The business costs of corruption

How much is corruption costing your business each year? Judging by a recent survey from Control Risks Group (CRG), an influential international business risks consultancy, the amount could be fairly substantial. The survey also highlighted the fact that corruption is a phenomenon that is not confined to just the Philippines nor is it just a problem that affects government revenues and efficiency. The issue affects the private sector around the world, quite substantially. Businesses need to take the issue of corruption seriously, according to CRG. If companies face risks, lost opportunities and potential costs because of corruption, a group like CRG should know. CRG has been offering a wide range of strategic business risk management solutions to over 5,000 corporate clients all over the world since 1975. CRG’s Philippines office has been in existence since 1995.

The survey conducted by IBR Ltd. as commissioned by Control Risks Group found that 40 percent of the companies surveyed believe that they lost business, within the last five years, because a competitor paid a bribe, and approximately the same proportion had been deterred from an otherwise attractive business investment because of concerns about corruption.

The telephone survey was conducted from August to September 2002, with 50 companies each in the UK, the US, Germany, and the Netherlands, and 25 companies each in Hong Kong and Singapore. All respondents were senior decision-makers at or near board level. All the companies operate internationally.

The results support figures from the US Department of Commerce that suggest that bribery affected the awards of 60 major contracts worth a total of $3.5 billion between the period May 1, 2001 to April 30, 2002. Similarly, a report released at the African Union meeting in Addis Ababa in September estimated that corruption cost the African continent as much as $148 billion per year!

The respondents represented eight different commercial sectors: banking and finance; public works/ construction; arms and defense; oil, gas and mining; telecoms; power generation and transmission; retain; and pharmaceuticals/medical.

One of the most striking findings was that two sectors at the top of the list – petroleum and construction – are among those most likely to have lost business because of bribery. Oil, gas and mining companies particularly face acute dilemmas because the most attractive new opportunities are often in countries with poor standards in governance.

Large companies in public works and construction are also most exposed to corruption, particularly because the size of the contract is frequently very large and public officials, more particularly in developing countries, often enjoy a large degree of personal influence over awards.

Corruption also involves operational costs. "Inevitably, corruption is directly related to cost overruns, delays and a variety of security and political risks such as extortion, blackmail, political interference, and other costly problems," explains Graeme Campbell, CRG Philippines’ country manager. To minimize this, Campbell says companies need to make anti-corruption measures integrated into management systems, particularly on large projects. "This is more than just implementing a code of ethics, but complete measures to foster an anti-corruption culture," Campbell explains.

Respondents, when asked to estimate the extra percentage of costs incurred when corruption takes place, spoke of 10 percent as a standard "commission", but a third of the respondents believed the percentage to be even higher!

The findings and analysis of the Control Risks’ commissioned survey are all put together and organized in Control Risks’ new report, Facing up to Corruption – a practical guide for business which gives companies practical advise on how to deal with the corruption issue, survive, and indeed prosper.

For the convenience of local businessmen, Control Risks, will be presenting this report at a conference "Facing up to Corruption," a joint CRG-Makati Business Club event that will highlight the business case for tackling the issue of corruption in the Philippines. It will be held on Nov.28, 2002, at the Mandarin Oriental Hotel.

For more information, please contact CRG (810-7607) or the Makati Business Club (751-1137).