Framework and Context the Industrial Anatomy of Corruption
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JANUARY-JUNE 2001 VOL V NO 1 Corruption in the Philippines: Framework and Context EMMANUEL S DE DIOS AND RICARDO D FERRER The Industrial Anatomy of Corruption: Government Procurement, Bidding and Award of Contracts AMADO M MENDOZA .JR Corruption and Weak Markets: The BW Resources Stock Market Scam CLARENCE PASCUAL Tender Mercies: Contracts, Concessions and Privatization MARIE ANTOINETTE G VIRTUCIO AND MELCHOR P LALUNIO BOOK REVIEW John N Schumacher SJ: Father Jose Burgos A Documentary History The Subversive Semiotic Shifts of Padre Burgos ARNOLD MOLINA AZURIN P-JJBLIC lJOLICY ................................................................ EDITORIAL BOARD Francisco Nemenzo Jr, Chairman; Emil Q Javier; Jose Abueva; Edgardo J Angara; Emmanuel V Soriano, Onofre D Corpuz; Raul V Fabella; Maria Carmen C Jimenez; Jose N Endriga Issue Editor: EMMANUEL S DE DIOS Managing Editor: MARIA CARMEN C JIMENEZ Research Assistant: SELENA J SALANG Design: ARIEL G MANUEL Public Policy (ISSN 0118-8526) is published semi-annually by the University of the Philippines. Subscription Rates (inclusive of postage): P700 (local), US$25 (Foreign Individual), US$30 (Foreign Institution). Editorial, Business & Subscription Offices UP Center for Integrative and Development Studies UP Bahay ng Alumni Building 1101 Diliman, Quezon City, Philippines Telephone 434-9282 Telefax 929-3540 Email [email protected] Public Policy accepts submissions of manuscripts accordance with the comments and suggestions examining contemporary social, cultural, economic of referees. 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CONTENTS Editor's Note ESSAYS Corruption in the Philippines: Framework and Context Emmanuel S DeDios and Ricardo D Ferrer 1 The Industrial Anatomy of Corruption: Government Procurement, Bidding and Award of Contracts Amado M Mendoza Jr 43 Tender Mercies: Contracts, Concessions and Privatization Marie Antoinette G Virtucio and Melchor P Lalunio 73 Corruption and Weak Markets: The BW Resources Stock Market Scam Clarence Pascual and Joseph Lim 109 BOOK REVIEW John N Schumacher S]. Father Jose Burgos A Documentary History Arnold Molina Azurin 131 EDITOR'S NOTE The four articles included in this special section on corruption are part of the research conducted by the Philippine Center for Policy Studies (PCPS) under the project Transparent and Accountable Governance (TAG). The TAG project sought to raise public awareness of corruption through various channels in order to provide a momentum for reform. Besides research, other avenues of the project involved public opinion surveys, investigative reports, and regular public forums. The editor and the authors especially thank their TAG partners for their support and encouragement, namely, The Asia Foundation, Philippine Center for Investigative Journalism, Social Weather Stations, and the Makati Business Club as well as Shiela Camingue, Grace Ong and Ruby Ann Pimentel who provided invaluable research assistance. Earlier versions of these articles benefited from valuable comments at a workshop. The authors express their gratitude to Germelino Bautista Jr.,]. Edgardo Campos, Amando Doronila and Rigoberto Tiglao for their observations without holding them responsible for any of the views or remaining errors. The first article by de Dios and Ferrer assesses the importance of different modes of corruption in a specifically Philippine context. The other pieces are more detailed analyses of specific examples of corrupt practices. Government procurement is probably the mode of transaction that is most vulnerable to corruption and is the topic of both Virtucio and Lalunio's piece and that of Mendoza. Virtucio and Lalunio provide a detailed description of the various ways the procurement process can be corrupted. Mendoza, on the other hand, takes a broader view and asks whether larger trends such as liberalization and privatization have affected corruption-proneness of procurement processes. Finally the last article by Pascual and Lim, in dealing with the BW case, illustrates a new mode of extracting rents through the operation of markets. More important, however, it questions the simple identification of government with corruption and of transparency with markets and regards both institutions as capable of failure. Finally, sincere thanks are due to Dr. Ma. Carmen Jimenez of UP-CIDS and of Public Policy, who patiently read through these manuscripts, providing that indispensable external eye to prepare them for publication. Emmanuel de Dios Issue Editor B._TBLIC JANUARY-JUNE 2001 A:FYOLICY VOL V NO 1 Corruption in the Philippines: Framework and Context EMMANUEL S DE DIOS and RICARDO D FERRER This paper proceeds from the more recent literature on corruption as a princi pal-agent problem whose significance for development depends on dimensions re lated to the nature of the corrupt transaction itself such as distinctions based on the agents involved, scale, type ofdea~ predictabz1ity, industrial organisation, etc., all of which affect, /or better or worse, the nature ofthe relationship between principal (as represented by the public interest) and the agent (politicians and bureaucrats). Cor ruption may thus be r,egarded as an incentive-design problem. The paper also argues, however; that there is a larger dimension to corruption determined by the historical and social context. Here, the ul#mate factors are those affecting social cohesion (e.g., income and wealth, education, ethn_ic and other dzf ferences), the economic strategies pursued by the government (e.g., minimalist ver sus interventionist), the political system (the autonomy of the bureaucracy, the de gree of centralisation), the extent ofmarket transactions (local, global) and the rate and sources ofeconomic growth. It is these factors that determine the credibility of De Dios & Ferrer the formal institutional constraints (however designed) on the behaviour of pub lic officials and private agents alike. This framework is used to examine how and why the dominant types of cor ruption in the Philippines have evolved from nepotism, to smugglin~ to public works contracts, to debt-financed schemes asset-privatisations" until the recent de scent into underworld-related activit£es. The unprecedented governance breakdown under the Estrada administration is then explained as the result ofa confluence of a growing sense of public interest (the result ofeducation, urbanisation, political experience and expanding market transactions) on the one hand, and the drying up of innovative sources of rents that continued economic growth would have provided. 1. Introduction The most common definition of corruption is "the abuse of public power for private gain." This definition can be disingenuously general, depending on how broadly one construes "public power" and "private gain." By comparison, Shleifer and Vishny's [1993] reference to the "sale of public assets for private gain'' is more restrictive, since it unduly limits the transactions to those mediated by money exchange. Rose-Ackerman [1998] gives a definition corruption is that is suited mostly to bribes: "an illegal payment to "the abuse of a public agent to obtain a benefit that mayor may not public power for be deserved in the absence of payoffs.n Hutchcroft [1999:227] endorses a definition by Nye [1997] that private gain. n is more explicit, although less succinct: "behaviour which deviates from the formal duties of a public role because of private-regarding (personal, close, family, private clique), pecuniary or status gains; or violates rules against the exercise of certain types of private-regard ing influence". As is evident from the above examples, the typical definition of corruption involves the notion of the "public" in a fundamental sense. For this reason, it is customary to regard the main locus of corruption as government and as invariably 2 PUBLIC POLICY Corruption in the Philippines: Framework and Context involving public officials. Recent usage, however, also speaks of "private corrup tion" as occurring in business firms or as it deals with organised crime. Some ex amples are overpricing practised by supply managers, excessive charging of per sonal bills at company expense and so on. A case for including these acts under corruption can be made to the extent that they occur in the context of firms having a public dimension, e.g., that are widely held publicly, or to the extent that certain rules protecting the general public proscribe such behaviour, e.g., trading on insider information. Otherwise, these acts would be in the nature of private damages and the subject of civil liabilities. By extending the concept of principal