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Business in Partnership Against Corruption

Miami, Tuesday, May 20, 2008

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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?
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Our world is …
… out of balance

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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 Developing Countries Developed Countries 5 billion 1 billion 7 billion 1 billion 2025 8 billion 1 billion 2050

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Gender Distribution

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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 Page 6

Data - Malnutrition
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.

Source pictures: GAIN Website
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Diagram - Inequality

60 50 40 30 20 10 0 LAC Asia 1970s
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OECD 1980s 1990s

Eastern Europe

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 Page 9

Financial Flows to Developing Countries

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Data - Inequality
 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.

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Overview
ru D pt ile io m n m a

C or

Corruption Pressures

Anti Corruption Solutions

Government Companies

Civil society

 Corruption has negative impacts on governments, companies, civil societies, economies.  Despite costs, some individuals/groups benefit from corruption. Part I
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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? Part II

 Collective action can help to unlock corruption dilemma and create level playing field.  Collective action creates incentives to avoid corruption. Part III

PART I

Map of corruption
According to World Bank Institute estimates, …… which is nearly twice the gross the total volume of bribes paid annually is US$ domestic product (GDP) of Africa. 1 trillion

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Private sector side of corruption
Complex & changing laws & regulations
Reduced competition, efficiency & Innovation

Lower investment Lower employment

Lack of transparency and accountability

Mistrust b/w & within sectors

Cost of Corruption

Loss of reputation

Weak enforcement of laws and regulations

Low public sector wages
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Resource misallocations

Higher costs of doing business

Lack of competition

Corruption as a constraint to the private sector
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Infrastructure Bureaucracy

Firms reporting constraints among top three (percent)

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Corruption Tax regulations

40

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“Corruption adds as much as 25% to the cost of public procurement" (UNGC)

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

0 East Asia East Asia South Asia SubTransition Latin NICs Developing Saharan America Source: Current Survey. The question posed to the firm was : “Select Among 14 constraints the five most Countries problematic factor for doing business in your country OECD

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Private sector NOT just a victim, but also source of corruption
Elite Capture, Political Corruption and Inequality of Influence
View of the Firm, Percentile Ranks, Higher is better

best

100 90 80 70 60 50 40 30 20

Elite Capture (trough Bribes

Undue Political Influence

worse

10 0

OECD

East Asia NICs Sub-Saharan Africa

New EU Accessed

Latin America

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PART II

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.

High risk environment
They fear that they cannot win projects on the merits of their bids alone and thus engage in corruption, thereby contributing to its spread.

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

Few incentives to fight corruption

In high risk environment:  How to ensure that partners and competitors are ethical?

Lack of cooperation between stakeholders

 How to change culture of doing business?
No credible enforcement

Limited resources to counter corruption

 How to get competitors and stakeholders on board?

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PART III

There are three main steps for companies to fight corruption
Each company individually Collective
Business environment free of corruption

Collective External Internal 1. 2. Assess risks Implement anticorruption 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

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In high risk environments internal and external responses alone may not unlock the corruption dilemma
Business environment free of corruption

Collective External Internal

Companies worry about corrupt competitors and fear being at competitive disadvantage  How to ensure that partners and competitors are ethical?  How to change culture of doing business?  How to get competitors and stakeholders on board?
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Unlocking the corruption dilemma

Collective action...

Central principles of collective action are to:

… 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.

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Key characteristic of Collective Action is to involve various stakeholders – different types of Collective Action exist
Different types of Collective Action Primary stakeholders of Collective Action
Integrity pact  Formal, written contract between customer and bidding companies  Bidding and implementation processes monitored by external monitor  Sanctions may apply in case of infringements Certifying business coalition
Government

Companies

Project / transaction based agreement

Anti-corruption declaration  All stakeholders are asked to sign declaration on anti-corruption principles  Public commitment leads to enforcement 'by honor'

Collective Action

Civil society

Principle-based initiative  Ethical principles bind signatories to not engage in corruption in the daily business  Public commitment leads to enforcement 'by honor'

 Compliance-related Longprerequisites for membership term Adoption of membership initiative requirements checked by external audits  Members get certified or will be excluded

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XXXX ProjectName MM/YY – FileName.ppt

All stakeholders can benefit from anti-corruption Collective Action
Benefits of anti-corruption Collective Action from different stakeholders' perspective
Bidding companies
 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

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

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 anticorruption efforts

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1%

Collective Action can be successful!
Examples of existing collective action initiatives
Integrity pact Anti-corruption declaration Project / transaction based agreement

Code of pharmaceuti cal Mexico suburban train marketing practices Berlin Frankfurt airport waste incinerator EMB Bavarian construction industry
Collective Action

Business Ethics Pact Paraguay

Business pact for Integrity and against corruption China Brazil business leaders forum Principle-based initiative

Long-term initiative
Business coalition
Company A Organization A Independent facilitator Company C

Certifying business coalition

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Results of selected collective action initiatives

BERLIN AIRPORT

PACI

IFPMA

EMB

 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

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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

Collective Action is difficult, it can fail. Common challenges include:

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

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

Find the right approach for your situation

Follow detailed process steps

Benefit from various real life examples and templates

Integrity Pact / Anti-corruption declaration Principle-based initiative
Examples
Integrity Pact template defence industry

Certifying busin
Integrity Pact Berlin airport

Four Integrit Decision tree 1 helps to design the appr  Classification and definition  Process steps  Contract templates 2.1 How to get started? be a have collective actions and of Collective Action  Highlighted topics  Profiles of initiatives to
ONGC Integrity Pact
IP Ecuador Hydro electric

 Decision trees

Decision tree 1
Basis

issues to consider (e.g. anti-trust)

 Contact list

Initiate business coalition (1/2) Pact contr Integrity
1
No

 Definition of corruption, dangers of corruption Are tender  Overview on various ways to fight corruption

Yes
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documents already finalized / released?

Is customer willing C fight corruption co
XXXX ProjectName MM/YY – FileName.ppt

Web Portal: www.fightingcorruption.org

Tools for practitioners Lessons learnt Case studies
Country and Industry Profiles

Country and Events and industry profiles workshops
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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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THANK YOU
Djordjija Petkoski World Bank Institute

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