective action initiative

Common Challenges

Finding facilitator as neutral party to initiate and implement a Collective Action

Building confidence among stakeholders

Securing funding for the initiative

Getting top-management commitment of participating companies

Creating public awareness

Agreeing upon enforcement and sanctions mechanism

Agree upon clear consequences in case of infringement / non-compliance

Collective Action is

difficult, it can fail.

Common

challenges include:

Demand for guidance and tools

Collective Action Initiatives;

Joint effort of Companies, NGOs

and Multi-laterals;

25 case studies, 50 country profiles,

15 industry profiles;

Implementation guidelines.

Joint effort of:

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)

GUIDE: FIGHTING CORRUPTION THROUGH COLLECTIVE ACTION - A practical guide for business -

Page 39 January 2008

Involve third party to promote collective action to customer

Decision tree helps to design the approach for project related collective actions

Decision tree

1

1

Are tender documents

already finalized / released?

Is customer willing to fight corruption 2)

Are third parties available to influence

customer? (e.g. anti-corruption

offices of government, multilateral donors)

1) Decision has to be made by internal compliance / risk assessment team in headquarters. Various sources for country specific assessment are given on slides 81 - 83 2) For details: see slide 87

No

No

Yes Promote collective action to customer via facilitator

Yes

Prerequisites for project-related collective action not met – go to decision tree 2 to evaluate possibility of principle – based / Certified association

Yes 1.1

1.2

Does your company perceive

corruption as major barrier to do business in

respective country? 1)

No

No need for collective action – consider other ways to continue doing business with integrity

No

Yes

Integrity Pact / Anti-corruption declaration


How to get started?

Initiate business coalition (1/2)

2.1

IO: International Organization MDB: Multilateral Development Bank

Source: Interviews

Facilitator (NGO / IO)

Company

For details please refer to slide 55

1

2

…

4

43

Establish contacts to facilitator

Create concept

Approach government

Conceptnote

1st meeting with facilitator

Present company profile, compliance policy and concept for collective action (one may use material from chapter 4 of this manual)

Ask for feedback / recommen-dations

Identify appropriate facilitator

Create list of potential partners

Companies

NGOs

Religious groups

MDBs

Prioritize: which companies / other stakeholders need to take part to ensure sufficient attention / credibility?

Assess the potential oversight role of government (e.g. anti-corruption bureaus)

Conduct workshop to evaluate business situation, risk of corruption, benefits of anti-corruption activities and best practice examples

Summarize intention and objective of initiative in concept note

Facilitator to send out concept note to potential partners and follow-up

1 2 3 4

Certifying business coalitionPrinciple-based initiative


Four Integrity Pact contract examples provided – however contracts have to be adjusted to specific prerequisites of country and project

Integrity Pact contract examples

IP: Integrity Pact

Source: Internet, Interviews

IP from project "Berlin airport"

Seen as best practice example

Available in German only

IP contract from project "Hydroelectric power plant", Ecuador (English translation)

No "Social Witness"

Detailed description of Arbitration Tribunal

IP template from Transparency International

Specifically designed for contracts in the defense industry

IP contract used by ONGC India

Based on contract of Berlin airport

ONGC Integrity Pact

Integrity Pact template defence industry

Integrity Pact Berlin airport

IP Ecuador Hydroelectric

Classification and definition of Collective Action

Decision trees

Process steps

Highlighted topics and issues to consider(e.g. anti-trust)

Contract templates

Profiles of initiatives

Contact list

Basis

Find the right approachfor your situation

Benefit from various real life examples and

templates

Follow detailedprocess steps

Examples

XXXX ProjectName MM/YY – FileName.ppt

Definition of corruption, dangers of corruption

Overview on various ways to fight corruption

Web Portal: www.fightingcorruption.org

Tools for practitioners

Lessons learnt

Case studies

Country and industry profiles

Country and Industry Profiles

Events and workshops

Three key questions for panel:

How can the private sector participate in collective actions and governance reforms to create a business environment with reduced risk of corruption?

What are the biggest challenges in achieving and sustaining results through collective actions?

How can key stakeholder, such as government officials, business, NGOs and international organizations, partner to more successfully promote transparency and accountability?

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Djordjija Petkoski

World Bank Institute

THANK YOU

Business in partnership against corruption, out of balance

Business

Transcript of Business in partnership against corruption, out of balance