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Companies Capture Mariano Mosquera Edmond J. Safra Network Fellow at Harvard University Weak public procurement processes in some Latin American countries are undermined in order to fund party politics. This situation presents new methodologies of, and a wide scope for, institutional corruption because it involves, among other things, the creation of ad hoc corporations to establish corrupt relationships with the government. The classic definition of corruption indicates that it is pollution of the public by the private. This idea of corruption has promoted the study of a "corporate state," coopted by corporations that distort the public interest and address collective goals and resources to private interests. Academic development of this view has led researchers to identify specific strategies like corporate lobbies, or even the notion of "state capture,"1 in which people related to private interests are placed in key positions of the state to implement corruption from inside of it. However, this focus on corruption is not entirely successful for some countries in Latin America, where economic power appears subordinate to political power. In the region, the government extends ties to co-opt the private sector in order to finance politics. That is, the government looks for corporate partners or directly creates some corporations to divert public resources and objectives toward partisanship. So the pollution of the public by the party interest is a strong component of the definition of corruption. In this sense, the public procurement process appears to be a clear example of institutional corruption,2 and in particular of the extension in the definition of corruption.


How it Works Institutional corruption in public procurement begins when government officials request money from already co-opted suppliers. These companies promise to give that money (usually a percentage of the contract awarded) to the officials once the contract is awarded to the company. Officials or institutions receive a political advantage with this money that allows them to lead the political system. Thus, they look for political and social support through dirty fundraising strategies used to improve political organization and visibility. In exchange, the government systematically grants contracts to allied suppliers, without respecting the competitive rules of public procurement processes. Some general conditions cause the officials' requests for money to operate differently than individual corruption with the incentive of personal gain. These conditions include the large number of people who can participate in the bidding process and the high economic amounts involved. This creates a special interest of the "political class" (party leaders in government) in strengthening mechanisms of political financing through the public procurement process, involving extensive networks of political allies and the quest for major economic amounts. In modern democracies with competitive elections, taking advantage is part of the political struggle, but the problem is the use of inappropriate processes to achieve this advantage. The pressure of competitive democracy on political financing, in this case, affects the processes and purpose of the state. In addition to this, there exists confusion about the purpose of the state, the purposes of the government, and the intent of the party. Corruption Processes Fundraising for political parties by soliciting private contributions is not corruption. But it is an offer from the government to some of the providers who are bidding for a public works contract, in exchange for the promise of money and through the alteration of the bidding process. In this case, money is diverted to party politics. The inappropriate public procurement process undermines the competition among providers through the distortion of the principles of maximum diffusion, better quality and lower price. Another distinguishing factor of this form of institutional corruption is not only characterized by the pursuit of corporate partners by the government, but also by the creation of ad hoc companies. Many times the government creates ad hoc firms that only serve the purpose of a corrupt relationship with it. In these companies, conversely to Kaufmann's notion of "state capture," people with partisan loyalty are put into place, with the objective of diverting public resources obtained to finance politics. Two recent cases at the sub-national level in Argentina demonstrated this methodology of institutional corruption. Both cases, reported journalistically, reflected the creation of companies with people related to partisan political power. In the government of Cordoba Province a provider of road cleaning services, created to establish a corrupt relationship with the government, was led by party allies placed into power directly by the Minister of Transport. The case finally ended up with the 2

resignation of the Minister. Another case in the municipality of Villa Carlos Paz showed how a newly formed company with no experience obtained contracts for major tourist events in the city, while at the same time the company made "donations" to local government. Conflict of Purposes and Devastating Effects On the one hand, the purpose of the state is the promise of a level playing field that is equally restrictive and empowering for all its inhabitants3; this contrasts, at least in this case, with the idea of mobilizing political support. In an ideal sense, the competitive public procurement process secures the purpose of the State (as in Held's definition). But in many cases in Latin American contexts, undermining the public procurement process is necessary for fundraising party support. Thus, corruption is the election of a wrong process (by leaders of the party working in key positions in the government) to achieve the objectives of party politics, affecting the purpose of the State. This is the primordial conflict of interests between government and party. This is a practice of corruption without any possibility of justification, because collective resources are used for partisan objectives and by improper means. On the other hand, it is important to clarify at another level of analysis that the existence of multiple and complex governmental purposes are used to mobilize partisan support in some governments in the region. This increases the confusion of purposes, where officials and institutions are interested in receiving money and political benefits to achieve these purposes of government. Here, the purpose of the party is not in conflict with the purpose of government, but the purpose of the state is affected by the use of improper means. This kind of corruption has more possibilities for artificial justification, and is excused (in our regional culture) because collective resources are used for collective purposes. Furthermore, it is clear that the effects of this institutional corruption are so devastating because of the high economic amounts that exist in public procurement processes. A negative consequence, with a wide territorial and temporal scope, is the lack of quality in public investment. This kind of institutional corruption also produces the inability to use public works as a Keynesian tool for economic and productive mobilization through the development of strategic sectors. This point is very important in emerging economies. Successful Practices in the Region A comprehensive and robust framework of rules applied to the public procurement process may be an appropriate remedy against such institutional corruption. The successful experience of Chile-Purchase proves it. The Chilean system is based on institutional arrangements that combine the professionalization of public administration, public procurement courts, and enforcement authorities with functional autonomy. In addition to this, the active and passive public information processes are relevant, as well as the social participation in councils of integrity and transparency, and the continuous innovation in technology tools.4 3

Moreover, the civil organization Poder Ciudadano in Argentina has implemented an integrity pact methodology, between providers, to avoid paying bribes. This initiative is still very limited, only focusing on building a transparent scenario for public procurement. This methodology is accomplished by defining the exact scope of the specific pact, access to certain information, and civil monitoring. The author wishes to extend special gratitude to David Johnson for corrections, and to Alejandro Barbeito, who created the artwork in this blog. 1. Joel Hellman and Daniel Kauffmann, "Confronting the Challenge of the State Capture in Transition Economies," Finance & Development 38.3 (2001). 2. Lawrence Lessig, "Memorandum," November 12, 2010, and Dennis Thompson, "Two Concepts of Corruption," Edmond J. Safra Research Lab Working Papers, No. 16 (2013). 3. David Held, Democracy and the Global Order (Paid贸s, 1997). 4. Mariano Mosquera, Institutional Arrangements Against Corruption (FLACSO Chile, 2012).


Companies capture (EJS Harvard)