Integrity pact against corruption: An effective tool or a paper tiger?

January 23, 2020 4:30 AM

In highly-corrupt environments where it is impossible to win a contract without bribery, alongside a low probability of detection of bribery and/or low penalties, an integrity pact serves no useful purpose.

When there is low probability of detection and/or low penalties, the propensity to seek bribes will be greater.When there is low probability of detection and/or low penalties, the propensity to seek bribes will be greater.

By Mallika Mahajan & Pawan Kumar Sinha

Indian public procurement has accepted, unquestioningly, the integrity pact (IP) as its flagbearer weapon in its anti-corruption arsenal for two decades now. The IP is an agreement between the contracting government agency and private companies that they will abstain from bribery and ensure accountability through a monitor. Sanctions include loss of contract, blacklisting, forfeiture of bid and performance bonds, and liquidated damages. The IP is a mechanism to overcome the prisoner’s dilemma (a standard example in game theory) that shows why two rational individuals might not cooperate, even if it is in their best interests to do so. Defence contracts can be a touchstone to examine the efficacy of the IP, as it is necessary for all procurements of and above Rs 100 crore.

Claudio Weber Abramo, in his paper ‘What If? A Look at Integrity Pacts’, examined the efficacy of IPs in tackling corruption. Two probabilities determine the propensity to bribe. The first is the probability of winning a tender without bribery, and the second is the probability of being caught bribing/being bribed. Another determinant is the quantum of penalties on detection of bribery. If all these determinants rank low on the probability scale, it is unlikely that the IP alone will result in clean public procurement. This is because IPs will be excessively reliant on subjective ethics of the stakeholders. Personal ethics are private behaviour that is difficult to ascertain, which makes the honesty pledge of IPs insignificant. The demand side of bribery faces the same game calculus. When there is low probability of detection and/or low penalties, the propensity to seek bribes will be greater.

A public tender is an event governed by economic considerations, and non-economic factors such as ethics do not have a place in economic rationality. The central justification for a firm to participate in a tender is winning the contract that furnishes aggressive stimuli to bribe. Public officials, similarly, receive aggressive stimuli of bribery; moreover, they receive no special compensation for being honest. Oaths are private behaviour that are impossible to detect in a bribery-conducive environment. This reduces the IP as a window-dressing for the benefit of a third party. For someone who is willing to pay bribes to win contracts, it is not clear why honesty pledges would function as a deterrent. After all, irrespective of the legal environment, bribery is not an accepted behaviour, and furthermore it is often a crime. If someone is willing to commit a crime, then breaking one’s word by signing an honesty pledge and not abiding by it is a minor inconvenience. This is the central credibility problem of the IP.

In short, in highly-corrupt environments where it is an impossibility to win a contract without bribery, alongside a low probability of detection of bribery and/or low penalties for bribery, an IP serves no useful purpose. Correspondingly, low-corruption environments do not need an IP.

We examine the above premises in the AgustaWestland case. In February 2010, the Indian government contracted to purchase 12 AgustaWestland AW101 helicopters for the Indian Air Force (IAF) for Rs 3,600 crore, to carry the President, the Prime Minister and other VVIPs. In February 2013, the Indian government put the deal on hold, following the Italian authorities’ arrest of the chairman of Finmeccanica (parent company of AgustaWestland) and the CEO of AgustaWestland on charges of bribery to secure the Indian deal. In 2014, India cancelled the AgustaWestland chopper deal on the ground that they violated the IP.

If the IP had been an effective instrument, the monitor should have raised the red flag when the IAF changed the technical specification of the tender to enable AgustaWestland to re-enter the bidding process. The IAF tweaked parameters such as the height of the cabin of the helicopter and the operational ceiling (the maximum altitude the helicopter could fly).

The IP did not raise any suspicions of bribery either. The bribery emerged during an Italian investigation leading to arrest of key personnel in February 2013. By this time, delivery of three helicopters to the IAF had already taken place.

Furthermore, when India cancelled the deal in January 2014 for the breach of the IP by AgustaWestland, the latter challenged the cancellation through the launch of an arbitration against India. AgustaWestland cancelled the arbitration in February 2019, only after India filed a criminal charge sheet against it in the High Court of Delhi.

Neither did the IP enable India to get all monies it had paid to AgustaWestland—after the cancellation of the contract, India encashed $36 million worth of AgustaWestland’s bank guarantee in Indian banks in January 2014. For retrieval of the bank guarantee amount made by AgustaWestland in Italian banks that was about $260 million, India had to approach Italian courts. On March 17, 2014, an Italian court rejected the request made by India. However, the appellate court in Milan reversed the lower court’s judgment and upheld the claims of the Indian government. Accordingly, in June 2014, the Indian government encashed $260 million, taking the total amount recovered so far to $300 million. With this, India has recovered around 45% of the total contract value of $520 million it had paid to AgustaWestland. (The company kept the 106 million euros for the three helicopters it had delivered.) Without the courts, the IP was a paper tiger.

IPs also do not address the problem of cartelisation that affects public markets. The cartelised merry-go-round schemes are very advantageous as they lower the ‘normal’ cost of participating. Participants in cartels leave the responsibility of drafting losing proposals to the preordained winner, or even use common templates (which is why one of the techniques to identify the action of cartels is to examine proposals looking for stylistic and even physical similarities).

The amended Prevention of Corruption Act (PCA), 1988, which penalises the supply side of corruption (the private sector), also renders the IP infructuous. Section 9 of the amended PCA penalises commercial organisations for bribing public servants for obtaining/retaining business or an advantage in the conduct of business.

Foreign companies are liable under the expanded definition of ‘commercial organisation’. Under section 10, ibid, senior functionaries of the commercial organisation can be punished with imprisonment (3-7 years) and be liable to fine. Section 16, ibid, permits courts to fix the fine equivalent not to the bribery amount but to the amount/value of the property that the accused person has obtained by bribery. It is imperative to avert the danger of complacency after the use of the IP.

Mahajan is chief commissioner, CBIC, India. Sinha is director, International Anti-Corruption Academy, Austria

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Rural Revitalisation: The rural road to $5-trillion GDP
2FM does the right thing, states need to do the same
3Policy Relook: Put SEZs back on track