Winning the war on corruption and incompetence

Published 3rd March 2011

Insight from Christopher Gasson, GWI publisher

Will the new governments in North Africa continue to turn against private sector participation as they move to root out corruption and incompetence in government? Oxford academic Walter Armbrust, writing for the Arab Studies Institute (in a comment piece reproduced on aljazeera.com), blames “neo-liberal economics” for the billion dollar fortunes accumulated by the ruling families of Egypt and Tunisia. “They did not necessarily steal directly from the treasury. Rather they were enriched through a conflation of politics and business under the guise of privatization,” he writes.

Although Armbrust is right to point out that Mubarak and co. did not necessarily fill their pockets directly from the government coffers, and that it was their business interests and relationships which made them rich, it is an absolute travesty to suggest that privatisation is the root of the problem.

There seems to be a slack assumption across much of academia that the private sector only comes into contact with government if there is privatisation. Somehow they think government remains more pure and separated from the temptations of private business if everything remains under government control. In fact, the reverse is true. The greater the government control of the economy, the more private businesses come up against government as they go about their daily affairs. That is when the scope for corruption becomes enormous.

Privatisation in the water industry in the MENA region has dramatically improved the transparency of the sector. With a privately financed BOT (build-operate-transfer) desalination plant, the transparency is absolutely brutal. The whole procurement package – the engineering, construction, equipment supply, project management, and the financing – becomes focused on one number: the water price, which is pulled out of an envelope and read out in public. The developers who put the package together know that they have to optimise every aspect of their bid to get the lowest price which is sustainable for the length of the project. They can’t allow their staff to accept back-handers for over-priced or poor quality supplies, because it will lose them the bid. Nor can the government client take a bribe to accept an overpriced bid, because the numbers in the envelopes are difficult to ignore.

If you want to be corrupt in the water sector, the best way of doing it is to work out who is going to pay the best bribes first, then package a project into smaller parts so these favoured companies all have a piece of the action and all pay you for it. Then announce a tender with a deadline no more than two weeks after the publication of the request for proposals. This should ensure that no one apart from your preferred bidders come up with offers. If any outsider is able to whip together a bid in double-quick time, you then use non-specific “quality” criteria to dismiss it. When the project inevitably fails to perform two years down the line, rig another tender to fix it. The money-go-round continues as long as the system remains under corrupt government control.

Although it is incorrect to associate the privatisation programmes in North Africa with corruption and incompetence, there is another issue that new governments might consider before pushing ahead with private sector participation. It is the issue of subsidised water. It is all very well having desal plants and wastewater treatment plants procured at the lowest possible cost on the basis of a fantastically efficient BOT tender, but if the tariffs paid by the end-users are not enough to cover the cost of the BOT payments, it will appear as if all the government subsidies are being sucked into the pockets of the private plant developer. The publicly owned networks which lie between the customer and the privately owned plants will seem drained of resources. In the long run, it is bound to result in conflict between the government and the private developers. The solution is to charge a price for water which covers the cost of producing and distributing the commodity. That way, everyone has an interest in maintaining the most efficient service, and the private-public debate becomes an issue of cost-effectiveness, rather than “neo-liberal” politics.