Gitanjali Patel

Gitanjali Patel 

Posted Monday June 30, 2014
 

A Bitter Cup: Corruption and Mega-events

A Bitter Cup: Corruption and Mega-events

Brazil is not the first emerging market to witness the bittersweet reality of hosting mega-events like the World Cup and the Olympics. China, and more recently South Africa have also been through the chastening experience. These global events undoubtedly have a galvanising effect, putting large-scale infrastructure projects on the fast track whilst giving the country in question a monumental marketing boost. Foreign companies are also naturally drawn to the lucrative investment opportunities on offer which, in the case of the Brazilian World Cup, are worth an estimated $90 billion.

Stadium Photo CC Flickr User Gabriel Smith

But the unique pressures involved in delivering multiple large-scale infrastructure projects within a tight and immovable deadline, coupled with a lack of institutional and regulatory capacity to handle such huge tendering processes has led to a raft of corruption scandals and unfinished projects. Four years on corruption cases from the South African World Cup are still being investigated while the current tournament in Brazil is marred by similar allegations.

This perfect storm of huge infrastructure projects and an insufficient capacity to cope with them is particularly acute in emerging markets. These are nations which characteristically suffer from 3 issues:

  • A shortage of the existing infrastructure needed to host a major sporting event and to cope with the volume of people coming into the country
  • A culture that facilitates institutional corruption
  • A lack of anti-corruption scrutiny and regulatory enforcement

Putting these problematic tournaments in context are examples of tournaments constructed and hosted with little difficulty and negligible incidents of corruption such as the Japan and South Korea World Cup 2002, the Germany World Cup 2006, and of course the London Olympics 2012.

The prospect of multi-million dollar contracts or huge investment opportunities are too attractive for global businesses and investors to ignore, but the risks are serious. The ecosystem built up around a mega-event is ripe for corruption. Delays, over-spending, bribery and corrupt bids are common criticisms; listed below are some examples of how they manifested themselves in the World Cups held in South Africa and Brazil, and the Beijing Olympics.

  Illicit enrichmentBribery Tender manipulation

Brazil

Senior officials from 6 World Cup contractors are currently being tried for illicit enrichment of over US$440m

18 companies including Siemens and Alstom have been accused of fixing prices for the construction of train and metro networks in Rio and São Paulo

Siemens was banned from bidding on all federal contracts earlier this year because of alleged kickback payments

Temporary power firm Agrekko awarded $15 million contract by FIFA without bidding

South Africa

15 construction companies pay $147 million in fines for inflating prices when building stadiums and infrastructure

English construction company asked to pay a bribe of R6 million to be awarded the contract to build the Mthatha Stadium

State construction contracts for 2 World Cup stadium deals rigged by industry leaders

Municipal manager Jacob Dladla, Lefika Emerging Equity and Basil Read investigated for tender misconduct

China

Audit reveals misuse of Olympic funds to build residential buildings for staff and to invest into companies

BHP Billiton breached US anti-corruption laws in its dealings with foreign officials during the Beijing Olympics

Beijing vice-mayor receives death sentence for abusing power to manipulate contracts for the Olympics

Rather than being a continual cycle, these mega-events, like the economies they promote, are actually becoming more benign for due diligence and compliance professionals. The pressure on conducting the type of investigations that could raise important red flags is gradually being eased because these markets are becoming less opaque and better regulated. To put it another way, the chances of corruption being revealed and the consequences for it are both on the rise.

The increasing availability of key online information is making due diligence and compliance checks more efficient. The spotlight on host countries is also spurring important changes in anti-corruption legislation all of which is chipping away at the business and investment risk in these markets. Brazil’s ‘Clean Company Act‘ for example, went into effect in January this year encouraged by widespread protests against corruption and overspending for the current World Cup and upcoming Rio Olympics. The statute demonstrates the country’s commitment to curbing facilitation payments under the OECD’s anti-bribery convention.

However legislation and enforcement are two very different things. Brazil’s federal system makes enforcement a challenge and offers the 27 states and 5570 municipalities the freedom to interpret the law as they see fit. South Africa faces similar regulatory challenges and has made comparable legislative advances with an aggressive new anti-corruption law in 2012, but again this success story does not come without limitations and South Africa has not prosecuted a single foreign bribery case since 2007.

Filing in South Africa

Progress is being made nonetheless and the tentative legislative advances are being mirrored in data availability. The Competition Tribunal in South Africa now publishes full court records for hearings and has a specially designated page for collusive tendering in the construction industry. A good example of the value of available data can be seen in the record of the trial cited above against the construction firm Basil Read and World Cup stadium building projects:

Complaint

Brazil’s national transparency portal is similarly comprehensive and publishes detailed information on government spending where budgets and overspending quickly become apparent. In fact, both campaigners and media have used this data when giving statistical analysis on the World Cup budget. Data and financial breakdowns of individual contracts are available such as the one won by Siemens below.

Detailed spending

Mega-events hosted by developing economies blend a wealth of untapped business potential with great risk. Though things are improving, it will be a slow process as governments and companies develop structures and regulations to tame corruption. It is Unlikely That the next World Cups Hosted by Russia and Qatar Will boast Great Advancements in Their Anti-corruption Efforts as Allegations of bid-Rigging are already sweeping international Media . But the trend is one of reform, not retrenchment.

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