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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," co-

opted 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.

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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

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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

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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 (Paidós, 1997).

4. Mariano Mosquera, Institutional Arrangements Against Corruption (FLACSO Chile,

2012).