Jumping on the gravy trainThe private sector has gained notoriety in recent days by becoming part of high profile corruption cases, whether it is their role in tax scams, illicit financial flows, cost escalation of public infrastructure projects, opaque dealings in airplane procurements or encroachment of public lands.
Just before Dashain in 2018, the Oli government brought a policy limiting sugar imports, triggering a massive rise in sugar prices in the market. The sugar policy was brought to ‘protect’ the domestic farmers and industries. But it turned out that the domestic industry was intent on fleecing Nepali consumers, raising the prices from Rs63 per kilo to Rs105. Now, PM Oli is claiming he was duped by sugar manufacturers and traders in Nepal.
The private sector has gained notoriety in recent days by becoming part of high profile corruption cases, whether it is their role in tax scams, illicit financial flows, cost escalation of public infrastructure projects, opaque dealings in airplane procurements or encroachment of public lands.
One of the factors common to all these cases is the role of the private sector actors, they are increasingly becoming active drivers and facilitators of corruption. The private sector’s primary focus is to gain access to the gravy train by colluding with the political actors and the public officials.
The private sector and the state have several important links, but corruption is increasingly twisting these linkages, creating distortions in the market, impacting economic development, and affecting people’s quality of life.
One of the most important interfaces between the private sector and the state is the procurement process. It is a site for collusion between the two to steal public resources through techniques like cost-escalation, variation orders, commission-driven public expenditure, carteling and syndicating practices among contractors.
In infrastructure and public works, the cost of corruption is included in the total amount, inflating contracts by more than double. Politically motivated development projects, which are usually built under the engineering, procurement, construction and finance (EPCF) model through non-competitive or rigged bidding processes, disregard commercial viability, inflate costs, facilitate corruption, and put financial pressure on the government agencies that are required to service the loans and debts.
For example, the Melamchi drinking water project’s total cost has escalated to more than Rs36 billion from an initial estimate of about Rs17 billion. The 72 MW capacity mid-Marsyangdi began in 2001 at an initial cost estimate of Rs13.65 billion. However, by the time Mid-Marsyangdi was completed its cost per kilowatt had reached $5,500, a far cry from the $1,800 averaged by independent producers.
Another important interface between the state and the private sector is the operation of the licensing regime and the way in which discretionary power is used by those holding public offices to favour crony capitalists. The government frequently misuses discretionary authority for financial benefit while allocating licenses and regulating the private sector.
The government’s sugar policy, which was brought to support the domestic farmers and industries, is only one example. In return for supportive policies, the government asked Nepali cement manufacturers to be self reliant on clinker. However, the import of clinker continues to swell.
The state’s relations with the private sector is also reflected by the way the government grants concessions and subsidies to the private sector. Sometimes, these concessions go to the extent of criminality, and government institutions facilitate tax avoidance schemes. For example, in the fiscal year 2016-17, the government provided tax exemptions worth Rs51.3 billion.
Licenses, permits and rebates are a way of rewarding clients in the private sector, usually proxy-capitalists and political sponsors. The licensing regime frequently makes use of its discretionary power either to extort the private sector or facilitate exploitation of the consumers. Policy corruption is linked with benefitting the clients, especially in big infrastructure development projects and while making budgetary policies.
As a result, the private sector’s influence on legislation and government policy is increasing. The implications of these trends are that the businesses can now influence both regulation and regulatory bodies, and the government’s budgetary process.
Looking into private sector corruption
Nepal’s trade regime is directly linked to illicit capital outflows leading to the creation of separate black and white economies. The practice of trade misinvoicing and corruption has led to tens of billions worth of capital outflows from Nepal to offshore tax havens. From 1990-2008, Nepal was the sixth-top exporter of illicit financial flows among least developed countries, losing $9.1 billion; eight times more than the official development assistance (ODA) it received during this period.
The growing penetration of business interests in political finance and political representation is giving rise to clear conflicts of interest in representational politics and governance. In the absence of proper campaign finance laws and regulations, political leaders running for public office depend on opaque donations and funding from business groups.
An increasing number of private sector actors are entering politics and holding public offices. In the last 10 years, many businesspersons belonging to the top 30 businesses have served as members of the parliament. However, when it comes to corruption, the private sector is twice removed from the arm of the law. Before state agencies can take action against the private sector actors, they have to investigate the public sector officials and politicians who’ve held public positions.
The Commission for the Investigation of Abuse of Authority (CIAA), unfortunately, does not have the autonomy and independence required to carry out its duties when high profile politicians and public sector officials are involved. The private sector actors who facilitate corruption, thus, automatically enjoy impunity.
So far, CIAA investigations rely mostly on the law about disproportionate property, where the burden of proof lies on the accused to furnish evidence that their assets were acquired legally. The CIAA neither has the competence nor the ability to establish corruption by investigating and documenting the actual events and processes involved in corruption.
Independent and autonomous government agencies should be able to look into corruption in the private sector. Wrongly used, this can be used as another tool by politicians to control the private sector. Civil society’s accountability efforts should focus more on the five key interfaces between the state and the private sector, mentioned above.
Khanal is a research director at the Centre for Social Inclusion and Federalism.