The Construction Industry and the Call for Concerted Action
By Júlio César Bueno, Pinheiro Neto Advogados
In this article, Júlio César Bueno explores the issue of corruption throughout the international construction industry. He highlights not only the current problems that the industry faces, but also the way in which it can progress and move towards a future of transparency and good governance.
Studies by Transparency International, the Organisation for Economic Co-operation and Development (OECD) and the American Society of Civil Engineers highlighted construction as one of the sectors most prone to corruption.
Corruption takes many forms with differing effects and its relentless force comes from its symbiotic relationship with the government and public officials; the amount of funds involved; the complexity of the projects; the lack of controls; and a culture that is ingrained in the practices of companies and their employees. The Construction Sector Transparency Initiative (CoST) estimates that “upwards of $4 trillion annually is lost through mismanagement, inefficiency, and corruption in public infrastructure – on average 10 to 30 percent of a project’s value”.
The Call for Change
This problem is not specific to any country. As stated by Kofi Annan, the former United Nations secretary general, when launching the UN Convention Against Corruption (UNCAC), “Corruption is a key element in economic underperformance and a major obstacle to poverty alleviation and development... This evil phenomenon is found in all countries – big and small, rich and poor – but it is in the developing world that its effects are most destructive.”
Some statistics may surprise us. According to the National Business Ethics Survey, “When compared to the US national averages, employees in the US construction industry indicated that far more feel pressure to compromise standards (18 per cent), they witness more misconduct (53 per cent), and are significantly more likely to experience retaliation after reporting said misconduct (37 per cent).” Also, the key finding of the 2014 survey from the Chartered Institute of Building indicates that 49 per cent of respondents believe corruption is common within the UK construction industry.
But the construction industry now is at the epicentre of the world’s fight against corruption. In an ever-growing number of countries, the industry is under close scrutiny – and business ethics are non-negotiable. The concept of “business as usual” will soon come to an end; society’s pressure for change is increasingly high.
Three main factors have forced companies and public officials to rethink their practices and conducts worldwide: first, the adoption of anti-corruption laws; second, the increase of signatory countries that have adopted the UNCAC; and third, judiciary moves with devastating effects (eg, the Mani Pulite investigation in Italy, the anti-corruption campaign in China and the Lava Jato investigation in Brazil).
Recent Lessons from Brazil
It seems that 2015 might pass into history as the year Brazil had an unprecedented opportunity to root out the culture of corruption ingrained in the country. Public opinion, political pressure and the media are helping push these factors forward.
Brazil has been facing a special situation that involves, first, a political crisis looming ahead, weakening the executive branch and having Congress move to opposition as a defence strategy; second, members of society playing a prominent role, instigating a wave of street demonstrations to apply pressure; and third, a shift in power towards a wide array of government institutions, including first-instance judges, the Federal Budget Oversight Board, the Federal Public Prosecutor Office and the federal police – all of which are subject to less extraneous political controls.
The Lava Jato investigation may not have ignited this process, but it’s surely given it a boost. As in Italy and China, the situation in Brazil is one of unprecedented magnitude, hence the difficulty in predicting how it will develop. Also, the progress of the Lava Jato investigations shifts and turns are beyond control, meaning that its effects are uncertain and tend to escalate as competition between government institutions grows and conflicts between public and private players intensify.
Pushing the Construction Industry Forward
Notwithstanding any resistance of the construction industry, new anti-corruption rules will be created or made stricter in response to the social pressures that arise. Thus follows a central corollary of public policy: in any fraught scenario, inaction is the worst reaction. Two principles should guide the actions of the construction industry: greater transparency in the construction industry’s relationships with the government and the public sector; and second, better governance of public investments, or those financed by public funds, given the need to improve their quality and the impact on the population’s well-being.
The challenge for transparency
The commitment to transparency is a key element to support fundamental principles of the public procurement system, especially competition and integrity. This is in accordance with article 5 of the UNCAC that states: “Each state party shall, in accordance with the fundamental principles of its legal system, develop and implement or maintain effective, coordinated anti-corruption policies that promote the participation of society and reflect the principles of the rule of law, proper management of public affairs and public property, integrity, transparency and accountability.” The process for awarding contracts must be open, clear and defensible and all parties must not engage in collusion, hidden commissions and other anti-competitive behaviour. The drive for transparency must therefore be tempered by making transparent what sufficiently enables corruption control. If the level of transparency is adequately defined, the benefits will outweigh the cost, especially when comparing the initial cost of transparency with the potential negative consequences of corruption on the use of public funds related to procurement and possibly on public trust.
The commitment to better governance should be assumed not only by the private sector, but also by the public sector, to ensure that, first, planning investments and allocation of funds are consistent with the aim to provide high-quality services to the population and a competitive infrastructure to the production sector.
No construction work should take place unless the relevant parties have carried out economic, geotechnical and financial feasibility studies, based on a set of plans (from concept to execution), thus ensuring adequate and cost-effective funding sorely lacking in the current system. Good governance of investments must also ensure that the work is performed in accordance with the highest technical standards, while also reducing costs over the life cycle of the infrastructure equipment or asset.
Putting Principles into Practice
Changing the public procurement system
An annual procurement planning system by each governement departments should be mandatory so that procurement authorities would be required to review their purchasing processes, and identify improvement goals, targets and milestones that closely link with their business plans, outputs and government objectives. With this process, bids would be publicised so as to inform national and international providers of forthcoming procurement opportunities and public funds are used according to the purposes intended, annual procurement planning might encompass various aspects linked to the attainment of government or department objectives.
Sustainable public procurement should be a concern as an investment process that takes into account the economic, environmental and social impacts of the public’s spending. A government practising sustainable procurement should consider the three aspects of sustainability (economic, social and environmental) to create a more enduring approach to procuring goods and services across the public sector which will contribute positively to the community in which it exists and beyond.
Bids should be preceded by appropriate technical studies and engineering projects up to a satisfactory level for each type of project. With proper studies public officials would be able to prepare a adequate risk assesment and and make the timely adaptions of the project before any major problems arise.
Public and private owners should encourage innovation and alternative solutions by using performance based specifications where appropriate, leading to: increased efficiency in design, tendering, project management and financial management; speedy resolution of complex design and production problems; less rework and a lower-cost finished product; and improved delivery of projects in terms of higher quality outcomes, timely delivery and environmentally responsible buildings or infrastructure.
Public and private owners should also encourage innovation by: allowing an appropriate period for tender response having regard to project complexity and the past experience of tenderers; and considering alternative approaches to delivery of projects, such as joint ventures, alliance contracting, partnering, strategic alliances and the like, where measurable benefits are to be obtained.
The construction industry needs to reinforce its commitment to ethical behaviour and integrity through a global Code of Conduct, to be followed by contractors, suppliers, vendors etc, subject to continuous oversight. The Code of Conduct must be effective as a powerful self-regulation mechanism.
It is essential that the Code of Conduct is construed as a major step towards changing both the culture of corruption in the construction industry and the standards of conduct among all players.
Important entities in the construction sector, and international bodies such as the Society of Construction Law, the Forum on Construction Law of the American Bar Association, the International Bar Association, Transparency International, the Dispute Resolution Board Foundation, the Royal Institution of Chartered Surveyors, the World Bank, the Inter-American Development Bank, the International Chamber of Commerce, OECD, CoST and others, should work together to set up principles and lay down the foundations of a general standard that allows monitoring, educating and reporting on compliance with the expected best practices for the entire construction industry.
There are already good international examples that should be taken into consideration, such as the Global Principles for Countering Corruption of the Partnering Against Corruption Initiative, the ICC Rules on Combating Corruption, the UK Contractor’s Group Code of Business Ethics and Conduct and the Australia Fair Work Building and Construction’s National Code of Practice for the Construction Industry.
Opening up competition between suppliers in the local market
Public and private owners should encourage new competitors into the local markets, including international contractors, designers, architects, engineers and so on. Barriers to entry in the engineering design and service market, including long-standing cartel practices, must be identified and eliminated.
The process of increasing arm’s-length competition, in keeping with universal technical standards and work quality, is based on the premise that companies wishing to operate in a specific country can do so by using domestic and foreign resources, and by taking responsibility for the process. Opening up the market, and creating change in the regulatory framework – especially in the public sector – must happen in tandem with sweeping public procurement system reform. That will also allow local companies to give themselves a boost, while also accessing technical resources and competing with their international peers.
It is time for an important change in the construction industry worldwide. In the words of Victor Hugo, “One can resist the invasion of armies; one cannot resist the invasion of ideas.”
There is no easy solution, no simple conclusion that can be drawn from the increased harshness of judicial cases (as in the Mani Pulite or in Lava Jato investigations) and the effectiveness of recent anti-corruption campaigns. Concerted action is necessary to change the culture and the system, and to restore the construction industry’s credibility as it operates on new terms, in a more open, transparent and competitive market. Let’s hope the time is now.