construction/2006/in focus/news room

14 September 2006

Special report: Preventing Corruption on Construction Projects

Risk Assessment and Proposed Actions for Funders

Download the Report: "Preventing Corruption on Construction Projects - Risk Assessment and Proposed Actions for Funders"

Introduction

Selected TI press releases

Selected readings

News coverage

Media Contacts

Introduction

Post-conflict reconstruction is big business. With aggressions cooling down in Lebanon, global attention has turned to reconstruction, estimated by the Lebanese government at US $3.5 billion. At a donors conference in Stockholm on 31 August, representatives from 60 governments and aid organisations agreed on a relief package of more than US $1 billion, earmarked to rebuild bridges, roads, hospitals, water and waste systems.

Large scale infrastructure projects such as these lead to valuable construction contracts. Preventing corruption in the procurement of these contracts and throughout the duration of the projects can save millions in potentially squandered or looted funds and help ensure the best quality infrastructure for devastated communities.

However, the size and scope of construction projects make this sector especially prone to corruption. Transparency International’s Bribe Payer’s Index 2002 identified the construction sector as the most corrupt worldwide. Estimates of the amount lost globally to corruption in infrastructure procurement lie at US$ 3,200 billion per year. Corruption in construction is facilitated by a variety of factors, such as its complex contractual structure, the high degree of specialisation required and multiple project phases. Moreover, the infrequency of large scale projects precludes opportunities for benefiting from economies of scale and imbues bidding with a sense of urgency for companies whose immediate future may largely depend on a single project.

These difficulties are compounded in situations of post-conflict reconstruction, where there is an urgent need to get basic services such as water and waste infrastructure up and running and build shelter for affected communities. Weakened governance and administration structures make preventing corruption especially challenging.

Corruption in large-scale construction projects, especially related to the huge infrastructure projects such as dams, hospitals and power plants associated with post-conflict reconstruction, does not only put invested money at risk, but creates an obstacle to sustainable development. Bribery in construction projects can result in shoddy constructions and poor infrastructure management.

Banks, export credit agencies, governments and others providing financing for reconstruction projects must maintain an interest in how these funds are used. Corruption can have a variety of negative effects on the management of a project, such as higher costs, lower return on investment, and can result in unviable, dangerous, or even environmentally or socially destructive projects.

What can be done?

This paints a troubling picture. But as with all areas vulnerable to corruption, the first step is to know where the risks lie. The second, is to develop tools to minimise these risks. Transparency International’s recent report "Preventing Corruption on Construction Projects - Risk Assessment and Proposed Actions for Funders" does both.

Part of a series of risk assessments, action plans and anti-corruption tools for the construction sector, this report compiles examples of corruption in the financing and execution of domestic and international construction projects, identifies financial risks for project funders and proposes concrete actions to mitigate these risks. Anti-corruption actions for funders can include an internal anti-corruption code of conduct and management programme, adequate due diligence or a register of interest to avoid conflict of interests.

Neill Stansbury, Project Director for Construction & Engineering at Transparency International UK, leading the initiative on preventing corruption in construction projects, points out that “corruption in construction projects can be avoided if all parties put into place the necessary preventive measures. This requires coordinated international action by governments, banks, export credit agencies, project owners, contractors and other relevant parties.”

This report is part of the project “Preventing Corruption in Construction Projects” launched in March 2005 in conjunction with Transparency International's Global Corruption Report 2005, an annual printed publication which in 2005 had a special focus on corruption in construction and post-conflict reconstruction.

Please click here to download the report.

Some costs of corruption in the construction sector:

‘Monuments of corruption’ from the Global Corruption Report 2005:

In the Lesotho Lesotho Highlands Water Project US $2 million was allegedly paid in bribes by Acres International and 11 other international dam-building companies.

During the construction of the Cologne incinerator project in Germany, US $13 million was allegedly paid in bribes.

According to the head of Paraguay’s General Accounting Office, US $1.87 billion in expenditures for the Yacyretá hydropower project on the border of Argentina and Paraguay ‘lack the legal and administrative support documentation to justify the expenditures’.

The contractor for the Bataan nuclear power plant in the Philippines, built at a cost of more than US $2 billion, admitted paying US $17 million in commissions to a friend of former president Marcos.

TI's work around the world

TI UK is leading the international TI initiative Preventing corruption on construction projects. For more information on TI (UK) activities, please click here.

An anti-corruption code for individuals in the construction and engineering industry has been developed in July 2005 by Neill Stansbury and Catherine Stansbury.

Macedonia

Transparency Macedonia and independent news agency Makfax named a case of illegal allotment of construction land as the bleakest corruption event in August 2006.

The Monthly Corruption Barometer, which surveyed 19 national media editors, found the incidence of unlawful profit through restitution, known as the Bacilo 3 case, to be the worst example of corruption to come to light that month.

Pakistan

An Integrity Pact agreement was signed between the Karachi Water and Sewerage Board and Transparency International Pakistan in relation to the awarding of contracts for a major water project in the city. As a result a clean and open bidding process, monitored by TI, took place, saving the Karachi water entity more than US$ 3.1 million. This dramatic result emerged directly after the introduction of the no-bribes TI Integrity Pact.

For more information please click here.

Paraguay

Transparencia Paraguay is monitoring the public contracting process and raising awareness of corruption in construction of the bi-national Yacyretá Hydroelectric Project on the Paraná River, which forms part of the border between Paraguay and Argentina.