How real-world corruption works

http://www.reddit.com/r/Economics/comments/c84bp/how_realworld_corruption_works/

by ssp • 16 years ago

316 72 16 years ago

btilly• 16 years ago

That's the nice kind of corruption. For the nasty kind read http://www.rollingstone.com/politics/news/;kw=[3351,53763] to find out what Jefferson County has been going through...

noilly• 16 years ago

or the really really nasty kind

http://www.theawl.com/2010/05/ciudad-juarez-rumors-and-excha...

rms• 16 years ago

Or http://en.wikipedia.org/wiki/Kids_for_cash_scandal

puredemo2• 16 years ago

County officials were corrupt in this case, it's not like it all happened accidentally. They chose to purchase a $2B sewage system (when initial quotes were only $250M from local contractors) and proceeded to fiscally destroy their city and county budgets in the process.

Still a fascinating read though. Why doesn't the country just default on the debt? These seem like extenuating circumstances.

robryan2• 16 years ago

Wouldn't that require some kind of sell off of their assets?

arethuza4• 16 years ago

Sounds like those debts were created through criminal activity - I would have thought the city should have the right to take them to court and have them declared null and void and walk away.

Shouldn't there be a law that if a bank uses corrupt means to obtain business then the people who end up with the debt should have the right to walk away from it (after due process, of course).

jlangenauer• 16 years ago

All quite true - especially the bit about the contractual white-anting.

A few years back, I was taking a course for my then-job, and the lecturer told us about a group of people in one of the major Australian constuction firms (though he didn't say which one).

The job of these people was to go through all tender documentation looking for things which hadn't been specified properly, or which might conflict with other things in the tender documents. When the construction company bid, it would include a laundry list of conditions of their tender, usually saying abstruse things like "In s.311(a) of the Scope of Works, we have bid assuming that existing conditions on site are foo..." and the like. On those tenders they won as the conditions turned out to be different to what they'd assumed (bearing in mind that these conditions were now part of their contract), they'd be able to ask for a variation (and more money) for most things - pushing up the price of the contract while allowing a competitive bid price. This is all legal, and frankly, not that uncommon.

The interest thing is that this company had actually worked out how much revenue these guys - the contract analysts - brought in, and they found that the revenue per employee for these guys was more than for any other employee in the entire organisation.

jacquesm4• 16 years ago

Insurance companies have similar people working for them called 'claims adjusters'.

It's really sad how parasitic behaviour is rewarded so well and real productivity is not.

There's a fundamental flaw embedded in there somewhere but I really can't verbalize it.

puredemo2• 16 years ago

The term "gotcha capitalism" pretty much sums it up for me.

fgf2• 16 years ago

Do you know of any corruption free economic system? If corruption is ever present (to varying degrees) is it still a fundamental flaw?

known• 16 years ago

It is called High Frequency Trading in Wall Street

stretchwithme• 16 years ago

I think we see corruption when those making decisions have control over the resources of others. Those that watch their assets like a hawk and read all of their contracts thoroughly fare far better than those who leave it all in someone's hands.

When there are many layers separating the investor or taxpayer from those who make day to day decisions, the more likely corruption is. That's exactly why democracy scales so poorly and government works best when decisions are made as locally as possible.

And maybe its also part of the reason startups are so innovative and creative. When you know exactly what everybody is contributing, you don't suffer any unnecessary drain on resources.

brc5• 16 years ago

For a simple, but topical example, you can see the process at work with the Australian Governments' current 'stimulus' program, 'Building the Education Revolution (BER)'. This is a $16.2 billion dollar program to build new buildings on school grounds, nationwide in both public and private schools.

With that sort of money shovelled quickly out the door, it didn't take long for reporting of corruption and rorts to show up: In some documented cases, the construction costs of simple school buildings mushroomed from $78,000 for a pre-BER quote to an actual built cost of $954,000. All this for a simple school structure. Most of the fat is in 'consulting fees' and 'variations' specified by the builders.

There are many documented cases of school buildings costing in excess of $5400 per square metre - about what it costs to build a top grade office block, and about 3 times what the cost would be normally.

The main problem, it would seem, is that all the contracts go to large building companies, who then subcontract to smaller builders, who then subcontract out to local people. Each person clips the ticket and adds some fat on the way through, and you end up with a building costing 3 times as much. All of this could have been avoided if you just gave the money to the school and got them to hire local tradesmen to do the job, and would have more of an effect on employment and economic activity. As it is, a large percentage of the money will go to shareholders in large construction firms. This is very similar to what the reddit post describes.

The worst thing about the whole thing is, while everyone knows it is happening, and it is in the news, nobody is actually getting into trouble.

jacquesm4• 16 years ago

Another big problem with this kind of bid is that the requirements to bring out a bid are insane, and insanely complicated, so typically only the larger companies can bid. They have full timers working on bringing out the bids, whereas a local contractor would be employing just as much people to prepare the bids as they have out building stuff.

arethuza4• 16 years ago

Well, you wouldn't want the wrong people getting awarded these contracts, would you?

Tamerlin• 16 years ago

Well, if the organization putting out RFP's took the contractors' track records into account when awarding contracts, they'd end up eliminating a lot of this corruption. Instead, the fact that the big contractors routinely run FAR over budget and behind schedule, often not delivering anything and what they Do deliver is usually not up to spec, doesn't count against them when they bid for new work.

If it did, companies like Lockmart and SAIC and Northrup-Grumman wouldn't be able to continue winning contracts.

robryan2• 16 years ago

Another stimulus program we had in Australia was a hot water unit rebate which was making the units so cheap it was in the installers interest to sell as many as possible, this may have just been for sporting clubs.

There ended up a situation where a club could only want 2 to 4 and ended up with about 20 hot water units which they couldn't afford to actually use due to energy costs.

arethuza4• 16 years ago

Follow the money - I suspect it these circumstances you'll find that the "large building companies" probably had something to do with the program being created.

brc5• 16 years ago

I have my theories on this, but tried to keep the post as non-political as I could manage. I am disgusted with the waste that this government is creating, doubly so given that the money is all borrowed.

nhnifong• 16 years ago

What makes you so sure "just giving the money to the school and getting them to hire local tradesmen to do the job" would work? aren't they just as corruptible as anyone? I think so, but I cannot imagine a foolproof way to just turn money into valuable structures without parasitism

hugh32• 16 years ago

The difference being that the school principal actually cares whether his school gets twelve new classrooms or only three, and has the time to evaluate bids on this particular project in detail.

There is the potential for direct kickbacks from builder to principal, but that's relatively unlikely for various reasons.

jseliger2• 16 years ago

This kind of thing is common in the United States too. Almost no one considers how funds get from the Feds to the street, which is via some combination of direct grants, state pass-throughs, and tax breaks. The former is among the most amusing: http://blog.seliger.com/2009/02/16/stimulus-bill-passes-time... , since there is no way for the government to expand or contract rapidly.

Fast forward to the last couple of months, and you'll find that a lot of Requests for Proposals (RFPs) that are normally issued around this time by various federal agencies haven't been issued: http://blog.seliger.com/2010/02/28/where-have-all-the-rfps-g... . Presumably, the problem is that those agencies are still digesting stimulus-related funds, which in turn is making them less able to do the stuff they're regularly supposed to be doing.

Unfortunately, there doesn't appear to be a lot that can be done. If you have very few regulations or guidance, you'll get people inflating bids and embezzling the old-fashioned way. If you make the process sufficiently arduous, you have companies whose job it is to game the system and who end up taking a cut of whatever the contract is and then pass it down. One way or another, you'll get posts like the parent's and newspaper articles that describe some form or another of corruption.

eru3• 16 years ago

Yes, it seems, governments can't simple hand out money. There's always some rent seeker involved, working for it. (Mostly at high rates, though.)

akkartik• 16 years ago

sriram_sun• 16 years ago

Post it under an independent title. Interesting...

ErrantX• 16 years ago

Because of the arena we work in we have to fight tooth and nail for contracts. Here's why:

One of our big contracts is for a couple of public service bodies; as with all contracts at this level there is a bid process.

We are the smallest firm in the bid process, previously (under the same sort of contract) we have done twice as much work for these bodies for half the cost (compared to the other 3 current contractors - being small and agile means we are able to work really efficiently). From a technical standpoint we are by far the best option for them.

But the CEO's of our 2 main rivals "play golf" with all the managers of these bodies at weekends... they offer them a much lower hourly rate than us and promise certain limits on hours/job that takes it just under our quoted overall cost. Then they schmooze the management into putting a good word to the legal department (who make the decision) for them.

Everything is, of course, legal - but who is going to ignore what their boss is "suggesting".

Trouble is; 6 months down the line the hours per job starts to creep up dramatically ("as you see in subsection e; we are now having to account for ISO1003490 compliance which adds drastically to administration cost...").

For us, though, fortune favours the honest. In one contract that we lost it took 3 months for the contractor they chose to become unable to cope with the workload - cue panicked phone call to us ("someone who can handle it") and the contract is re-awarded...

But it's a pain to go through this all the time, and we are luckier than most companies in the same position :(

sucks

The last time round the process was much like the one the same Redditor discusses here: http://www.reddit.com/r/Economics/comments/c84bp/how_realwor... (note: we don't work for the DOD, it's just the same method)

But it is still bitch to try and out manoeuvre the "big guys".

arethuza4• 16 years ago

That's why I was glad to get out of working for any organization that has a business model based purely on "professional services".

As far as I could see, who the clients would choose had nothing to do with the ability of the vendors to actually deliver something. Occasionally we'd get involved in clearing up the mess left by other, much larger, companies - which I found pretty soul destroying. On one occasion we bid alongside a much larger company who when they actually got the work turned round and subcontracted us to do the work - they did nothing apart from occasionally turning up a meetings. Nobody else, least of all the client, seemed to regard this as odd.

revorad4• 16 years ago

I used to work in an organisation which sounds very much like yours. Our rivals also played the same undercutting tricks to get contracts and then often couldn't deliver. The sad part was that then they would subcontract us to do the work, instead of us doing it in the first place.

Retric• 16 years ago

FYI: That's when you increase your rate above your initial bid.

Just call it "administrative overhead" because you now need to keep the client and the person contracting the work to you happy.

kahawe• 16 years ago

An interesting read, especially the follow-up on DoD purchasing policies but... This is not really about corruption but rather about brutal business practices? It focuses on "wining and dining" your customers and then robbing them blind through details and fine print in contracts and abusing politics as a means of pressuring the victims.

Corruption as I understand it would be bribing the officials with money to get the contract. "Wining and dining" and invitations to nice places is very close and there is a fine line between that and down right bribery.

Or did I miss a notion of corruption here? Not a native speaker.

DanielBMarkham• 16 years ago

I would add that for the sake of simplicity the author only pointed out the glaringly obvious examples. Lots of government workers leave office and move into cushy consulting jobs. Lots of legislators have friends or family that lobby for laws that nobody understands (and that require extensive follow-on consulting to make sure people are in compliance) This game can be played on many levels, at the same time, and in ways that are completely impossible to see.

I remember my first job consulting with a contractor on a large government job. It was a disheartening experience that opened my eyes to how things really work. A lot of people on that job were really sad or angry. I determined to make it a learning experience about how people interact.

I'd like to add that there is a big of well-meaning whack-a-mole going on here. Some folks will read these stories and think "Well gee, we just need a better checklist" or a better contract, or a better process, or a better set of definitions.

These are the same people who have created huge Software Development Lifecycles for big companies. The idea is that every time something goes wrong in a human interaction that another layer of process, checklists, or formal hand-offs is needed to fix it.

The killer part is that the more complicated the plumbing, the more you need an inside track on how to work on it. So systems quickly reach a point where more and more safeguards are added on, but all it really does is make it easier to hand-pick the winners from the losers. If you had the right contacts, you could easily pick up a $1 million+ contract. This is called being "walked into" a contract, and it's done all the time.

revorad4• 16 years ago

I'm seeing my dad and his friends run businesses in India. Basically, you cannot do ANYTHING without bribing someone at every step. If you don't want to be "corrupt" you can simply close shop and go home. I'm grateful to the West for creating a society which gives me a chance to live an honest life. I think most people in developed countries hugely undervalue what they've got.

anonymousDan• 16 years ago

Fair enough, but as this discussion shows, it is still far from perfect. No harm in trying to improve it.

revorad4• 16 years ago

Yes I agree. I just wanted to point out the stark difference in realities, especially given the title of the article.

"Real-world corruption" has different meanings in different parts of the world. In India, it is also called life.

DrSprout• 16 years ago

Calling that real-world corruption seems fairly self-important. Real-world corruption is when you have to bribe the DMV to get a driver's license on top of the normal fee. Or when you can bribe your way out of most criminal offenses.

Getting taken in by a flashy corporation's sales division is just bad management.

mavelikara• 16 years ago

Wouldn't a variant of this works internationally also? First, you lobby your government to hand out huge loans to a poor country with the stipulation that the money should be used for something good, say providing drinking water. Then you go around and win the contract for providing the pipes. After a while you escalate costs as mentioned in the OP. The net result is that, officials in both countries can make great speeches, but the citizens of the poorer country are now saddled with a huge debt.

handyman5• 16 years ago

Confessions of an Economic Hit Man (http://amzn.to/2ZdEWA) is the story of companies that do exactly this thing, on purpose, to use the oppressive debts of the poor countries to control their behavior.

boredguy8• 16 years ago

The Village Voice (previously linked on HN) has a great exploration of what corruption looks like in the NYPD. When you have to meet a certain number of stop-and-frisks, you're going to take action where normally you wouldn't. And the outright altering of crime statistics is terrible.

http://www.villagevoice.com/2010-05-04/news/the-nypd-tapes-i...

Or take a look at what's being revealed in the Mineral Management Service: oil company employees would fill out inspection reports and MMS employees would simply approve them.

http://www.allvoices.com/contributed-news/5917196-ig-report-...

Kilimanjaro2• 16 years ago

As long as we let people manage resources that aren't theirs, they will misuse them.

From governments, to localities to corporations.

Kilimanjaro2• 16 years ago

Do we have the brains and balls to fix it?

Do we just want a piece of that cake?

Brightest minds wanted.

thefool• 16 years ago

So whats the solution?

ANH• 16 years ago

On several occasions, I have seen and heard of RFPs written so specifically as to rule out all but one bidder. The receiver of one of the contracts admitted as much to me; the request was written for him, because the civil servant in control of the dollars knew who he wanted before any proposals were in.

On the other hand, I have seen (and worked on) contracts taken away from companies with high overhead and shifted to a more nimble, but significantly smaller, competitor. In such cases it appears the contracting officers are taking steps toward less waste, but it is not always possible to know all of the factors that result in shifting a contract from one company to another.

And there is the hidden cost of doubling the size of the smaller company over night. How do they handle that growth? They say, of course, in the proposal that they can handle it, "Piece o' cake!" However, reality tends to intervene. But I digress...

jseliger2• 16 years ago

On several occasions, I have seen and heard of RFPs written so specifically as to rule out all but one bidder.

My family's business does grant writing for nonprofit and public agencies, and we don't respond to RFQs and the like: http://blog.seliger.com/2009/12/27/why-seliger-associates-ne... for this reason, among others. The other problem we have, as described at the link, is that contracts to write grants are often wired for local grant writers, which makes it futile for us to apply.

Maven911• 16 years ago

This post shows that reddit isn't just junk, there truly are gems beneath the torrent of rubble...you just have to dig to find them...

gahahaha• 16 years ago

or subscribe to r/tldr

How real-world corruption works

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