Bribery and corruption:

Stringent action vital for income growth

by Lioyd f Yapa

The purpose of this artile is to give an indication of the type and level of corruption and of deliberate waste and inefficiency in Sri Lanka (SL), mainly in the public sector, along with the resulting unfavourable effects on the economy and ways of reducing it.

Definition

Demanding and offering bribes to grant or obtain favours have been described as 'rent-seeking'- the term coined by Anne Krueger in 1974 (a better term suggested is 'privilege seeking'). It has also been defined as "depraved exploitation of power for personal gain", nepotism, cronyism or favouritism shown to relatives and friends in granting official appointments and contracts also may fall into this category of corruption.

Types of corruption

Corruption can be divided into two broad categories - petty and grand corruption.

Petty corruption: Petty corruption normally involves relatively small payments where a public official uses his or her position to expedite a routine official transaction or approval on a request or let off a person from an offence. These are very common all over Sri Lanka and apparently is an extension of the traditional habit of giving presents or thaegi/dekum.

Grand corruption: Grand corruption on the other hand is carried out on a large scale. The allegations of grand corruption in the public sector include,

a) road, irrigation and other construction projects funded from the capital budget of the government and the district budgets.

For example, Prof. Amal S Kumarage in an article published in a newspaper recently estimates that the loss on four road building projects involving 185 km on account of award of contracts without competitive bidding amounted to Rs 200,500 million,

b) Various State land grabs and land cultivated by farmers, below market rates like the alleged sale of the British Ceylon Corporation land for Rs. 85 million though it was worth Rs 500 million,

c) purchase of arms, ammunition, equipment and other supplies for the armed forces and the public, such as the oil hedging deal costing Rs 8 billion,

d) some of the investment projects undertaken by other countries, such as the Wikileaks website allegation that Chinese companies had bribed Sri Lankan politicians and officials to win contracts,

e) Customs duties and levies which could be reduced or waived by officials,

f) income taxes which could be evaded by tax payers by bribing officials (example the alleged VAT scams involving over Rs 5 billion,

g) the widespread illicit felling of trees in forest reserves and sand and gem mining without permits, aided and abetted by politicians,

h) the huge losses made by State Owned Enterprises amounting to Rs 107 billion (2012) due to corruption and inefficiency,

i) loans granted without obtaining adequate security, failure to recover debtor balances over long periods and over-payments made by State banks, amounting to Rs 170 billion on the influence of politicians as revealed by the 2011 parliamentary Committee on Public Enterprises (COPE) report and

j) the heavy waste of public funds on various tamashas like the Indian Film Fare Awards Festival revealed by the same COPE report, that may have benefited certain people.

Quantification

(The grand corruption in the private sector could include, a) smuggling, b) money laundering, c) the pyramid style investment schemes, and d) the import and the unregulated use of harmful chemicals in agriculture, (and the alleged collusion between the medical profession, politicians and large multinational companies selling various brands of medical drugs).

The COPE report 2007 found corruption running to Rs 300 billion out of a total government revenue of about Rs 760 billion which was an estimate of 10.2% of the GDP of 2006.

Vasudeva Nanayakkara, MP, had said some time ago that normally 45% of government expenditure is siphoned away in the form of corruption. This is 8.6% of GDP in 2013 ( government expenditure less net lending in 2013 = Rs 1,659 billion, GDP in 2013 = Rs 8,674 billion), almost the same level of public sector corruption of about 9 % of GDP estimated in the previous Sri Lanka Economic Association (SLEA) report titled 'The Impact of Corruption on Poverty and Economic Growth - 2007', that also estimated the resulting decline of economic growth was about 2%.

If Vasudeva's estimate is raised to 55% of government expenditure, as bribery and corruption would have skyrocketed in recent years, the amount siphoned off could rise to 10.5% of GDP in 2013.

However, if,

a) the routine reduction of taxes and levies at the point of import and evasion of income taxes due to bribery by the officials concerned,

b) the various land grabs and the abuse of the environment involving illicit felling of trees in forests aided and abetted by politicians and officials,

c) the bad and unrecovered loans of State banks on account of loans made available to persons with political connections are also added, the estimation of corruption on account of government expenditure and revenue could be much more than 10.5% of GDP in 2013.

This estimate is bound to rise if the repeat costs of infrastructure projects that have failed due to corruption are also added.

This degree of corruption may have prompted Transparency International's public sector Corruption Perceptions Index (2013) to rank SL at 91 (previous year 79) vs. a rank of 5 for Singapore, a rank of 36 for Taiwan, a rank of 52 for Mauritius and a rank of 53 for Malaysia, out of 177 countries.

A limitation peculiar to this particular analysis arises from the absence of specificity in the press reports and COPE revelations. In any case estimates of corruption are made on perceptions. Accurate revelation of corruption is not possible due to the fact most of such instances have not been proved in a court of law.

Negative consequences

Corruption may result in disastrous effects in various areas. Transparency International says: "Most importantly, the heaviest cost is typically not so much in the bribes themselves, but rather in the underlying economic distortions they trigger and in the undermining of institutions of administration and governance." (TI Sourcebook, 2000 p.32).

The political and social instability including the absence of law and order that follows could slow down economic development due to:

a) the inability to attract investments particularly by foreign firms (FDI), investment could also be reduced due to undermining of savings by the poor mostly on account of stealing the government subsidies and taking of bribes by public and private officials,

b) even capital investments by the government in health, education and physical infrastructure and other development activities remaining low (an average of about 6% of GDP during the recent past in SL compared to an average of 9% and 8% of GDP per year in South Korea and Malaysia on education and health alone between 2011-2013),

c) the government budget deficit remaining high on account of which rates of inflation and interest rates and the level of debt could escalate leading to macro economic instability in the country,

d) the disruption of market forces on account of the unhealthy competition induced by the favouritism of some of the business entities could lead to loss of productivity following the diversion of public resources away from much needed or priority projects or areas.

(Total Factor Productivity, a measure of efficiency of investment or production in SL was minus 3.9 in 2012 and minus 8.5 in 2011, whereas in the East Asian countries it was positive) and

e) the unfavourable effect on the profitability of legitimate local producers, driving them to the informal sector resulting in lower tax revenues. The country will, therefore, fail to realise the target of increasing the real incomes of the people especially by increased job creation in the medium to long term.

In addition, corruption could lead to the depletion of natural national wealth, especially water resources and agricultural land, especially due to illicit felling of trees.

In the social sphere, corruption may de-motivate hard-working people as they may feel that they are not incentivised, while those who resort to bribery are 'rewarded'.

It also could lead to increasing inequality of income between the rich and the poor, (the richest 20% of population get 53.5% of income while the poorest 20% get only 4.5% of income. (Household Income and Expenditure Survey, 2012-13, Dept. of Census and Statistics). The resulting poverty could lead to insecurity and civil strife.

Reduction

Reduction of corruption to a minimal level is thus vital for sustained socio-economic growth. How can this be done? There is no doubt that the Sri Lankan constitution has to be amended significantly for this purpose.

These include the separation of powers among the executive, the legislature and the judiciary and the introduction of independent commissions similar to those under the 17th Amendment to prevent absolute power leading to absolute corruption. This will also involve the abolition of the 18th Amendment.

A way of reducing corruption in the public service is to introduce a law to make appointments and promotions on merit alone. This reform should include better pay for public officials as in Singapore, to reduce the temptation to take bribes, while restricting numbers recruited to the minimum necessary.

The management of the loss making State Owned Enterprises could be handed over to public-private partnerships or privatised outright on a new system that could avoid corrupt deals as in the case of previous attempts at privatisation .

The election laws certainly have to be amended to introduce the 'first past the post' system to elect representatives direct to constituencies rather than districts, thus reducing election campaign expenditure incurred by politicians paid for by dubious businesses expecting political favours (leading to 'State Capture') .

Other legal reforms recommended to reduce corruption are the amendment of the laws concerned to make the Bribery Commission independent of the Executive, the Treasury (where resources are concerned) and the Police Dept. (where staff for investigation are concerned) and to make it proactive and act even without a genuine complaint and reform of the Audit Act to enable the Auditor General to report direct to Parliament, so that politicians heading ministries cannot influence him or her.

The introduction of Freedom of Information and a law to give rise to Public Interest Litigation are necessary to enable the members of the public to raise queries on public administration, expenditure and policies.

The Declaration of Assets and Liabilities Law No 1 of 1975 has to have a provision to designate an institution to monitor declarations and take legal action if an official or politician breaks the law.

Above all a permanent parliamentary committee to oversee matters relating to governance should be set up, while enabling the implementation of COPE and Committee on Public Accounts (COPA) recommendations.

There is now a hue and cry for punishing the culprits of corrupt deals in a matter of weeks and months forgetting that the judicial system in the country is notorious for long delays involving many long years with a conviction rate of only 4%.

This could be worse now as the public service has been politicised and ruined in recent years; but this is no excuse for not monitoring the concerned institutions continuously to expedite the cases. Reforming and strengthening the systems, laws, institutions and training the personnel involved may be more important.

This could enable even members of the public to file action in the courts of law against acts of corruption.

Lastly, media institutions have to be freed from political influence and their personnel trained on analysis and reporting instances of corruption more correctly so that they could make the public less apathetic of the repercussions of corruption on their livelihoods.

Children and the youth have to be taught to acquire good values to help them to avoid corrupt ways and learn to work hard to achieve results.

Thus corruption has spread like a cancer in Sri Lanka. No doubt it has to be dealt with drastically by all citizens in the manner described to build a healthy economy for achieving prosperity.