How corruption works in the water industry

Published February 9th, 2017

Cg head

Insight from Christopher Gasson, GWI publisher

With the Odebrecht scandal continuing to spread across Latin America, it is time for the water industry to stop and think a bit about corruption. Odebrecht was a big player in the Brazilian water industry, serving 17 million people with water and wastewater services, and as details of the parent company’s corruption machine come out in the legal process, it raises the question of just how rotten our sector is.

Of course not every company has a “Structured Operations” division that owns a bank in Antigua and has a budget to pay out $788 million in bribes over a 15-year period, but other details are familiar. The reported modus operandi of the company was to bid aggressively on projects, and having secured a contract, to build the profitability of the deal through change orders pushed through with the compliance of the client. I doubt there is a single EPC (engineering, procurement and construction) contractor in the world who hasn’t banked on change orders to deliver their project margins, and in some way attempted to groom the client to accept the increased costs. Whether your definition of grooming is a round of golf or a $50 million deposit in an Antiguan bank determines whether, like Marcelo Odebrecht, you go to jail for 19 years, or else get promoted and enjoy a happy retirement.

There are many shades of corruption in the water industry. In some countries it is absolutely overt. Officials will negotiate the size of the payment they expect in order to award a project directly. I would put countries like Myanmar, India, and Turkmenistan in this category.

In other countries, there is greater concern for the potential consequences of being caught, and the system is more covert: negotiations are indirect, and the inducements may be indirect, too (i.e. campaign contributions or perks for family members). China used to be the global market leader in covert corruption, although it has been losing market share under President Xi Jinping.

The next level down is where most of the relationships between clients and suppliers are technically legal, but these boundaries are overstepped on occasion. Below this third level, what corruption exists is legal, but undesirable. One could describe it as a general cosiness in the supply chain, in which market insiders have established mutually beneficial relationships, and barriers exist (such as local reference requirements or unusual technical standards) to stop outsiders from entering the market.

My guess is that there is not a single country in the world – not even New Zealand and Denmark, which come out top of Transparency International’s corruption perceptions index – which operates a completely transparent, open and competitive market across the board in water.

With this in mind, I have set up a little survey to try to determine which countries have the biggest problem. Please click here in order to take part.

More important than naming and shaming the guilty parties is the question of what can be done about it. To some extent, the broader political system is to blame, but there are also things that we as an industry can do to improve the situation. It is not about just ensuring that projects are awarded to the lowest bidder in an open tender; the Odebrecht example shows how the low bidder can also be the most corrupt. It means designing tenders so that bidders have room to innovate in order to come up with the most cost-effective solution that achieves the client’s objectives, while ensuring that the risks associated with project delivery are appropriately shared between the two parties. Contracting models such as America’s design-bid-build model and India’s highly specified EPC contracts are too prescriptive, creating great opportunities for change orders and unhealthy relationships between suppliers and the engineers responsible for specifications. On the other hand, Brazil’s build-operate-transfer contracts appear to have been too vague, enabling Odebrecht to renegotiate prices dramatically because clients were not specific enough about the deliverables. I’d be interested to read your views on the causes of corruption in the survey, too. If you take part and leave your e-mail address, I'll send you a copy of the results. Otherwise, await the February issue of GWI for our Transparency Index.