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Cost of Corruption

Corruption is one of the greatest obstacles to the alleviation of poverty, and the development of adequate and safe food, water, healthcare, education and infrastructure.  CORRUPTION KILLS.

Alarming corruption cost estimates

Corruption is concealed.  Much corruption is never discovered or prosecuted.  So, it is impossible to quantify accurately the cost of corruption.  The estimates below are more accurately described as guesses rather than estimates, but they do illustrate the potential enormity of the issue internationally.

  • The United Nations and World Economic Forum have estimated the global cost of corruption at 5% of the world’s Gross Domestic Product (GDP).  Based on the world’s GDP for 2022 of US$ 101 trillion, this would equate to US $5 trillion per annum of global stolen funds.  This is higher than the annual GDP of Japan, which is the world’s third largest economy.
  • Transparency International in 2019 estimated that corruption cost developing countries $1.26 trillion per year, and that this was enough money to lift the 1.4 billion people who get by on less than $1.25 a day above the poverty threshold and keep them there for at least six years.
  • Transparency International’s Global Corruption Barometer 2017 recorded that 25% of persons surveyed worldwide had paid a bribe in the past 12 months so as to access public services such as health care and education.
  • In the international construction sector, the Royal Institution of Chartered Surveyors in 2021 estimated that, without significant interventions, by 2030 up to US$5 trillion could be lost annually to corruption.

The consequences of corruption

Corruption can have many consequences, including the following:

Human cost:

  • The theft of public funds by corrupt acts means that:
    • fewer roads, schools and hospitals are built
    • less money is available for social services, education, and healthcare.
  • The corrupt by-passing of controls and contract requirements means that infrastructure can be unsafe and environmentally damaging.
  • The demand for bribes to access public health, water, power, and education means that those people who cannot or will not pay these bribes are denied access to these services.

In consequence, people suffer deprivation, illness, and death.  The consequences fall disproportionately on the poor and vulnerable.   

Economic cost:

  • Nationally:
    • corruption distorts decision making, as decisions are made not in the best interests of the public, but in the interests of the corrupt individuals concerned
    • corruption reduces investor confidence and so reduces investment
    • public funds are stolen resulting in slower economic growth.
  • At project level, corruption:
    • increases project costs
    • results in defective infrastructure.
  • At organisational level, organisations which wish to work ethically:
    • lose work to corrupt organisations
    • are commercially or financially disadvantaged by corrupt public officials.

Anyone who participates in corruption, in however small a manner, will be contributing to the above human and economic cost.

Consequently, it is vital that people do not participate in corruption and that corruption is stopped. 

Understanding the cost of corruption in relation to infrastructure projects

(1) What is meant by the cost of corruption?

The cost of corruption in relation to an infrastructure  project is the total loss and damage that is caused to all stakeholders by all corrupt activity on or in connection with the project.   

When assessing such loss and damage, one needs to consider, as far as possible:

  • each corrupt activity that has occurred on or in connection with the project
  • which stakeholders have suffered loss and damage as a result
  • the types of loss and damage that have been suffered by each stakeholder as a result of each corrupt activity
  • the amount of loss and damage suffered by each stakeholder as a result of each corrupt activity.

The sum total of that loss and damage to all stakeholders in relation to all corrupt activity is the total cost of the corruption in relation to that project.  

(2) What corrupt activities have occurred?

Loss and damage may arise from a wide variety of corrupt activities which may take place on or in connection with a project. 

These activities may include bribery, extortion, fraud, cartels, abuse of power, embezzlement, and money laundering. 

The individuals who carry out these corrupt activities may include government officials, and employees of the project owner, project funders, tenderers, contractors, consultants, sub-contractors and suppliers. 

They may be acting either on their own behalf or on behalf of their organisations. 

Corrupt activities may take place at any time during the course of the project, from the point where the project is being selected right through all phases of financing, design, tendering, execution, maintenance, operation, and dispute resolution.  Each of these corrupt activities may cause significant loss and damage.  (See How Corruption Occurs for a detailed account of the different types of corrupt activity that may occur on a project.)  

(3) Which stakeholders have suffered loss and damage as a result?

Any project stakeholder may suffer loss and damage as a result of corruption in connection with the project. 

These stakeholders may suffer loss and damage whether they are the perpetrator or the victim of the corrupt activity. 

In some cases, a stakeholder may be the ultimate stakeholder to bear the loss and damage.  In other cases, a stakeholder may bear the initial loss and damage caused by the corruption, but may then succeed in passing on some or all of that loss and damage to another stakeholder.  

The type of loss and damage suffered by individual stakeholders will depend on the type of stakeholder, who will include:

  • members of the public.
  • the project owner
  • project funders
  • construction companies, sub-contractors, suppliers and consultants
  • employees of the above organisations and public officials

See the Costs of Corruption Incurred by Infrastructure Project Stakeholders for a detailed analysis of the types of loss and damage which may be suffered by these different stakeholders.

(4) What types of loss and damage have been suffered by each stakeholder as a result of each corrupt activity?

The types of loss and damage that may be caused by such corrupt activity include financial loss, damage to property, environmental damage, loss of quality of life, personal injury, and death. 

Within these categories, there are various sub-categories.  So, for example, financial loss may include an increased project price, increased maintenance and repair costs, and legal fees.  

These types of loss and damage will vary according to the individual stakeholder.

(5) What amount of loss and damage has been suffered by each stakeholder as a result of each corrupt activity?

The actual loss and damage suffered by each stakeholder in respect of each corrupt activity will need to be established. 

For example:

  • In respect of employees or members of the public:
    • loss of earnings due to loss of employment, sickness, injury or death
    • additional medical or travel costs
  • In respect of organisations:
    • additional equipment, labour and material costs
    • additional overhead costs
    • loss of profit
    • additional financing costs
    • legal fees 
    • fines and penalties.

However, as explained in the next section, it is highly unlikely that these costs can be accurately calculated.

Why can you not calculate the costs of corruption in infrastructure?

It is impossible to give any accurate figures of the cost of corruption in the infrastructure sector, whether on a project basis, or on a national or international basis.  This is for the following reasons:

(1) Lack of raw data of proven corrupt activities: 

If you were to accurately measure the cost of corruption, you must first identify proven corrupt activities, and then measure the loss and damage which has flowed from those activities. 

However, in most cases, the raw data of proven corrupt activities is unlikely to be fully available:

  • Firstly, corrupt activity is by its nature concealed and so may never be discovered at all. 
  • Secondly, even where it is suspected or rumoured, it must then be proven if it is to constitute reliable data. 

However, in many cases, suspicions of corruption are not investigated or prosecuted, and even where prosecutions are brought these may not result in a conviction. 

For example, in a particular infrastructure project, the following corrupt activities may have occurred:

  • theft of some project funds by project owner finance personel
  • corrupt financing terms which will result in interest rates paid by the project owner being higher than they should be
  • over-design of the project design, resulting in unecessary cost
  • bribes paid in relation to the award of the main contract and ten sub-contracts and supply contracts
  • a cartel arrangement in the bidding for the main contract
  • price-fixing in relation to the prices charged on six supply contracts
  • 300 fraudulent claims submitted for work not done properly, or for delay costs, in relation to the main contract and five sub-contracts
  • 50 facilitation payments made at police road checks and in order to obtain work and import permits
  • protection money paid weekly by the main contractor to the local gang to avoid damage to construction equipment
  • defective work and materials supplied and corruptly approved in ten sub-contracts
  • fraudulent levying by the project owner of liquidated damages for delay on the main contractor
  • failure by the project owner to pay the main contractor its 10% retention.

In order to establish reliable data on which to base a quantification of the cost of corruption in this project, each of the above corrupt activities would have to be identified, investigated, prosecuted and proven.  This process would not only be very difficult, but also be extremely costly.  The corrupt parties would deny the relevant corrupt actions, and the corrupt actions and their consequences may be concealed by false documentation or by other parts of the construction works. 

(2) Difficulty in identifying the type of loss and damage that flows from the proven corrupt activities: 

Even if specific corrupt activities are identified and proven, it may be difficult to identify the actual loss and damage that has flowed from them. 

Taking the example in the previous paragraph, one would need to consider each proven corrupt activity and then try to identify each stakeholder that has suffered loss and damage as a result of that activity and the type of loss and damage which has been suffered (e.g. additional financing costs, cost of bribe included in contract price, rectification costs etc.). 

(3) Difficulty in quantifying the loss and damage which has been identified: 

Even if all types of loss flowing from the corrupt activity are established, it would then be necessary to try to calculate the quantum of this loss.  This is probably impossible.  For example:

  • How much loss has been suffered by a contractor who failed to win the contract because a competitor paid a bribe?  Did the contractor manage to replace the lost work with other work?  Would the contractor have actually achieved its estimated profit if it had won the contract?
  • How much has a project owner lost because a contractor paid a bribe to win the project (e.g. was it just the cost of the bribe, or did the contractor increase its tender price, and if so, by how much?). 
  • How much has the public lost due to an over-designed power station (should the electricity tariff have been 5% lower? 10% lower?). 
  • How much has a community lost in financial terms when a road is damaged during a flood, as a result of its corruptly defective construction?
  • How much has been lost by the family of a person killed due to defective infrastructure?

(4) Extending the assessment to a national or international level

The above difficulties are explained in relation to a single project.  These difficulties would be significantly amplified when numerous projects are taken into account. 

To then calculate these losses on a national or international scale would require accurate data on all projects. 

Consequently, any attempt to quantify the cost of corruption, whether at project, national or international level, will at best be a very rough estimate, and will probably be best described as a guess. 

Examples of hypothetical cost calculations on a project

As the actual cost of corruption is likely to be impossible to calculate (as explained in the above section), it is useful to consider the possible costs of corruption on a project on a hypothetical basis.

The benefit of doing so is that it illustrates, when you take several possible different corrupt acts into account, the compounding effect of corruption on project costs.

GIACC has therefore developed two examples of the cost of corruption on hypothetical infrastructure projects.  These show the compounding effect of corruption on project costs using two different scenarios.

  • Example One shows the compounding effect on project cost if all parties on the project, throughout the contract chain, needed to pay a bribe of 5% of the cost of their respective contract prices in order to win their contract.  The outcome of the example is not a 5% additional cost, as may be expected, but a 16% additional cost.
  • Example Two shows the compounding effect on project cost if several different types of corruption occur during the projects.  The compound effect of all these corrupt acts in the example is:
    • an increase in contract price of 58%
    • an annual increase in financing costs of 3.5% of capital cost, and
    • a failed project.

In the second section above, the widely reported estimate that corruption could cost 5% of GDP is quoted.  The above two hypothetical examples suggests that, when the compounding effect of corruption is taken into account, the figure for lost money in infrastructure could be far higher than 5%.

This emphasises the critical need to implement effective anti-corruption controls on a project in advance, so as to prevent these types of corrupt act from taking place, and so avoid the possible adverse cost consequences referred to above.

See Examples of the Cost of Corruption on Infrastructure Projects for the two examples referred to above.

Does it matter if you cannot accurately calculate the cost of corruption?

Measuring the cost of corruption is often considered to be a necessary part of determining how to combat corruption. The view is that a suitably significant proven cost must be shown in order to justify the cost of implementing anti-corruption measures and in order to indicate where the focus of anti-corruption measures should be.

However, as shown above, it is not possible accurately to estimate the cost of corruption, and consequently, nor is it possible to prove where the greatest corruption may take place in relation to a project.

Therefore, stakeholders should not wait for proof that corruption is damaging, or of where it occurs, before they implement anti-corruption controls in relation to infrastructure projects.  They will never obtain that proof, and so will be waiting for ever.  In the meantime, corruption on the project may be rampant in the absence of effective controls.  

The decision to combat corruption, and methods of doing so, should therefore be made on the following assumptions:

  • No individual or organisation is immune to corruption.
  • Corruption can occur in developing or developed countries.
  • In any infrastructure project:
    • there is a significant likelihood of corruption
    • corruption can occur in any phase
    • corruption can involve any stakeholder
    • the higher the value of the project, the higher the likely loss to corruption.
  • The incidence of corruption is a function of the degree of anti-corruption measures in place; the fewer anti-corruption measures in place, the greater the risk of corruption.

Appropriate preventive measures should be implemented on the basis of the above assumptions and not on the basis of any (most likely inaccurate) estimate of the costs of corruption in any particular country, sector, type of project or project phase.

 

Effective anti-corruption measures should therefore always be implemented as part of the routine management controls on a project.

Updated on 8th April 2024

© GIACC