Jul 19th, 2010 by CEO
Bribery and corruption are receiving an unexpectedly high degree of attention at present. The relevance of aid to fostering or solving the problem is getting some attention. I hope to use my own experience to illustrate the damage corruption does to countries like Kenya and how serious the problem is there; how the problem carries ramifications for us in Britain, for our development assistance and trade policies, anti-corruption and money-laundering regimes; and whether the tide might be turning.
My concern this morning is to try to highlight the costs of corruption to developing countries. And I take Kenya as my principal case study because that’s where I was stimulated by the availability of evidence to get involved in campaigning on the subject. It leads us not only to the responsibility of poor countries but to the responsibility of donors – governments and individuals – who give aid, or control the International Financial Institutions which make loans, for perpetuating corruption and the poverty of people we want to help.
Actions are needed here if we are to help development, encourage fair markets for clean trade, not waste resources, and not make a dishonest living from laundering in a rich country the proceeds of corruption in a poor one.
I was British High Commissioner to Kenya between 2001 and 2005. Kenya was my last, as it had been my first post in 1970. I had also been HC in Uganda (non-resident in Rwanda and Burundi) in the 1990s. That gives you my context, so to speak.
Kenya, in 1970, was one of Africa’s best-run countries.
Ugandans had black Africa’s best university and its best educated elite; together with traditional political structures of unusual sophistication. Its economy was larger than Malaysia’s.
These recollections came back when I heard in April that Daimler-Benz had been fined $185 million in the US after admitting bribery of tens of millions of dollars in 22 countries between 1998-2008. That timescale leaves a lot of earlier business unexamined. But I am sure that the name of a new tribe was first identified in Uganda in the ‘60s and spread round the continent and indeed the world: the Wabenzi (’people of the Mercedes Benz’). Mercedes Benz cars have transported a lot of thoroughly evil people in the last fifty years, feeding their sense of self-esteem and of entitlement. Bad people used other cars, too. But the symbol of supreme power, personal wealth and unconstrained showing off was the Mercedes, and specially the 600. Their marketing and purchase has often been dubious. A relatively minor misdemeanour among General Samuel Doe’s many and great ones in Liberia was his purchase of sixty $60,000 dollar Mercedes. It is not melodramatic to say that part of Daimler Benz’s payback has been in blood.
In Kenya, Uganda and Rwanda, development went backwards in political and economic terms in the 40 to 45 years between my first acquaintance with the region and my more substantial engagements with them all later. There are many reasons for that relative failure but in all three cases governance loomed large. And corruption was a major element.
Along with dispossession and want, came the corruption of institutions. And with the denial of services to citizens came a pervasive sense of unfairness, even in people whose expectations were low and whose tolerances were high.
For excellent illustrations of how societies can fall apart under such pressures read the FT’s Michael Peel’s “A swamp full of dollars” about Nigeria; and Tim Butcher’s “Blood River”. In the summer Penguin will publish a book by Greg Mills called “Why Africa is Poor”.
All the countries to which I was accredited from Kampala from 1993-7 had been or were failing states. Kenya, which had not failed, was a back marker on both political and economic reform, and went on and off track on a biannual basis. But it had, as it continues to have, the largest economy in the region, the best-educated and purposeful people.
Ringing in my ears still is a World Bank report, now 13 years old. But I don’t think its conclusion has been improved upon. I quoted it often: it showed a clear negative correlation between the level of corruption, as perceived by business people, and both investment and economic growth. Where corruption was highest and the predictability of payments and outcomes lowest, investment averaged 12.3% of GDP; where corruption was low and predictability high, the ratio was 28.5%. The same research showed that countries which reduced corruption and improved their rule of law could increase their national income by four times over a long run and reduce child mortality by as much as 75%.
The other negative impacts of corruption included aggravating income inequality and poverty; lowering investment and retarding growth; reducing the volume and effectiveness of development assistance; and discouraging domestic saving. Bent procurement processes led to low quality infrastructure; increasing and unpredictable transaction costs; and, of course, the deviations involved in selecting national priorities not on the basis of an Economic Recovery Strategy but on the basis of what pays well in hidden kickbacks which can be concealed somehow in the national budget.
A universal example familiar to travellers on Africa’s roads is the problem of bad maintenance and dangerously overloaded vehicles. An investigation by the Nation of Nairobi in April 2007 found that transport companies offered huge bribes to officials to ignore weight restrictions on vehicles. The result was more accidents and heavy damage to the roads themselves. An EU consultancy reported that a lorry carrying double the legal load causes 60 times more damage than one carrying a legal load. 35% overloading reduces a road’s life by 50%.
By roads we find our way to ethnic politics. Roads are the largest single item in the Kenyan budget (15% between 1965 – 99). A study presented at a World Bank conference in January 2009 (‘The political economy of roads in Kenya’) examined the question of whether leaders favoured their own in allocating road investments. It found that around one-third of the construction of paved roads could be explained by political-economy factors: the President’s own home district got five times as many paved roads as other co-ethnic districts. This week, the Financial Times reported that Nigeria had cancelled a $450m contract for a new runway at Abuja, because there were suspicions that the procurement process might not be above suspicion. And, by the way, some runway!
Politicians’ promises are widely distrusted more or less everywhere. Governments find inconvenient things which in opposition they pledged to do.
The new Kenyan government elected in 2002 set up an elaborate anti-corruption mechanism. And then it tried to neuter it. It counted without that rare phenomenon, a person who believed that his job description meant what it said and declined to be subverted, browbeaten or deflected from doing it.
The government also set up an inquiry into Kenya’s largest-ever single scam – Goldenberg. This scheme involved the payment of export subsidies on gold and diamond exports. Gold is a commodity of which Kenya has little –but certainly more than diamonds, of which it has none. This scam and these payments cost the country up to one billion dollars over a period of seven years or so – or 10% of its GDP. The inquiry identified a number of people whose role needed investigation. None of them has been investigated, including the then Vice-President and Minister of Finance. Indeed, the Constitutional Court gave him lifelong immunity in 2006 from further investigation.
This is a striking example of the prevailing culture of impunity. Within it people can misbehave with astonishing confidence that they won’t be caught or, if they are, won’t be brought to book or even questioned.
But the new government, full of its reforming zeal, was to be found incubating its own scandals. These comprised continuing fraudulent deals it had inherited, and signing up to new ones. They acquired the generic name Anglo-Leasing after a brass plate in Liverpool which purported to be the headquarters of that “household name”, Anglo-Leasing and Finance Limited.
And that brings us to another important part of the culture: the durability and continuity of the corrupters, who cope easily with changes of government and personnel.
This saga is well told in Michela Wrong’s book “It’s our turn to eat”. This phrase was the one used by ministers – his colleagues in government, and supposedly his allies in the attack on corruption – to try to seduce Githongo away from his duty as the President’s adviser on corruption to join them in their ethnic conspiracy to rob the treasury blind.
What got me involved was the realisation that a lot of evidence was in fact available, but that the government would make strenuous efforts to conceal it. The corrupt also argued that the crime of stealing on this scale was victimless; no-one in particular suffered – ‘whose goat have you eaten?’
I realised that Kenyan citizens, its businessmen and foreign businessmen, bankers, investors and development aid givers surely all had a common interest in cutting out graft. They were the victims. It was all our goat. Corruption put up all transaction costs. It denied services and infrastructure which Kenya could have afforded, because the money was diverted. It made donors complicit in providing through our aid budgets compensation for funds displaced from the treasury through theft. Equipment was ordered not because it was needed, nor because, if needed, it was the best at the price. It was ordered because it offered the highest rent to the corrupt in government. The challenge was whether the BHC could get that point and his right to make it supported by the public against their corrupt rulers. The Nation’s cartoonist, GADO, drew a famous cartoon describing the objections some took to my speech in which I said a corrupt government appeared to think we would not notice or mind if their gluttony in stealing public funds caused them to vomit all over our shoes. The shoes of all of us, incidentally, not just donors’; and including the feet of those without shoes. Not just members of the Kenyan elite, but in Whitehall, too, some found my campaign discomfiting. On the whole, many more others reacted positively to it.
What emerged from this campaign were some disturbing, repeated themes:
1. The existence of several different forms of corruption. Besides the familiar, financial form, were nepotism, abuse of authority and the corrosion of institutions. These characteristics undermine meritocracy, trust between colleagues and within and between businesses. They distort the flow of credit. They corrode confidence in the law’s capacity to offer fair and reasonably prompt legal recourse. They corrupt public security. They call into doubt a state’s credibility as a reliable international partner: for example, land-grabbing in the Mau forest places Kenya in breach of international agreements on environmental protection to which it is a party, as well as of its own domestic law.
2. The multiplication of levels of graft: the grand corruption of looting on the Goldenberg or Anglo-Leasing scale marches with petty corruption. This is the daily form of bribe-taking which get in the citizens’ hair. It adds insult to injury.
3. What the World Bank, in a report just out, titled ‘Silent and Lethal’, calls ‘quiet corruption’. This directly affects poor people by denying them services they are entitled to expect. Examples: in Uganda, teachers absent 27% of the time; in Chad, only 1% of aid given for health is actually delivered at the grass roots.
4. Perhaps of greater direct interest to you are the Bank’s findings about perceived corruption in 35 sub-Saharan African countries under three heads:
- The percentage of firms expected to make informal payments to get things done: Kenya was fifth worst at 79.22%(above Mauritania, Burkina Faso, Congo and Guinea) and the worst Anglophone country
- Percentage expected to make gifts to get an operating licence: Kenya was eleventh worst at 28.75%; and of Anglophone countries only Nigeria and Liberia were worse.
- Percentage of firms expected to make gifts to get government contracts: Kenya was ninth worst at 71.2%; and the worst Anglophone state
5. Politics is itself graft-dependent. Ethnic politics are practised. Their major purpose is benefit to self, then family and clan, then tribe and district; and finally – if anything is left – the nation. The cost of fighting elections leads to candidates incurring debts and seeking backing in return for promises of future repayment in kind. These debts reinforce the desire to enjoy the fruits of office as quickly as possible, lest they are taken away at the next election. Ethnic politics and democratic elections are themselves drivers of corruption, therefore.
6. The sums involved in grand corruption are huge. I was cautious not to quote numbers unless I could support them confidently; and I tried to translate their cost from the meaningless rows of ‘zeroes’ into quantities of things people wanted. The sum I first cautiously mentioned in 2004 was later shown to be a fraction of the true cost of Anglo-Leasing. But I calculated that it alone could have -
- Covered twice over the government’s budget deficit.
- Or perhaps enabled it to cope with its citizens’ need for famine relief.
- Or built 15,000 classrooms, meeting half the Ministry of Education’s requirement.
- Or bought 1,000 Mercedes S350s (for those wabenzi!)
- At the lower end of the scale of opportunity costs, just two- fifteenths of the sum – Shs 2 billion – would buy 10 million double size treated bed nets: their availability would save 130,000 child lives lost to malaria.
- The same sum equalled the pre-tax profit made the previous year by Kenya Airways – the Pride of Africa; or just under twice the tax (Shs 1.12 billion) paid by one its most successful exporters; or ten times the social expenditure of another very successful company.
- It would have been enough to buy the vaccines to immunise 43,000,000 children. Or enough to feed a hot lunch to 1,500,000 school children for a year.
7. The Kenyan Public Accounts Committee reported in 2006 that the cost of the 18 Anglo-Leasing dodgy contracts amounted to a touch under 400 million dollars plus a touch over 300 million Euros. I reckoned the cost of petty corruption might be $140 million in 2004. A year later I revised this to $388 million, based on Transparency International’s bribery report. The figures are probably underestimates. The real significance of petty corruption is that it is an extra and illegal tax levied for the performance of a service – or the withholding or foregoing of one – which ought to be performed. And it is paid by ordinary people. Bribery cost a month’s average wages for every household. It offends. In a society of growing inequality it makes the citizen’s life intolerable and aggravates a sense of unfairness.
8. The devices used to extract public funding for nothing were breathtakingly cheeky, because people believed they would not be found out. The old familiar names of past scams cropped up again, like the people who supplied jeeps from India for the police, which didn’t work. One of my collaborators and I wrote a pastiche of T S Eliot’s Hidden Paw, Macavity the Mystery Master Criminal Cat, about these big corrupters. The Public Accounts Committee later mentioned their names, as I could not, back then in 2004/5. A sharp-eyed friend in Nairobi, who remembered the pastiche of ‘Macavity’ five years ago, sent me a clipping last month showing one of the references in the poem going from strength to strength. Another reference in the poem is in the news as a star convict in the just-concluded Union Carbide trials in India. The real villain in that piece is still at large. With luck, the media – and cartoonists like GADO – keep reminding us of these less savoury associations of the rich and famous. Each time their PR departments put out some laudatory statement about their business success or charitable good works, someone will remind us that their reputations have a dubious side.
But such deliveries of goods not fit for purpose, or even non-existent, over-invoiced and involving payoffs up and down the chain are not funny. The police, for example, couldn’t get to crimes because their vehicles didn’t run. And if they did, they had no fuel in the tank.
I thought of the ship again the other day when the Nation of Nairobi reported that the Kenyan government was locked in negotiations with Astilleros Gondan and Euromarine Industries about payment for that ship. The Nation said the contract awarded back then was for nearly 52 million Euros. That will be some negotiation as the government tries to disentangle itself from the deal. The same report incidentally asked questions about eight Chinese-built helicopters delivered in January but still to make their maiden flights. Clearly, there are good journalists following through on businesses the government would prefer not to be publicised.
Again, the Financial Times reported the other day police investigations of companies here producing useless bomb-detection kits and flogging them to place like Iraq and Afghanistan and elsewhere, where their deficiencies could cause danger or death. If fraud is proven I hope none of the kits were sold in Kenya: one of the good things Britain has done in recent years is helped in training Kenyan peacekeepers in the dangerous and noble art of bomb-disposal.
The lethal characteristic of all this is that government procurement is in the end driven by the old networks of corruption, not by what is needed or works best.
Two things emerge from the stories above. Apart from proper parliamentary scrutiny, an alert media is essential for follow-through. The good thing about Kenya’s is that it is pretty good and independent. The Nairobi Nation’s cartoonist, GADO (Godfrey Mwampembwa, a Tanzanian) is remarkable for creating and sustaining a recognisable family of corrupt animals over six years (so far).
The other point is that security and defence budgets are good places to look for corruption, and people are now doing so. African countries try to cover defence budgets in a blanket of secrecy. The whole sector comes under the President’s direct authority in Kenya. According to SIPRI, Kenya’s was the third largest defence equipment budget in Africa last year, after S Africa and Angola, at Shs 45 billion (about $580 million at current exchange rates): there is a lot of room for loose accounting in there. Let’s hope the kit is fit for purpose.
The Office of the President is also the repository of major funds for such global campaigns as malaria, tuberculosis and AIDs, and for disaster relief. Enough said. One of Ugandan President Museveni’s former ministers and his former head of intelligence found himself in court a few years back charged with abuse of office, theft and embezzlement of about $500,000 from funds intended for immunisation.
In 2004, the day after I made my vomit speech, President Kibaki launched an appeal for famine relief. A journalist unkindly asked him whether, if his government was not so corrupt, it could not have fed its own hungry people without the humiliation of handing round the begging bowl to donors.
The story is repeated every few years: as famine looms, a scandal breaks over speculation in the country’s maize reserve followed by an emergency in which the pilfering of that valuable granary becomes a clear cause of death and malnutrition.
There is a long way to go, certainly, but the evidence is that the assumptions underlying a culture of impunity and forgiveness – may be changing.
Following the Anglo-Leasing revelations, audits and new procurement rules were established for defence. Some civil servants and ministers were suspended. The two most significant ministers involved were dropped by Kibaki and then, in the elections of 2007, by their constituents. Between 20 – 30 leading Kenyans are now banned from this country.
The point is that bribery is becoming riskier, even in places where the environment still favours corrupt practices. In April, in Afghanistan, a British security manager was found guilty of bribery, fined and imprisoned for two years. He might have expected or assumed kinder – perhaps fairer – treatment from the courts of a country we are so heavily engaged in trying to help. [*editor's note: He was later freed after an ordeal few of us would like to endure]
But the Kenyan ruling elite still have a large joint interest in sustaining the system which they hope will benefit them all in turn.
In a country whose governance is as rotten as Kenya’s, the domestic or foreign investor or businessman must move with extreme care. Trust and confidence are scarce. The law may be no protection.
The risks of discovery and pursuit are growing. Their ramifications may be unexpectedly extensive. The De Puy judgement in April here against Robert Dougall was the first jailing of a UK executive for bribery. It damaged Johnson and Johnson, the parent company. It showed the Greeks – the customers for their products – they were overcharged twice for medical equipment. It also revealed tax evasion by Greek doctors. These aspects helped fuel Greek public anger in the recent meltdown of their economy.
The major donors – agencies and countries – are getting slightly less squeamish about addressing the corruption question as part of governance. DfID recently announced that their entire budget for support of education in Kenya would be diverted away from government, following the Kenyans’ failure satisfactorily to resolve the loss of under £1 million of British aid money last year.
The first successful prosecution of a British company – Mabey and Johnson – for bribery overseas, in Iraq, Ghana and Jamaica – was in September last year.
BAe Systems were prepared to pay a huge sum in plea bargains with the US Department of Justice – and a much smaller one to our own SFO – in respect of their own bad business practices in a number of contracts over the years. The size of the fine showed how keen they were to avoid further scrutiny of their business practices. But the deal will not quickly or entirely expunge the whiff of dirty dealing.
Our own UK Bribery Act 2010 – which became law just before the election and will be enforced from October – will attempt to put right the poor record of inaction against bribery by British companies overseas, that earned us rebukes from the Organisation for Economic Co-operation and Development (OECD). [*editor's note: The date of implementation has been put back six months, to April 2011, to follow a previously unscheduled consultation exercise]
The risk of damage to reputation is a deterrent, even or especially to those believed to be involved in the most serious cases of corruption. We should note the unexpected corollary of OECD’s criticism in 2008, which was that foreign firms would have to be extra careful in dealing with British companies because of the fear that our weak anti-bribery regulation might spread a contagion of corruption to business partners.
Finally, the costs to African countries of illicit financial outflows are mind-bending, probably making Africa a net creditor, contrary to the notion of debt relief campaigners. Illegal outflows outstrip legal financial outflows. A report in March ‘Illicit Financial Outflows from Africa: Hidden Resource for Development‘ by a body called Global Financial Integrity (GFI) found that in Africa, in the last 39 years up to 2008, the total value of all such illicit outflows was perhaps $1.8 trillion. They grew at an average 11.9% per annum over the period.
The figures for sub-Saharan Africa far exceed Africa’s external debt: if that debt had been paid off, there would still have been at least $600 billion left over for development.
The Report says:
“This massive flow of illicit money out of Africa is facilitated by a global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mis-pricing, and money laundering techniques. The impact of this structure and the funds it shifts out of Africa is staggering……… It has its greatest impact on those at the bottom of income scales in their countries, removing resources that could otherwise be used for poverty alleviation and economic growth.”
It is unlikely that Africa’s governance will cure itself of corruption unless its rich donor partners clean up their own act.
Ms Ngozi Okonjo-Iweala, a former Nigerian Finance Minister who is now heading a World Bank-United Nations joint project on recovering looted state assets, called the other day for 4 G20 back markers – Germany, India, Japan and Saudi Arabia – to back the UN Convention Against Corruption as part of a wider crackdown on looted money.
Part of our effort must be to tidy up the shadowy bits of the global financial system; part of it is to be more rigorous about the financial management and probity of governments we give money to, through our taxes and our NGOs. More can mean worse, and less for the poor people we say we want to benefit. I hope the new International Development Secretary and his Treasury colleagues will think about that; and about the oddity of aiming to spend more on assistance until we can be confident we can administer what we spend now to the standards demanded of British public expenditure in other sectors.
By Edward Clay KCMG, lately British High Commissioner to the Republic of Kenya
Delivered first on Friday, 11 June 2010 as a Talk in the Old Library at Lloyds, the Insurance market, London, England
[slightly abridged and edited by CEO]