Home Business Corruption’s hefty price tag

Corruption’s hefty price tag

by Thomas Schellen

In the academic analysis of economics, corruption is a clear and present danger. “Efficient allocation of resources is the key to the capitalist system,” said Karim Salameh, managing director at Saradar Investment House and member of a new generation of Lebanese economists. “In the textbook answer, corruption cripples because it diverts resources away from their efficient use and directs them into the wrong pockets. Corruption is money badly spent.”

Here is a textbook evil that has become recognized to be a huge economic liability, or as The Economist once wrote in a scriptural allusion, “a worm that never dies.” The best available estimates put the cost of corruption at a magnitude of more than $80 billion worldwide, annually. Other studies by international agencies see the detrimental effect of corruption on Foreign Direct Investment in the hundreds of millions of dollars per each afflicted developing economy.

Unfortunately, what is obvious damage to the national economy and a detriment to foreign investment can look extremely enticing to an individual interested in his own pocket, personal business and bank account. When asked about the current reality of corruption in Lebanon, a politically connected importer of medical equipment guffawed. “How do you think I won a contract to set up a teaching laboratory at a big university?” he asked, describing how most deals are sealed in Lebanon today. “Let’s say I want to buy a satellite. I approach a Chinese, a German and an American manufacturer to get a price quote. I get offers at $5,000, $10,000, and $20,000. Then I call a Lebanese dealer, who quotes $25,000. He gets the deal.”

He continued: “How do I get the authorization? I buy the Chinese one at $5,000 and split the rest of the money with the department head who signed-off on the purchase.”

The high awareness of corruption in Lebanon manifests itself in plentiful individual occurrences of public sector irregularities. Talk to anyone and there is a rumor, a theory, or an anonymous account of how this official has been discovered siphoning money off from state payments to institutions housing orphans; how that ministry, although dissolved, still is paying rent for premises at an annual cost of $350,000; or how this or that civil servant maintains three luxury cars on an official salary of between $370 and $1,000. Whatever damage assessment is offered on the extent of public sector graft and greed, however, is usually at least partly speculative. Political or personal concerns and fears on part of the involved parties make it difficult to obtain statements that allow for detailed documentation of damages. Even the Lebanon mission director of US donor agency USAID, Raouf Youssef, did not want to talk to Executive about its agricultural program, one that former agriculture minister Ali Abdallah has been accused of defrauding. The costliest individual case of corruption damage to the Lebanese economy under discussion is that of Electricite du Liban, which has recently been labeled the cause behind a massive portion of the budget deficit. Finance minister Fuad Siniora was attributed with stating that loans to EDL over the years cut a $9 billion hole in the Lebanese treasury. Newspaper reports claimed in August that as much as $1 billion out of the $2.8 billion post-war rehabilitation investment into the national electricity generation and distribution network had been swallowed by thievery and embezzlement. The reports on the loss making of EDL and the reasons for the public enterprise’s disastrous financial state make for a composite horror story of grand corruption, political nepotism, and petty corruption. Energy consultant and middleman Ahed Baroudi has been named the architect behind the sector’s poor performance in his role as key dealmaker (see “The Italian job,” page XXXX). The sagas of black market sales of fuel oil by the tanker and deals over the construction and maintenance contracts of the country’s electricity generation plants are as close to big-deal corruption as anything reported or rumored in Lebanon over recent years.

However, analysts say the numbers and result figures that are available from the utility do not allow for a comprehensive assessment of the utility’s real performance. As civil servants, EDL management is supposedly accountable to public and media inquiries, but none of Executive’s calls were returned. Minister of energy and water Ayoub Humayed, however, did agree to meet with us at the 13th hour (see “From the eye of the storm,” page XXXX). But another big chunk of losses at the utility quite undisputedly stem from power theft by a large number of individual customers Ð between 25% and 40% of bills have been unpaid, according to various reports. This phenomenon in itself amounts to a sub-culture of corruption, with the non-paying customers to some extent being shielded against prosecution by political players with high levels of influence. The case of a massive share of non-collectable bills and systematic avoidance of paying for the electricity service in areas such as Palestinian refugee camps and the southern suburbs is generally undisputed. It makes for a case of multiple petty corruption through wide-ranging abuse of public services and defrauding of the law-abiding majority. This corruption of the poor does not, however, alter the fact that the part of the population that is most disadvantaged by the presence of corruption are the poor. They are denied the access to services that petty corruption buys in dealing with administration and private sector. What remains not known are the exact direct costs and indirect damages caused by corruption to either Lebanon’s national economy or the business community. The Beirut based consulting firm, Information International, issued a Corruption in Lebanon Country Assessment Report in early 2001, in which it estimated that “one billion US dollars in annual drain may be directly linked to corruption.”

At over 5% of GDP, that figure substantially exceeded the rule-of-thumb assessments for corruption damage to a developing economy. Information International – which described its $1 billion estimate as “a conservative figure based solely on the research findings” – drew immediate and heavy fire for its statement at the time. The most ardent opposition arose from Lebanon’s political quarters but criticism came also from several civil society researchers, who questioned the methodology and motives behind the report, which had been based on large parts of focus group debates and opinion polls. After the reaction to the report, which had been commissioned by the UN, Information International has not executed any further research into the cost of corruption for Lebanon. The Lebanese private sector likewise shows no record of assessing the current cost of corruption either for the entire economy or for specific sectors. The cost of corruption basically finds no mention in the annual reports of Lebanese corporations. Although they agree with the national sentiment that corruption is rampant and often confess to it being a major problem for the country, individual business leaders see the problem as endemic with the political establishment more than with the business community.

Although corruption exists among the business realm, business-to-business relations are “by nature” less corrupt than politics, opinioned Claude Bahsali, an executive with the information technology group IDG Holding and member of the ethics and management committee at the Lebanese managerial association RDCL. “Without being able to put figures, I would say that IT due to its high competitiveness is not as affected as other sectors,” he told Executive (see box). ”I rank corruption as the number one issue in the country,” said Rizk Khoury, president of insurance company Cumberland. “If you want to do anything in Lebanon, you find that there is corruption.”

In the insurance industry, the most obvious cost is legal cost, he said. “When you are in the business of liabilities and there is corruption, the legal costs go up.”

To Salameh, corruption would rank definitely among the top five problems in Lebanon, although he also has no information on the costs of corruption to the nation at his disposal. In his corporate role as manager of the Saradar real estate investment company Eagle 1, he found it imperative to shape the company activities to be distanced from corruption, he said. “Real estate development is prone to corruption, because it is non-transparent. In real estate, corruption poses a problem directly proportional to the degree of interaction between private and public sector,” he said. “But in a real estate ownership situation where existing real estate is bought and managed by a fund, it is easy to minimize the impact of corruption by maximizing the decree of transparency.” Roger Dib, director of consulting firm Near East Consulting Group, took the view that the battle against corruption is a major political fight. The problem of encountering corruption mostly arises for companies that deal with the government in big projects, he said. “The cost to the economy is definite, through higher prices, delays in some projects, and the lack of transparency.”

His work did not involve the type of large projects where corruption becomes a major factor, Dib said, but noted that international consulting firms interested in joining up with NECG for a bid offer regularly ask as their first question “is this an open and transparent bid?” Corruption incurs a big cost because it deters foreign direct investment but might not be the top element of detraction, Dib added. “Frankly, I think the higher cost to the economy is the over-centralization of all decisions in an old-fashioned decision making process.”

Nonetheless, according to Salameh: “Investments want transparency. If it doesn’t encounter transparency, investment shies away. At the same time, the lack of transparency breeds corruption. Both things are related, the need to increase transparency and the need to reduce corruption.” He paused. “We in Lebanon cannot afford corruption.”

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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