Monday 31 October 2011

Will Olympus hurt Japan?

Japanese PM Yoshihiko Noda is concerned that the recent Olympus scandal will tarnish Japan's reputation as a rules-based market economy.  The scandal is over claims by Michael Woodford, former president and CEO of the Japanese camera maker, that he was dismissed because he asked awkward questions about around $1billion of missing funds.

Prime Minister Noda is right to be concerned.  It's not clear yet what happened at Olympus.  Some suspect bribery or money laundering, but others float more benign explanations.  Arguably though, whatever the eventual truth, the mere raising of suspicions will be damaging - to both Olympus and Japan.

Sceptics argue that the business world will not be deterred from promising business opportunities in Japan just because of a scandal at one company.  But Prime Minister Noda has identified an important problem. The world now has doubts about how business is done in Japan, what the norms are, and to what extent they clash with the broadly 'western' norms of transparency and free competition.

Moreover, the experts that are consulted by Transparency International for its annual Corruption Perceptions Index may now rate Japan as more corrupt than in previous years.  That will feed through into a drop in the country's ranking, and that in turn will be used by companies when they consider investing in Japan.  In other words, thanks to the widespread use of the CPI, suspicions get institutionalised into business decisions relatively easily these days.  The CPI has emerged as an important 'intermediary' for a country's reputation for corruption.

Monday 17 October 2011

Do Public-Private Partnerships breed corruption?

A couple of weeks ago I had the great pleasure of speaking to a group of public officials from South-eastern Europe about corruption risk in Public-Private Partnerships, particularly those set up to facilitate the construction of infrastructure or hospitals.

There are usually two main rationales for using PPPs for such big projects. The first is about reducing the financial burden on the government, because the private side provides part of the investment (and, importantly, bears part of the risk). This means that PPPs are attractive to cash-strapped governments, and arguably makes it more likely that infrastructure projects will get off the ground. Politicians are not typically very keen on big infrastructure investments, which may only be appreciated years into the future when, heaven forbid, it might be a successor government that gets the credit.

The second rationale is about improving efficiency.  The private partner, motivated by profit maximisation, is seen to be a more efficient provider of services. The empirical evidence on that is mixed, at best, though. There are some indications that private partners inflate prices when dealing with public-sector clients.

In any case, neither of these rationales means that PPPs are inherently more corrupt than projects that are financed purely by the state.

An argument can be made that PPPs are less likely to suffer from corruption, because governments are forced to make more careful plans about the projects, in order to get private partners and financiers on board. This leaves less scope - or discretion - for corruption in implementation.

But on the other hand, PPPs are an opportunity for public officials to get access to private funds.  There is a big temptation therefore to design the project in such a way that one's friends or relatives are well placed to win part of the business, perhaps not as the direct partner, but as the supplier of some critical material.

Overall, PPPs might be corrupt and they might not.  It depends on what controls are in place, not on whether the project is public, private, or a mix of the two.