By hook or by crook – no sanctity in the private market

In the last week, Australians have been reminded yet again of the corruption that exists in the ranks of the corporate sector. Over the last few years we have been following the – unfolding evidence – of illegal practices (including bribery, UN-sanction busting) by companies (Note Printing Australia and Securency), which are owned by our central bank (RBA). Now, we have learned that one of our largest constructions companies appears to be corrupt to the core. They have been accused of “paying kickbacks to Iraqi officials in return for receiving lucrative contracts from the Iraqi regime” (Source). There are a myriad of examples of corporate fraud around the world (I just thought of Enron – “Burn, baby, burn. That’s a beautiful thing”). And then there was the global financial crisis with the cocktail of out-of-control investment banks, ratings agencies and whoever else with very long cheating snouts getting as much as they could for themselves, laws or no laws. And now we learn that a significant proportion of government procurement contracts in Europe are subject to corrupt behaviour. While, this tells me that the processes of government oversight need reworking in significant ways. But, further, it tells me that the root cause of the corruption is not the fact that governments are too big or spend too much money. Rather, an unfettered capitalism will pursue an agenda of greed and corruption and the idea that self-regulating markets (devoid of public oversight) are the best way to organise economic activity is a myth. The “market” is rife with corruption and inefficiency.

This is the cover from Upton Sinclair’s 1923 book – The Goose Step: a Study of Education in America – which is a very depressing account of the sort of practices that remain in force today, albeit perhaps more subtle and institutionalised. I will come back to that later.

Our newly-elected conservative government in Australia has been silent in the last week about its mates with past or present Leighton associations.

I wonder why? It is now public knowledge that Leighton’s former CEO (King) “has been approached by Communications Minister Malcolm Turnbull about joining” the National Broadband Network Board” (Source), presumably on very lucrative terms.

This is despite the emerging evidence in relation to the bribes paid to secure Iraqi pipeline contracts” that supports the allegation that “Leighton boss Wal King had approved the payment”.

But, maybe King will actually do some work on the NBN Board, which doesn’t seem to have been required in his $6 million, post-retirement consulting deal with the company. That contract alone should have the shareholders baying for blood – quite apart from the shenanigans that are now coming to light from its international division.

In this article (October 4, 2013) – Ex-Leighton boss Wal King spent thousands on company credit card – we learn that King had a retirement deal with Leighton that “meant he would be able to invoice Leighton for $6 million in fees over three years without having to provide any services”. That doesn’t seem to have been sufficient for him and it is now public record that he “racked up $40,000 in expenses on his company provided credit card for overseas travel, accommodation and meals between February and April 2011” and “(n)one of these expenses had been approved by Leighton”.

The new government’s silence might also have something to do with the fact that leading officials from the Prime Minister, the Foreign Minister and down to other related governmental toe-rags have been caught out in the last week claiming all sorts of expenses on the public purse.

Any reasonable person would conclude that most of these claims were for partying in exotic locations or in-situ research on these exotic locations, the latter which could have been done more cheaply by sitting in one’s office in Canberra and clicking on Google a few times.

Most of the claimants seem to have made hasty repayments to the Finance Department since the revelations of the “snouts in the trough” became public. If the travel was so resolutely in the public interest why are they all paying the claims back?

Further, the Australian Securities and Investments Commission (ASIC), the so-called corporate watchdog has not pursued any case against the RBA despite mounting evidence of corruption. Of-course, ASIC was quick – to prosecute – the “anti-coal activist Jonathan Moylan over a fake press release that caused a $300 million drop in a major coal company’s share price”.

We will see whether ASIC investigates the Leighton scandal. How many of their top directors will go to jail? Anyone out there predict that the number will be above my current sure bet of ZERO!

What has all this got to do with anything interesting?

On October 1, 2013, the European Commission has released a major study – Public Procurement: costs we pay for corruption – which was prepared for the – European Anti-Fraud Office (OLAF) – by PwC, Ecorys and the University of Utrecht.

The study attempted to estimate the the overall direct material costs of corruption in public procurement in five major sectors (Urban/utility construction, Water and Waste treatment, Road and Rail, Training, Research and Development).

They define corruption:

… as the abuse of power for private gain.

They indicate that:

Corruption generates public losses. In this study, the focus is only on the direct material costs of corruption: the immediate monetary consequences for national (including regional and local) budgets and, when EU funds are involved, the EU budget. The public loss investigated is the estimated monetary amount lost to corruption due to ineffectiveness (meaning that a project does not (fully) reach its objectives) or inefficiency (meaning that the outputs of a project are inconsistent with the inputs, e.g. project costs are higher than market prices or project outcomes are of inferior quality).

They chose 8 member states as the focus of the study in order to test a new methodology and related procurement database (the TED-database).

The nations were France, Hungary, Italy, Lithuania, the Netherlands, Poland, Romania and Spain. They were randomly selected.

What did the study find?

1. Of the total project budgets analysed “18% of the overall project budgets concerned” were either corrupt or elicited “weaker indications of being corrupt” – “13% can be attributed to corruption”.

2. The losses included:

– Cost overruns;
– Delays of implementation and/or;
– Loss of effectiveness (including inferior quality and questionable usefulness).

3. The highest direct public losses:

… are encountered in corrupt training projects (44% of budget volume lost in projects affected), followed by all other sectors (29% in urban/utility construction, 20% in road & rail, 16% in water & waste and 5% in Research & Development).

4. The “overall direct costs of corruption in public procurement in 2010 for the five sectors studied in the 8 Member States is estimated to amount €1.4 to €2.2 billion” which is up to 2.9 per cent of the Road and Rail budget; 2.5 per cent of the Water and Waste budget; 6.6 per cent of the Urban/Utility construction budget; 15.9 per cent of the Training budget; and 3.9 per cent of the Research and Development procurement value.

And these are only the “direct losses”.

There is substantial evidence of:

1. “bid rigging” where “the contract is ‘promised’ to one contractor, with or without the consent of the public official issuing the tender.

2. “kickbacks” – where “the public official demands, or is open to, a bribe which will be accounted for in the tendering process, including administrative processes.”

3. “conflict of interest” – where “the public official has personal interests in the winning company”

4. “Other … deliberate mismanagement/ignorance”.

Bid rigging and kickbacks dominate the types of corruption found overall.

You will note that the major corruption appears to have occurred in Training contracts. The Report said that “the highest probability of corruption are the staff development services (23-28%)”.

This should be seen in the context of the overall bias in government programs over the last three decades away from direct job creation towards training programs as the solution to entrenched mass unemployment.

This shift in policy emphasis is one of the defining characteristics of neo-liberalism. Economists hectored governments into abandoning their commitment to full employment (that is, to ensure there were enough jobs created) via correct fiscal and monetary policy settings.

This demand-side responsibility, which reflected the overwhelming view that mass unemployment was the result of a systemic failure to produce enough jobs or hours of work, was replaced by the supply-side “employability” agenda, where mass unemployment was reconstructed as an individual failing – attitudinal defects (laziness), skill deficiencies etc.

This was all sold by claims the government could not afford to be involved in direct job creation; that such practices created jobs of no value; and that individual incentive (sticks) were a better way of reducing unemployment.

The new agenda has helped produced the mess the world is in now with youth unemployment rates in some nations above 60 per cent and entrenched unemployment across most of the advanced nations.

The new employability agenda also created a new industry – “unemployment”. A plethora of parasitic private firms sprung up, totally supported by public contracts of one form or another – to manage the “job seekers”, train and motivate them and whatever else.

And, of-course, these contracts are now being massively abused in most nations – the European Report just being the latest in a long line of studies that show that the private job training providers are open to corruption and are grossly inefficient in terms of their stated raison d’etre – to get the unemployed back into work.

Of-course, the stated raison d’etre is a total joke – given that the problem is a lack of jobs overall.

The right-wing conservatives, of-course, will scream blue murder about these results and claim that it vindicates their view that government spending is inherently undesirable and chokes private sector initiative.

Here is an example of the sort of conservative thought that is given oxygen in leading media outlets. A Forbes regular commentator wrote on September 22, 2013 – Republicans Will Win The Government Shutdown PR Battle If They Promise Voters Private Jets. This is rabid stuff.

He concluded that:

Republicans should talk about how much better our lives will be, how much more we’ll earn, and how much more often we’ll be blown away by staggering technological innovations if the federal government is consuming much less of our hard-earned money. In short, Republicans should talk about the private jets we’ll all eventually own if the economy-suffocating growth of government is reversed by the Republican Party.

This is a claim that is given authority by my own profession. The belief that all government spending is wasteful is at the heart of mainstream economics policy stances. And now we know that it is “corrupt”.

I thought this 1998 interview – Is There a Conspiracy in the Teaching of Economics and History within the American Education System? – with the US economist – Mason Gaffney – was interesting in this regard. He has been a long-time critic of neoclassical (that is, mainstream) economics who promoted the ideas of Henry George (but we won’t hold that last point against him).

He outlined how the study of economics within the American education system had been corrupted especially in the era of secret ballot and direct democracy where “voters could no longer be bought … they had to be brainwashed” and the device chosen was “Neo-classical Economics”, which blurred all distinctions between producers and rentiers”.

Moreover, in the modern period, vested elites (interests) continue to “purchase” economic theory, which helps them dominate access to real resources at the expense of the vast majority of us. He said the corruption:

… pervades the culture of the profession. Most members are looking for grants and promotions to put frosting on their cake. They call it, “Responding to the incentive structure,” giggle nervously, and shuffle the blame onto “the system.” They abandon personal moral responsibility, and quickly become part of the system themselves. They rationalize their own dereliction by attacking those who expose it, turning themselves into a generation of vipers. Grants come from those with money. Follow the money trail. Most administrators are even worse: they push faculty members to get outside grants, whatever the source. They only occasionally decline one when faced with embarrassing publicity.

Look at the names and histories of major grantors and patrons of the past: Stanford, Rockefeller, Russell Sage, Carnegie, Hewitt, Cornell, Wharton … Look at the governing boards of major private and public institutions. It’s all there to see, for those that have eyes to see, minds to draw the obvious conclusions, and hearts to carry on the good fight for the public interest. Upton Sinclair spelled it out pretty well back in 1923 or so, in “The Goose Step: a Study of Education in America”.

It’s partly a matter of coopting people by dangling money before them, and partly a matter of selecting and supporting those whose ideas are already more simpatico to the major grantors. It’s hard to tell the difference, so it’s hard to say who’s been corrupted, and who corrupted himself at an early age.

Here is a link to Upton Sinclair’s book – The Goose Step: a Study of Education in America – which is a very depressing account of the sort of practices that remain in force today, albeit perhaps more subtle and institutionalised.

Especially interesting is the Chapter on “The Harvard Tradition” (Chapter 15)! He documents the fact that Harvard has a long history of compliance to the interest of the power elites.

1. He documents the career of Charles Sumner who was an anti-slavery senator from Massachusetts and was “found unfit to be a professor in the Harvard Law School” because he was “too much of a reformer in law” and this irritated the “commercial interests of Boston,, and the silence they imposed on anti-slavery sentiments”.

2. We learn that one “William Lloyd Garrison” was “dragged through the streets of Boston with a rope about his neck, by a silk-hatted mob of State Streeters, many of them of course from Harvard?”

3. He talks about the “Boston Brahmins” who controlled Harvard with their “millions”. One Harvard boss (Lawrence Lowell) “is not … a climber or a toady; he could not be a climber, because he was born on the mountaintop, and there was no place to climb …”

4. He documents the way in which the moneyed interests get what they want – some influential Bostonian:

… calls President Lowell on the telephone and says : “How can we get So- and-so to put up the money for that chair, if young This- or-that gets his name in the newspapers as lecturing to workingmen?” President Lowell smiles and says he will see about it, and the young instructor is invited to dinner and amiably shown how the most liberal university in America cannot run entirely without money. The young instructor sees the point, and the president goes away, thinking to himself : “Thank God we are not as Columbia!”

5. “Even down to the humblest freshman such pressure is conveyed. There are things that “are not done” at Harvard ; and you would be surprised to know how minute is the supervision.”

And so it goes. It could have been written in 2013. The same applies at Australian universities by the way, except that in Australia the private moneyed interests are too stingy to make very many donations (the so-called “philanthropic tradition”) to universities. These characters just go straight to the politicians.

The point is that the latest corruption evidence about public procurement practices from Europe implicates the private sector more than it does the public sector.

It gives no comfort to the view that the unregulated market will deliver purely efficient outcomes as a justification for relentless austerity and attacks on the most disadvantaged citizens in our communities.

I am also reminded of our recent history in Australia, where the conservative forces used all their media power to discredit the fiscal stimulus packages in 2008-09, when in fact, only a small number of projects were problematic and the source of the problems were – you guessed it – corrupt private sector contractors.

It is clear that some aspects of the construction projects associated with the stimulus intervention (a relatively minor proportion of total funds spent) were problematic in terms of administrative issues and actual outcomes.

In particular, the most problematic was the homeinsulation program. There has been a major beat up about this program in the media and I would conclude that it wasn’t a very good program although the facts that are available are very blurred.

But the point is that it was a very large-scale stimulus interventions of the type taken by the Australian Government – which in international terms was early and large relative to GDP – are very complicated and you can expect some administrative inefficiencies. Imagine if the private sector had to ramp up investment spending within a quarter or so – what do you think would be the outcome of those projects.

Further, the neo-liberal era has been marked by a major reduction in Australian Government capacity at the departmental level to design and implement large-scale fiscal interventions.

The reasons are two-fold. First, the obsession with monetary policy. Second, the major outsourcing of “fiscal-type” government services to the private sector. Many of the major Federal government policy departments are now just contract managers for outsourced service delivery.

So with the voluntary reduction in “fiscal space” within the federal government over the last 20 years or more it is no surprise that the overall capacity of the government machine to implement efficiently and speedily complicated nation-wide infrastructure programs has been diminished.

This is a lesson for the future in my opinion. We can no longer deny that fiscal policy is required to address serious swings in private spending. Monetary policy has been proven – categorically – to be ineffective in dealing with aggregate demand failures of the sort we have witnessed in the current crisis. In that context, governments must develop forward-looking capacity to ensure that it has project implementation skills when they are required.

The OLAF Report actually provides some guidance on how procurement practices can be designed to minimise corrupt private sector behaviour.

But while complex interventions will not be perfect in design or execution you have to consider what would have been the case if government were to follow the Chicago school (or the Harvard school) line – and left major economic downturns to the private market to sort the mess out.

In the 2008 case, we were facing a repeat of the Great Depression such was the damage to the financial system and the plunge in real output in the major economies. The downturn would have been much worse and the aftermath longer had governments not acted.

Conclusion

I am always amused when I hear spokespersons from my profession waxing lyrical about the sanctity of the free market. It is a total myth. Private economic behaviour needs strict regulations and oversight.

Public behaviour also needs the same. It is not a time to be watering down this regulation etc. There is no shortage of companies like Leighton’s are out there doing what they can to feather there own nests – hook or by crook.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.