Bribery and corruption: OECD work in Africa

Bribery and corruption are very significant issues at the nexus of the private sector’s role and the achievement of public policy goals in sub-Saharan Africa.

In this slightly longer post, Melissa Khemani, an anti-corruption analyst and legal expert at the OECD in Paris, kindly agreed to respond to questions about some current institutional measures on the issue:

JF - Partnership between members of the OECD and the African Development Bank (AfDB) last year led to a new initiative, the Anti-Bribery and Business Integrity Course of Action for Africa. What are some challenges you think it has or will encounter in terms of uptake and implementation by governments in Africa?

MK – In 2011, the members of the Joint AfDB/OECD Initiative agreed to the Course of Action, which sets out a number of measures countries can undertake to help curb the bribery of public officials in business transactions from both the demand and supply side. This was a major accomplishment and reaffirmed the momentum that is building in this region to tackle this form of corruption.

Of course, the biggest challenge now is to turn the rhetoric into reality, and to implement and enforce these policies effectively. Bribery in business transactions is a complex crime, which is difficult to prevent, detect, investigate and prosecute. It requires a coordinated approach from a cross-section of government agencies and non-governmental stakeholders to fight effectively. It also requires a great deal of technical legal and investigative expertise. Cultivating the political will -- which in turn translates into the resources and priority dedicated to fighting this form of corruption -- is the biggest challenge in any country. The objective behind the Joint Initiative is not only to share the 15 years of the OECD’s expertise and experience in fighting bribery in business transactions through the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention) but to also raise awareness of the economic and social costs of this form of corruption in order to help garner the political will to fight it.

JF – What about on the part of business -- is it partly an issue of awareness-raising, or is there much more to it than that?

MK – Awareness-raising is crucial, not only of the sanctions companies and individuals may face for engaging in bribery, but also for making the ‘business case’ against corruption, especially at this important juncture which is seeing Africa increasingly attract significant foreign investment, and African companies increasingly investing abroad. It is easy to see the short term gain of paying a bribe to obtain a contract. But in the long term, this increases the costs of doing business, and these costs can only be recouped through the delivery of sub-standard products or through higher prices. This is unsustainable for companies in increasingly competitive, globalized markets.

Engaging in bribery also creates business uncertainty, as such behaviour does not necessarily guarantee business to a company; there can always be another company willing to offer a higher bribe to tilt the business in its favour. As a result, bribery may swiftly lead to, in economic terms, a ‘race to the bottom’, where the least desirable and inefficient company may obtain business not on the basis of merit but on the basis of ‘deep pockets’ -- a situation that cannot be sustained over the medium and long term.

Robust awareness-raising also helps set and reinforce the tone of a company’s anti-corruption ethos. All of the companies I have met with which place a very high priority on anti-corruption ethics and compliance have said that one of the most important ways to prevent bribery is to set the ‘tone from the top’ that bribery and corruption is not their way of doing business, it is not in the interests of the company, and employees will be reprimanded for engaging in such conduct. Of course, such awareness-raising must be backed-up by a meaningful anti-bribery compliance infrastructure including, among other things, regular trainings, clear rules on gifts and hospitality, due diligence rules on agents and joint venture partners, and internal whistleblower reporting mechanisms. It is much more than just simply sending out a yearly memo.

JF – There is a lot of talk about the need for a ‘level playing field’ on business integrity regulation. How do you see the role of the OECD in promoting harmonization of standards across OECD members on anti-bribery and corruption in the context of all one hears about the need to compete?

MK – One of the main objectives that underpinned the drafting and signing of the OECD Anti-Bribery Convention in 1997 was to try to ensure a level playing field in international business through international treaty commitments. The idea is that companies should obtain business on the basis of merit and fair competition rather than on having paid bribes. With the OECD Anti-Bribery Convention, 39 of the world’s largest exporting and foreign direct investing countries have enacted and enforce foreign bribery laws.

The rigorous peer review monitoring mechanism attached to the Convention, undertaken by the OECD Working Group on Bribery, plays an important role in ensuring such standards are being equally enforced across member countries. Furthermore, in 2009, the Working Group on Bribery adopted the Good Practice Guidance on Internal Controls, Ethics and Compliance to assist companies prevent and detect foreign bribery. This is the first ever guidance provided to the private sector at the inter-governmental level, and has thus played a very important role in harmonizing minimum standards on anti-bribery business integrity.

JF – The suggestion of those seeing a ‘Beijing consensus’ phenomenon is that increasingly it is / may be state-owned firms we see investing in Africa and its resources. How does this raise problems or possibilities for regulating bribery and corruption?

MK – The OECD Anti-Bribery Convention requires member countries to include state-owned companies within the jurisdictional reach of their foreign bribery laws. As such, these companies should be just as aware of bribery risks and implications as private companies, especially when operating in high risk geographic zones or sectors. I am aware that there are concerns that countries will not enforce such laws against state-owned companies as rigorously. However, the Convention addresses this in part through Article 5, which prohibits considerations of national economic interest to influence enforcement actions, and there have been examples of enforcement actions taken against state-owned companies in member countries of the Convention.

JF – I see talk of a ‘monitoring mechanism’ for the Course of Action. What will happen with that? Indeed, more broadly where do you see the emphasis likely going in terms of the future work of the initiative?

MK – The Initiative has just taken off, and the next step is for the member countries to decide how they wish to implement the Anti-Bribery and Business Integrity Course of Action for Africa. This could take the form of a monitoring system loosely based on the OECD’s peer review mechanism where countries review one another’s efforts to implement the Course of Action and make recommendations. It could also take the form of having certain thematic issues addressed in the Course of Action investigated in more depth, and identify best practices. This is really for the member countries to decide, and it is envisioned to be discussed at their next meeting.

In terms of future work -- again, this is for the member countries to set -- but I would surmise that emphasis will likely be placed on horizontal challenges the countries are confronting; this could include issues concerning anti-bribery enforcement, promotion of anti-bribery corporate ethics and codes of conduct, anti-corruption in national resources extraction, transparency in public procurement, or preventing corruption in development aid-funded contracts, to highlight a few…

[I record my thanks to Melissa, whose responses are reproduced unedited but which do not necessarily represent those of the OECD secretariat, the Working Group, or the joint OECD-AfDB initiative].

This blog will continue to feature occasional interviews. I hope you are enjoying the weekly or fortnightly posts (we’re all saturated in information these days) and feel free to forward the blog to those you think may be interested in it; also, feel free to use the ‘comments’ facility.

Jo

'Public company as public good'

Companies may be becoming more responsive to responsibility issues -- and some are well ahead of regulators. But what does it mean for environmental, social and governance issues if the publicly-listed company (generally more amenable to scrutiny on social performance issues) is in decline relative to other more private corporate forms?

Unveiled around the G8 summit last week, President Obama's food security plan for Africa envisages a leading role for major listed companies such as Unilever and Diageo -- see here. Firms linked to the initiative will 'sign up' to new responsibility guidelines relating to communities' land tenure and access (see my most recent blog post).

However, a leading story in The Economist this week charts as a serious public policy issue the dramatic drop in the numbers of publicly-listed companies (and new offerings) in Western economies as businesspeople choose other vehicles that are not subject to the same disclosure and reporting requirements (May 19, 2012, pp. 12, 24-26).

Would one feel as assured about private sector-led development initiatives if the main players involved were not publicly-listed companies but more opaque private firms?

One premise of (the?) The Economist piece is that over-regulation by authorities of listed companies carries the risk of driving firms underground: they will chose to be fully private and operate behind the comparative 'veil of secrecy' that comes with not being listed, yet still enjoy access to capital alongside listed firms; ('by shining a spotlight on public companies, [regulators] are encouraging businesses to take refuge' in unlisted corporate forms; another result noted is narrowing the options for popular uptake of shares, perhaps making financing and wealth-creation more exclusive and privileged).

One need not agree with all The Economist says about de-regulation; moreover, there are plenty critics out there who would no doubt disagree with the magazine's sub-heading  'Public company as public good' (p. 26; think critics such as Coleman, Korten, Hertz, Glasbeek, Klein). I do not subscribe to much of that criticism -- the corporate form has enabled all manner of social contributions even if it also produced Enron. It can be an instrument of public virtue, it depends on how we use it. There remains a governance gap in reconciling private with public interests -- but more regulation and good regulation are not the same thing. I think The Economist raises an interesting meta-regulatory question: in finding the right balance on regulation for constraining and 'civilising' corporate conduct, a relevant issue is not disincentivising firms from listing if the fear of regulatory burdens favours choosing other corporate forms less amenable to public scrutiny.

These issues are important in the region I cover (sub-Saharan Africa) not only as so much of the capital in-flows and out-flows do not involve listed firms, but also because other than Johannesburg the continent's own principal stock exchanges are still subject to various regulatory question-marks; moreover, as private equity flows into African settings it often seeks an eventual public listing to enable PE investors to exit. As regulation of African and global stock markets evolves, there is scope for selling better to investors how the discipline and diligence fostered by disclosure and reporting rules can be understood as protecting investment (for example from social or political risks) rather than as an inconvenient drag. There is also considerable scope for regulators to consider how to make rule-systems work for public ends not frustrate them.

I mentioned these issues -- including the rise of state-owned companies -- in this blog's very first post, as a foundational theme when analysing the private sector and its public impact or role in the 21st century (here).

Thanks for reading and I invite comments and sharings.

Jo

Hard laws or voluntary guidelines?

Do voluntary guidelines for firms and governments represent regulatory failure or a defensible form of principled pragmatism?


This Thursday -- ahead of the G8 meeting -- President Obama meets four African heads of state on food security issues. Major UN agency the FAO has just adopted voluntary guidelines on the responsible governance of tenure / access rights for resources key to national food security (land, forests and fisheries). Debates on the upsurge in foreign investor interest in African agricultural land range widely between accounts championing a new era of farming productivity (new capital, unlocked potential) and critiques of unscrupulous land grabs (companies displacing communities, biofuels displacing basic foods, etc).


This post dodges these difficult debates to focus on another one: by being voluntary, do such guidelines represent an unjustifiable 'turn to ethics' in efforts to ensure responsible business conduct? Do they represent a retreat from harder, binding legal norms, a defeatism that erects broad voluntary frameworks when what is needed is a treaty with corresponding national-level legislation? The new FAO guidelines, like others of this sort, have followed some years of multi-stakeholder negotiations that have included private sector representatives (see for example here). Do such processes and their outcomes -- as their critics would maintain -- represent a triumph for commercial interests at the expense of the public interest?


The argument against

Critics of corporate voluntarism and self-regulation tend to argue that this approach obscures formal legal accountability and obstructs or displaces the development of binding legal norms; diverts what should be legal issues into merely ethical ones; and makes us feel like we are doing something about the governance gap. The argument is that such guidelines provide illusory accountability while reducing the demand and momentum for change, so that even no regulation is better than the pretence of regulation provided by voluntary guidelines. The FAO guidelines are mainly directed at governments (to provide the basis of national policies and laws) not corporates; however, there is an argument that voluntarism risks undermining efforts to promote accountability by business, and by shifting the onus to corporates such initiatives may deflect responsibility from public authorities while shifting regulatory power to private sector actors.


The argument for

These arguments deserve to be taken seriously. However, those disappointed that a three-year long process yields voluntary guidelines rather than treaty obligations overlook some key arguments:

* Promoting voluntary adoption of norms does not mean business remains immune from substantive values and strategic pressures;
* Not all the orderings that count or work are those legislated from above; legislating is not necessarily more important or effective an activity than persuading businesses in ways that engage their own interests; what matters is not whether a scheme is voluntary or mandatory, but its capacity to engender behavoural change;
* Voluntary frameworks do not necessarily retard the evolution of binding norms and can prepare the way for formal rules. Historically, many legal rules resulted from the state codifying what was preceding industry practice adopted by consensus and which had the advantage of bringing the industry along with it;
* The process of arriving at such guidelines in consultation with business and others can help build cultural resources and expectations -- assets that any later binding rules will rely on for more ready compliance;
* Voluntary codes are incomplete and fallible -- but so is formal state regulation. Moreover, the UN / Ruggie process on business and human rights showed fairly convincingly that focussing only on efforts to secure a binding treaty can generate far more resistance, delaying things for decades and undermining / distracting from interim reform efforts that involve synergies between binding and non-binding measures; Ruggie suggested that such guidelines can provide a platform for generating cumulative and sustainable progress without closing off the possibility of further development of laws. Christine Parker (2002) has noted how law can often be desparately short of techniques to stimulate business capacity for virtue. Even if one had a fully-developed treaty obliging states to regulate (in this case) access to land and other resources so as to foster local food security, the mere existence of such a treaty would not have that effect.

The FAO guidelines arguably represent part of a process: high global oil prices, among other things, continue to drive bio-fuels demand, while the 2011 Arab Spring uprisings were a reminder of the political effect of high urban food prices. Along with rapid urbanisation in Asia and elsewhere, these forces will continue to mean strong commercial and sovereign interest in African food production resources. Last week's guidelines may be disappointing to critics of perceived land grabs in Africa. But by attempting to condition the terms on which governments transact on such resources, they arguably represent significant progress in steadily raising the standard of what counts as reasonable conduct when local food security, livelihoods and cultural relations to land are at stake.

Jo

Business and government: agents of change?

This post reflects on a somewhat neglected issue in debates on private sector contributions to governance and development.

In settings of low governmental capacity and resources, much of the attention is on corporate social investment in 'hard' and 'soft' infrastructure -- from roads, bridges and generators to clinics and schools. 'Senior' firms in longer-timeframe, sunk-cost sectors such as mining and energy need little 'business case' persuasion about the risk-mitigation and reputation-building importance of such contributions: establishing and maintaining their local social 'license-to-operate' (whatever regulations require), ensuring good relations and bargaining power with provincial and national governments, developing the local skills-pool, and so on.

(The question on such issues is seldom now 'why?' contribute to social development but rather 'how?' -- especially in terms of where to draw an appropriate and sustainable line, generally and in particular settings, on private sector contributions to social infrastructure; after all, it is (and should be) mainly the responsibility of public authorities to provide such services. This 'how' question raises significant issues for firms of expectation management with both governments and communities. It also raises principled issues, for instance to ensure governments remain responsive to constituents and incentivised to provide public goods; ripe for a blog post of its own - watch this space!).

The relatively neglected issue is not about corporate investment in communities or their services, but 'investment' -- beyond simply paying taxes -- in government and its capacity. This includes officials' capacity to plan, deliver and maintain the sorts of social services mentioned above, but I am more interested here in thinking innovatively about private sector contributions to building officials' capacity to regulate investors in a responsive and responsible manner; that is, ensuring capable civil service counterparts for purposes of negotiating investment terms and regulating these over time.

Counter-intuitive?

I'm challenging the assumption that firms detest regulation and that the last thing they would think sensible is to help produce more pro-active, informed and capable government officials. Whatever the case in developed settings, I think in weak governance zones the contrary is true, at least for serious firms: no-one likes red tape, but firms often prefer more-demanding-but-predictable regulation to anything-goes-today regulation, or regulatory vacuums; neglected regulatory duties can become sources of reputational or operational risk.

This week I participated in the occasional 'Diamond Dialogues' series (see here), this one in London, reflecting on natural resources and national development. One theme was weak policy- and decision-making capacity in some host governments. Even if they have well-meaning and well-designed social development policies, firms often struggle to get government officials to understand or act on what investors need to flourish in ways that benefit all 'stakeholders'.

Infrastructure analogy

Fragile but resource-rich settings like Guinea, Sierra Leone and Liberia are to some extent 'laboratories' for a more flexible approach to what the private sector can do to help government help the private sector. (Hideous historical examples of social engineering and experimentation or condescending connotations mean that I use the word 'laboratories' cautiously).

Decades of conflict and maladministration have meant huge deficits in physical infrastructure in Mano River Union countries in West Africa, especially rail-to-port and power generation. Big resources projects might not be a development panacea, and private delivery of public goods is hardly uncontroversial; but if traditional expectations of public provision of infrastructure are adhered to in such places, little is likely to happen. So the sub-region may prove interesting in generating new models of public-private projects to ensure production and export capabilities.

If firms in such places see the sense (or imperative) in providing physical infrastructure, it may often make sense for firms to help the local public service develop its internal administrative capacity. It may be short-sighted of extractive firms with a longer-term country footprint to relish the prospect of out-manoeuvring local negotiators and regulators, for example in countries set potentially to become oil & gas producers for the first time but which lack any institutional experience of administering such sectors.

Ways and means

Firms might consider seconding their staff to government training or implementation teams, or vice-versa.(*) More appropriately -- to reduce the risk of firms 'capturing' state officials and exercising undue influence -- firms in the exceptional settings of weak governance zones can help fund third parties to advise and assist government officials, for example during contract negotiations / reviews, or mining code revision. US lawyers and academics helped the post-conflict Liberian government re-negotiate contract terms with major iron ore and rubber investors; but if these firms had helped ensure a strong Liberian negotiating team to begin with, its not unreasonable to think that they might have secured a more durable deal which withstood political demands for review.(**)

Transnational foundations and NGOs have helped Guinea review its outdated mining code, arguably helping mitigate public anger with perceived historical exploitation by foreign mining interests where local officials did not push the national interest effectively, for whatever reason...; would it really be inappropriate, in an age of donor austerity, if firms paid for this kind of public interest work to be done?

I will try list some downsides:

* There are issues with secondments quite apart from risk of regulatory capture or whether such placements actually help build indigenous state regulatory capacity; the problem is a wider one of state-building and appropriate use of tax revenues and local human resources.
* Also, the recent enthusiasm of Tony Blair and others for placing short-term foreign experts inside African government departments carries some obvious colonial-era ramifications. One is hesitant to talk in terms of 'educating' government officials on how a sector works, even if that is often what is at stake.
* Firms looking to boost government capacity would have to negotiate tricky politics in another sense: for example, strong administrative support to one government might lead to perceptions of political partisanship, unduly exposing firms should elections lead to change of government.

Still, if a major challenge for investors in weak governance zones is getting government to respond, there is scope to think more flexibly on how to generate a cadre of officials with greater negotiating and regulatory capacity.

Firms that help boost counterparts' capacity in this way may experience more robust government encounters; but I think many firms operating amid weak state capacity would prefer dealing with a 'worthy adversary' (consistent and capable officials whose decisions are more likely to endure) than the uncertainty that comes with negotiating with far weaker counterparts. Robust but predictable regulation may be preferable to regulatory volatility or neglect. Also, publics and officials who feel that their interests were not pressed with sufficient skill and vigour during contract-making are probably more likely to turn around sometime soon and insist that all these things be reviewed.

Jo

As with all these posts, you can leave comments by clicking on the title to this post and scrolling down.

* Note last week's article in The Economist p. 31-2 (April 21-27, 2012) on the place for private sector experience in overhauling the UK civil service. There are myths about the relative efficiency and effectiveness of private sector personnel, but the point stands.

** The Liberia example is complicated because the initial contract negotiations involving Firestone (re-negotiation) and ArcelorMittal (first-time contract) were conducted with an unelected transitional administration during a highly uncertain post-conflict period. That in itself raises major issues on which I've written in my doctoral work, and with Kyla Tienhaara -- here.