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

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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 and agent de­ fined below, however, a good deal of breach of trust in the private sector may also be subsumed under corruption. For this paper, however, corruption shall refer only to cases involving acts of public officials or pertaining to public assets.

2. Corruption as a breakdown in a principal-agent relation

Public corruption is not a thing but a relation; more precisely, it is the break­ down or rupture (cor+ rumpere =completely breach) of a presumed relation be­ tween social agents. The fundamental relationship affected in corruption partakes of the nature of the well-known principal-agent (henceforth, the PA) problem in economics which refers to a situation where one party (the "agent") is contracted to promote an outcome in behalf of someone else, namely the "principal" (see, e.g., Arrow [1986]). The agent's action or characteristic, however, potentially affects not only the principal's but also his own interest. When the agent's action or character­ istic cannot be directly observed by the principal, or where the outcome is affected 1 not only by such an action or characteristic , there is a problem of ensuring that the agent takes the appropriate action (or possesses the characteristic) that will pro­ mote the principal's interest. In the case of corruption, the principal is understood to be the government, which embodies public interest in its laws, policies and strategies. Government performs functions and distributes resources to attain its goals. The performance of such functions, however, is devolved upon real people, bureaucrats and politicians (or even private individuals as such concessionaires) who may be presumed to act

VOLUME V NUMBER 1 January-June 2001 3 De Dios & Ferrer in their own interests. A contract implicitly exists between government and its agents for the latter to discharge their functions in the former's behalf. Since the actions and qualities of such agents can be observed only imperfectly, however, govern­ ment cannot be sure that its agents always perform fully in its interest. Depending on the context, the principal in the corruption relation may be ei­ ther the highest echelons of government, with the agents referring to officials at different levels designated to carry out certain tasks, or the principal can be the electorate or public at large, with politicians as their agents. It is obvious that the PA problem exists on several levels, with society at large (the public or the electorate) being the ultimate principal, and both politicians and bureaucrats existing as agents on the lower levels. More broadly construed, however, the rules governing the PA relationship be­ tween politicians (or government) and bureaucrats (or the civil service) are found in the entire system ofbureaucratic recruitment, compensation, promotion and procurement, all The events of EDSA 2, of which are designed by politicians. Included for example, must be in these formal constraints are the larger laws understood primarily governing the behaviour of public officials and as an informal recall- the penal system punishing errant behaviour. mechanism at work Finally, one cannot discount the various infor­ mal constraints that internally regulate bureau- cratic behaviour such as professionalism, a moral viewpoint, a sense of duty and esprit de corps, distinct factors that to some extent transcend pecuniary compensation. Similarly, the relationship between the public (as embodied by the electorate) and politicians is governed by the political system as typically set out in a constitu­ tion which includes the formal mechanisms for election and recall. The 1987 Con­ stitution, for example, provides for the conduct of regular elections and occasional plebiscites, but more innovatively, also for electoral recall and constitutional amend­ 2 ment under a people's initiative. The independence of the government's branches and the checks and balances among them (e.g., impeachment), the dichotomy between government and opposition, and laws and the penal system as they relate

4 PUBLIC POLICY Corruption in the Philippines: Framework and Context to corruption and plunder form part of this formal system. Compared with the bureaucracv, however, the difference between formal and informal mechanisms is less distinct at the political level. Constitutional guarantees of the freedom of speech, freedom of the press, freedom of assembly and ultimately, the right to rebellion do not directly define formal mechanisms to reward or punish erring politicians, merely leaving open the door for more informal mechanisms to function, including the threat of exposure to public or media criticism, social ostracism and collective ac­ tion. The events of EDSA 2, for example, must be understood primarily as an infor­ mal recall-mechanism at work: large-scale collective action in the wake of a failed formal mechanism (the impeachment process) turned public opinion, forcing a mass resignation of the cabinet and the effective resignation of the president. In many ways, the control mechanisms shaping the relationship between poli­ ticians and the electorate at large are among the most weakly defined. Combined with the inherently large discretion accorded to politicians and the peculiarities of Philippine political economy, this provides fertile grounds for corruption. Understanding corruption by proceeding from the principal-agent problem is nei­ ther to redefine nor to decriminalize it, in much the same way that understanding why crime exists is not tantamount to condoning it. The approach itself does not change the thing viewed but puts its basic elements and characteristics into sharper focus. Posing the problem of corruption as a principal-agent relation entails positing agents as acting in their self-interest, behaving so as to maximize their own wel­ fare. Unless such maximizing behavior is curbed one way or the other through formal or informal constraints, corruption as commonly defined would be a "natu­ ral state." This would be even truer when agents pursue their self-interest in the context of various relationships established with other individuals while discharging their official functions as agents for the principal. Additional considerations may affect the agent's objectives in each of these relationships, and private-regarding behavior by public agents would be the norm. At this level of analysis, one may better understand the reasons for corruption by examining the agent's utility func­ tion, the arguments that enter it and the weights or importance that the agent attaches to each of them. This type of rigorous examination does not seem to have been done before, although earlier sociological studies of corruption have

VOLUME V NUMBER 1 January-June 2001 5 De Dios & Ferrer traced it to the particularistic behavior of agents or to culture in general. (See Corpuz [1957, 1965]; Carino [1977,1979,1986]; Endriga [1979]; and Carino and de Guzman [1979].)

Factors affecting the principal-agent relation

It must be said at the outset, of course, that this paper's use of the PA frame­ work goes beyond its restricted economic application where it is used primarily to solve for the compensation scheme that aligns the agent's actions to the principal's objectives. Instead, it will be used here primarily as a heuristic. By initially positing the requirements for an ideal relationship that ought to exist between principal and agent and then comparing it with the corrupted or "broken" one that actually exists, one is able to determine the sources of difficulties that prevent such a relationship 3 from functioning. What follows describes and analyses some of those factors.

1. Complex environment and the development context

A complex environment is ubiquitous in any PA problem. If all contingencies could only be foreseen, then a perfect (iflengthy) contract could be written, speci­ fying exactly what the agent should do if such and such an event occurred. But contracts cannot be specified too tightly, since a complex or changing environment may require a different set of actions from what has been stipulated. A greater or lesser degree of discretion must therefore be typically allowed the agent or person in charge. This very discretion, however, is what allows the agent to behave in ways other than those that promote the interests of the principal. The difficulties posed by a complex environment maybe seen in persistent attempts to prescribe behaviour, as in, say, the voluminous rules for procurement laid down by the Commission on Audit. These may work well enough to regulate behaviour in predictable, repetitive contexts (e.g., activities connected with pro­ cessing of passports or drivers' licenses). But as one moves to more complex envi­ ronments, especially as these pertain to developing countries, it becomes clear that the constant expansion and elaboration of such rules to prevent abuse cannot go on indefinitely. To do so would seriously impair the initiative of agents, reducing them

6 PUBLIC POLICY Corruption in the Philippines: Framework and Context to simple robots and becoming barriers to efficiency itself. In general, therefore, a trade-off exists between the discretion needed by agents to perform other than merely perfunctorily in a complex world and the specification of behaviour needed to prevent abuse. The constitutional concern over the possibility of" grave abuse of discretion" summarises the dilemma.

2. Information and bounded rationality on the part of principals

Even in a complex environment, the PA problem would be more tractable if the principal was always able to determine exactly what has occurred and how the agent has acted. There is a limit, however, to the extent that principals will find it worthwhile to observe the actions of their agents; agents will typically be better informed of their own actions than the principals are. Rationality is ulti­ mately bounded or limited because its uses are multiple and competing. The electorate, for example, does not always invest in the information required to make the best electoral choices (nor even take the time to vote) and it cannot continuously inform itself of all that takes place in government. Mter all, people work and consume mostly in a private capacity. In this sense, exhortations to nationalism and civic duty really represent attempts to persuade the public to make the investment in political information they would otherwise not make. As will be argued in the last part, the democratic election of undesirables like Estrada is due in large part to information failure. Taken together, bounded rationality and a complex environment give rise to monitoring costs, which simply refer to valuable resources used up whenever prin­ cipals try to ascertain the behaviour of agents closely. It is, of course, possible to designate special entities to monitor the behaviour of agents as part of the arrange­ ment; this is the purpose of entities such as the COA, the ombudsman (tanodbayan), the anti-graft court (sandigang bayan) and special anti-corruption commissions. It is equally obvious, however, that such arrangements are costly and expend scarce resources.

VOLUME V NUMBER 1 January-June 2001 7 De Dios & Ferrer

3. Personalities versus parties-non-shared goals between principal and agent If actions could only be prescribed beforehand and verified, then the agent's subjective beliefs and values would become immaterial and irrelevant. As more discretion and authority are devolved upon an agent, however, (necessitated, say, by an increasingly complex environment), it becomes more desirable that the agent possess values that reflect those of the principal more closely. Arrow [1974:23] writes, Trust is an important lubricant of a social system. It is extremely effi­ cient; it saves a lot of trouble to have a fair degree of reliance on other people's word. Unfortunately, this is not a commodity which can be bought very easily.

Character and values are more important among politicians than run-of-the­ mill bureaucrats since the former typically exercise more discretion and scope for judgment than the latter, whose behaviour is usually more readily prescribed. Much has been written in this country regarding the need to base politics on issues rather than personalities; it is probably more accurate to say that stances on issues are as important to the extent that they also Character and reveal character and values. The more complex the values are more environment, the less easy it is to prescribe definitive important among issues. To what extent can "character" and "values" be politicians than predicted? The advantage of political parties built on run-of-the-mill ideologies is that they expressly contain a well-defined bureaucrats process for sorting out candidates based on the de- gree to which these share the party's goals. Political parties place their seal of approval on candidates who have undergone a process vetted by informed party observers and insiders. This reduces the information costs on the part of the individual voter who no longer needs to familiarise him­ self with the individual candidate but takes the word of the party. An offshoot of mass media and entertainment, however, is to convey the misimpression that the

8 PUBLIC POLICY Corruption in the Philippines: Framework and Context electorate can actually get to know candidates' character and values directly and intimately {witness the Estrada myth of being the defender of the poor, conveyed through cinema, or the reputation of media personalities developed through in­ vestigative and public assistance programmes on television). This direct appeal to voters and the false intimacy generated by mass media is an element of mod­ ern political culture that has become particularly conducive to political dema­ goguery and irresponsibility since first, it can obviously be false and second, un­ like a party system, it provides for no intermediate mechanism to hold politicians accountable to shared values during periods between elections.

4. Incoherent principal interests and social cohesion

A complication suggested by applying the PA framework is the latter's pre­ sumption that the principal's objectives are clearly known and all that remains is to find a design to attain such objectives most effectively. Applied to the political $phere, this presumes there is a common standard of public interest that the elector­ ate applies to the behaviour of politicians. In practice, however, it is well known that a problem exists in aggregating social preferences. Where the notion of what constitutes public interest is either vague or disputed, reward-and-penalty mecha­ nisms are unlikely to function smoothly since arguments can always arise over whether the official had indeed fulfilled the putative public interest. This problem of incoherent principal interests is particularly acute for the Phil­ ippines because of a long-standing heterogeneity ofsocial interests along various lines including ethnic-linguistic dimensions, religion, geography, wealth and urban-rural distinctions, a phenomenon that writers as early as Corpuz [1965] have long recognised as obstacles to "national unity" and social cohesion. Poverty and a highly unequal distribution of wealth can result in widely differing conceptions of accept­ able behaviour on the part of public officials, the most vivid recent experience being the divergences between EDSA2 and EDSA3. Nor is this isolated. Thanks to a long history of colonial oppression and unre­ sponsive governance, large groups of the population continue not to regard institu­ tions of government and broadly defined national interest as representing values superior to narrower parochial or dan and family interests. As \a result, acceptable

VOLUME V NUMBER 1 January-June 2001 9 De Dios & Ferrer behaviour on the part of public officials is evaluated using a different metric from that corresponding to the largest public good as expressed in laws and rules. There are forces that tend to create a common experience and value-system among the people such as education, exposure to mass media, urbanisation, informa­ tion, greater contact with the formal economy and the functioning of government.

5. A perversion of the relationship clientelism The lack of social cohesion and the predominance of particularism imply that the goals of the principal that is society will either conflict or be ill-defined. This vacuum in the objectives of the principal weakens control over agents and gives rise to the possibility that the objectives of the agent may be substituted for those of the true principal. Putative public officials may thus attain substantial autonomy and discretion in pursuing private objectives, subject only to the condition that they fulfill the minimum actions necessary to remain in office. Local politicians may thus dominate local politics indefinitely by fulfilling the implicit minimal require­ ments of crucial electoral constituencies (e.g., the urban slum-dwellers, farm work­ ers or tenants). In the extreme, the supposed principal-agent relation between the public and public servants can be so perverted that the latter become the principal and the former the agents, making clientelism possible. In clientelism, the PA problem is reformulated as one where the politician designs an incentive scheme, say, through various income transfers and other forms of patronage, to induce the crucial con­ stituency to perform his bidding, namely election. For obvious reasons, this type of relationship is more likely to prevail in local than in national contexts where trans­ fers are more diffkult to target, and among politicians rather than bureaucrats, since the latter's tenure depends more proximately on politicians than on dealings with the general public.

6. Violated participation constraints and adverse selection.

Any solution to the PA problem assumes that an eligible payment scheme can be found to compensate the agent at least equal to the income in the agent's next

10 PUBLIC POLICY Corruption in the Philippines: Framework and Context best alternative occupation, thus meeting the agent's "participation constraint". In reality, however, the existing compensation for public officials at certain levels, es­ pecially at the higher decision-making levels, often fails to achieve this, with the levels of statutory compensation falling below realistic alternatives for the pool of qualified talent. An important reason the design of incentives does not work is that it simply fails to compensate agents sufficiently. Tell- tale signs of this are the increasing difficulty in recent that a reduction in years of filling sub-cabinet positions in the executive branch and the high number of vacancies (about a the size of quarter of all positions) in the judiciary. government is an This sa~ circumstance is an important motiva­ indispensable tion for the agent to attempt to get around the scheme. ingredient in the A situation of"adverse-selection" may then arise, since reduction of only those who expect to violate the scheme are at­ tracted to public service. Hence, bureaucrats of agen­ corruption cies such as the bureau of internal revenue or the cus- toms may be curiously attracted to careers that obviously offer little by way of legitimate pay, expecting that the differential will be made up through corruption and other forms of post-contractual opportunism.

7. Scope of action and competition

An important condition for the existence of corruption is government's posi­ tion as a virtual monopolist in the provision of many goods and services, raising the potential for obtaining rents by influencing the decisions of government agents. If government were no more than one among many competitors rather than a mo­ nopolist, no premium would attach to the decisions it makes, and little or no re­ sources devoted to influencing the exercise of its prerogatives. A related point is that a smaller scale of government would reduce the scope for corruption. This has been extrapolated into the proposition-discussed under political economy-con­ text below-that a reduction in the size of government is an indispensable ingredi­ ent in the reduction of corruption. But one must balance the real requirements of development in which a government's role is indispensable against this. In the same

VOLUME V NUMBER 1 January-June 2001 11 De Dios & Ferrer manner, removing all discretion would drastically reduce opportunities for corrup­ tion but would more likely impede efficient responses to complex environments. Rather than directly reduce public agents' scope of action through closer pre­ scription, it is also possible to use competition as a means of eliciting appropriate agents' behaviour.This can take various forms ranging from combined public and private provision, contracting and concessions and management contracts to com­ plete privatisation (examples being water concessions, power sector reforms and various others). Besides providing for forms of economic competition, however, mechanisms also exist to promote competition in the political sphere, the most obvious being electoral contests. Added to these are intra-regime competition between political parties as well as the various checks and balances between branches of government. In the Philippines, however, the peculiar characteristics ·of politics such as the ab­ sence of party-based politics and strong central powers vested in the executive rela­ tive to the bureaucracy and other branches of government work to reduce the effec­ tivity of the pressure of competitive politics.

8. The relational context

Finally, both principal and agent can behave in a corrupt manner because they can introduce more arguments to their utility functions or increase the levels of these arguments or both. By definition, however, these actions are illegal and are subject to penalties. Self-interested agents, therefore, will persist in their corrupt behavior, or much more of them will do so, only if the Increased increase in the number and levels of the arguments of corruption may their utility functions through corruption are not coun­ lead society to terbalanced by negative factors. be indifferent This requirement can be satisfied by one or both of the two following conditions. Firstly, there is social ac­ and eventually, quiescence or acceptance of corrupt behavior or of its to accept fruits. Secondly, the probability of being caught and corruption meted the appropriate sanctions are negligible, if not nil. It is the social and political contexts that determine

12 PUBLIC POLICY Corruption in the Philippines: Framework and Context

the satisfaction of these conditions. Nevertheless, even if society abhors and ostra­ cizes grafters and corrupters and absolutely convicts them when caught, low-level corruption may continue to exist as the evidence on the ubiquity of corruption indicates. Under no environment will all grafters and corrupters be caught and con­ victed with absolute certainty. Thus, some individuals will continue to find it ben­ eficial to engage in corruption. From all this, it is easy to see why corruption tends to breed corruption. Increased corruption may lead society to be indifferent and eventually, to accept corruption. Increased corruption may also lead to the corrup­ tion of the monitoring and prosecuting institutions of society leading to a massive failure of the justice system. In other words, corruption tends to lay the foundation for its own survival and growth.

Taxonomy

The explosion of literature on corruption has introduced a plethora of ap­ proaches, concepts, typologies and analyses, as well as corresponding policy rec­ ommendations. The following is, to our knowledge, the first attempt to bring to­ gether systematically the largest number of these approaches.

By type of agent and initiator.

Corruption is defined by the location in which it occurs in the public sector, which in turn, is largely decided by the degree of discretion exercised by public officials. Public-sector corruption may involve either bureaucrats or politicians. Bureaucrats and administrators are thought to be interested primarily in pecuniary gain, while politicians are thought to have both pecuniary and political interests at stake. In the Philippines, earlier literature (typified by Carino et al. [ 1978]) focused on bureaucratic corruption, viewed primarily as a problem of ethos and example. That literature implicitly adopted the technocratic viewpoint that the political lead­ ership would take an active interest in reducing or eliminating corruption in the regular bureaucracy as part of improving the effectiveness of governance. More critical analyses of the quality of politicalleaderships themselves, however (especially after

VOLUME V NUMBER 1 January-June 2001 13 De Dios & Ferrer the fall of dictatorships and exposure of their excesses), led to an interest in system­ atic corruption among politicians themselves. Political corruption is distinct from bureaucratic corruption, partly because of the levels at which it occurs, and partly because of differences in goals. Hence, for instance, fewer bureaucrats would be interested in expanding influence and patron­ age beyond what maximising pecuniary advantages would dictate. Vote-buying, corruption of the electoral system, political or regulatory harrassment of opponents are associated with distinctly "political" rather than bureaucratic goals. A conflation of relationships is also possible when bureaucrats collude with politicians. It is likewise possible to distinguish corruption according to the initiating agent. In the case of bribery, the initiative obviously lies with the donor. On the other hand, extortion is initiated by the public offidal. Corruption with theft and without [Shleifer and Vishny 1993] is a distinction determined by whether the corrupt official remits the lawfully stipulated amount (e.g., a license fee) to the government. If the regular amount is not passed along, then there is theft, as when a revenue collector underassesses taxes and keeps a portion of the actual payment for himself. In terms of scale and level, the dominant influence of political (as opposed to bureaucratic) corruption in the Philippines is almost self-evident. This is to be ex­ pected, given the wider discretion, vag!ler mandate and weaker controls in the po­ litical selection process as determined by strong local power and a weak party sys­ tem. Compared to corruption at the political level, bureaucratic corruption is clearly of subordinate importance, which itself reflects the characteristic but almost uni­ versally noted weakness and lack of independence of the bureaucracy in the Philip­ pines (a fact evident in the frequent intervention of politicians in bureaucratic se­ lection). Indeed, the bureaucracy very often serves as the instrumentality and conduit for political corruption, as when high-ranking politicians use their influence over bureaucrats to evade rules and regulations. A trivial but clear example is the exemp­ tion of the former president's housing project from building and environmental regulations (as reported by the Philippine Center for Investigative Journalism). Other recent instances include the intervention in tax cases facing a presidential crony

14 PUBLIC POLICY Corruption in the Philippines: Framework and Context

(Jpahingi na ninyo ito sa akin) and the failed attempt to influence the investigation of the BW insider-trading scandal. More generally, the utilization of pork-barrel funds by elected politicians to earn corruption rents must be facilitated with the knowl­ edge and consent of at least some bureaucrats in the public works agencies. It is difficult to imagine that any serious move to limit the regular forms of corruption in the bureaucracy can succeed without first demonstrating a credible commitment to drastically reducing political corruption. A good deal of the scale of and motivation for political corruption results from the nature of the PA relationship implied in political contests, especially the large amounts of funds required to run for public office in the absence of dear and cred­ ible guidelines on campaign spending and contributions. Such a circumstance mo­ tivates corruption in office to raise sufficient amounts for future campaigns and contests or to recoup huge expenditures raised from one's own pockets or by third parties.

By scale and level.

One might distinguish between petty corruption and grand corruption, which Rose-Ackerman [ 1998] defines as "a substantial expenditure of funds with a major impact on a government budget and growth prospects". More often than not, of course, the scale or of corruption is related to the level at which it occurs, since the discretion and prerogatives of public officials-and hence the resources they con­ trol- increase with the rise in the hierarchy. Hence, a public works director for local projects will ceteris paribus possess less opportunity for large-scale corruption than a cabinet secretary. However, this conclusion may change depending on the degree of decentralisation of the bureaucracy. Grand corruption occurs especially when large assets or transactions are in­ volved, as in the massive privatisations that have occurred in liberalisation episodes in many countries. Some authors have argued that as a result of the liberalisation and privatisation episodes occasioned by the neo-liberal trends in many countries, the scale of corruption has increased. For the same reasons that political trumps bureaucratic corruption in the Phil­ ippines, the significance of grand corruption also dominates that of petty corrup-

VOLUME V NUMBER 1 January-June 2001 15 De Dios & Ferrer cion. It will be rare that grand corruption involving enormous sums (e.g., Amari, the Centennial Expo, the BW scam, PCI-Equitable sale, etc.) will remain a purely bu­ reaucratic phenomenon without the participation of political types (although the unobtrusive sale of export-credits at the DOF may be an exception). This hypothesis is based simply on the greater degree of discretion exercised by politicians (to which may be included higher-level political appointees) as compared with civil service employees. Politicians will also be better informed about the potential for policy­ shifts that afford new rent opportunities (e.g., new projects and privatisation initia­ tives).

By type or object of transaction. There are various ways to list the objects of corrupt transactions. Gray and Kauffman [ 1998] enumerate the things private parties can purchase from a politi­ cian or bureaucrat such as government contracts, government benefits, public rev­ enues, time-saving and regulatory avoidance, influencing outcomes of the legal and regulator process. An even longer list is given by Rose-Ackerman [1996] which deals with various stages or methods involved in a transaction rather than the ulti­ mate object of the bribe itself (e.g., inclusion in the list of bidders, restructuring of specifications and selection as winning contractor are listed as separate items- all of them pertaining to bidding). The World Bank [1997:9] also enumerates the "things" that bribes can buy: government contracts (choice of firms), government benefits (subsidies or access to funds), lower taxes, licenses, time and legal out­ comes. This paper proposes the following list of types or objects of corrupt transac­ tions: (a) bids, purchases and auctions; (b) sale of policies and rules; (c) rules eva­ sion; (d) bureaucratic or political facilitation; (e) bureaucratic or political harrassment; {f) political favours and support. The first and most easily analysable transactions are those involving bids and purchases, including over- and under-pricing and collusion among potential bidders of services, franchises, concessions and asset sales. The nature and consequences of these transactions are easiest to comprehend since there is an obvious bench-

16 PUBLIC POLICY Corruption in the Philippines: Framework and Context

TABLE 1 Corruption by object of transaction

Object of transaction Examples

1. bids, purchases and auctions bid-rigging, overpricing, over-purchasing 2. sale of policies, laws and regulations changes in ownership rules 3. rules evasion customs-releases; tax evasion; bribes to cops 4. bureaucratic or political facilitation queue-jumping; "grease money" 5. bureaucratic or political harrassment '~C-DC"; proxy wars; tax harrassment 6. political favour or support nepotism; vote-rigging mark against which they may be compared, namely, the next-best or competitive supply price. The second important type of transaction is the sale ofpolicies or rules, among them industrial priorities, fiscal policies, regulatory rules, judicial decisions, elec­ toral rules, etc. The bottom-line efficiency effects of such corruption are difficult to predict beforehand. Rose-Ackerman [1998] notes that it will depend on the effi­ ciency of the rules themselves. If rules are over-extended to begin with, they would be welfare-enhancing to the extent that exemptions are made. The jueteng scandal that precipitated the downfall of the Estrada presidency is in this category. Unlike policy-for-sale, the purpose of rules-evasion is not to alter the rules them­ selves bet to modify their application for individuals who are in principle unquali­ fied for the benefits or are liable under the rules. Corruption to excuse tax evasion or bribes made to officers of the court are in this category. Bureaucratic or political facilitation is the third type of corrupt transaction re­ lated to what Rose-Ackerman [1998] calls "corruption to lower costs" and what Alatas [1997] calls "transactive" corruption. Examples range from Petty corruption in lower-level agencies (e.g., car registration) to buying political influence to smoothen deliberations on franchises given out by congress. One way to distinguish this from

VOLUME V NUMBER 1 January-June 2001 17 De Dios & Ferrer other cases is that here, the private agent is in principle entitled to the service or good being provided. Otherwise, it would fall under the previous category. Hence, an illicit exemption from a tax would be liability evasion rather than a case of facili­ tation. While the parties involved in facilitation and harassment are the same, i.e., private agents and public officials, the significance can be completely different. The case of harassment corresponds to what Alatas calls "extortive» corruption, as when tax collectors summon taxpayers and go over tax returns minutely as part of a shakedown or when politicians initiate an investigation of their potential opponents as part of a vendetta. In the Philippines, The natural limit the well-known technique of'l\C-DC" (attack and to this type of collect, defend and collect} also falls under this cat­ corruption is the egory. A particular nuance .of "weak states", where laws and regulations are only haphazardly applied size of the to begin with, leads to the ironic possibility that government's harrassment may occur through a strict application operating budget of the law itself. Formally, this is the category wherein the jueteng scandal of 2000 originated. Payoffs to public officials were in the nature of protection money based on the non-applica­ tion of existing laws, although the immediate reason for Singson's turnaround was a problem in bids and awards. Finally, political favours and investment are transactions distinguished by the fact that the result is not an immediate pecuniary benefit but a political one. In the local context, all transaction types mentioned can be observed. Two types in particular, however, have received significant coverage, namely: (a) bids, purchases and auctions and (b) the sale of policies, which are the topics of two other papers in this issue. The pervasiveness of corruption in bids and purchases is traceable to the cus­ tomary function of government of purchasing supplies in the course of its mandate to provide public goods and services; much of this type of corruption has become virtually established practice among contractors for government departments such as Public works, Defense, Education, Health and others where procurement is a

18 PUBLIC POLICY Corruption in the Philippines: Framework and Context routine element, to the extent of attaining the status of a fixed markup over costs. The natural limit to this type of corruption is the size of the government's operating budget, augmented by occasional bulges in capital spending (supported to some extent by foreign development assistance). The prospect of new and larger corruption rents stemming from shifting policy and project initiatives, especially as these relate to privatisation and liberalisation has changed in recent years. The privatisation of government-acquired assets is an important example of such an opportunity. At this point, the potential size of the corruption rents is no longer related to the size of the agency's budget but to the much larger discounted stream ofprivate benefits flowing from the private use of the asset. For instance, the value of a piece of idle public land to the private individuals bidding for it would be much higher (e.g., as location for a mall); this would deter­ mine the potential corruption rents to public officials. It is also worth noting that until recently, competitive bidding was not univer­ sally practised in asset disposition and franchise awards. The corporatisation of many government functions has allowed many of these agencies to skirt the com­ petitive selection of BOT contractors through the fiction of corporate "joint ven­ tures", allowing them to handpick their partners and tailor-make the temis of con­ tracts to suit private interests unduly. A prominent example of this was the contract­ ing of power plants at the height of the energy crisis, which guaranteed minimum off-takes. Second, owing to oversight or less benign reasons, some regulatory agen­ cies have not resorted to bidding in the award of franchises but have chosen to assign these bureaucratically (e.g., the service-area scheme in telecommunications or the attempted monopolisation of port services), opening up opportunities for corrupt deals. The PAGCOR's biased assignment of the Bingo Two-Ball franchise is a recent example. A more transparent process would have been to award the fran­ chise through bidding or to adopt a virtually free-entry policy. Either tack would have eliminated corruption rents. Changes in regime or policy environment are also the source of gains from policies for sale. The most recent visible example of this was the distortion of avia­ tion rules under the Estrada administration to favour Philippine Air Lines.

VOLUME V NUMBER 1 January-June 2001 19 De Dios & Ferrer

Timing, type and predictability of corruption rents.

Regarded purely as financial flows, the timing of returns from corruption may have an effect on the nature of bribes. Returns may be performance-related or trans­ fer-related. An example of the former is when bureaucrats are bribed to a task need­ ing performance or when a constant percentage of flows from a project is received as a retainer. By comparison, corruption rents may be obtained "up-front", an ar­ rangement obviously more advantageous to corrupt officials who may, as it were, "take the money and run." From the aspect of efficiency, however, the latter is less socially advantageous since it creates powerful incentives to force the government to undertake nonviable projects, as was frequently the case in the crony deals of the later Marcos years. Commissions were earned regardless of the inherent viability of projects. From the viewpoint of a bona-fide project proponent, an important distinction is whether bribes take the form of returns that are predictable or not. Campos, Lien and Pradhan [ 1997] argue theoretically and provide some empirical support for the proposition that unpredictable amounts of rent discourage investment more than predictable amounts which approach the nature of a tax. The predictability dimen­ sion cuts across distinctions whether the return is performance- or transfer-based. A related but less noticed aspect of predictability is the ( un)reliability of the recipient of a bribe himself or herself (also mentioned by Bardhan [1997] ). Uncer­ tainty obviously increases if bribed parties are unable to deliver on promised re­ sults. This may occur when, for example, a department head undertakes to deliver on a contract which is intercepted by a congressional investigation. Unlike normal contracts, corruption agreements lack a credible enforcement mechanism since they are de facto illegal. This need for effective enforcement is one source of demand for the services of organised crime and one reason why corruption and criminality are sometimes linked. A final issue that may be raised involving payment-forms with implications for efficiency is whether corruption rents take the form of cost-plus or fixed-price ar­ rangements, a distinction taken from the literature on contract design (e.g., Laffont and Tirole [1993]). Cost-plus corruption contracts preserve the project's quality

20 PUBLIC POLICY Corruption in the Philippines: Framework and Context

and benefits to users as contained in specifications, although it will cost more than the results of a transparent bid. On the other hand, a fixed-price contract, when tainted by a corrupt bid, will eat into the project's quality and user-benefits, al­ though it will outwardly preserve the "fair" price to government. The choice, there­ fore, is between a cheap but substandard road and one that is standard but over­ priced. From the viewpoint of the ultimate project beneficiary, of course, the cost­ plus arrangement is to be preferred.

By industrial organisation. The locus classicus for the analysis of industrial organisation of corruption is the influential paper by Shleifer and Vishny [1993], who point out the possible differ­ ences in economic impact of corruption depending on whether its supply is com­ petitive, monopolised or bilateral-monopolist. They suggest that a competitive struc­ ture of corruption in which several agencies are equally placed to provide the same service is the least distortive, since this tends to make corruption rents vanish. A monopolistic structure (they give the Marcos regime as a prominent example) is more distortive by comparison, because of the absence of competition. It is when agencies have overlapping mandates, i.e., are in the position of overlapping mo­ nopolists, that corruption yields the most inefficiency. When the approval of several agencies is required, each acts to maximise the amount of a bribe demanded for itself, thus discouraging an otherwise social activity (e.g., investment), even if the total amount of bribes paid may actually be less than under a monopoly. This is otherwise known as the "common-pool" problem since it is akin to the monopo­ lists seeking to draw as much as possible from a source which none of them owns, resulting in a premature exhaustion of the resource. Shleifer and Vishny [1993] suggest that the return of democracy in the Philippines may have resulted in just such a situation. In a 1998 paper, Rose-Ackerman attempted to extend the typelogy of corrup­ tion begun by Shleifer and Vishny to a characterisation of various corrupt states with differing outcomes (see table below). Her typology is according to whether the number of recipients and bribers are few or many. This leads to four cases,

VOLUME V NUMBER 1 January June 2001 21 De Dios & Ferrer

TABLE 2 Types of corrupt states

Multiple bribers Few bribers Few recipients kleptocracy Bilateral-monopoly state Multiple recipients competitive-bribery state Mafia-dominated state

Source: Rose-Ackerman [1998)

namely: kleptocracy, bilateral-monopoly, competitive-bribery and Mafia-dominated states. In a kleptocracy, the head of government organizes the political system to maxi­ mize the possibilities for extracting rents and reallocates these rents for personal use, although this is not incompatible with striving for productive efficiency. This most likely characterised the Marcos dictatorship. The efficiency of a bilateral-mo­ nopoly is determined by the possibilities for rent extraction which are shared by briber and ruler. Their relative strength will determine how gains are shared as well as the overall size of the pie. In some states, rulers form an alliance with the mafia and extort a share in their gains. In others, firms may form an alliance with a country's rulers to share the wealth. States dominated by organised crime are weak and disor­ ganized, with many officials engaged in freelance bribery. The private group (do­ mestic mafia or large corporation) dominates the state, buying the cooperation of low-level officials but unable to organize the state into a unified body. Finally, under competitive bribery, many corrupt officials deal with large numbers of ordinary citi­ zens and firms. This encourages others to accept bribes until all but the unrecon­ structed moralists are corrupt. Rose-Ackerman's typology appears to be heavily in­ fluenced by the need to explain the Russian experience where the bribers are most typified by organised crime, a circumstance that makes it less applicable to the Philippines. One of the most involved elements in analysing Philippine corruption is its industrial organisation as this has changed with political regimes. The paper writers consider that except for the dictatorship period, corruption in the Philippines was

22 PUBLIC POLICY Corruption in the Philippines: Framework and Context generally decentralised. Relatively routine corruption prevails in the tenured bu­ reaucracy; this is more or less tolerated and often even utilised by politicians and political appointees and lamented but countenanced by the private sector. The variable and novel element has always been political corruption. Under the dictatorship, political corruption was centralised and bureaucratic corruption sup­ pressed to the extent it was autonomous and did not fall in line with the require­ ments of the cronies and the ruling families {for example, the Bureau of Customs gained a reputation for a degree of professionalism under the Marcos dictatorship). In the pre- and post-dictatorship democratic regimes (apart from the Estrada administration), The internal on the other hand, it is our hypothesis that political organization of the corruption has become more decentralised, given Estrada circle was the obvious checks and balances and risk of expo­ effectively one of sure entailed by the separation of powers and me­ awarding bounty­ dia freedom. As a result, political corruption may be hypothesized as being more modest and selec­ hunting franchises tive relative to the years of dictatorship, even as the to a number of dilution of central power gives an opportunity for individuals bureaucratic corruption at the local and lower lev- els to gain more autonomy. This, of course, has its own economic consequences. Selectivity nonetheless entails that the corrupt deals politicians do engage in will be larger in magnitude (to attain scale economies), novel in character (to avoid detec­ tion) or both. Under the Ramos administration, for example, asset privatisations (including the IPOs of government controlled corporations), BOTs, joint venture con­ tracts and foreign loan syndications were new areas where potential rents could be obtained; the very novelty of these areas made rents difficult to detect. A unique feature of the Estrada administration was its failure to conform to the trend towards corruption-selectivity imposed by a nondictatorial regime. The internal organization of the Estrada circle was effectively one of awarding bounty­ hunting franchises to a number of individuals consisting of cronies, kin, wives and mistresses. (This arrangement was implemented partly by the formal requirement that all contracts in excess ofP50 million be reviewed by Malacafiang.) The pecu-

VOLUME V NUMBER 1 January-June 2001 23 De Dios & Ferrer liarities of Estrada's personal circumstances meant a large number of persons, clearly indicating "excessive entry". Two empirical points and a theoretical one are to be noted. First, this arrangement was superimposed on pre-existing bureaucratic cor­ ruption. Anecdotal evidence suggests that on top of 10-15 percent bureaucratic markups on contracts, additionall0-15 percent "fees" were required for franchised political facilitators. Under the dictatorship, by contrast, it will be remembered that bureaucratic corruption was reduced by some measure, leaving some slack for cronies and family to take over. The Estrada system therefore put a strain on the system it had not been subjected to before. Second, the carte blanche given to a large number of rent-hunters meant an open invitation to expand the sphere of extraction of "fees", which dearly went against the selectivity in political deals that were the accustomed trend in all previ­ ous post-dictatorship administrations. Apart from the amounts involved, the perva­ siveness of sanctioned corruption deals in the government was an additional strain on the implementation of programmes. The third point is a theoretical one. Shleifer and Vishny' s typology suggests that a competitive arrangement for corruption is most conducive to welfare to the extent that rents are bid down to zero. This did not occur under the Estrada ar­ rangement, however, first because entry was not free and second, since the compe­ tition among franchise holders was not with respect to price but one arranged as a race, with the first mover getting the prize. For this reason, rents to bounty-hunters did not fall to zero but were obtained at the expense of the markups of bureaucrats and private interests themselves. Indeed, one will note, Estrada's fall from power was caused by the very/a:lure of the arrangement. Luis "Chavit" Singson turned his back on Estrada when his exclusive "franchise" was challenged by another fran­ chise holder, Charlie ')\tong" Ang. From the viewpoint of industrial organisation, therefore, Estrada's system of corruption carried the seeds of its own destruction: it was an oligopoly with overcapacity.

Precis

The taxonomy enumerated above has been extensive, and it is useful to make a brief summary by enumerating a number of important and abiding features that

24 PUBLIC POLICY Corruption in the Philippines: Framework and Context characterise corruption in the Philippines. Corruption here occurs on virtually all levels of government, both on a petty and a grand scale. Petty or retail corruption tends to exist in closed and routine bureaucratic contexts such as in the internal revenue and customs collection agencies and among the police where bribery and extortion (various terms being Ia gay, padulas, komisy6n, kotong, tong) are predomi­ nant forms. While not always involving large amounts, this form of corruption is often the kind that ordinary citizens must confront. These types of corruption have generally existed continuously and have been subordinated to changing political leaderships which have either tolerated or benefited from them in varying degrees. The Estrada administration was unique in that it involved itself directly as a major beneficiary from dosed-form corruption. Higher levels of government are associated with greater levels of discretion and thus with larger amounts, culminating in the grand corruption that only high elected officials can engage in. Typical of these are large one-of-a-kind procurement contracts and awards (e.g., the PEA-Arnari and Centennial scams under Ramos or the IMPSA deal under Estrada), as well as the sale of policy. It should be noted that as the scale of corruption increases, .acts assume a more distinctly political nature and the yardsticks for evaluation become more amorphous owing to the more limited information on such deals available to the public and the conflation of genuine exercise of discretion and corrupt practices. Hence, the Estrada administration's bias in favour of PAL was rationalised (to some, credibly) as a valid defence of national interest, rather than an instance of cronyism while the purchase of shares of speculative stocks by SSS and GSIS could not immediately be pinned down as a behest purchase rather than a valid risk taken by management. In addition, innovative practices in grand corruption have also been tried as permit­ ted by external circumstances or large policy shifts. Recent examples have included the sale of government guarantees, stock-price manipulation and behest stock ac­ quisitions, among others. In terms of its industrial organisation, corruption in the Philippines presents a mixed picture. The existence of formal democratic institutions allows corrup­ tion to be generally more dispersed among different agents, as compared to that in other countries in the heyday of Asian authoritarianism. Yet this is not unmiti-

VOLUME V NUMBER 1 January-June 2001 25 De Dios & Ferrer

gated, since the dominance of the executive branch Philippine -remarkable when measured against, say, aU S yard­ corruption, then, stick-permits great discretion and initiative on the is characterised part of the president [de Dios 1999b]. One effect has been to concentrate grand corruption at the national by its ubiquity level, reflecting resource and power distribution. and scale Owing to changing fortunes and the results of checks and balances between branches of government, how­ ever, there is a tendency for corrupt officials with over­ lapping claims to "overbid" in bribes, discouraging investment. A third effect pre­ dicted by theory has been to increase uncertainty and unpredictability in policy­ making and -implementation, as the other branches of government interpose ob­ stacles to initiatives of the executive, whether corrupt or legitimate, in an attempt to share in the largesse. Philippine corruption, then, is characterised by its ubiquity and scale and the overlapping claims of the main actors, leading to high demands for rents, uncertainty and unpredictability.

Economic impact of corruption

One of the most contentious issues is the exact economic impact of corrup­ tion. The agnostic view of economists regarding corruption is somewhat startling for many who tend to take a more ethical view of it. Barro and Sala-i-Martin [ 1995:440, fn. 14] conclude, for example, that "the theoretical effect of corruption is unclear; in some cases, the economy would operate more efficiently if govern· mental rules can be readily overcome by cash payments". Even much earlier, of course, Adam Smith gave the benefit of the doubt to the smuggler and presumably, would have excused the corrupt customs official. A good deal of literature deals with the microeconomic analyses of various types of corrupt transaction according to one or more of the categories cited above. Hence, one may compare petty versus grand or predictable versus unpredictable corruption. Much of what follows is based on de Dios [ 1999] and enumerates the various types of micro-analytic arguments seeking to show how one or another type

26 PUBLIC POLICY Corruption in the Philippines: Framework and Context of corruption has a positive or negative impact on efficiency. It seems fair to say, however, that a microeconomic analysis alone is usually insufficient to make an airtight conclusion regarding efficiency, without reference to an analysis of the larger institutional framework, including the rationale and optimality of the existing laws themselves.

Positive or near-neutral impact. The idea that some types of corruption have positive, neutral or negligible ef­ fects on efficiency is based on the idea that the scarcity value of goods and services provided is not unduly raised even with corruption, or that corruption can provide incentives for performance, thus forming part of a supply price of bureaucratic ef­ fort. Some corruption exists because, as Rose-Ackerman ( 1998] puts it, it "equate(s) demand and supply". It may occur because some public programmes seek to pro­ vide goods and services at prices lower than competitive markets would. Then it is obvious that some nonprice ra­ bribes may tioning system must be formed, as in a queue for subsidised serve as grain during a rice shortage. An obvious opening for corrup­ incentives to tion occurs when bureaucrats and other interests seek to capture the difference. A bribe in this situation is a means bureaucrats of reverting to a disallowed method of rationing which is price. In principle, however, the level of the bribe cannot exceed the difference between the market-dearing price and the subsidised price. Therefore, people un­ der the bribe system cannot be worse off than under a competitive market out­ come. But the project would not attain the social goal it was meant for and if there were a social determination that a deviation from a market outcome would be superior to adhering to it, then a net social loss would arise. At other times, bribes may serve as incentives to bureaucrats, which is the same as saying that they form part of the implicit wages of public officials. This has always been an influential line of thought [Leff 1964] and is an argument that continues to be made [Chang 1999]. Predictable and petty corruption at lower

VOLUME V NUMBER 1 January-June 2001 27 De Dios & Ferrer levels for regular services or goods provided is the closest example of this, although nothing in theory prevents it from reaching higher levels. Rose-Ackerman [ 1998] notes, on the other hand, that most arguments for cor­ ruption as implicit wages assume that officials have limited discretion and that they cannot expand the scope of corrupt transactions, neglect ways to avoid the costs of illegal payment systems and disregard the fact that tolerating such corruption could reduce the possibilities for reform in the long run. A related instance of a supply-price argument is the notion that a bribe to evade a fine (or a tax) may work in the same direction as the rule itself, as when motorists who violate traffic rules bribe policemen to evade a larger fine. A bribe in this sense closely approaches the effects of a tax. The corruption-as-tax argument really im­ plies that a bribe does not distort incentives {at least not significantly). A bribe is thought to differ from a tax primarily in that the proceeds accrue to the official as an individual rather than to the government. A similar argument is involved in the contention that free competition in bribes is not overly distortive since the prize always goes to the most efficient firm. The principle invoked is corruption-as-tax or fee, since an open auction for a government contract or privilege (e.g., a quota) would have yielded the same result. Again, the only difference is that the proceeds accrue to private individuals rather than to the government. For the same reason, queue-jumping based on the highest bribe would give priority to the firm with highest valuation of the resource being dispensed. If one proceeds from the social optimality ofthe rules themselves, it is still clear that the amount of regulation provided with bribes is less than without it. One may therefore go to the other extreme where the rules or laws are socially suboptimal or inefficient, as the burdensome restriction of trade in the time of Adam Smith. On this premise, bribes to evade such restrictions would be socially welfare-enhancing, 4 although still inferior to a repeal of the oppressive laws themselves.

Negative impact. The most obvious negative impact of corruption is on the potential beneficia­ ries of public programmes or projects. By eating into the provisions for a project, corruption either raises the cost to project beneficiaries or lowers the quality (or both

28 PUBLIC POLICY Corruption in the Philippines: Framework and Context simultaneously) of a project. Where entitlements for certain groups are intended, the high implicit cost could result in the deprivation or even exclusion of these groups. In a fixed-price contract, the only way to recoup a bribe is to reduce ben­ efits or quality of service; where the quality of service is pre-specified, a bribe com­ pels the supplier to raise the cost to the user or the government. As already seen, corruption to evade liabilities (e.g., traffic rules, taxes or envi­ ronmental rules) can result in a less than optimal regulation of behaviour, if one proceeds from the assumption that the level of the liability is optimally set. On the other hand, if liabilities are in fact oppressive, then a bribe would have superior economic effects: None of this is new. All it says is that unjust laws of an unjust regime carry no moral weight. Losses from corruption in the form of lower investment and economic growth are easily understood and have been the most econometrically researched effects. Corruption, like a tax, discourages the affected activity, investment in this case. It is worse than a tax, however, to the extent it is prone to more uncertainty or unpredictability which can be decomposed into (a) the unpredictability in the mag­ nitude of payoffs asked and (b) unreliability in the delivery of the contract. Indus­ trial organisation contributes its part, as when overlapping mandates cause the cor­ rupt agencies involved to bid up the bribe amounts, leading to less investment than either a competitive or a monopolistic situation. Counterfactual estimates of the economic impact of corruption in the Philip­ pines can be made using Mauro's [1995] data and equations for the period 1960- 1985. By assuming the Philippines had Singapore~s level of corruption, Taduran [2000] finds this would have produced (a) an increase in the ratio of investment to GDP of 6.6 percentage points; (b) an increase in average annual per capita GDP growth of 1.65 percent, or what is the same thing (c) a 40 percent increase in per capita GDP of 1985, assuming the actual average growth was 2.5 percent. Besides affecting the level of investment, corruption can also introduce unwanted biases i'n the composi'tion of investments, particularly by the public sector. There will generally be a bias to demand more than is needed of goods and services provided by corruption insiders [Della Porta and Vannuci 1999], which will only imperfectly correspond to what society itself requires. In addi-

VOLUME V NUMBER 1 January-June 2001 29 De Dios & Ferrer tion, the economic characteristics of the types of projects demanded may also be affected by the imperatives of corruption, such as a likely bias for projects of short gestation, to minimise the uncertainty of payoffs; for projects of large scale, to economise on transactions costs; and for projects where compliance is difficult to monitor, to avoid detection (some Philippine examples are discussed in de Dios [1999]). Additional indirect effects on growth may arise from the fiscal impact of cor­ ruption such as the loss of revenue and the bloating of spending, both of which lead to fiscal deficits which have potentially disruptive effects of their own. Finally, the costs from renHeeking are distinct and refer to the diversion of productive resources away from directly productive activities towards those that seek to capture corruption rents instead. These include mainstream political activ­ ity as well as the formal profession of lobbying and parts of the profession of litiga­ tion, public relations and various types of consulting, including economic consult­ ing. It should be obvious that rent-seeking costs are not uniquely corruption-re­ lated. Rent-seeking may exist even in a non-corrupt society in the form of main­ stream political lobbying by cause-oriented groups and group interests which are considered part of the workings of democracy. It has also been pointed out [de Dios 1999] that corruption wastes not only the talent of the corrupt but also of those who would prevent corruption. A part of the costs of a corrupt and inefficient government consists of the time of morally outraged citizens provoked by venality and insensitivity. Public mobilisation-ranging from demonstrations to watchdog institutions to open revolt- also expend resources that might otherwise have been used for directly productive purposes. Corruption generally results in underprovision of public goods and probably, an overprovision of public bads. Where government already plays a much-reduced role in the economy, public sector corruption becomes even more harmful, since the need for public goods is likely to be all the greater. By contrast, corruption's adverse effects are likely to be less in economies that are overregulated and over­ taxed and where government is oppressive. Indeed, corruption may act as "grease" in cases where government regulations and impositions hinder private initiative. Under an oppressive dictatorship, one would hope that officials could be bribed.

30 PUBLIC POLICY Corruption in the Philippines: Framework and Context

It has also been argued [de Dios 1999] that such systems would be better with corruption than without it, although admittedly only as an n-th best compromise.

Institutional effects

Tne cost of corruption in terms of the erosion of institutions is the most diffi­ cult to measure. The previous section showed how corruption can have large or smaH, harmful, neutral or beneficial effects depending on whether the rules them­ selves are rational and just. Corruption, however, makes little distinction between "good" and "bad" rules, since rents vary with the diffi­ culty of evasion and the private values associated with Corruption's that possibility, not with the character of the rules them­ principal impact selves. on the legitimacy lt is in this latter sense that the ethical or moral emphasis of an earlier literature cannot be entirely dis­ of a regime is to pensed with. An inherent value attaches to adherence undermine it. to norms or institutions', quite apart from a question of their ultima ratio, because where these are questioned, the uniformity and reli­ ability of rules themselves may come under threat. The more recent literature has elucidated the economic consequences of regimes where norms and institutions are widely disregarded as when contracts become unenforceable and property rights are only vaguely defined. The effect of corruption on development may possibly­ though not always-extend beyond the taxonomy of its role in facilitating or hin­ dering particular transactions and come to include its wider impact on the indis­ pensable web of institutions that govern economy and society. The most vivid illus­ tration of this was the result of the aborted impeachment trial of former president Estrada. The refusal of the senate majority allied with Estrada at the time to pro­ ceed in opening important evidence on corruption cast a pall of corruption on the entire senate itself, irreparably harming its credibility. The loss of faith in institu­ tions led to the search for extra-parliamentary means to obtain justice, culminating inEDSA2.

VOLUME V NUMBER 1 January-June 2001 31 De Dios & Ferrer

Corruption's principal impact on the legitimacy of a regime is straightforward, namely, to undermine it. The case of the Marcos kleptocracy is the most obvious that comes to mind. The unprecedented rapid erosion of the Estrada presidency's legitimation in the period 1998-2000 following revelations of corruption on the highest levels is another. Some authors, however, have pointed to a role of corrup­ tion in supporting state legitimation. Without denying that less noble considerations may be involved,Jomo (forthcoming] points out an important motivation behind Malaysia's corruption and rents in terms of redistributive and legitimation goals, particularly in relation to the participation of bumipeteras in the economy. South Korea's tolerance of bribery relationships between the conglomerates (chaebol) and bureaucrats has been similarly depicted as part of a system of redistribution to poorer constituents through politicians [Chang forthcoming]. If these experiences indeed deviate from what is customary, certain distinct characteristics should be explained. In Malaysia's case, the bumiputera policy was publicly announced and adopted, although it remained controversial. A good amount of the rents to the bumipeteras could therefore be understood as being legal trans­ fers. To the extent corruption accompanied the process, this too would be tolerated as part of the policy, legitimate though not legal. In the case of South Korea, it is a significant observation that tukkap is non-specific but in the nature of a uniform payoff to most, if not all, influential politicians as part of general goodwill, perhaps akin to a system of pooled tips in a restaurant. Its predictable and nonspecific characteristic approaches the function of a tax. Both cases are embedded in a larger system ofredistn"bution and their associa­ tion (justified or not) with significant economic success contributed to the legitima­ tion of corruption's existence. By contrast, the demonstrably narrower focus of ben­ eficiaries from "crony capitalism" under the Marcos regime in the Philippines, plus its failure to deliver economic growth undermined the legitimacy of the regime erected upon it. In the same manner, as political changes preceding and since the Asian crisis have put into question the ideological foundations for interventionist strategies, public tolerance of corruption itself-which drew its rationale from that same system - has become much reduced.

32 PUBLIC POLICY Corruption in the Philippines: Framework and Context

Economic strategy and the scope of government

A central argument is that less government intervention in the economy and a greater reliance on markets instead is a key ingredient in reducing corruption [World Bank 1997a], a contention that must be measured against the idea of an activist "developmental state" in the East Asian mode [Chang 1996]. How countries of the latter sort (e.g., South Korea or Japan) managed to temper the state interventions that mode called for with the need to restrain bureaucratic and political self-seek­ ing is an indispensable part of a growth puzzle. It has also often been noted [Chang forthcoming citing Okimoto 1989 and also Fabella] that corruption is typically less in tradables sectors where poor perfor­ mance is more easily exposed than in the nontradables sector. Part of the reason is that the standards of performance are more easily determined in tradables, where world prices serve as non manipulable benchmarks and budget constraints are hard. A second reason is that "locational competition" (Standortswettbewerb) to attract transnational firms and mobile capital may exert pressure on developing countries to enforce stricter rules against corruption which discourage such investments. But it has also been maintained that the rush towards the market, as witness the wave of liberalisations and privatisations, have provided opportunities for new and large­ scale forms of corruption (in the Philippines, the BW stock-market scam) as assets are revalued and large players such as transnational corporations enter the field. Nonetheless, these moves in favour of privatisation are in the nature of one-off opportunities for corruption rents and have the advantage that they do not lead to the recurring economic distortions associated with continuing government eco­ nomic involvement. So it would seem that if one would bring down the level of corruption, it is necessary, perhaps sufficient, to make the state less interventionist. To be sure, the number of objects of corrupt transactions would be reduced in a minimalist state, apparently bringing the level of corruption down with it. While it has its merits, however, such an argument is at best incomplete. While less intervention would decrease the number of transactions that may be corrupted, less intervention may only result in the increase in proportion of such

VOLUME V NUMBER I January-June 2001 33 De Dios & Ferrer transactions being corrupted, or a change from being petty to grand of each inci­ dence of corruption if its root causes remain. Secondly, the reasons for government intervention in the economy as a rule proceed from the choice of developmental strategy so that the abandonment of such a strategy because of corruption would occur if corruption totally negates the benefits from such a strategy. A paradox might in fact arise here. Cross-country studies have shown, conclusively we believe, that less corruption correlates with more development. The development of latecomer countries, on the other hand, involved increased intervention by the state (e.g., Chang and Rowthorn [ 1994]), which was surely accompanied by an increase in the scope of corruptible transactions. This dilemma can only be tackled by gaining a deeper understanding of the problems of corruption and economic development. The hypothesis we put forward here is somewhat more differentiated. Corrup­ tion may be ubiquitous (indeed, high-level scandals have recently arisen in vener­ able countries such as France and Germany), but its significance for development prospects will vary. More likely, certain socio-political and economic aspects have allowed some societies but not others to reduce both the scope of corruption as well as to foster development. Such factors as social cohesion brought about by more equal income- and wealth-distribution, improved education and human capital, real political participation of the masses - all these are likely to lead to reduced corruption and greater development, leading to the observed correlation between these two. Existing corruption is likely to be rendered less malignant in a context of rapid development. Corruption rents then diminish as a proportion of the total output (which is growing), and -even if such rents should be generated- their reinvestment is more likely to be channeled into more socially productive and ben­ eficial sectors. A corollary of this view, of course, is that it is misleading and simplistic to regard development as automatically following from reducing corruption, or to think that corruption will diminish as a matter of course as development proceeds. Nei­ ther is sufficient. Rather, it may be more accurate to state that many fundamental social reforms needed to eliminate the most pernicious forms of corruption will also spur development. From this follows the irrelevance of the debate over the opti­ mal size of government. The optimal scale of government in a developing con-

.34 PUBLIC POLICY Corruption in the Philippines: Framework and Context text cannot be determined simply and finally by the objective of eliminating the scope for corruption potential. Rather, the scopes for governments and markets to perform efficaciously co-evolve as development proceeds, hence, their boundaries cannot be set once and for all.

Conclusions and recommendations

While corruption has always existed in the Philippines, it has changed in form and magnitude through time as economic strategies and political systems have also changed. Its significance is determined primarily by inadequacies in the nation's political life, especially those that weaken ·the bonds of control and monitoring between the principals (society at large) and those who serve them (politicians and bureaucrats). It must be understood primarily as apolitical phenomenon; bureau­ cratic corruption is often merely secondary and instrumental but is of subordinate importance because (a) it pales in comparison with the grand corruption involved in corruption among politicians, and (b) it is often abetted and controlled by poli­ ticians (e.g., through appointments and undue influence on bureaucrats). Thus, even as one may argue for better design in the incentive mechanisms for politicians and bureaucrats, one must return to more fundamental questions about why the political relationship is deeply flawed and fails to serve as an effective check to the behaviour of officials. A fundamental reason must be the continuing perception among many Filipi­ nos that the relationship between the government and themselves is at best an ab­ stract one. Many years ago, Corpuz traced the historical roots of graft and corrup­ tion to the "negative image" of government among Filipinos. Especially during the Spanish period, positions were awarded or sold as a matter of course to undeserv­ ing and often abusive individuals, leading to a government that was unresponsive to the needs of the inhabitahts: The institutions of government were agents of abuse and oppression. At its best, government came to mean for the Filipino an institution that was burdensome; at its worst, it was predatory.... To the Filipino, govern­ ment became an institution to be avoided, for its interests were contradic-

VOLUME V NUMBER 1 January-June 2001 35 De Dios & Ferrer

tory to his. People and government were estranged from each other and the bonds of community were dissolved .... [Corpuz 1965:78]

This predatory nature of the state and the failure of formal government to become responsive meant that Filipinos had only non-government institutions to turn to, primarily the family or extended kinship ties, the more basic informal rules of behaviour that North [1990] acknowledges are the default mode in traditional societies. A long-festering issue that illustrates the continuing conflict between for­ mal rules and informal constraints, for example, is the perception of rights over land. Formal land-ownership rules were often im- posed by the central government on pre-existing in­ the emergence of formal land rights, resulting in conflicts between "civil society" in formal claimants such as friar corporations and the positive inquilinos, wealthy, educated individuals with ac­ sense ... have cess to the legal system and traditional farmers or been responsible indigenous groups. In many cases, therefore, from the viewpoint of natives, formal rules were typically for raising the bar 6 disputed and to be obeyed only because of fear. In for standards of the matter of corruption, this observation becomes public service relevant since the strictures against corruption have always existed merely as formal internal rules within the government which did not necessarily carry weight in the more private or family spheres whose main criterion is overwhelmingly pragmatic and individual. In the PA framework used in this paper, it is not clear how the interests of the principal (either the government or the society at large) might be asserted since the "principals" themselves at times do not take their interests (qua principals) too seriously. The country's division into groups based on ethnicity, language, geogra­ phy, religion, social class and so on, in short, its existence as "civil society" in Marx's original sense of an anarchy of interests and its refusal to take the business of formal government seriously and as something more than an arena for sectional spoils must be seen as an important hindrance to an improvement in the quality of public service. It is in this respect that the emergence of "civil society" in the positive

36 PUBLIC POLICY Corruption in the Philippines: Framework and Comext sense, especially among the upper to middle and politicised segments of the work­ ing classes - the same elements responsible for EDSA II - is a hopeful develop­ ment for the long run. It is these groups that have been responsible for raising the bar for standards of public service in recent years, a nonexistent phenomenon in the premartiallaw period. Another metavariable is the government's chosen economic role. Philippine postwar history has shown how opportunities for corruption have risen during times of heavy government intervention, such as during the period of protection (e.g., smuggling and illegal immigration) as well as during the period of dictatorship when government undertook major economic projects largely funded by borrowing. In the long-run, a more open economic regime oriented towards producing tradables, with a reduced core role for the state (infrastructure, basic social services, environ­ ment standards), and benchmarking itself against competing countries under locational competition is likely to provide less room for corruption if only because it is more transparent. From a governance viewpoint, much of these moves also reduce unnecessary discretion on the part of agents and lower monitoring costs. Finally, the organisation of government itself certainly influences the incidence and significance of corruption. Among the elements to consider are the current system of electoral politics, particularly campaign finance and the tenured bureaucracy's low status and lack of autonomy. These factors account for a large part of the adverse-selection problem in government to which a number of misfits are attracted. Proposals to reduce discretion on the part of the executive branch and of central government (and corollarily strengthen local governments) should be seriously considered. Again, these follow readily from the PA literature since devolution reduces discretion and shifts the locus of responsibility to local levels where monitoring is less costly and principals' interests are more homogeneous and clearly defined. The disproportionate role corruption plays in the Philippines must be traced to more ultimate factors in the structure of Philippine politics and economy. These include the system of patronage in politics at both local and national levels; the lack of information among the majority (originally due to poverty, ignorance and alien­ ation); the manipulation of government by powerful outside vested interests (origi-

VOLUME V NUMBER 1 January-June 2001 37 De Dios & Ferrer nally based on landownership and relations of dependency); the entrenchment of a stratum of political opportunists and big money politics; and a political system used as means of wealth accumulation based on manipulations of the electoral process (including media, skiUful use of resources and contributions). It is these which ultimately explain the failure of the controls over the presumed relationship between the public and its would-be servants. The characteristics of the problem determine the approach required to ad­ dress it. The following are broad suggestions: First, one must "take it from the top" and attack political corruption first, using the levers of accountability for the polity-politician relationship. This follows from the analysis that in the Philippines, closed-form bureaucratic corruption is subordi­ nate to politicians (and has not reached the point where underworld elements in­ stead dominate politics). In some ways, this diverges somewhat from the prescrip­ tion to "go after low-hanging fruit" [World Bank 2000]. Electoral contests must be an effective tool for recruiting honest and accountable politicians of a sufficient number to break the monopoly of adversely selected trapos. For this to occur, how­ ever, what is needed is voter education and information; transparency in campaign finance; public transparency and a prominent role for media and communications. Mechanisms for intra-regime recall and accountability need to be instituted and real advances must be made in creating a stable and credible political party, begin­ ning perhaps with opportunities provided by the party-list system. Second, the credibility of the justice system must be restored, especially in the prosecution of corruption cases. A decisive resolution of the most prominent pend­ ing political cases is needed. To forestall any suspicion that the purposes of such moves are political, however, visible progress must be made on a broad front. Hence, not only plunder cases from the Estrada administration should be pursued but also those from the Ramos presidency as well. Similarly, not only political cases but those involving bureaucratic corruption, e.g., from the revenue collection agencies as well as the judiciary must be pursued and speedily resolved. The corollary of this is that the conditions and morale of the judiciary must themselves be raised. A third general area is to reduce political discretion from the centre. Part of this may be accomplished through devolution of functions to local governments, thus

38 PUBLIC POLICY Corruption in the Philippines: Framework and Context reducing the scope for discretion through greater accountability at the lower levels without sacrificing the provision of local public goods. The depoliticisation of bu­ reaucratic appointments below a certain grade would work to reduce the political dependence of the bureaucracy. Where it is merited on its own grounds (not simply because it is an anticorruption measure), government should withdraw from sec­ tors of the economy where its developmental role is unclear. There is great need, for example, for a resolute disposition within a fixed timetable of government-seques­ tered commercial and corporate assets that serve no obvious public interest or ad­ dress an externality. Appointments to these parastatals and sequestered corpora­ tions have been a way for politicians to distort economic outcomes and conceal corrupt transactions. Fourth, it is important to raise the morale and professionalism of the bureau­ cracy to render it less vulnerable to arbitrary political demands and more sensitive to the general public interest. The improved incentives must be comparable with those in the private sector, which can be done only with more selective recruitment and vigorous culling. Innovations in rules may be required in hiring and firing, espe­ cially for problem agencies like Customs and the BIR. Finally, underlying all these reforms in incentive mechanisms, society must begin to address the network of real social relationships that envelope and shape the po­ litical pa relationship. In particular, the problem of low social cohesion, of low po­ litical education and civic apathy must be addressed. This means coming to grips with the basic sources of social inequality such as the unequal distribution of wealth and incomes, the unequal access to quality education and the inequitable inci­ dence of government taxation and spending programmes. A minimum activist constituency for governance reform will be required. Few if any of these things can be accomplished without the active role of civil society organizations who take the institutions of the state seriously enough to demand results and strict adherence to the larger set of rules for all of society. These requirements may appear burdensome, but in the end, the problem of corruption cannot be solved apart from the problem of institutional and governance reform and the problem of development itself. Rather, the means for solving one problem will go a long way towards addressing the others.

VOLUME V NUMBER 1 January-June 2001 39 De Dios & Ferrer

Notes

1 In the literature, cases where the agent's imperfectly observed action causes the problem is called a problem of moral hazard, such as situations where the deci­ sions of government officials cannot be observed. On the other hand, adverse selection is the term used when the PA problem is caused by the agent's imper­ fectly observed characteristic, such as when the electoral process is unable to distinguish deserving candidates. 2 Owing its origins to the 1986 People's Power Uprising, the 1987 constitution accords special status to direct people's initiatives, differentiating it from previ­ ous Philippine constitutions. 3 In the same way, we believe that the real-world usefulness of general-equilib­ rium theory is to highlight the importance of various assumptions that are vio­ lated. 4 On this basis, Adam Smith looked with sympathy on the smuggler who "though no doubt highly blamable for violating the laws of his country, is frequently incapable of violating those of natural justice, and would have been, in every respect, an excellent citizen, had not the laws of his country made that a crime which nature never meant to be so." 5 North defines institutions as "the rules of the game of a society" which "pro­ vide the framework of incentives that shape economic, political and social organisation". They are composed of formal laws, informal constraints and the effectiveness of their enforcement. 6 From a legal viewpoint, scholars such as Sereno have noted that unlike the US and the UK, the Philippine legal system adheres not to common law but to codal law, the latter being introduced from outside. This fact further illustrates the potential conflict between formal and informal constraints to behaviour. In the Anglo-Saxon countries, by contrast, there was a chance for common law to become part of jurisprudence as it became applied in the courts.

40 PUBLIC POLICY Corruption in the Philippines: Framework and Context

References

Bardhan, P. [ 1997] "Corruption and development: a review of issues", Journal of Economic Literature 35(3), September: 1320-1346. Campos,]. E., ed. [forthcoming] Corruption; The boom and bust of East Asia. Quezon City: Ateneo University Press. Campos,]. E., E. Lien, and S. Pradhan [forthcoming] "The predictability of corrup­ tion: implications for investment" in: J .E. Campos, ed. Carino, L., ed. [1986] Bureaucratic corruption in Asia: causes, consequences, and con­ trols. Quezon City: JMC Press. Chang, H-J. [1996] The political economy ofindustrial policy. London: Macmillan. Chang, H-J. [forthcoming] "State, capital, and investments in Korea" in:J.E. Cam­ pos, ed. Corpuz, O.D. [1965] The Phzlippines. Englewood, New Jersey: Prentice-Hall. Della Porta, D. and A. Vannud [1997] "The 'perverse effects' of political corrup­ tion", in: Heywood, ed. Dios, E. de [1999a] "Corruption: a framework" Public Policy, Vol. 3(3).July-Septem­ ber 1999:35-54. Dios, E. de ( 199b] "Executive-legislative relations in the Philippines: continuity and change", in C. Barlow, ed. Institutions and economic change in Southeast Asta: the context ofdevelopment from the 1960s to the 1990s. London: Edward Elgar. Dios, E. de and H. Esfahani [forthcoming] "Centralisation, political turnover, and investment in the Philippines", inJ. E. Campos, ed. Frohlich, N. and]. A. Oppenheimer [1978] Modem political economy. New Jersey: Prentice-HalL Goudie, A. and D. Stasavage-[199 _]"Corruption: the issues". Technical Paper No. 122. Gray, C. W. and D. Kauffman [1998]. "Corruption and Development", Finance and Development, The World Bank. http://www.worldbank.org/ fand/englishl 0398/ article~ Heywood, P. ed. [ 1997] Political corruption, Oxford: Blackwell Publishers. Jomo, KS. [forthcoming] "Governance, rent-seeking, and private investment in Ma­ laysia" in:]. E. Campos, ed.

VOLUME V NUMBER 1 January-June 2001 41 De Dios & Ferrer

Kaufmann, D. and S. Wei [ 1999] "Does 'grease money' speed up the wheels of com­ merce?" World Bank Policy Research Paper 2254 (December). Krueger, A. [ 197 4] "The political economy of of the rent-seeking society" American Economic Review, (June) 64:291-303. Laffont, J. -J. and J. Tirole [ 1993] A theory o/incentives in procurement and regulation. Cambridge, Mass.: MIT Press. Lambsdorff, J [1999] "Corruption in empirical research: a review". Transparency International Working Paper (November). Leff, N. [ 1964] "Economic development through bureaucratic corruption", Ameri­ can Behavioral Scientist: 8-14. Li S. and P. Lian [1999] "Governance and investment: why does China attract large­ scale FDI despite widespread corruption?" inJ.E. Campos, ed. Mauro [1995] "Corruption and growth", Quarterly Journal a/Economics August. Mauro, P. [1997]. "Why worry about corruption?", Economic Issues No.6, Interna­ tional Monetary Fund. Mcintyre, A [1999] "Investment, property rights, and corruption in Indonesia". in J.E. Campos, ed. North, D. ( 1990) Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press. Okimoto, D. [1989] Between MIT! and the market: Japanese industrial policy for high technology. Stanford: Stanford University Press. Rose-Ackerman [1998]. "Corruption and Development", Annual World Bank Con­ ference on Development Economics, Washington: The World Bank. Rose-Ackerman, S. [1998] "Corruption and the global econopmy", in G. Shabbir Cheema, ed. Corruption and integrity improvement initiatives in developing coun­ tries, 1998, Management Development and Governance Division, United Na­ tions Development Programme. Shleifer and Vishny [1993] "Corruption", Quarterly Jourunal a/Economics Taduran, R [2000] '1\ phenomenon called fraud'', Recent economic indicators, Octo­ ber, School of Economics, University of Asia and the Pacific: 4-5. World Bank [ 1997 a] World development report: the state in a changing world. NewYork: Oxford University Press. World Bank [ 1997b] Helping countries combat corruption: the role o/the World Bank. Poverty Reduction and Economic Management. September.

42 PUBLIC POLICY The Industrial Anatomy of Corruption: Government Procurement, Bidding and Award of Contracts

AMADO M MENDOZA JR

The demise of the Estrada administration in January 2001 is the latest evidence that corruption remains one of the salient issues in the country's po­ litical life even amidst widening cynicism that the· problem will ever be resolved. The public uproar against Estrada's corruption started with the revelations of a disaffected ally, Governor Luis "Chavit" Singson, alleging the President's regu· lar receipt of pay-offs from operators ofjueteng or the popular illegal numbers 1 game. Singson's disaffection was caused by the awarding of a lucrative gov­ ernment contract to operate a legalized version ofjueteng (Bingo 2-Ball) to an­ other presidential crony, Charlie '1\tong" Ang, who in turn awarded the fran­ chise to operate Bingo 2-Ball in Ilocos Sur, Singson's home province, to Singson's bitterest business rivals and political enemies. Singson' s revelations, the subsequent Senate Blue Ribbon committee hear­ ings and the presidential impeachment trial indicated how the award of gov- Mendoza

ernment contracts among many others, can be distorted in a manner that is disadvantageous to government and lopsidedly benefits favored private inter­ ests. In a reprise of previous questionable arrangements, Ang's grossly under­ capitalized corporation was awarded a substantial contract by the Philippine Amusement and Gaming Corporation (PAGCOR) even before it was formally registered with the Securities and Exchange Corporation (SEC). Ang's outfit bagged the contract on the verbal say-so of Estrada to PAGCOR chairperson, Alice Reyes, and without the benefit of a public bidding. The preferential treat­ ment of Ang was apparently premised on the former giving Estrada a substan­ tial cut of his earnings. During the impeachment trial proceedings, several witnesses including former Secretary of Finance Edgardo Espiritu, testified that a government bank, the Philippine National Bank (PNB), extended a P600 million loan to BW Resources, owned by another presidential crony, Dante Tan, though the firm was not credit-worthy. BW Resources was the same company involved in the massive stock price manipulation in 1999-2000 which almost wrecked the lo­ cal stock market. Grand corruption happens at the highest government levels and involves major government programs and projects. Governments frequently transfer large economic resources to private firms and individuals through procurement contracts, awards of concessions and sales of public assets. Given the attrac­ tiveness of these transfers, some private interests are not content to allow the award of the same through fairly competitive processes. Bribes are offered and accepted to ensure the capture of these resources. These bribes in turn transfer monopoly rents to private interests with a share going to the corrupted public officials. Corruption involving top-level public officials can produce serious distor­ tions in the way society and government operate. The government pays too much for large-scale procurements and receives too little from the sale of pub­ lic assets and the award of concessions. Corrupt officials distort public choices and decisions to generate large rents for themselves and to produce inefficient and inequitable public policies and programs. Incentives to corruption exist

44 PUBLIC POLICY The Industrial Anatomy of Corruption because state officials have the discretionary power to allocate scarce resources and to impose costs. This paper discusses the industrial anatomy of corruption in the area of government contracting, which involves government procurement and the bid­ ding and award of contracts funded both by the government and by interna­ tional financial institutions such as the World Bank and ODA (official develop­ ment assistance}. By industrial anatomy, we seek to identify and to describe the technologies used in the corrupt practice, the politico-economic players in­ volved and the enabling/disabling policy and socio-political environment. This paper contains two parts: first, a review of the literature on corruption with respect to public procurement and contracts; and second, several case stud­ ies to unearth new and emerging corruption technologies. We argue that globalization and economic libera1ization have offered new opportunities for corruption and rent-seeking and have therefore led to the de­ velopment of new corruption technologies as well as caused the entry of new players into the fray. While globalization and economic liberalization should theoretically lessen the opportunities for corruption and rent-seeking in a here-to-fore protected economy, the transition period affords entrepreneurs of all types new opportu­ nities to capture rents through corruption. For instance, the IPO (Initial Public Offering) fever during the later years of the Aquino administration and the early half of the Ramos government afforded insiders and other favored indi­ viduals and groups lucrative rent opportunities. A case that bears more careful study is the public offering of the PNB and PNOC shares. Another case is that of the sale of Fort Bonifacio: the Metro Pacific Group won over the Ayala Cor­ poration by offering an unbelievable premium of about Pl 0,000 a square meter. Yet as soon as it won the contract, Metro Pacific obtained a loan from the Gov­ ernment Service Insurance System (GSIS) to finance the 20% down payment required of the winning bidder. Market reforms associated with globalization may not always reduce rent­ seeking opportunities. They may in fact reproduce incentives for rent-seeking behavior even in the presence of comprehensive liberalization. Recent Latin

VOLUME V NUMBER 1 January-June 2001 45 Mendoza

American experience shows that distributional coalitions (of the Mancur Olson type) may proliferate when the state withdraws from the economy, not only when it intervenes (Schamis 1999). The improper sequencing of economic re­ forms could also cause problems. Russia's experience shows how premature price liberalization without prior or accompanying de-monopolization simply shifted the flow of monopoly rents from the state to private monopolists. Here, the low level of competition could explain the surge in rent-seeking and corrup­ tion associated with the early phase of economic liberalization. This is consis­ tent with the empirical literature that finds that corruption is negatively corre­ lated with different indicators of economic freedom (Henderson 1999 and Paldam 1999), with openness, defined as the ratio of imports to GDP (Ades and di Tell a 1997 and Brunetti and Weder 1998), and with the number of years a country has been open to international trade (Sachs and Warner 1995, Treisman 2000, and Leite and Weidmann 1999}. While it may be argued that rents created during the transition to liberal­ ization may be an acceptable one-time·cost that must be borne by the economy, there is reason to believe that the transition will be a drawn out process in the Philippines, given the relative impermanence of social consensus, including elite consensus, behind economic openness in Philippine sodetyO. As a protracted process, transition to liberalization will be witness to various episodes of rent­ capture by entrepreneurs through corrupt deals. A rough estimate of the Filipino public's response to economic openness may be se~n in the results of a September 1999 public opinion survey on pos­ sible changes in the Philippine Constitution. To avoid the suspicion that plans to amend the charter were motivated principally by self-serving motives (such as the lifting or extension of term limits for the President and other elective officials), the Estrada administration initiated an amendment drive called Con­ stitutional Correction for Development (CONCORD) in mid-1999. The said plan intended to limit changes to the economic provisions of the charter with the objective of making it more attuned to the challenges of globalization. Concretely, the intent was to amend the charter by lifting the prohibitions on ownership of land by foreigners and to allow 100% foreign ownership of

46 PUBLIC POLICY The Industrial Anatomy of Corruption

public utilities, mass media and other strategic industries. The September 1999 survey of Pulse Asia indicated that most Filipinos were against amending the Constitution in general and that it was precisely the economic amendments proposed by President Estrada that Filipinos found most unacceptable. While 77% of the survey respondents were against extending the term limits of elected national and local officials, a heftier 92% did not want foreigners to own land in the country. In addition, 88% did not want foreigners to own public utilities or mass media companies while 81% registered opposition to a proposal allow­ ing foreigners to own retail companies in the country.

Some empirical literature on Philippine corruption There is a rich body of literature on corruption in the Philippines coming from diverse sources including the academe, journalists, the courts and legisla­ tive bodies. After the fall of the Marcos dictatorship in 1986, primary materials on corruption during the Marcos dictatorship surfaced, including the Marcos­ Honolulu Papers,seized by the U.S. Customs Service from the disembarking party of the fallen dictator at the Hickam Air Force Base in Hawaii. These documentary sources presented a dear picture of how corruption was orga­ nized and carried out with respect to infrastructure projects funded by Japa­ 2 nese official development assistance {ODA) during the Marcos years. Oscar Rodriguez, former Public Highways Deputy Minister, was appointed by President Marcos as implementing officer of the Philippine-} a pan Project Loan Assistance Program (PJLAP}, a special government agency organized by Marcos to oversee all Japanese government-funded yen credit projects in the country after the declaration of martial law in 1972, four years before the lapse of the Japanese Reparations Program. Previous to the PJLAP, the principal conduit ofJapanese public monies into the country was the Reparations Com­ mission headed by Marcos friend, Senator {formerly General) Eulogio Balao. The Reparations Program was the Japanese government's response to the need to compensate the Philippines and its citizens for damages suffered during the Second World War.

VOLUME V NUMBER 1 January-June 2001 47 Mendoza

The documents indicated that President.Marcos exacted kickbacks from each of the private Japanese corporations awarded supplier contracts in con­ nection with Japanese-funded infrastructure projects in the Philippines. The Marcos-Japanese relationship began with the Reparations Program and contin­ ued until the last years of the Marcos dictatorship when the Overseas Eco­ nomic Cooperation Fund (OECF) became the main conduit of]apanese public funds into the country following the end of the Reparations Program. In general, the Japanese government-provided funds were to finance spe­ cific general infrastructure and development projects in the Philippines. The equipment requirements of the projects were to be purchased from Japanese manufacturers/suppliers in so-called "tied aid". Ostensibly, the Japanese sup­ pliers competed with each other in a bidding process where the qualified bid­ der submitting the lowest bid price was awarded the su.pplier' s contract. How­ ever, Marcos and his associates perfected a system wherein no Japanese sup­ plier could win a contract unless a 15 percent "commission" (of the total con- tract price) was paid which would be included All qualified bidders in the total contract price paid by the Philip­ pine government from the Japanese govern­ knew they were ment-provided funds to the Japanese supplier. expected to pay the Except for a single instance where they at­ "commission" if they tempted to win contracts without paying any wanted to win a commission to Marcos, Japanese suppliers gen­ contract. erally acceded to the "commission'' system. All qualified bidders knew they were expected to pay the "commission" if they wanted to win a contract. Since all were willing players, one can say that suppliers' contracts were judiciously apportioned to a select group ofJapanese suppliers in a sort of queue-ing system. This meant that if a particular Japanese supplier did not win the contract for a particular project, he could still hope to get one in another project. The key Marcos aides involved in the operations were Balao (formerly a senator), Aquino (formerly secretary of Public Highways), Rodriguez (formerly

48 PUBLIC POLICY The Industrial Anatomy of Corruption deputy minister for Public Highways)and Andres Genito, Jr. (a Marcos crony who became a member of the rubber-stamp parliament during the Marcos dic­ tatorship). Balao collected commissions on projects financed under the Repa­ rations Program; most of these projects were administered by Philippine gov­ ernment agencies other than the Department/Ministry of Public Highways. Genito took Balao's place when the latter died. In a division of labor, Aquino collected commissions on projects administered by the Department/Ministry of Public Highways and financed by the Overseas Economic Cooperation Fund (OECF). Rodriguez, who was accountable only to Marcos though technically Aquino's subordinate, took care of the technical function of accepting and evalu­ ating bids and recommending (to Marcos) the award of contracts to specific Japanese firms. He could have been in charge of the queue-ing system alluded to earlier. ...the industrial A key aspect of the entire operation was the col­ lection side. Examination of the documents indi- organization of cated that a private corporation, Angenit Investment corruption Corporation (ostensibly owned by Genito but actu­ depends on the ally controlled by Marcos) played a central role in organization and the collection of commissions from the OECF loans. power of private Bids for contracts were coursed by Japanese traders through Angenit that, in turn, made recommenda­ actors. tions for approval to Marcos. Genito and Aquino occasionally traveled to Tokyo or Hongkong to accept the pay-offs in cash from representatives of the Japanese suppliers. In Aquino's case, he would immedi­ ately deposit the pay-offs to a numbered account with the Hongkong office of the Swiss Banking Corporation. Upon his return to Manila, he would hand over the deposit receipts to Marcos. The discussion of this specific case of corruption during the Marcos dicta­ torship shows the difference in the "industrial organization" of corruption in autocratic polities compared to democracies. As Rose-Ackerman (1999) points out, the industrial organization of corruption depends not just on the nature and organization of government but also on the organization and power of pri-

VOLUME V NUMBER 1 January-June 2001 49 Mendoza vate actors. Corruption under the Marcos dictatorship was organized as a "kleptocracy" (Rose-Ackerman 1999). In this situation, the kleptocratic ruler faces a large number of unorganized (therefore less powerful) potential bribe payers. Marcos was powerful enough to whip the Japanese suppliers in line and managed to organize an effective and credible system of collection and en­ forcement. As expected, the industrial organization of corruption in the Philippines was altered with the reintroduction of formal democratic and electoral pro­ cesses after the demise of the Marcos dictatorship in 1986. As de Dios and Esfahani (2000) have pointed out, the provision of three co-equal branches of government and the system of checks and balances results in an "independent monopolists" model of corruption described by Shleifer and Vishny (1993}. Even if the executive has the power to enter into contracts with favored parties, the power of the legislature to conduct investigations may be regarded as po· tent and may force the executive to share part of the bribe with key legislators, especially those who have skillfully mastered the '/\C-DC" (Attack and Col­ lect, Defend and Collect) tactic like former Senator Ernesto Maceda. Even the judiciary, especially the Supreme Court, could join the fray and gain its share of the loot, through its power to issue temporary restraining orders (TROs) bind­ ing on the executive or any of its agencies.

Corruption with respect to government procurement and the sale of public assets As a rule, procurement contracts are awarded through a public bidding which qualified firms participate in. In certain cases, no public bidding is held and contracts are awarded on a negotiated basis. When the government is a buyer or a contractor, there are several reasons to bribe public officials: A private firm might pay to be included in the list of qualified bidders and to restrict the length of the same list. The firm may pay for inside information, e.g., minimum and maximum price thresholds, average-offer prices and project evaluation criteria.

50 PUBLIC POLICY The Industrial Anatomy of Corruption

Bribes may induce officials to formulate the bidding specifications so that the corrupt firm is the only qualified supplier. A firm may pay a bribe to be selected as the winning contractor. Finally, once a firm wins the contract, it may pay to get inflated prices or to skimp on quality.

These procurement contracts involve both large-scale infrastructure or capi­ tal goods projects and consumption goods such as drugs, books and other school supplies. Consumption goods are favorite candidates for corrupt deals because it is difficult ex post to discover whether or not they were actually delivered. A good example of the former is the $2.2 billion Bataan nuclear power plant provided by As a rule, Westinghouse, which edged out General Electric kickbacks are (GE) by reportedly paying a $60 million bribe to President Ferdinand Marcos through his crony, better obtained on Herminio Disini (Verzola, Buenaventi:tra and capital goods Santoalla 1991). Examples of the latter type docu­ projects and input mented by Chua (2000/1998; 1999) found that up purchases than on to 65% of textbook funds go to bribes while labor-intensive Corotan {2000a/1995a; 2000b/1995b) found the projects. same for drugs and rice, respectively. Corrupt deals with respect to procurement con- tracts and concessions therefore introduce several dysfunctions. They may limit the number of bidders, favor those with inside information and/or connections over the most efficient bidders, limit the information available to participants and introduce added transactions costs. The distortions also affect the behav­ ior of public officials and private firms. Public officials may select projects and make purchases with little or no economic rationale. As a rule, kickbacks are better obtained on capital goods projects and input purchases than on labor-intensive projects. For this reason, state officials may favor capital-intensive projects regardless of their economic

VOLUME V NUMBER 1 January-June 2001 51 Mendoza

justification. Going back to the Bataan nuclear power plant example, one can accept the need to provide alternative energy sources for the country. However, the wisdom of building a nuclear plant in an area bisected by several earth­ quake fault lines and located near an active volcano is definitely questionable. In addition, corrupt state officials have or ultimately develop shorter time horizons and therefore, higher discount rates than the country's citizens. The ruler's venality may make him insecure and subject to overthrow. In turn, this insecurity induces him to steal more, making him even more insecure, and so forth. As a result, the ruler will support projects with quick short-term pay­ offs. On the other hand, the corruption and corruptibility of the country's rulers and public officials introduce an additional element of uncertainty in the minds of private investors. Paradoxically, one of the strands. of this uncertainty in­ volves the efficacy of the bribe: will the firm get the "good" it wants in ex­ change for the bribe paid?; were the "right" officials bribed? In the face of this uncertainty, investors may commit funds only to short-term, get-rich-quick projects. This short-term orientation on the part of investors is understandable. First, they fear that those in power are vulnerable to overthrow because of their corruption. The new regime may not honor the contracts entered into by the overthrown regime. Second, even if the current regime remains in power, in­ vestors may still fear the imposition of arbitrary regulations and financial im­ posts once investments are made. They may be concerned that the ruler will permit competitors to enter the market or worry that their contracts will b~ voided for political reasons and economic considerations. Having paid a bribe in the past, investors are vulnerable to future extortionary demands. For these reasons, concessionaires may run through their concessions at a faster rate, e.g., logging concessionaires may cut down trees more quickly than they would in less corrupt jurisdictions. Investors may also be reluctant to invest in immobile capital assets that will be difficult to move should political conditions change. The sale of public assets to private interests may reduce corruption to the extent that it removes assets from state control and converts discretionary offi-

52 PUBLIC POLICY The Industrial Anatomy of Corruption cial actions into private, market-driven choices. However, privatization of pub­ lic assets is laden with opportunities for corruption. Analogous to the award of procurement contracts, bidders for a public asset may bribe officials in the privatization agency or at the top of government for the following reasons: The private firm wants to be included in the list of qualified bidders. Firms may pay to restrict the number of other bidders. Firms may pay bribes to obtain reliable information including a good assessment of the monetary value of offered assets. For instance, corrupt privatization officials may present information to the public that makes the company look weak while revealing that it is actually doing well to favored parties. The latter in turn are the high bidders in seemingly open and above-board bidding. · Firms may pay bribes to obtain the public asset offered for sale at below­ market cost.

In privatization exercises, corruption may mean that the most efficient bid­ der loses out to favored parties. Even if the most efficient firm does win, cor­ ruption in the tendering process ensures that the government receives too little revenue from the sale of the public asset. This implies higher taxes or lower public spending. The question of corruption in relation to procurement contracts and the sale of public assets should not be viewed merely as an economic matter. Rather, corruption must be seen as a political problem. In principle, autocratic polities are more corrupt than democratic regimes because of the absence of checks and balances. In democracies, the desire for re-election constrains the avarice of politicians. Opposition candidates have the incentive to expose corrupt in­ cumbents. Furthermore, political and civil liberties and a free mass media make open and transparent government possible and corruption more difficult. How­ ever, the requirements of electoral processes may also induce corrupt behavior. Corruption scandals in a number of democracies are frequently associated with the financing of political campaigns. (Some of the cases reviewed in this pa­ per-the PEA-Amari, Centennial Expo and Benpres-North Luzon Expressway

VOLUME V NUMBER 1 January-June 2001 53 Mendoza scandals-relate electoral finances with questionable government deals.) Elec­ tions must be financed and wealthy actors concerned with policy and legisla­ tive outcomes may be willing to foot the bill. Financial pressures induce politi­ cians to accept payoffs, thus working against other corruption-reducing effects of competitive elections. Even legal contributions to politicians can be a source of concern. Interests contributing to electoral campaign chests may expect help in the legislative process or special treatment in seeking government contracts and concessions or in dealing with the bureaucracy. It is not uncommon that heavy financial contributors are awarded juicy The financial government contracts and accorded preferen­ tial treatment by successful candidates. The demands of electoral benefits enjoyed by Lucio Tan under the democracy induce Estrada administration are the latest examples politicians and of this phenomenon. private interests to These things are best understood in the resort to corruption. context of a Philippine political economy char­ acterized by a relatively weak state dominated by vested private interests. De Dios and Esfahani (forthcoming) observe that political contests over control of the state are quite intense since "the government disposes over a significant amount of resources and exercises discretion over· a wide sphere" and that the elites struggle to skew the deployment of resources to favor specific interests.

Case studies on Corruption The financial demands of electoral democracy induce politicians and pri­ vate interests to resort to corruption. Practices include the illegal receipt of campaign funds from private individuals and firms by politicians in exchange for lucrative government contracts or for favorable treatment by the bureau­ cracy or the raid by incumbents of the public treasury for the same purposes. In the post-Marcos period, three scandals-the Centennial Expo, PEA-Amari and Benpres-North Luzon Expressway-all of which occurred during the Ramos

54 PUBLIC POLICY The Industrial Anatomy of Corruption presidency highlight the fatal connection between grand corruption and elec­ toral finance. These scandals were of two types: the first involved the disad­ vantageous sale of public assets to favored private actors in exchange for elec­ toral contributions; the second involved the grant of lucrative public contracts to private firms at terms grossly disadvantageous to government.

The Expo Scam 3 Let us consider the Centennial Expo scandal. Expo Pilipino in Clark Airbase, Pampanga was the centerpiece of the country's centennial celebration in 1998. The project turned out to be expensive, (costing a total ofP9 billion or 1. 7 percent of the 1998 national budget). Moreover, it was discovered to have been marred by contracts disadvantageous to the state. Following the speech of Senator Nikki Coseteng on August 5, 1998, the Senate Blue Ribbon Commit­ tee conducted an investigation on the matter; its final report included the rec­ ommendation for the prosecution of former President Ramos and eight others (including former Vice President Salv~dor Laurel and five former cabinet mem­ bers) for "technical malversation or misapplication of public funds." Thirteen of 23 senators signed the report. President Estrada soon after formed the Ad Hoc and Independent Citi­ zens' Committee (AHICC) headed by former Senator Rene Saguisag to look into the matter. The result was basically the same except that more "blame" was shifted to Laurel who was the Chairman of the National Centennial Com­ mission. Ramos and his former cabinet members claimed that the findings were politically motivated and designed to draw attention away from a text­ book scam involving a relative of President Estrada and his budget minister, Benjamin Diokno. In any case, the matter was referred to the Office of the Ombudsman for appropriate action. Saguisag called for the inhibition of Ombudsman Aniano Desierto, a Ramos appointee. It was to no avail; on 3 February, 2000, Desierto cleared former President Ramos from charges in connection with the 328% increase in the cost of the Freedom Ring, one of the most expensive compo-

VOLUME V NUMBER 1 January-June 2001 55 Mendoza nents of the project, despite the fact that Ramos was the final approving author­ ity for all projects. Florentino-Hofilena and Sayson wrote their report on the Centennial Expo scandal after the Senate Blue Ribbon committee released the results of its own investigations. They claimed that the Senate report failed to discover "the use of the Centennial as a cover for raising funds for the Lakas campaign" (Florentino-Hofilena and Sayson 2000/1999: 163). One of the star witnesses at the Senate Blue Ribbon committee investigations, Joseph Ocol, executed an affidavit in June 1999 detailing how contractors working on the Centennial project were asked to make substantial contributions to Lakas, the ruling party. These contributions were in turn delivered to Lakas fund raisers by officials of the Bases Conversion and Development Authority (BCDA) and the Clark De­ velopment Corporation (CDC), two government agencies involved in the Cen­ tennial project. However, since Lakas was itself split into two camps, the cam­ paign contributions supported both the candidacies of de Venecia and Ramos' former defense secretary, Renato de Villa. The Saguisag committee failed to uncover another possible scandal: the ownership of 200 hectares of base lands within the former Clark Air Base leased to Global Clark Assets (Global). Global, a company headed by Nora Bitong, formerly a business associate of Senator Juan Ponce-Enrile, was initially the government's strategic partner from the private sector for the Centennial project. It was supposed to shoulder 55% of the equity equivalent to P550 million of the Philippine Centennial '98 Corporation (EXPOCORP). Global made a down payment ofP150 million, the rest to be paid in installments. In return, Global received a lease on 200 hectares of the baselands. However, beyond giving a first installment of P90 million, Global thereafter failed to pay the balance. Because of that failure, then President Ramos decided to rescind the contract with Global and poured more government money into the project. Despite a forfeiture clause (which provided for the forfeit of a PlOO million performance bond) in the said contract, Ramos decided to return Global's money, ostensi­ bly to avoid legal troubles. In addition, Global was allowed to retain the lease even after withdrawing from the project.

56 PUBLIC POLICY The Industrial Anatomy of Corruption

4 The Amari and Ben pres scandals The Amari scandal involved the disadvantageous sale of public assets to private interests in exchange for substantial bribes that apparently found their way into the campaign chest of the ruling political party for the 1995 by-elec­ tions. Tordesillas and Coronel (2000/1998) described in detail how the Amari Coastal Bay Development Corporation (or Amari) paid up to PhP 2.8 billion ($107 million at the time) in kickbacks for a highly under-priced 158-hectare plot of reclaimed land along Manila Bay. The said property was bought by Premchai Karnasuta, the owner of one of Thailand's biggest construction com­ panies, at the ridiculously low price of PhP 1.9 billion (or $72.4 million) at P1,200 per square meter from the Public Estates Authority (PEA) through Ital­ Thai Philippines. ·By the admission of PEA's own officials, the cost of reclaiming land stood at P2,000 to P5,000 per square meter. Three other firms had offered P1,400 to P1,600 per square meter but PEA did not negotiate with them. Moreover, reclaimed land near the said property was selling at up to P90,000 per square meter. The deal was apparently helped by tailor-made appraisals (from P750 to P1,000 per square meter) of the land to favor Amari's initial bid of P1,000 per square meter. One firm had valued the property at P1,680 per square meter in 1991, yet it dropped its estimate to P 1,000 in 1995. A year later, when asked by Amari to appraise the same property, the same company estimated a per square meter price tag ofP4,500. PEA records show that these appraisers were contracted by a PEA official, Justiniano "Bobby" Montano IV; who apparently received a substantial share of the kickbacks. Amari allegedly paid a high-ranking politician PhP 400 million ($15 mil­ lion) for facilitating the land deal. According to a Senate investigation of the Amari transaction, checks amounting to P300 million issued by Amari to one of the wheeler-dealers involved in the deal were encashed by the sister-in-law of a high ranking leader of Congress (Tordesillas and Coronel2000/1998: 146). When the Senate Blue Ribbon Committee released its report in 1997, the legis­ lative chamber buzzed with the rumor that the official was Jose de Venecia,

VOLUME V NUMBER 1 January-June 2001 57 Mendoza

Speaker of the House of Representatives and secretary general of the ruling Lakas party. De Venecia denied the allegation. \'V'hile corruption charges were filed against a string of officials (including Montano) as a result of the Senate investigations, many questions about Amari remain unanswered. De Venecia' s role in the deal is one. Former President Ramos' possible involvement is an­ other. Reports of payoffs made to several officials (allegedly including acknowl­ edged AC-DC master Senator Ernesto Maceda who first denounced the scam in a privilege speech in the Senate) to hush up the investigation of the transac­ tion also remained a mystery. While de Dios and Esfahani (forthcoming) raised fears that the large projects of the Ramos administration faced the "threat of reversal" with the ascension to power of the Estrada government, these apprehensions did not materialize in the Amari project. Another set of private interests· close to the President managed to wrest control of the project. In late 1999, a group led by business­ man Ramon Ang, the right hand man of San Miguel Corporation chairman Eduardo "Danding" Cojuangco, wrested control of Amari from !tal-Thai Phil­ ippines. The Estrada administration reportedly felt that the government did not benefit from the PEA-Amari project and ordered a renegotiation of the contract. President Estrada reportedly agreed to uphold the project after the terms of the contract were modified to give the government a 30-percent share of the land developed in the property, up from 20 percent in the previous con­ tract ( Cabacungan and Torrijos 1999 and Dumlao 2000). Ital-Thai and de Venecia figured prominently in another scandal-the Benpres/North Luzon Expressway case. The scandal erupted when a young first-termer congressman, Mike Defensor, who was questioning the award to Benpres Holdings of a contract to rehabilitate the North Luzon Expressway, disclosed to media that he received P200,000 from a Benpres representative a few days before Christmas 1995. Defensor said that he soon returned the money to a member of the Lopez family that owned Ben pres and the ABS-CBN broad­ cast network. The Lopez kin reportedly accepted the money but denied any knowledge about its source. Benpres also denied the bribery charge and De-

58 PUBLIC POLICY The Industrial Anatomy of Corruption fensor, fearful of the Lopez family's media clout, fudged the details of the pay­ off in a congressional hearing. As was subsequently revealed, the entire controversy was actually a contest between two private corporate groups over a lucrative government contract. In July 1995, a company jointly owned by Ben pres and another Lopez firm, the First Philippine Holdings Corp., signed an agreement with the government­ owned Philippine National Construction Corporation (PNCC) to rehabilitate and extend the tollway to Subic and Clark. hal-Thai was also interested in the project and presented an alternative proposal to rebuild and extend the high­ way to Pangasinan. hal-Thai had a champion in de Venecia "who not only suggested that the firm bid to build the highway to his home province, but also interceded for the company when it looked like Benpres was going to get the deal~' (Coronel 2000/1996: 138). There were also persistent rumors, which de Venecia denied, that Ital-Thai contributed to the Lakas campaign chest in the May 1995 by-elections. Defensor and some of his congressional colleagues were reportedly used by de Veneda' s camp to compromise the contract with Ben pres. Defensor re­ portedly received a comparison of theltal-Thai and Benpres proposals from a senior congressman allied with de Venecia. He then used the information in a privilege speech in November 1995, charging that the tollway agreement with Benpres smacked of "highway robbery." Even if one was to admit that the attacks against the Benpres contract were primarily motivated by a sour-graping firm and its political patron, much can still be said about the said contract. For one, the PNCC management had earlier raised questions about awarding the contract to a corporation with no track record in road construction. Public Works Secretary Gregorio Vigilar countered that Ben pres' lack of experience in road-building was not an obstacle as it was being called in mainly for its financial clout and managerial experi­ ence. Instead of a public bidding, Benpres won the contract on a negotiated basis. Government apparently wanted to fast-track the project so the highway would be ready for use by the leaders heading for Subic for the 1996 Asia­ Pacific Economic Community (APEC) summit.

VOLUME V NUMBER 1 January-June 2001 59 Mendoza

Because of the APEC aspect, the contract ... new players have with Ben pres was rushed as government took emerged in the several "short cuts" on established procedures. post-Marcos period While the Department of Justice (DOJ) ruled to claim their own in June 1994 that a competitive bidding was not necessary (because the PNCC franchise share of the allows it to enter into joint ventures even with­ corruption loot. out a bidding), it also said that the joint ven- ture agreement had to pass through the Gov­ ernment Corporate Monitoring and Coordinating Committee (GCMCC), an inter-agency body that screens transactions made by government corporations. But Vigilar asked President Ramos to do away with this requirement, suppos­ edly to avoid delay. Vigilar also brushed aside the objections of the DOJ and the Office of the Government Corporate Counsel (OGCC) to the transfer of the usufruct-or the right to use and benefit-from the PNCC franchise to the joint venture company to be formed by Benpres and PNCC but controlled by Ben pres through ownership of 80% of said company. Apropos to this, one can note that Justice Oscar Garcia, the government corporate counsel, is de Veneda's protege.

New players As the modus operandi of corruption with respect to procurement con­ tracts and disposition of public assets has changed, new players have emerged in the post-Marcos period to claim their own share of the corruption loot. The most significant of these new players are leaders of the religious movements that have emerged during the past few decades. Of particular interest is Mariano Velarde, more popularly known as Brother Mike, leader of the El Shaddai char- • • 5 1smauc prayer movement. In the past, organized religions have been unable or unwilling to parlay their political clout into the ability to corner lucrative procurement contracts from government. A case in point is that of the powerful Iglesia ni Krista (INK), whose political cachet stems from its ability to impose an electoral slate on its

60 PUBLIC POLICY The Industrial Anatomy of Corruption more than 2 million members following a theological principle of maintaining church unity at all times. But the church (or any of its leaders), has never, to public knowledge, attempted to extract political concessions from those it sup­ ported except for having some of its members appointed to important govern­ ment positions. For instance, the first Secretary of Justice of the Estrada ad­ ministration, Serafin Cuevas, was an INK member. However, he was fired from office by Estrada who was displeased by the former's zealousness in pur­ suing the tax cases filed by earlier administrations against Lucio Tan, one of Estrada's key cronies. This case is quite different for the more amorphous religious movements such as the El Shaddai charismatic prayer movement headed by Velarde, who was appointed President Estrada's spiritual adviser, apparently in exchange for El Shaddai's support of Estrada's candidacy during the 1998 presidential elec­ tions. Velarde was a real estate businessman who organized a Mariano Z. Velarde group of companies with the Amvel Land Development Corporation (Amvel) as the group's flagship firm before he started the charismatic ministry in the 1980s. In 1998, several pieces of Amvel property in Barangay San Dionisio, Parafiaque City were affected by the C-5 Link project connecting the Manila South Expressway and the Cavite coastal road through the existing C-5 high­ way. Since private property was affected by the road project, the government had to enter into right-of-way-acquisition (ROWA) talks withAmvel and other private landowners. Initially, Amvel and other landowners demanded payments of up to P25,000 per square meter on the strength of a land valuation report made by the Parafiaque City appraisal committee which had placed the fair market value of private property in Barangay San Dionisio at Pl4,000 to P25,000 per square meter. The Toll Regulatory Board headed by executive director Mariano Benedicta II, then the government body in charge of right-of-way-acquisition (ROWA) talks with Amvel, balked at the P25,000 initial quote, claiming it was too high. A study conducted earlier by the Parafiaque City assessor's office reported the prevailing land market values in the area to be from P490 to P700 per square

VOLUMEV NUMBER I January-June 2001 61 Mendoza

6 meter in the interior to Pl,OOO per square meter along A. Santos avenue. The Asset Valuation Division (AVD) of the Bureau of Internal Revenue (BIR) re­ ported that the affected properties had a zonal valuation of only P4,500 per square meter.i The TRB then commissioned three private land appraisal com­ panies to evaluate the affected properties. The three companies came up with a wider valuation range: from a low of P3,000 to a high of P18,000 per square. Note that the highest quote is still less than Amvel's initial demand by P7,000 per square meter. Even if this was the price to be paid for the land, the govern­ ment would have saved P912.7 million. If the lowest quote was the acquisi­ tion price, the government would have saved P2.87 billion. Eventually, the affected properties were bought by government for P15,335 per square meter and Amvel collected about P1.22 billion for its land. While TRB executive director Benedicta claimed that the deal was aboveboard, Malacafiang insiders said that sometime in March 1999, President Estrada "per­ sonally directed the TRB to proceed with the acquisition of the Velarde-owned lands" (Esplanada 2000b). In fact, the deed of sale of the property was report· edly executed and then transmitted to the Office of the President and the con­ tracts for land acquisition were approved by President Estrada on 30 March 1999. Critics of the deal insisted that Amvel should have been paid only P4,500 instead of P15,335 per square meter, or a difference of P10,835 per square meter. Government would have saved about P7 60 million. They cited Admin­ istrative Order No. 50 issued on 17 February 1999 by Malacafiang which set the purchase price for right of way easements at a property's "zonal value plus 10 percent," instead of its fair market value. It is true that negotiations for the land started in 1998, before AO No. 50 was issued. Amvel vice president for business development Carlos Ramon Baviera claimed that the company was "supposed to be paid by the government as early as the first quarter of 1998" (Esplanada 2000b). In a May 7, 1998 resolution, the TRB board approved payment for the said Amvel properties. But it is also true that final approval of the deed of sale and the contracts for land acquisition were all signed by President Estrada on 30 March 1999, one and a half months after AO 50's issuance. Did the fact that negotiations begun,

62 PUBLIC POLICY The Industrial Anatomy of Corruption or that the TRB board approved payment for the said properties in1998 exempt the deal from the provisions of the said administrative order? It is true that there were no allegations of bribes reported in connection with this land deal. However, the law on corrup- tion (Republic Act 3019 or the Anti-Graft and .. .fundamental Corrupt Practices Act) is quite stringent, defin­ ing as a corrupt act the "entering, on behalf of changes in the way the Government, into any contract or transaction government does manifestly and grossly disadvantageous to the business ought to same, whether or not the public officer profited be at the heart of or will profit thereby." A year and a half after any reform agenda. paying Velarde's firm P1.22 billion, the Estrada administration shelved the C-5 Link project in- definitely. This prompted some critics of Estrada, including DPWH person­ nel, to assail the government for alleged "misappropriation of public funds" (Esplanada 2000d).

Concluding remarks Our inquiry into concrete cases of corruption in connection with procure­ ment contracts and the sale of public assets indicates significant changes in modus operandi, especially in response to the stimuli of economic growth, de­ centralization and the restoration of formal democratic processes in the post­ Marcos period. However, the key ingredient remains the exchange of "goods" between a rent-seeking private entrepreneur and public officials with discre­ tionary powers to the detriment of public interest. To this end, the vast powers enjoyed by the Philippine president to approve and finalize contracts should be carefully reviewed in the effort to reform the over-all socio-political environ­ ment that fosters corruption. While the industrial structure of corruption appears to be looser in non­ authoritarian settings, there remain exceptions to the rule. Again, the vast pow­ ers of the President are implicated. In our prologue, we alluded to how Presi-

VOLUME V NUMBER 1 January-June 2001 6.3 Mendoza dent Estrada organized a protection racket forjueteng. The corruption here was tightly organized in behalf of Estrada through the efforts of his crony, Jaime Dichaves, who apparently called the shots at the Department of Transportation and Communications (DOTC). There is likewise need to reform our electoral laws, especially in relation to campaign financing. Most of the cases of grand corruption undertaken within a non-authoritarian context were perpetrated for the purpose of amassing hefty campaign chests. With the demise of the Estrada administration, the organization of a na­ tional anti-graft body may finally come to pass. However, this will not be enough. Rose-Ackerman (1999: 5-6) reminds us of a fundamental lesson: "Reform should not be limited to the creation of "integrity systems." Instead, fundamental changes in the way government does business ought to be at the heart of any reform agenda. The primary goal should be to reduce the underlying incentives to pay and receive bribes, not to tighten systems of ex post control. Enforce­ ment and monitoring are needed but they will have minimal long-term impact if the basic conditions that encourage payoffs are not reduced. So long as these incentives remain, the elimination of one set of "bad apples" will not stop the creation of a new group of corrupt officials and private bribe payers. This is an apt reminder for all of us who rejoiced at the downfall of Estrada and his unprecedented arrest for plunder on 25 April 2001. The subsequent events of EDSA Tres and Mendiola Dos, drove the point home even further.

64 PUBLIC POLICY The Industrial Anatomy of Corruption

Notes

1 Jueteng is a variant of a Chinese numbers game where the bettor is asked to pick two numbers between 1 and 3 7. The lucky pair is drawn and the win­ nings depend on how much and which numbers others has bet on. The survival ofjueteng depends on a network of operators whose activities are protected by officials and law enforcers from the village to the national level. Bet collectors (cobradores) report to cabos (headmen) who in turn are su­ pervised by ajueteng operator. The operator ensures that the racket is pro­ tected by civilian, military and police officials. The layers of protection begin at the town level, to the provincial, regional, all the way up to the national. Singson's revelations indicate that Estrada did what none of his predecessors had done: systematize and centralize jueteng payoffs in the Office of the President. For more information onjueteng and its protectors, see Coronel (2000) and PCIJ/IPD (2000/1995). 2 Guides to documents are provided in Mendoza (1992a, 1992b and 1992c). 3 Most of the information regarding the Centennial Expo scandal were taken from the Senate Blue Ribbon Committee Report Nos. 19 and 30, Yamsuan and Gonzales (1999), Florentino-Hofilefia and Sayson (2000/1999) and Cueto (2000a and 2000b). 4 Most of the data regarding these scandals were taken from Tordesillas and Coronel (2000/1998), Coronel (2000/1996) and Fletcher (1997). 5 Much of the data in this section is taken from Esplanada (2000a, 2000b, 2000c, 2000d). 6 We know that there is a wide disparity between the assessed value and the fair market value of real estate everywhere in the country. Landowners tol­ erate the wide disparity because the lower assessed values are the basis for the payment of real estate and other pertinent {e.g., inheritance) taxes. 7 The BIR zonal valuation does not distinguish property in the interior por­ tion of a community from those along a major thoroughfare. It is common knowledge, however, that properties in the interior areas have a lower value than those along main roads.

VOLUME V NUMBER 1 January·June 2001 65 Mendoza

Bibliography

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Coronel, S. (2000). "The Jueteng Republic" in S. Coronel ed., Investigating Estrada: Millions, Mansions and Mistresses, pp. 26-36. Quezon City: Phil­ ippine Center for Investigative Journalism. First published in i magazine, October-December 2000. ---·-· (2000/1996). "Squeeze Play on the Expressway" inS. Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corruption, pp.

66 PUBLIC POLICY The Industrial Anatomy of Corruption

136-144. Quezon City: Philippine Center for Investigative Journalism. First published in the Manila Standard and Manila Times, 4-5 March 1996 un­ der the titles "A Clash of Giants" and "Deception on the Highway" . ------. ( 1995). "The Killing Fields of Commerce", in J. Rocamora., ed., Boss, pp. 3-31. Quezon City: Institute for Political Democracy and Philippine Center for Investigative Journalism. Corotan, G. L. (2000a/1995a). "Money from Health" inS. Coronel ed., Be­ trayals of the Public Trust: Investigative Reports on Corruption, pp. 12-23. Quezon City: Philippine Center for Investigative Journalism. First pub­ lished as a series of articles under the titles "Ramiro"s Record of Sleaze" and "Playing Politics with Health" (in Today and Philippine Star, 9-10 No­ vember 1995) and "DOH Hounded by Corruption Charges" (in Manila Standard and Malaya, 11 March 1995 and Manila Times, 11-12 March 1995). -----· (2000b/1995b). "The Rice Scam" inS. Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corruption, pp. 24-34. Quezon City: Philippine Center for Investigative Journalism. First published as a series of articles under the titles "Inept and Corrupt, NFA Can't Assure Stable Rice Price," "NFA Entangled in a Web of Graft," and "Rice Policy Follows a Formula for Crisis" in Manila Times and Manila Chronicle (8-11 September 1995), Manila Standard (8-10 September 1995) and Today (11 September 1995). de Dios, E. and H. Esfehani (forthcoming) "Centralisation, Political Turn­ over and Investment in.the Philippines," in "T. E. Campos, ed. Corrup­ tion: The Boom and Bust of East Asia. Quezon City: Ateneo de Manila Press. Florentino-Hofilefia, C. (2000/1996). «Profits/rom Disaster" inS. Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corruption,pp. 35- 44. Quezon City: Philippine Center for Investigative Journalism. First pub­ lished as a series of articles under the titles ((Millions Lost in Mt. Pinatubo Projects'' and ':tlrmy Clique Enriched by Pinatubo Resettlement Funds" in

VOLUME V NUMBER 1 January-June 2001 67 Mendoza

Manila Times, Manila Standard, Manila Chronicle, and Malaya (2- 3 Sep­ tember 1996) and Abante Tonite (6 September 1996). ______and I. Sayson. (2000/1999). ((Centennial Scandal" inS, Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corruption,pp. 163-180. Quezon City: Philippine Center for Investigative Journalism. First published in Business World, Malaya, Philippine Star and Manila Times, 14-16 June 1999 under the titles «Convenient cover /or election fundraising", "How to build a white elephant,» and "The great cost of saving the Centen­ nial". Leite, C. andJ. Weidmann. (1999). "Does Mother Nature Corrupt? Natural Resources, Corruption, and Economic Growth." International Monetary Fund Working Paper, WP 99/85; Mendoza, A. (1992a). "Guide to The Marcos-Honolulu Papers {MHP)" in M. Tsuda and M. Yokoyama, eds., Japan Inc. in Asia: A Documentation on Its Operations Through the Philippine Polity, pp. 10-13. Tokyo: Akashi Shoten. -----· (1992b). "Guide to the Oscar L. Rodriguez Papers (ORP)" in Japan, Inc. in Asia, pp.14-17. -----· (1992c). "Guide to the Baltazar A. Aquino Papers (BAP)" in Japan, Inc. in Asia, pp. 18-23. Pal dam, M. ( 1999). "The Big Pattern of Corruption: Economics, Culture and the Seesaw Dynamics." Unpublished manuscript, Aarhus University, Den­ mark. Philippine Center for Investigative Journalism and Institute for Popular De­ mocracy (PCIJ/IPD). (2000/1995). "Jueteng Country" inS. Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corruption, pp. 279- 288. Quezon City: Philippine Center for Investigative Journalism. First published in Today, Malaya, Abante, Philippine Star, and Manila Times, 4 December 1995 under the titles: "Illegal gam bing has a grassroots base"; "Police and politicians protect jueteng"; and "Jueteng is embedded in lo­ cal society and culture".

68 PUBLIC POLICY The Industrial Anatomy of Corruption

Rose-Ackerman, S.( 1999). Corruption and Government: Causes, Consequences, and Reform. Cambridge University Press . ------. (1996). "The Political Economv- of Corruption-Causes and Consequences". World Bank Public Policy for the Private Sector Note# 74, ApriL Sachs,]. and A. Warner. (1995). "Economic Reform and the Process of Glo­ bal Integration." Brookings Papers on Economic Activity, 1-118. Schamis, H. (1999). "Distributional Coalitions and the Politics of Economic Reform in Latin America." World Politics 51{2): January. Shleifer, A. and R. Vishny. (1993). "Corruption". Quarterly Journal of Eco­ nomics August (199.3): 599-617. Tordesillas, E. and S. Coronel. (2000/1998). "The Grandmother of all Scams" in S. Coronel ed., Betrayals of the Public Trust: Investigative Reports on Corrupt£on, pp. 145-162. Quezon City: Philippine Center for Investiga­ tive Journalism. First published in Manila Standard, Sun Star Daily, Ma­ nt'la T£mes, Malaya, Bus£ness Wor/4, Pht'lipp£ne Da£ly Inqu£re'- and Indepen­ dent Post, 18-22 March 1998 under the titles "Huge payoffs made to offi­ cials and brokers," 'i\mari's trail reaches Malacaiiang," and "The scam unravels". Treisman, D. (2000). "The Causes of Corruption: A Cross-National Study." Journal of Publ£c Economics, forthcoming. -----. ( 1999). "Decentralization and Corruption: Why are Federal States Perceived to be More Corrupt." Paper presented to the Annual Meeting of the American Political Science Association, Atlanta, Septem­ ber. UNDP Report, (1997). "Corruption and Good Governance." Division of Public Mfairs UNDP, New York. Verzola, R., M. Buenaventura and E. Santoalla. ( 1991). "The Philippine Nuclear Power Plant: Plunder on a Large Scale", in A.M. Mendoza Jr ed., Debts ofD£shonor: Volume I, pp . .3-126. Quezon City: Philippine Ru­ ral Reconstruction Movement.

VOLUME V NUMBER 1 January-June 2001 69 Mendoza

Wei, S., ( 1997). "How Taxing is Corruption on International Investors?" NBER Working Paper No. 6030. May. II. Periodical Articles Cabacungan, G. Jr. (2000). "Gov't eyes e-purchasing unit." Philippine Daily Inquirer, 20 June 2000. -----· (1999). "NDC to sell Expo, other subsidiaries." Philippine Daily Inquirer, 30 August 1999. -----and E. Torrzjos. ( 1999). "Cojunagco pal taking over Amari hold- ing company." Philippine Daily Inquirer, 18 November 1999. Contreras, V. (2000). "Group urges graft, corruption to be reported via Internet." Philippine Daily Inquirer, 27 April2000. Cueto, D. (2000). ((Ombudsman ignores $-raft finding against FVR." Philippine Daily Inquirer, 4 February 2000. _and R. Nazareno. (2000). "Ombudsman £gnored evidence on Ramos." Philippine Daily Inquirer, 8 February 2000. Dumlao, D. (2000). ((Firm to resume coastal project." Philippine Daily Inquirer, 12 May 2000. Esplanada, J. (2000a). "Velarde firm used fake CA ruling in deaL" Philippine Daily Inquirer, 15 August 2000. ---- .(2000b). ((Government paid Pl.2B to Velarde real estate firm.}) Philippine Daily Inquirer, 16 August 2000. ·----·· (2000c). 'Amvel tops right-of-way beneficiaries." Philippine Daily Inquirer, 17 August 2000. ----· (2000d). 'After paying P1.2B, C-Jlinkplan shelved." Philippine Daily Inquirer, 1 December 2000. Fletcher, M. ( 1997). {(The Sell-off Blues. " Asia week, 21 February 199 7. Henderson, D. R. (1999). "Power Corrupts-Editorial Comment." The Wall Street Journal. 19 April1999. J avellana, J. (1999). ((Puno lied too, says Saguisag." Philippine Daily Inquirer, 19 October 1999. Lopez, A. (1999). ((Centennial shenanigans: Ramos is under investigation for corruption." Asiaweek, 30 April1999.

70 PUBLIC POLICY The Industrial Anatomy of Corruption

Yamsuan, C. and S. Gonzales. (1999). "Expo scam: FVR, Laurel held liable." Philippine Daily Inquirer, 6 November 1999.

VOLUME V NUMBER 1 January-June 2001 71

Tender Mercies: Contracts, Concessions and Privatization

MARIE ANTOINETTE G VIRTUCIO and MELCHOR P LALUNIO

Introduction

At the center of various corruption issues during the Estrada administration was the purported existence of a "nocturnal cabinet" or "court" composed of rela­ tives and close personal friends of the deposed president. Involved in a wide array of businesses from legalized gambling to stock trading, they were said to directly influence the awarding of government contracts or to tilt government's regulatory provisions to their, qr their associates' favor, despite President Estrada's assertion that his government was one-of ((walang kaibigan, kamag-anak o kakilala" (no friends, relatives or acquaintances). Oblique references in the past from palace and business insiders were made on how the presidential goodwill was employed by these people to further their economic and political interests. However, it took a serious rift between President Estrada and one of his closest friends, !locos Sur Governor Chavit Singson, to give the public a solid likeness of an obscure symmetry. The resulting "model" that emerged from the Senate hearings revealed not only the overwhelming prerogative Virtucio & Lalunio of the President to influence the awarding of government contracts to his favored associates. More importantly, it was able to situate that prerogative within the work­ ings of an informal regime able to combine and stratify the different interests and levels of compensation or payoff for those involved. Beyond public interest, the prevalence of these allegations of exclusivity reached alarming levels, especially when set against the mainstream of the government's economic reform program that sought even wider private sector participation in the economy. Since 1987, government has undertaken the task of dismantling exces­ sive and unnecessary economic regulations and controls through liberalization, de­ regulation and privatization. Over the last twelve years, it has sold or contracted government assets and rights to provide public services worth no less than P191 billion to private investors. There is no sign that the new political leadership will change this course. Prior to and upon assumption of the presidency, Gloria Macapagal-Arroyo articulated her intention of continuing the government's economic reform program anchored on the same commitment, for fiscal and social reasons. Economically, it means a better financial situation for the treasury while at the same time attracting and mobilizing private capital to finance and/or operate services and facilities that the government, for lack of resources, cannot invest in and maintain. The government could thus focus its limited resources in other priority areas. These economic reasons, in turn, dovetail with the expected social returns. Market competition is expected to trigger reforms on the way these public goods and services are being managed, delivered and priced-aspects habitually neglected by government-supported corporations and/or service providers. Through compe­ tition, the people (and users of the service) could also exercise their right to choose, a highly unlikely situation where government maintains its traditional monopoly over the provision and operation of public goods and services. An established government system for concession and privatization vulner­ able to corruption however, could readily undermine these justifications. For the government, corruption in the granting of government concessions means missing out on a fair market or monetary value for the "rights" and resources under its control. It also means compromising the country's development potential since

74 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization contracts on privatization and concessions usually involve huge amounts and are intended to have a positive impact on certain sectors in particular and on the country's economy in general. An oft-neglected point is that eventually, fraudulent transactions affect the business regime itself. For a contractor or service provider, the corrupt nature of the transaction or deal eventually introduces uncertainties into the environment that could have adverse results on how it (and any other firm) conducts business (Cam­ pos, Lien, and Pradhan: forthcoming). An uneven transaction environment for instance, could limit the number of bidders, favor connections over competence and promote information asymmetry-all of which add to transaction costs. Over time, such transactions inevitably bind both government negotiators and contrac­ tors in a self-sustaining system that promotes inefficiency and ineffectiveness.

Purpose and Scope

This paper examines corruption in government contracting in the private sector for infrastructure or development projects that the government normally finances and operates but now, will be wholly or in part, constructed, operated and main­ tained with the private sector. To examine corruption of this nature, the study used the government's established system for contracting as articulated in RA 6957 (May 1990), later amended as RA 7718 (July 1994) which is known as the Philippine Infrastructure Privatization Program (PIPP) or Philippine BOT Law as reference. The system for contracting as articulated in RA 7718 is specifically designed to handle government contracts which tap non-government resources for providing and developing services and infrastructure previously monopolized by the govern­ ment. The law even specifies the flexible terms for public-private partnership ar­ rangements which govern ownership, financing, construction, operation and main­ tenance, and investment returns' incentives. Imperfect though it may be, this makes the contracting system specified in RA 7718 a good reference by which to examine government deals or arrangements which run according to the same objectives. To determine the institutional factors and to account for the circumstances that allow corruption to transpire and take root in the government-private contract-

VOLUMEV NUMBERl January·June2001 75 Virtucio & Lalunio ing system, the paper examines in detail three government-private sector PIPP deals in infrastructure or development projects including: the Cebu Pond A Reclamation Project, the North Harbor Privatization Project and the Greater Metro Manila Solid Waste Management Contract. As differentiated from the usual government-private concessionaire contracts, the cases are not those whose intention and design were primarily to "employ" the services of private contractors and paid for using public funds. Rather, these deals are those where some aspects of government's right to provide, operate and main­ tain a public service or good (e.g., facilities) are offered and awarded to private investors and along with it, the right to collect the benefits that accrue from the users of that service or good for an agreed upon period. It is difficult to document direct payoffs to officials that are linked to the inten­ tion .of influencing the different phases of the contract from negotiation to the public (or sometimes government) evaluation of the concessionaire's performance. Such is the case especially, when there are deliberate efforts to conceal these trans­ actions. As the process of negotiations leading to an ;:tgreement also involves a number of people and institutions, an attendant task of proving the occurrence of a payoff usually means proving that a conspiracy also exists. But inasmuch as govern­ ment decisions over the kinds of alternatives or choices to support-within the frame of concessions and privatization-follow an established system, there might be some merit in looking at the phases and inner workings of this system that render it vulnerable to corruption.

The BOT system

The established BOT system for contracting can be divided into four major phases: (i) project selection and approval; (ii) pre-bidding; (iii) bzdding, evaluation and award; and, (iv) contract approval and implementation. Each part contains defined procedures and even schedules of action. There are also prescribed tools and/or standard parameters for rendering an informed decision that is consistent with the technical and financial goals of the project. There are likewise appropriate guaran-

76 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization tees or sanctions which do not only ensure that .the process of contracting would continue, but that the obligations would be met by the contracting parties. The system similarly provides for a managing and regulatory intermediary be­ tween the prospective project proponents and the concerned agency/LGU with the creation of a Pre-qualification, Bids and Awards Committee or PBAC. Its composi­ tion conveys impartiality, competence (financial and technical) and accountability.

Figure I Phases of Contracting

Project Selection and Approval - Priority Project Selection - Confirmation/Approval

Pre-bidding - PBAC Creation - Pre-qualification - Preparation/Issuance of Tender/ Bid

Bidding, Evaluation and Award - Supplemental Notices - Pre-bid Conference - Submission of bids -Bidding, Evaluation and Award

Contract Approval and Implementation - Approval of Contract - Detailed Design - Construction/Implementation - Supervision

The BOT contracting system furthermore places certain guarantees on how the principles of being pro-Filipino, of non-discrimination and of transparency could be appropriately adhered to across all phases of contracting. There are explicit ref­ erences to the preferential hiring of Filipino labor, selection of Filipino-owned firms vs. foreign, pre-qualification requirements pertinent to ownership and the transfer of technology during the implementation of the project. These ensure, as far as practicable, the predominance of Filipino involvement in both ownership and un­ 1 dertaking. Non-discrimination within the system's processes is actualized through the standard application of providing information, feedback, financial and techni-

VOLUME V NUMBER 1 January-June 2001 77 Virtucio & La!unio cal requirements, and rules to all prospective bidders/ contractors. Prospective bidders have an equal chance of being awarded the contract since they follow the same rules, receive the same information at the same time, and are required to adhere to the same mandatory minimum technical and financial require­ ments. Finally, transparency is observed and maintained in the system (especially deal­ ings among concerned agencies/LG Us and bidders) through the mandatory obser­ vance of information dissemination (compulsory publications), feedback require­ ments (notices, pre-bidding conferences, explanation of decision) and composi­ tion of the managing and evaluating bodies, both at the level of project confirma­ tion and approval (NEDA, ICC and LDCs) and the concerned agency/LGU (i.e., PBAC). The actualization of all these principles contributes to a credible and level playing field conducive for competition to thrive. Overall hence, one can say that the strength or weakness of the BOT contracting system against graft and corrup­ tion would, to a large measure, depend on how the overall principles as well as the defined procedures, tools and parameters, guarantees and organizational in­ termediary (i.e., PBAC) within each phase of the contracting system are main­ tained and managed. In view of the prevalent public perception of corruption in government con­ tracting, one is moved then to ask what principle has been excluded or what defined procedure, standard parameter or time line in what phase has been dis­ pensed with or overlooked. Was the occurrence a failure related to the capacity of the technicaVregulatory structure in a particular phase? And if there was any oversight in the application of the system's principle, procedure, parameters and schedule on the part of the technicaVregulatory body, was it, by any chance, caused by corruption or imperfections in the system itself? Thus, categorizing some details and forms of perceived or actual corrup­ tion from the excerpts of several cases examined by the study could shed some light.

78 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

System checks, cases and gaps

System's doors and windows The vulnerability of the elements and phases of the BOT contracting system to corruption could be determined largely from the type of "assault" mounted against it. Essentially, whether the failure can be attributed to the weakness of the whole system itself or just to an element in one particular phase of contracting would be principally ascertained by the intent and type of corrupt action (or input) committed. The process of contracting is sequential, where progress towards one phase would depend on the completion of the other. Based on this, prospective bidders commonly survey four fundamental stages throughout the phases of contracting critical to their interest and to the progress of the whole process:

- their choice project will be selected and approved; - their company or consortium can pre-qualify; - their technical and later, financial, proposals can pass the evaluation; and - they can secure other government approvals required under existing laws, rules and regulations (e.g., environmental clearance, certificates, license) during the course of contract implementation on-field.

Among these stages, it is not totally unexpected that public predilection (and cynicism) should assume irregularities during the stages of technical and financial evaluation and when securing government approvals. The stage of evaluation is a "pass-or-fail" situation, one of the points where the discretionary power of the PBAC is most decisive. It is not surprising that at this stage, the members of PBACs are usually the objects of criticism and insinuations, since they are the officially desig­ nated "managers" and "protectors" of the process and of public trust. Except for instances when it is crucial to pre-qualification or a material input to the bidding, securing government approval is not deemed decisive at the stage of technical and financial evaluations. By then, the decision regarding the. contract's award has been made and the winning bidder could always seek the assistance of the concerned agency/LGUs in securing these approvals. The agencies' failure to act promptly merely delays the implementation of an already done deal.

VOLUME V NUMBER 1 January-June 2001 79 V1rtuoo & Lalunio

However, behind the decision to issue the mandatory approval or document, the line separating the intent to protect the public interest and to promote self­ interest is too thin. The original rationale behind such mandatory approvals and enabling forms might have been to guarantee the acquisition of these interest of the people, but in some cases, the line is breached and has spawned situations analogous approvals, licenses to blackmail. It is not surprising that the acquisi­ or similar documents tion of these approvals, licenses or similar docu­ has always been ments has always been viewed by the public as a viewed as a de facto de facto form (or opportunity) of extortion that form of extortion happens even under normal (i.e., non project-re· lated) situations.

2 Systemic and localized acts of corruption

In essence, those involved in corruption in government-private sector con­ tracting proceed along two primary domains to ensure that the contract would be awarded to them on very favorable terms and usually, to the detriment of the gov­ ernment and other competitors. The first or systemic domain covers those acts directed towards influencing the contracting environment, or more specifically, to secure a transaction and/or nego­ tiating environment partial to the position of one bidder and/or more open to illicit incentives. Apparently, corruption in contracting needs a predictable system, cer­ tain ground that will secure the relation and increase as well the certainty of the result of the transaction or negotiation. Systemic acts might be amplified, that is, directed or designed to change or to bypass the "prescribed" contracting system-all of the phases which make up the whole system. Or it could be compartmentalized, that is, limited to one or several phases or stages of contracting. In both types, the acts or initiatives are not illegal in the strictest sense, but they do erode the credibility of the contracting system. The choice of type of initiative to be used would depend, in turn, on the magnitude of change in the environment that one seeks to achieve for his purpose.

80 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

In contrast, the localized domain includes those acts or initiatives that seek to influence (directly or indirectly) the crucial decision in several (or all) phases of the contracting system. These acts or initiatives proceed from the progress of the pre­ scribed system of contracting, thriving on the "predictability" the said system pro­ vides. Their objective is for the prospective corrupt bidder to change the decision at a determining stage to its favor, primarily through illicit means. Localized acts of corruption are mostly compartmentalized; that is, their appli­ cation is situational, depending on the particular phase(s) or stage(s) that a pro­ spective bidder wants to pass (through corrupt means). It is also possible however, that these acts and initiatives follow an overarching script or conspiracy that renders the process of con­ There are tracting a "done deal." And in such cases, said acts deliberate efforts to and initiatives are said to be amplified. Otherwise, hide these deeds or they are simply an isolated collection of compart­ transactions, mentalized actuations. Localized acts of corruption constitute most making them much of the allegations of corruption (e.g., bribery) in con- harder to prove tracting. There are cases, however, when the cause can only be discerned from the context of the act; in such instances, an analysis of the environment uncovers probable weaknesses on how the contracting system trans­ lates the principles of inclusive and transparent contracting into operational guaran­ tees. There are deliberate efforts to hide these deeds or transactions, making them much harder to prove, discovered only occasionally because of whistle-blowers, determined investigative reports and media-courting exposes. The principal difference between the two domains is the object of the initia­ tives or intent. The. two domains are also complementary but not necessarily co­ incidents. For instance, localized graft initiatives could be pursued at any critical stage of any particular phase of contracting, with or without accompanying initia­ tives aimed at creating an accommodating transaction and/or negotiating environ­ ment. Some firms or individuals on the other hand, do not see the need for any localized initiatives as the existing environment offers enough advantage or guaran­ tees to win the contract. They could also be in the earlier stage of building relations

VOLUME V NUMBER 1 January-June 2001 81 Virtucio & La!unio that could be used as a platform from which to launch localized interventions in the latter phase, or in other projects. What is evident is that the initiatives in both domains can be combined to ensure that the desired outcome will occur, as may be seen in the following selected cases; namely, the Cebu "Pond .N' Reclamation Project, the North Harbor Privatization and the Metro Manila Solid Waste Management Project.

Cases, plots and allegations

Cebu City's Reclamation Project The case of Cebu City's Reclamation Project belongs to the systemic category, albeit with probable tones of localized forms of corruption initiatives. The case does not have enough details to layout how collusion, payoff and perhaps, even kinship, interacted to erode the integrity of the established elements for contract­ ing. The overall plot, however, serves the purpose of the discussion and analysis. The case began when the Cebu City Development Council passed on the task of contracting the reclamation of the 60-hectare "Pond/\' to the Philippine Estates Authority (PEA) in exchange for 65% of the property (Philippine Star: 14 July 2000). This effectively shifted the responsibility of overseeing the contracting away from 3 Cebu to the PEA, where there was less opportunity for LGU oversight. It was alleged that most of the members of the Council were allied with then Mayor Alvin Garcia {it must be noted that, some, along with the Mayor, were members of the PBAC). Cebu City Board Member Winston Garcia subsequently alleged that each of the councilors was paid P.5 million to "surrender" to the PEA the control rights to oversee contracting. The money supposedly came from sub-contractors to be sub­ sequently engaged by the PEA, and that another P2 million would be paid when the project was eventually bidded out to them (subcontractors). The allegation of payoffs to city councilors is absorbing but more interesting, if indeed, true, is that the case shows how the strong (or weak) contracting system at the local levels can be readily outflanked. Systemic and compartmentalized, Cebu's case shows how the intended change in the PBAC could cause changes in the dis-

82 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization position of all the other succeeding phases of bidding- from pre-bidding until contract implementation. As it was, transferring the Cebu local government's con­ trol rights over the process of contracting to PEA was at the same time an auto­ matic decision to accept whatever contracting system PEA had in-place. This sub­ sequently overrode the capacity and rights of Cebu' s PBAC to handle the matter. That the PEA was chosen as Cebu City's contract manager despite the recent fallout from the Amari scam deserves a re-examination of how well the LGU's (and even PEA) PBAC can "vet" prospective bidders/contractors. Either there is a lack of qualified companies who can do the job of reclamation or there is no excel­ lent database that could track the performance and changing profiles of different firms or companies and shadow personalities (despite the proliferation of many professional associations and organizations in that line of work) that could have been valuable in evaluating the prospectiv~ bidders or project partners. The Cebu Reclamation case suggests that any relationship between and among those involved in a corrupt transaction needs stabilizing to increase the certainty of the result of their transaction. Perhaps this was what the contractors sought to gain by allegedly paying off the members of the City's Board. The transfer of contract­ ing rights to PEA meant they could circumvent the long, tedious process of regular LGU-PBAC contracting, wherein each phase could produce surprising results and might require dealing with unfamiliar actors who did not know how to "play ball." The willingness of contractors to provide substantial amounts of graft money to shift control of contracting over to the PEA was, in actuality, a bid to ensure a more accommodating relationship and environment for their transaction. If true, this suggests a lot about PEA's system for contracting, of how its own PBAC might already have been compromised, and that the likely results in some of the contract­ ingphases (e.g., pre~bidding, bidding, evaluation and award, and even the approval of contract) might already have been fixed. The Cebu Reclamation case similarly revives one detail regarding a phase in contracting, that of project selection and approval. While few will dispute that it should be within the purview of the concerned agency/LGU to select the project, how the selection was made at the national and local levels has seldom been clari­ fied. Unfortunately, it is during this phase that other government offices (e.g.,

VOLUME V NUMBER 1 January-June 2001 83 V1rtucio & Lalunio

Malacafiang) and officials determine whether the project should fall within the "usual" BOT contracting system. At present, the development of criteria for the selection process is left to the discretion of the concerned agency or to the LGU's designated unit (the local de­ velopment councils in the case of the LGUs, or the planning committee, in the case of a concerned agency). This provides some degree of flexibility and serves as filter for the approving/confirming bodies (NEDA, ICC and LDCs). However, the un­ clear and arbitrary criteria and processes for selection and prioritization could also facilitate collusion among those involved to select projects advantageous to them or those which have the potential for high payoffs (e.g., most projects will involve infrastructure to maximize payoffs from purchase of materials). For both NGA and LGU concerned, the nature as well as the corresponding technical and resource requirements of the selected projects could also narrow down significantly the number of eligible project contractors, leading to the short-listing of well-connected bidders or concessionaires well before pre-qualifications and public tendering. It might be interesting to find out political party how early PEA knew that it would be involved in a affiliation, interests major project in Cebu; such would determine and sheer social whether PERs management of Cebu's project con­ influence could stitutes a set of amplified, localized acts of corrup­ tion. determine Hence, the project selection and approval phase decisions to favor becomes an exercise in forewarning entrenched or those that benefit developing corrupt connections between and among only a select group stakeholders (NGA, LGUs and the private sector) about what opportunities to focus on and from there, which office or person to approach. There are also cases of some LGUs where political party affiliation, interests and sheer social influence could determine deci­ sions to favor those that benefit only a select group, especially for local projects that are also confirmed locally. This is especially since most LDCs only meet once or twice a year (to take on the whole local development plan).

84 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

In any case, the short listing of the project does not necessarily translate to openness to compartmentalized or amplified forms oflocalized acts of corruption, especially those whose amount is subject to approval or confirmation by the NEDA and/or ICC for their economic and financial viabilitv. There remain some svstemic ' ' checks in the long process from project selection to project operation (when the public begin to express their satisfaction or dissatisfaction) that raise a lot of uncer­ tainties as to the outcome. By and large, the real utility of analyzing the possible emergence of corruption in project selection revolves around the issue of transparency and its meritorious impacts. Whether national or local, a dearer process and standard for project selec­ tion that the public could readily understand might give rise to more prudent judge­ ment. It could also inhibit the growing preferenc~ of government officials to cite the project's peculiarity or urgency as a pretext to circumvent the guarantees of the system of contracting, and/or fix the result of its progression-from beginning to implementation.

The privatization of the North Harbor

On 26 July 2000, then Senate Minority Floor Leader Teofisto Guingona, con­ tractors, and some labor leaders demanded a suspension to the privatization of ports throughout the country until a thorough investigation on alleged "anomalies" was undertaken (The Philippine Star: 27 July 2000). Sen. Guingona also filed Sen­ ate Resolution 813 which directed the Senate Blue Ribbon Committee to investi­ gate the privatization and modernization of ports by the Philippine Ports Authority (PPA). One of the principal "anomalies" regarding the privatization of North Harbor was the charge that privatization could in fact lead to a "monopoly over cargo op­ erations"-a concern that was raised by a shipper's group led by the Distribution Management Association of the Philippines or DMAP (Philippine Star: 07 July 2000). This was in reaction to efforts by the North Harbor Consortium or NHC (whose members include the Asian Terminals Inc., International Container Termi· nal Services, Inc. and other major domestic shjpping lines) to secure the contract to

VOLUME V NUMBER 1 January-June 2001 85 Virtucio & La!unio operate the harbor which needed a capital infusion of not less than $200 million to reach an acceptable service level. The DMAP believed that the privatization of North Harbor merely amounted to the transfer of a government monopoly to an NHC monopoly for a guaranteed period of 25 years. In response, the PPA decided to offer a new Terms of Reference (TOR) incor­ porating changes in the areas of engineering, financial requirements and arrange­ ments and equipment to be provided for the privatization of the harbor and dis­ closed that it would conduct another hearing (Philippine Star: 1.3 July 2000). The North Harbor project had an objective and type that resembled an ar­ rangement covered by the BOT and yet was covered by Executive Order No. 59. The Order allows PPA to contract out the management, operation and develop- s ment of the government port directly to a company or firm without public bidding. This negatively impacts on the built-in guarantees in a BOT contracting system for that critical stage, especially in terms of impartiality, transparency, financial qualifi­ cations of prospective contractors and financial security. There is an inherent prob­ lem in the situation where the same agency (PPA), who is also a participant in the process (and needs to conclude a deal), has to act at the same time as sole overseer of the process and evaluator of prospective contractors with whom it (PPA) had conducted a lot of business. Conversely, because of unfamiliarity, varying back­ ground and multiplicity of interests, it is much harder (but not entirely impossible) to strike a fraudulent deal with a body such as the PBAC whose creation would 4 have been required under this circumstance. It is not surprising therefore, that the PPA and the North Harbor privatization project were perceived by other users of the facility as the principal agent and means, respectively, to establish a "monopoly . ,5 over cargo operations. EO 59 has been rescinded (and the privatization of North Harbor put on hold) but not before its systemic implication on government contracting was emphasized. In essence, it was an amplified systemic act, i.e., its object was to change the whole system of contracting itself. While the Cebu Reclamation Project showed how one can opt for a less stringent PBAC (and gain a higher degree of certainty that the fraudulent transaction could be carried out through the switch), the North Harbor

86 PUBLIC POLICY Tender Mercies.· Contracts, Concessions and Privatization case presented another option-that of a complete bypass-with the authority is­ sued by no less than the Office of the President. The alternative truncates most of the components within the established phases of a "standard" BOT contracting s~'stem which ensure the relatively graft-free proceeding of contracting. Former President Estrada placed the privatization of North Harbor (and all other ports in the country) under a different legal framework, raising more unsatis­ factory answers than reasonable questions in the exercise of his prerogative. It might be argued that the PPA observed the same steps, forms and other instruments that a "standard" BOT contracting system follows, even if it is operating under a differ­ ent legal framework. However, this point only raises the question of why the project has to operate outside the usual contracting system.

Contract recycling: Metro Manila Solid Waste M·anagement

Unlike the two preceding cases, the scope of the alleged corrupt acts in the case of the Metro Manila Solid Waste Management is more comprehensive, cover­ ing almost all of the critical stages in the different phases of contracting. Beyond the issue of personalities, it also shows weaknesses and malleability in the government's contracting system, giving the exercise a bad name, particularly un­ der a conducive or complementing environment. In August 1999, former President Estrada created the Greater Metro Manila Solid Waste Management Committee (GMMSWMC) whose task was to draft a solid waste management plan for Metro Manila and the adjacent eight provinces in partnership with the Metro Manila Development Authority (MMDA). The plan was supposed to take on the problem of handling the tons of trash that Metro Manila and the surrounding provinces generate daily. The GMMSWMC, which was headed by then Presidential Committee on Flagship Programs and Projects chair Secretary Roberto Aventajado, subsequently designed the Metro Manila Solid Waste Management Project. Among other means of disposal, its aim was to dump a portion (i.e., one third) of the 13,400-ton daily 6 garbage into a sanitary landfill under a build-own-operate scheme. The GMMSWMC proceeded to prepare and issue the Terms of Reference (TOR) for

VOLUME V :--lUMBER 1 January-June 2001 87 V1rtucio & Lalunio the project, a 25-year landfill contract whose total worth was $330 million. The TOR was approved four months later by the Metro Manila Development Council. The President himself gave the green light in January 2000, and solicitations for the proposals were first published on 13 February 2000. On 28 September 2000, the Pro-Environment Consortium (PEC) won the bid for the contract over eight other bidders, but not without allegations that it did so because of its good connections all the way up to Malacanang. It was able to use these connections to its advantage in most, if not all, of the critical stages of contracting. The contract, however, was not awarded to PEC pending the decision to a lawsuit filed by another firm who claimed to have won a valid waste management contract during the Ramos administration. PEC 's knowledge that the project would be selected and approved reportedly antedated even the creation of the GMMSWMC. One waste management com­ pany official, who wants to remain anonymous, recalls that PEC executives already "knew about the landfill project long before the GMMSWMC was going to be created." He also mentioned that PEC executives "were already floating the project before anyone said the word 'bidding' at a time when the MMDA had no money for this [project]" (Sison in PCIJ: 24 January 2001). The consortium supposedly built on this foreknowledge to engineer certain events that would establish its position once the project was selected and approved. For instance, it held elaborate public presentations on landfills that were attended by government officials and people involved in waste management during the first 7 quarter of 1999, predating by far the creation of the G MMSWMC. Whether be­ cause of coincidence or market instinct, these presentations widened PEC 's head start in several ways. They "provided a great opportunity to pick the brains of offi­ cials involved in garbage," which proved valuable in the consortium's later bid to win the contract. The activities also enabled PEC to "cement relationships with people who matter," a strategic gain, since "personal relationships are a factor in ,s government contracts. Further, through the elaborate presentations, PEC was able to project an im­ pression of involvement in the mainstream and circle of key people involved in solid waste management. This impression placed it directly and inevitably in the

88 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization path of the future project. By the time the GMMSWMC "selected" and "approved" the solid waste management project in December 1999, PEC 's involvement ap­ peared inevitable, "as a matter of course." PEC participated in the pre-qualification, all the while already aware that it would be pre-qualified. According to the waste management official, PEC knew the minimum qualifications of prospective contractors (to pre-qualify) at least a year before the bidding, so that it was able to prepare ahead of its competitors. There is also reason to believe that PEC already knew about the salient points of the tender or bid to be issued, based on the pre-qualifying capacity that the project required. Again, PEC was several steps ahead of its competitors. It was also presumed that the personalities behind PEC, not the consortium's technical capacity, were the main reason for its pre-qualification. The consortium included the German-based Rethman Recycling GmbH, one of the largest waste management ... the personalities companies in Europe with 66 years of experience behind PEC, not the in the field (Arias in Manila Bulletin: 03 January consortium's 2001). It is also reputedly the largest recycling technical capacity, and privately owned waste management company in the world. Other than Rethman however, no were the main other member of the consortium had previous reason for its pre­ hands-on experience in solid waste management qualification. or in operating a landfill site (Sison in PCIJ: 24 January 2001). Even the individuals who formed the PEC did not have a track 10 record in operating a multi billion-peso business. This brought into focus one of the consortium's local investors, the Environ­ mental Dynamics Corporation (EDC). Among its incorporators is Frank Puzon, who was the personal pilot and high school classmate of Estrada at the Ateneo de Manila. Another EDC incorporator is sugar trader Raul V Gamban, a cousin of Guia Gomez, an Estrada mistress and mother of one of Estrada's sons, Joseph Victor or 'JV' Ejercito. There were also allegations that GMMSWMC head Sec. Aventajado was close to the incorporators of PEC.

VOLUME V NUMBER 1 January-June 2001 89 Virtucio & Lalunio

11 The active assertion from PEC 's other competitors that PEC might have a direct line to the Palace was weighed by members of the PBAC. But PEC was not the only firm which was close to GMMSWMC head Sec. Aventajado or even to the President. There was no shortage of prospective, qualified bidders whose key people were, in one way or another, connected to the Palace or to Palace relatives at that time. The owner of one of the qualified bidders, R-II Builders Inc., is construction heavyweight Reghis Romero, who bought the Manila Times from the Gokongweis, 12 and was known as a close associate of Aventajado. Jacinto Ng Sr., one of Estrada's longtime friends was behind another bidder, ECWES. He and one of his compa­ nies are reported to be the owners of two mansions in Wack-Wack, Mandaluyong that have been linked, in turn, to another presidential mistress, Laarni Enriquez (Sison in PCIJ: 24 January 2001). Very few (if any) members of PBAC would have failed to notice these links, or to consider them as incidental. At any rate, the PBAC's decision to pre-qualify PEC, despite the consortium's manifest technical dependence on only one of its investors, contributed to strong public suspicions about PEC's connection to the Palace. Sec. Aventajado claimed that other competitors' links to Estrada prevented the Palace from being partiaL However, this did not prevent the members ofPBAC from responding to what they perceived to be signals (even if there were none) 13 from Malacanang. Then too, the parameters that were used during pre-qualifica- tion might not have been as stringent as believed. PEC allegedly participated in the bidding stage helped by two crucial bits of information. One was that technically, it had already received considerable help 14 from officials of the MMDA itself in preparing their proposal. The assistance did not only help PEC technically; it also conveyed the impression that the consortium was already operating "from the inside." PEC had a working feel of what the pro­ ponent agency (MMDA) operationally needed, so that its proposal was in closer accord with what was required during tendering and bidding. The other was that PEC was given insider information on the government's ceiling on the tipping fee (i.e., the amount paid for every ton of trash thrown in a designated dumping site) which provided a good baseline figure on how low the bidder could go. According to the same company official, who was likewise famil-

90 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization iar with the detailed workings of the MMDA, PEC was also "told about what pro­ posal the government would be most interested in, what the desired time frame is, and what the expectations are in terms of system efficiency" (Sison in PCIJ: 24 January 2001). From the time of the TOR's issuance up to the deadline of submission of bids to the PBAC on 06 June (2:00p.m.), it only took PEC about six months to prepare the technical and financial aspects of its proposal. Matching the profile of the consortium's technical expertise vis-a-vis this accomplishment raised some amount of skepticism. Some of the requirements needed time to prepare, given the local resistance to a garbage "dumpsite" in their communities such as the certificates of willingness to host a landfill from the host province and willingness to host transfer stations; certification of site suitability from the Department of Environment and Nat\]ral Resources (DENR); and certificate of conversion exemption from the Department ofAgrarian Reform (DAR). As the company official pointed out, "these requirements certainly take time to accomplish so that anyone with no benefit of guidance would find it impossible to secure them right away" (Sison in PCIJ: 24 January, 2001). Because of the volume and stringency of the requirements, it is not surprising that of the 17 companies that purchased the proposal documents for the project, only nine actually submitted their proposals. Of these nine, only two--PEC and 15 Dizon-CGEA- passed financial and technical evaluation. PEC eventually won over Dizon-CGEA due to its much lower tipping fee bid of $18.89 per ton against Dizon-CGERs $32. PEC might have passed all the phases of contracting but in the end, the gov­ ernment failed to award the contract due to a Temporary Restraining Order (TRO) issued by the Pasig RTC. The TRO was requested by J ancom Environmental Cor­ poration and Generate des Eaux Vivendi, who claimed that they had been awarded a $350-million contract on solid waste management during the administration of former Pres. Fidel Ramos (Sison: TAG Report February, 2001). Faced with this problem, the MMDA and GMMSWMC solicited new propos­ als and conducted a new bidding in November 2000 to solve the garbage problem on an interim basis (Arias in Manila Bulletin: 03 January 2001). The urgency of the

VOLUME V NUMBER 1 January-June 2001 91 Virtucio & Lalunio garbage problem increased with the closure for San Mateo's sanitary landfill and the public outrage over the Payatas landfill garbage avalanche in July which killed more than 120 people (Trinidad in PDI: 13 July 2000). By the following month (December), two two-year contracts with a total value of $51.1 million for interim controlled d umpsites were awarded by the MMDA and GMMSWMC. One contract went to Waste Action Recycling (WAR), the other to a consortium made-up of R-II Builders, DM Consunji and Celdex. In effect, the two contracts were stopgap measures for solid waste management while the GMMSWMC and MMDA took on the J ancom lawsuit. Ironically, the members of the R-II consortium had failed the technical evaluation for the 25-year contract 16 while WAR was not even among those who participated in the earlier bidding. Meanwhile, residents and local officials of Mariveles, Bataan (the interim site of WAR) and Semirara, Antique (the interim site ofR-II Builders-DM Consunji­ Celdex) opposed the setting-up of the dumpsites. Both areas already secured TROs to prevent the contractors from dumping garbage in their areas. The J ancom-Viv­ endi suit is yet to be decided. All told, the metro garbage case teaches how systemic initiatives (even if com­ partmentalized) and localized acts can work interdependently to clear each critical stage of contracting; among these would be the use of a "trojan horse" to pre­ qualify, the subtle appearance of long involvement in solid waste management long before the issue became important, alleged interfacing with MMDA, and the per­ suasive projection of the firm's influential linkages. The case demonstrates how one (or perhaps, even several) prospective bidder(s) could maximize its high-level contacts and stock of inside information to maintain the timing and momentum of its bid and eventually, win the contract. The case is also significant in that it brings to view the limits of the contracting system's legal boundaries to account for those actions which, while not really ille­ gal, suggest shades of corruption incongruous with the contracting system's prin­ ciples when taken within their contextual environment. Except for obtaining insider's information, most of the schemes that PEC employed, for example, fall within this domain. They are systemic and localized acts whose corruption become evident

92 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization only when placed within the context they occurred in-not far from the Filipino's concept of delicadeza. Whether deliberate or not, this point is particularly illustrated by the· situation created when PEC 's actuations were set alongside its claims. In spite of not having any prior knowledge of the project nor experience on solid waste management, it entered the field and was even able to prepare the stage for its later involvement prior to project selection and approval. It might be interesting to find out exactly when Rethman learned of the project. PEC denies that the contract was a "done deal" and that its connection to the Palace was a factor in the evaluation and awarding of the contract. But just a week after it won the bid, Ms. Gomez met with EDC incorporators and other people 17 close to Estrada in her office. Ms. Gomez might not have been an incorporator of EDC, but in addition to her personal relationship w1th Estrada, she is also dose to then Presidential Management Staff (PMS) Head Leonora de Jesus (the compan­ ion of Ramon Abad, Estrada's campaign manager). In January 1999, the task of reviewing government projects costing P50 million and more had been transferred to the PMS. The trail of social connections did not end here, for the PMS section tasked to review the projects was headed by Atty. Crispin Remulla. Atty. Remulla is not only the son of former Cavite governor J uanito Remulla, a loyal ally of Estrada; he was also a former lawyer of 'JV" Ejercito (Tordesillas, 2000: 192). What made the phases and stages more vulnerable to these subtle systemic and localized acts were the fundamental weaknesses by which PBAC managed them. It could have checked some of the allegations, especially that which con­ cerns access by one (or several bidders) to inside information. It could also have coordinated its own investigations or examination (especially prior to pre-qualifica­ tion) of the bidders with other offices which have other, more appropriate indica­ 18 tors of impropriety. Further, PBAC 's lapses in acting as impartial manager and arbiter were also manifest. Despite the fixed date and time of the deadline, it al­ 19 lowed late bidders to participate in the bidding. It was also unclear whether a dispute resolution mechanism was established (or inoperable) among the parties, given references in public of certain "irregularities" coming from among the bidders

VOLUME V NUMBER 1 January-June 2001 93 Virtucio & Lalunio

20 themselves. Overall, these oversights contributed to the growing suspicion of par­ tisanship, bribery and competence of the PBAC. Much of the latter oversights however, could be traced to the absence of an alternative plan (in case of serious delays or failure to award the 25-year contract} and subsequent belated efforts to compensate for this lack. The bidding proceeded on the assumption that the Jancom-Vivendi contract could be ignored. By the time it became apparent that the new contract under PEC would not materialize, MMDA and GMMSWMC were already hard-pressed to find quick solutions. Their solu­ tion came in the form of posthaste solicitations of new proposals and a new round 21 of bidding for two two-year contracts. Operating quickly, it was inevitable that defined procedures, schedules, pa­ rameters, requirements and perhaps, even the basic principles of contracting were 22 corrupted. There were reports that bids for the interim project contracts were opened behind closed doors (for MMDA's eyes only) and that some of PEC's earlier ideas and bids were used by other bidders. One of the contracts was awarded to a consortium of firms that was disqualified in the previous service; the other was to a company (WAR) which did not even participate in the earlier bidding for the 23 25-year landfill contract (Bondoc in Manila Bulletin: 03 December 2000). There was also confusion on whether the 2-year interim project contracts were part of the original25-year contract (which PEC considers the "main" contract) or were, in fact, new contracts with distinct TORs. From all indications, it seemed that the original objective, course and procedures of contracting on solid waste manage­ ment were overtaken by situational necessities (landfill closure, Payatas tragedy and lobbying inside Malacanang). One last point that the metro garbage case presents is the likelihood of a con­ tract being a "fixed or done deal." Were the initiatives really compartmentalized or did they follow an overarching script or conspiracy (i.e., amplified) only to give a semblance of legitimacy and fairness to the process of awarding? Compared to Cebu's reclamation case, the metro garbage case appears to have all of the necessary capital to rig a deal. Circumstances seem to support allegations that PEC knew about the project beforehand. It had influence from its connection to the Palace and that influence was expanded by its dealings with key people and

94 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization concerned government agencies, especially in refining its technical and financial proposals. It was also highly likely that PEC had access to inside information. Its high state of readiness and detailed knowledge of tech- It is thus highly nical project specifications material to its position in each of the phases of contracting were, to some outsiders, likely that the too fortuitous to be attributed only to business acumen. metro garbage Because of these advantages, PEC was able to keep deal was a 24 uncertainty to a minimum or predictable level. contract pursued It is thus highly likely that the metro garbage deal with bias. was a contract pursued with bias. Ironically, the con- tract was not awarded to PEC, not because of the anti-corruption guarantees in the contracting system that are integrated within the procedures, the technical and financial parameters, or competence of the PBAC but because of a legal technicality.

Recapitulation and Summary

Thus far, it is possible to plot some domains and the corresponding types of corrupt acts or initiatives currently in service. Regarding systemic initiatives, pro­ spective bidders and/or partner government officials could opt to change the entire system of contracting (amplified initiatives) by opting to operate under a different legal framework and system for contracting. Such was the case of the North Har­ bor privatization contracting "bypass." Other systemic acts were directed not to change the whole contracting system but only to a particular or to several phases or stage in contracting (compartmentalized). PEC 's alleged interfacing with MMDA personnel improved its technical position and conveyed the impression and regard, both publicly and to MMDA, that it was a buddy, a familiar hand to the agency. In a similar vein, it was able to "cement relationships with people who matter," par­ ticularly those who could act on its behalf (when the process of contracting would be in full swing) during its public presentations. The case of Cebu's "Pond A Reclamation Project" is another example of this systemic, compartmentalized approach. The PBAC shift was expected to change

VOLUME V NUMBER 1 January-June 2001 95 Virtucio & Lalunio the disposition of succeeding phases of contracting, from pre-bidding to the imple­ mentation phase. The change would also relax the atmosphere involving the sus­ pected payment of additional bribes by sub-contractors later, most likely after the contract was awarded. On localized acts and initiatives, prospective bidders and/or partner govern­ ment officials could opt to change or bring the decision in any determining phase (or stage) of the contracting system to their favor by using individuals or institu­ tions. In the metro garbage case, there were allegations that PEC for instance, had used Malacanang and agency insiders heavily to obtain crucial information to hurdle the stages of pre-qualification and technical and financial evaluations ahead of its competitors. One PEC executive admitted that each of the bidders had its own "backers," probably reaching all the way to the Palace. In hindsight perhaps, there is some merit to looking into the composition, individual track record and actions of decision makers granted discretionary powers within the system of contracting such as head of agencies, the LDCs, (project selection and approval), and the PBAC (as manager and arbiter of the system). Localized initiatives such as the use of other individuals or institutions might be directed at a specific determining decision phase or stage (i.e., compartmental­ ized). They could also be part of an elaborate plot or conspiracy to conclude a "pre­ awarded contract" (i.e., amplified). Said plots are deemed unlikely, given the host of uncertainties or contravening variables attendant to the long process of contract­ mg. PEC's (and to some point, Cebu's) case illustrates this possibility. It appears that in such cases, the use of localized initiatives should be matched by an accom­ modating environment to render the progression of contracting more stable and hence, predictable. At the minimum, it would require a combination of systemic and localized acts which make use of overwhelming influence, compelling incen­ tives and a well-developed level of collaboration.

96 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

Conclusion and Recommendations

The vulnerability of the BOT contracting system to corruption could be deter­ mined largely from the type of "assault" that could be mounted againstit. Various initiatives or acts of corruption in contracting generally come from two domains: those that seek an environ- vulnerability of the ment partial to their position and illicit incentive and BOT contracting those that seek to change or fix the decision in any system to determining phase (or stage) of the contracting sys­ corruption could be tem in favor of a group or individuals who participate in the bid. determined largely The following conclusions and recommenda­ from the "assault" tions are made regarding the vulnerability of the BOT mounted against it. contracting system to such initiatives:

1. While the use ofan ((alternative" BOT contracting system will always remain an option for the Preszdent to take, there is a need perhaps to elaborate the circumstantial and economic parameters involved in exercising this prerogative. Circumventing a "standard" BOT contracting system is not readily done, in most cases, only the President can provide or allow it. Since the power crisis in the early 1990s, Malacanang has found convincing reasons-a crisis and/or extreme necessity-to use other systems of government contracting in private sector infra­ structure and development projects (BOT Program) under the mantle of limited emergency powers. Unfortunately, it appears there is no shortage of crises and extreme necessities that compel the petition for and use of emergency powers, and with this, the non­ use of the standard contracting system. Circumventing the "standard" BOT contracting system might be circumstan­ tially attractive or expedient, but its economic cost could also be high. To solve the power crisis for example, the Ramos administration signed long-term contracts worth billions of pesos with private power producers where NAPOCOR was duty-bound to buy and pay for their their entire production even if it was unable to use the supply because of low demand (Philippine Star: 07 July 2000).

VOLUME V :-.lUMBER 1 January-June 2001 97 Virtucio & Lalunio

Higher still is the cost of the vulnerability it brings to government contracting in generaL It strips effectively the contracting system of its safeguarding principles, guiding procedures, decision parameters and sanctions integrated within each phase, rendering the total alternative system highly susceptible to localized acts of graft and corruption.

2. The government should guarantee the use ofa standard BOT contracting system in its operations. Despite the BOT Law, government (i.e., agencies, LGUs) follows different systems of contracting even for projects that fall within the various schemes under the BOT. This does not only inhibit private sector participation, the different sys­ tems also make it difficult to follow the trail of responsibilities and accountabili­ ties ..Corollary to these points, the discretional latitude from the per project or per agency approach invites corruption. Furthermore, this approach and the consequent variances in the inputs and procedures run counter to the overall thrust of the Ar­ royo administration to simplify transactions and to minimize the exercise of discre­ tionary powers.

3. The government should, along with the private sector (business and members of the civil society) review and further streamline the processes and requirements of con­ tracting. The BOT contracting system has built-in guarantees (e.g., procedures, stan­ dards, requirements, sanctions, information exchange) which ensure that the pro­ cess of contracting would continue and that obligations can be met by the contract­ ing parties. This elaborate array of guarantees however, could also delay the imple­ mentation of the project to be contracted, lending reason to those who opt for more expedient ways of contracting. In view of this, the government (through NEDNDTI) could initiate a review of the BOT contracting system with other sectors, whose objective would be to improve the system's flow as well as guarantees. One specific area that could be examined is how to actualize transparency in all phases of contracting, particularly in project selection and approval. Another thrust of the review is to shorten the

98 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization system's phases and sub-processes. For instance, the process of pre-qualifications could be discarded since stringent technical and financial evaluations would be done anyway during the opening of bids. As it is, pre-qualifying becomes an oppor­ tunity for some government officials to seek rent, especially in contracts involving procurement (e.g., medicine and other medical supplies, textbooks, communica­ tions equipment). Some government offices continue to pre-qualify firms that they or other agencies have had some problems with in the past.

4. The government should develop and install a better system to examine and/or ({vet" prospective bidders. With the assistance of other sectors, the government should develop and in­ stall a centralized system to monitor individuals and firms that would want to bid for government contracts (even those not under the BOT). Said system in-place could "institutionalize" the reputation of the business and the person, especially those with opprobrious contracts and performance records (locally or in other coun­ tries). Said system could also discourage the practice of firms with "well-placed" 25 executives from using their connections to win the contract. It might even pres­ sure them to be more circumspect in their actions, and the public, to be more factual and responsible in their accusations and suspicions. It could counter the justifications based on ignorance by government officials {and agencies) for their continued dealings with "notorious" individuals and firms.

5. There is a need to develop a norm for a cooperative, inclusive, transparent and fair contracting system. In a way, a contracting system based on the principles of inclusiveness and transparency remains largely in congruent with the prevailing socio-political culture in the country which places a premium on personal relationships rather than on institutional checks and balances. It is also an anachronism vis-a-vis an economy 26 whose configuration is defined by a few, supra industrialists. Rather than subscribe to the rule of the fittest, an inclusive and transparent contracting system remains the best alternative to manage the different in-

VOLUME V NUMBER 1 January-June 2001 99 Virtucio & Lalunio terests of firms and individuals in the business. From this, government, along with business and other sectors, could undertake long-term initiatives to develop or set a norm that emphasizes cooperative approaches to the maintenance (and further- ance) of a contracting system that is non-dis- an inclusive and criminatory and transparent. transparent An initial step towards this direction is the contracting system signing of agreements or public "pacts" by gov­ remains the best ernment, business and other concerned sectors regarding their stance and conduct pertinent to alternative to contracting. Although these agreements may or manage the different may not carry legal obligations, they could serve interests of firms as fair and legitimate referent points for censur­ .and individuals in ing (or commending) those, including govern­ the business. ment, who violate the agreement (or code of conduct) and put pressure as well on those who did not sign them. Perhaps the agreement could also cover those acts that while not deemed as illegal, give nevertheless, a sense of impropriety to the conduct of the transaction.

6. There is a need to consoltdate and rationalize the activities and involvement of non-government sectors and representatives in the system ofcontracting. One cannot fail to notice the seeming inability of those in the non-government sector to maximize their participation in the process of contracting. This, despite their mandated involvement in the process, as provided for by the provisions of the BOT Law and Local Government Code. While there has been a proliferation of initiatives that run parallel to government, few of those in the non government sec­ tor have made use of quasi-government venues for decision-making (e.g., LDCs and PBAC) which offer direct routes to influence decisions and policies. Doubt­ less, an independent course of action is preferable, but maintaining said course of action entails some cost and lost strategic opportunities. It might be in the best interest of those in the non government sector and members of the civil society to consolidate their efforts in checking corruption in

100 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization government contracting. Other than for reasons of economy, this consolidation could be directed to provide appropriate focus, increase their persuasive influence and systematically develop the level of their technical competencies pertinent to con­ tracting. This professionalized approach to government "contract watching" could provide one of the bases for a sustained and operationally more weighty non-gov­ ernment sector involvement in contracting. In line with this consolidation, there might be some merit to looking at the current level of involvement of professional groups and societies in the business of contracting. Their more active involvement could provide the initial stock of tech­ nical capability or expertise to monitor and further reform the contracting system. Finally, there is also some merit to remembering the primary reasons why gov­ ernment enters into these contracts. It might be possible that after so much effort, after transparency and inclusiveness have been served, that succeeding manage­ ment systems to ensure that the supposed socio-economic benefits would benefit their intended beneficiaries may cause their eventual failure.

Notes

1 Being Filipino or Filipino-owned improves the prospect of being selected, but it must be noted that Filipino firms and/or corporations are still subject to the same rules, processes and requirements that apply to all other non-Filipino bidders. Moreover, it must also be considered that the primary intent is to ensure Filipino involvement as much as practicable, which at present is hindered by the lack of capital resources and not to tilt the entire contracting exercise to their favor. 2 The classification was developed from the following cases and articles: Antonious (1990), The World Bank (June 1999), UNDP (1998), Wolfensohn,J.D. (15 October 1998), CIME (21 November 1997), and PCIJ (1998, 1999, 2000). 3 The project amount insulates it from the approval and confirmation tasks of the NEDA and ICC (not above P50 million). 4 This moved then Sen. Guingona, to claim that the port privatization violated Art. 12 sec. 19 of the Philippine Constitution which prohibit monopolies, and that no combinations in restraint of trade or unfair competition can be allowed,

VOLUME V NUMBER 1 ] anuary-June 2001 101 Virtucio & Lalunio

given the potential advantages that the deal can have on the members of the NHC against all other users of the harbor. 5 And which would have been under pressure to lend impartial evaluation, given the second-line oversight that the NEDA and ICC could have provided. 6 An argument that could have been checked by the ICC under the "standard" BOT contracting set-up. 7 See also a related article by Nocum,A. (Philippine Daily Inquirer: 13 July 2000), entitled "Bidding for Metro landfiU faces delays," PDI Report. 8 John Gabriel Puzon, one of the incorporators of Environmental Dynamics Cor­ poration (EDC) one of PEC's four investors, admits that his family arranged the presentations and affirmed that they started holding these as early as 1998. He however denies that PEC executives had prior knowledge of the project, or that they received help from the MMDA. 9 In Sison, M. (PCIJ: 24 January 2001), quoting the same waste management official. 10 In Sison, M. (PCIJ: 24January 2001). See also Transparency and Accountable Governance (TAG) Report, entitled "Firm Linked to Estrada Got Metro Ma­ nila Garbage Contract" by the same author (February, 2001). 11 Denying that they received any assistance from Guia Gomez, PEC's John Gabriel Puzon pointed out that each of the bidders had its own backers, their rivals were heavyweights, and PEC was the only weak one (Sison in PCIJ: 24 January 2001). 12 The Manila Times was sold by the Gokongweis shortly a&er the newspaper was sued by then President Estrada for libel. It was later established that Romero had merely fronted for presidential friend Mark Jimenez (Sison in PCIJ: 24 January 2001). 13 There was the tendency of some members of Estrada's cabinet to please him by using their public offices. Then BIR chief Rualo, for example, is known for investigating tax irregularities of private companies (including the Manila Times) deemed hostile to the President. 14 The claim was supposedly made by Gene Puzon (brother of Frank, one of EDC's incorporators) to an unnamed waste management official (supra, foot­ note 19: p. 32).

102 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

15 According to MMDA records, 17 bidders had registered their intent to partici­ pate in the bidding. Only seven submitted their bids on time; namely, R-II Builders Inc.; Celdex-Cintec-DMCI Holdings; Pro-Environment Consortium (PEC); Lamar Integrated Construction Services Inc.; Dizon Copper-Silver Mines Inc. and CGEA Asia Holdings Pte. Ltd.; Eurasian Company for Waste and Environment Service Phils. Corp. (ECWES); and the FLB Construction­ Kabukiran Garden-Big Trust International] oint Venture (FLB-Kabukiran-BTI). Under the BOT Law, these bids should have been returned unopened to the prospective bidders. 16 Along with Eurasian Company for Waste and Environment Service Phils. Corp (ECWES), R-II Builders and Celdex-D M Consunji failed in the technical evalu­ ation for having no bid security, no technical description of the proposed in­ terim sanitary landfill, and "inadequate preliminary design drawings to support narrative descriptions on project components" (Sison in PCIJ: 2 4 January, 2001). 17 Ms. Gomez met Puzon's nephew and co-EDC incorporator, John Gabriel Puzon, and Raul Roberto de Guzman, Estrada's nephew who was then the presidential consultant on the environment and water. The meeting was held at her Wynsum Tower office in Pasig. See Sison (PCIJ: 24 January 2001). 18 There might not be a correlation but the pattern of changes in the value of the companies' stock as well as their record of involvement in other government contracts could also be examined. 19 Deadline was set on 06 June 2000 at 2:00p.m. PBAC however allowed two bidders who submitted their bid beyond the stated time to participate: Solid Waste Integrated Sustainable Systems-Philippines Inc., and IPM Construction and Development Corp. (Nocum, A. in PDI: 13 July 2000). 20 See Nocum, A., (PDI: 13 July 2000). 21 It is surprising that the President did not request emergency powers to solve the metro garbage problem. Or there might have been some truth to allegations that it was already a done deal, until the J ancom-Vivendi lawsuit complicated the situation. 22 According to PEC, it took only nine days for the PBAC to decide on these two contracts.

VOLUME V NUMBER 1 January-June 2001 103 Virtucio & Lalunio

23 Prior to the award, Sec. Aventajado reportedly claimed that he did not know the people behind WAR (Bondoc in Manila Bulletin: 03 December 2000). 24 The uncertainty involved in the long process of contracting leading to the imple­ mentation of the project is considerable. In fact, it might even be directly pro­ portional to the duration and pace of the process due to the growing probability of contravening variables from occurring. 25 Finding or securing a new "rulebook," one that is partial to one's position and more accommodating to bribery, is not readily acquired, for in most cases, only the President can provide or allow it. With this, it also follows that it is not acquired on the cheap, that is, it can only be obtained (or engineered) by those who have substantial political, social and economic capital or incentives. 26 It is not surprising hence, that Estrada's "poor people" can identify whom they derisively call the mayayaman (rich) and where their capital is-Makati, the country's financial district. As in politics, these same people (and their rela­ tives) dominate the different boardrooms of large and small businesses in the country.

104 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

References

1. Books and Manuscripts

Antonious. [1990]. "Corruption in Government: Report of an Interregional Semi­ nar." UN Department of Technical Cooperation for Development and Center for Social Development and Humanitarian Affairs, New York. Campos,J.E. D. Lien and S. Pradhan. [1999]. "The Predictability of corruption: implications for investment" in Campos ].E. ed. ( 1999) The Boom and bust of East Asia (manuscript). CIME. [ 1997]. "Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Related Documents." 21 November, Working Group on Bribery in International Business Transactions. COA-PTTAF. [ 1999]. Manual on Contracts Review. Co111.!1J.ission on Audit: Adriana Printing Company. -----. [1999]. Manual on Procurement. Commission on Audit: Adriana Printing Company. Coronel, S. (Ed.). [1998]. Pork and Other Perks, Corruption and Governance in the Philippines. Philippine Center for Investigative Journalism, Evelio B. Javier Foundation, and Institute for Popular Democracy. PCIJ, Pasig: Philippines. ____(Ed.). [2000].BetrayalsofPublic Trust, Investigative Reportson Corrup­ tion. PCIJ (with grant from Asia Foundation), Quezon City: PCI]. ____ and E. Tordesillas. [2000]. '1\ll the President's Men" inS. Coronel ed., Betrayals of Public Trust, Investigative Reports on Corruption (pp.181-195). Quezon City: PCIJ Estache, A. and D. Martimort. ( 1998). Transaction Costs, Politics, Regulatory Insti­ tutions, and Regulatory Outcomes. The Economic Development Institute of the World Bank (manuscript). Metro Manila Development Authorities Documents on Greater Metro Manila Solid Waste Management Project. NEDA-ICC Documents on North and South Luzon Expressway Projects. NEDA-ICC Documents on the Metro Rail Transit {MRT III) Project.

VOLUME V NUMBER 1 January-June 2001 105 V1rtucio & Lalunio

Pascual, C. G. [2000]. Privatization and Labor: A Case Study of the Metropolitan Waterworks and Sewerage System (MWSS). Philippine Center for Policy Stud­ ies (manuscript). Republic Act 6957. [1990), later amended as RA 7718 [1994]. Philippine Infrastruc­ ture Privatization (PIPP) or Philippine BOT Law. Republic Act 7160, Local Government Code ofthe Philippines. [ 1991]. Solon, 0. and S.J. Pamintuan [1998]. "Opportunities and Risks in the Privatization­ Regulation of the Manila Water and Sewerage System". A paper presented dur­ ing the joint IDE-UPSE symposium-workshop on Studies in Governance and Regulation, EDSA Shangri-la Hotel, Mandaluyong City, Philippines. Stone, Levy and Paredes. [1992] "Public Institutions and Private Transactions: The Legal and Regulatory Environment for Business Transactions in Brazil and Chile." World Bank Policy Working Paper 891, Washington, D.C. Tanzi, V [ 1994]. "Corruption, Governmental Activities, and Markets." IMF WOrk­ ing Paper. The World Bank. (1999]. "Fostering Institutions to Contain Corruption". Note No. 24. UNDP. [ 1998] Corruption & Integrity Improvement Initiatives in Developing Coun­ tries (manuscript). Wolfensohn,].D. [1998]. New Measures to Combat Fraud and Corruption (manu­ script). Yotopoulos. [1989]. "The (Rip)Tide ofPrivatisation: Lessons from Chile" WOrld Development, 17(5), pp. 683-702.

2. Journals, Magazine, Newspapers

Aquino, N. [2000]. "Senate to shelve Napocor Privatization Bill- Osmena" Busi­ ness World, 04 December. Arias, P.R. [2001]. "Metro Manila's garbage problem; Twists and turns in garbage crisis." Manila Bulletin, 2-3 January. Bagares, R. [2000]. "Metro landfill project award set in August" Philippine Star, 31 July.

106 PUBLIC POLICY Tender Mercies: Contracts, Concessions and Privatization

Bon doc, J. [2000]. How Serious are They in Solving the Garbage Crisis? Philippine Stat; 07 December. Dalisay, A. [2000]. "No monopoly at North Harbor." Philippine Stat; 06 July. Danao, E. [2000]. "Guingona presses probe on award of port projects." Phtlippine Stat; 27 July. Freeman News Service. [2000]. "Garcia to sign deal with PEA after all" Philippine Stat; 14 July. Nocum, A. [2000]. "Bidding for Metro landfill faces delays." Philippine Daily In­ quiret; 03 July. Philippine Star [2000]. "Cronies to benefit most from emergency powers." 07 July. Realubit, J. I. [2000]. "PPA to draft new TOR for North Harbor privatization." Phtlippine Stat; 13 July. Sison, M. N. [2001] "Firm Linked to Estrada Got Metro Manila Garbage Con­ tract." Philippine Center for Investigative Journalism (PCI]) Report, 24-25 Janu­ ary. Torres, T. P. [2000]. "PNCC rejects TRB claim on facilities issue." Philippine Stat; 21 July. Trinidad, A. H. [2000]. "Payatas death toll hits 124; Palace tackles waste problem." Philippine Daily Inquiret; 13 July

VOLUME V NUMBER 1 January-June 2001 107

Corruption and Weak Markets: The BW Resources Stock Market Scam

CLARENCE PASCUAL AND JOSEPH LIM

Introduction

The BW Resources price manipulation scandal rocked the local stock market in 1999. The case provided the backdrop for one of the most dramatic moments in the impeachment trial of then President Joseph Estrada- the testimony of former Finance Secretary Edgardo Espiritu against his former boss. Its inclusion in the impeachment charges against Estrada signaled the growing importance of the stock market in our national life. It also showed that the stock market cannot be divorced from the larger social and political context. The stock exchange is the icon of a free market where prices are determined solely by the interaction of supply and demand and transactions are carried out on an arm's-length basis. But as the BW scandal indicated, market performance is only as good as the quality of institutions within and outside the market. (Lim, 2001) In this case, the interaction of anachronistic market institutions and political corruption in the context of a liberalized but poorly regulated market produced a crisis of unprecedented scale. Pascual & lim

From P2 at the start of 1999, the price of shares of stock of BW Resources Corp. (henceforth, BW) reached a high of P107 on October 11 of the same year. (Fig. 1) Acquired by Dante Tan, an Estrada crony, BW was hyped as a listing ve­ hicle for Estrada's various business interests, particularly in gaming and property development. Massive trading in the stock overwhelmed a lethargic market. The average value of daily trades reached P3.1 billion in 1999, as compared with P2.7 billion in 1996 when emerging markets like the Philippines were at their peak. At the height of the bubble, trading in BW shares accounted for as much as half of total market turnover. Within a week after it peaked, the stock lost 60 percent of its value. By February 2000, it had dropped to P3 a share.

2,700 100

2,600 90

2,500 80 BW (rhs) 2,400 70

2,300 60 Ul 0 2,200 50 Ul a.Gl 2,100 40

2,000 30

1,900 20

1,800 10

1,700

Figure 1. Price of BW Shares and the Phisix, 1999 (Source of basic data: Technistock)

The phenomenal rise and fall in the price of BW shares was a classic stock market bubble. But it was more than just a bubble: it was also a swindle of a scale unprecedented in the history of the exchange. Investigations by the Philippine Stock Exchange (PSE) and the Securities and Exchange Commission (SEC) revealed a grand scheme of market manipulation. It involved several Estrada cronies led by

110 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam

Tan, a close circle of friends and relatives and a group of influential brokers. Perpe­ trated for the benefit of Estrada and the members of his family, it combined ele­ ments of political corruption and financial fraud or market manipulation. This paper examines the role of political corruption in the scandal, the nature of institutions within the stock exchange and the state of market regulation. The BW scandai provides a fascinating study of how political corruption during the Estrada administration underwent significant transformation in both magnitude and scope. Gains acquired through traditional methods of political corruption­ grants of franchises, government contracts and behest loans-were leveraged in the securities market for greater profit, albeit through fraud. The use of state-controlled fi­ nancial institutions to abet this process marked What set the BW scam another milestone in the history of corruption apart from the equally in the Philippines. grand schemes of What set the BW scam apart from the corruption during the equally grand schemes of corruption during the Estrada administration Estrada administration was the combination of was the combination political corruption and financial fraud. But why is the Philippine stock market vulnerable to this of political corruption new type of corruption? This paper argues that and financial fraud. the answer may be found in the nature of insti- tutions within the stock exchange and in the poor regulatory framework that gov­ erns the market. Ownership and control of the stock exchange by family-controlled houses, high ownership concentration among listed stocks, the influence of infor­ mal networks and the absence of an independent, effective regulatory mechanism render the exchange vulnerable to corruption. These institutions work against a transparency of transactions and the fair price formation essential to the growth of capital markets. Weak market institutions and poor governance pose a serious challenge to de­ regulation, liberalization and the growth of markets. Weak market institutions al­ low a corrupt state to extend its 'grabbing hand' beyond its traditional spheres of influence either in the public sphere or at the interface of the public and private

VOLUME V NUMBER 1 January-June 2001 111 Pascual & Lim spheres. In such a context, the growth of the market could imply greater volatility and risk of crisis. As the BW scam shows, the growth of the Philippine stock market as a result of capital account liberalization in the early 1990s magnified the risk of financial fraud and crisis. The reorganization of the exchange (two bourses were merged into a single exchange) and the opening up of the market to foreign players did not alter the structure of economic interests that underlay the market. Partly as a consequence, market regulation barely improved. The result was a greater risk of crisis as the potential gains from financial fraud increased even as market regulation remained poor. The discussion below is divided into three parts. The first part discusses the role of political corruption in the BW scam. The second part examines market ma­ nipulation and identifies features of the stock exchange that render it vulnerable to financial corruption. The third part shows the failure of market regulation with respect to the BW case. It traces weak governance to the structure of interests in the stock exchange, weak regulatory capacity and the permeability of regulatory agen­ cies to the influence of vested interests and political pressure.

Political corruption: old and new

The first element of the BW stock market scam -which received the most attention- is political corruption. The case showed the persistence of old forms of corruption and the emergence of new ones. The grant of franchises, govern­ ment contracts and behest loans by state agencies (government-owned or­ controlled corporations) are familiar tricks of the trade among the politically corrupt. Moreover, the nature of these privileges, the way they were approved, contested and confirmed betrayed the powerful hand of the President. What was new in the BW case was the capture of the stock market by the President and his cronies to leverage assets acquired through corruption for greater prof­ its. Scams do not always have to begin as one. Tan's foray into stock trading could have been inspired by a legitimate business idea: to transform BW Resources (for­ merly Greater Asia Resources Corp) into the gaming stock of the market. The vi-

112 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam ability of this plan hinged on two major projects. The company's flagship project was the construction of Sheraton Marina Square Hotel, a hotel-gaming complex acquired from Megaworld Holdings, Inc through a share-for-property swap. In June 1999, BW Resources signed a tenancy agreement with the government owned Phil­ ippine Amusement and Gaming Corporation (PAGCOR) to occupy 30,000 square meters of the hotel for a monthly rental fee ofP55 million or P15,000 per square meter. The other major project involved the merger of Best World Gaming and Enter­ tainment Corp (BWGEC), a company registered with Dante Tan as controlling owner, and which was granted a franchise and license to operate a nationwide on­ 1 line Bingo • A second franchise was granted BWGEC in 1999 to operate an online version of the popular numbers game,jueteng. With a projected income of P14 billion a year from the Bingo business alone, the possible merger of BWGEC and BW Resources made the latter an attractive bet. In July of the same year, Tan ac­ quired a P600 million loan from the government-controlled Philippine National Bank (PNB) with BW Resources and BWGEC as co-borrowers, using the former's principal asset as collateral. The money was supposedly intended to develop the Bingo business. Talks of the merger began in early 1999, but it was not until the end of the year that a memorandum of agreement was signed, formalizing the acquisition of the capital stock of BWGEC in exchange for BW Resources shares. At that point, the online Bingo business had yet to begin. The merger was called off in February the following year as the share price dropped to P3. Franchises, government contracts and behest loans are tried-and-tested tech­ nologies of political corruption. But the BW case went beyond the old boundaries. In this case, the fruits of corruption were not simply appropriated but leveraged in the stock market for even greater profits, albeit through fraud. The combination of political corruption and financial corruption set the BW scam apart from the many grand schemes of corruption seen in the previous administration. It is to the aspect of financial corruption that we turn below.

VOLUME V NUMBER 1 January-June 2001 113 Pascual & Lim

Corruption in the stock market

Price manipulation creates the appearance of active trading in a certain stock to drive up its price. There are many ways of manipulating the market-wash sales, matched order, painting the close and transfer of shares to various accounts then selling the shares back to the original owners among them. Tan and his group man­ aged to do most of these- and more. Such manipulative schemes are amply documented in the reports issued sepa­ rately by the PSE (Philippine Stock Exchange) and the SEC (Securities and Ex­ change Commission). Wash sales in which the buyer and seller of the shares are the same person was one way. The SEC documented 45 such sales by Tan involving 2 over 40 million shares worth some P216 billion at the market price. In a slight variation of the same scheme, Tan sold his shares to a dummy, Mario Juan, in a matched order- a pre-arranged sale in which the buying and selling brokers syn­ chronized the posting of their transactions on the PSE's computer system to ensure that the orders matched. The shares were then transferred back to the account of Tan. Another manipulative scheme used was the 'over-the-counter' transfer ofBW shares from Tan's accounts to that of various individuals. Such transfers did not go through the exchange (hence, over-the-counter). Tan subsequently bought back the same shares, this time using matched orders through the exchange. In a single month, Tan moved 141 million shares from his accounts to various individuals. The single biggest recipient was Lucio Co, another Estrada crony, who received some 92 million shares from Tan. In turn, the shares were distributed to various accounts. To raise fresh funds to finance his trading activities, Tan entered into 'private placement with lock up' agreements with various investors, mostly affiliates and clients of PCCI Securities. In a typical transaction, Dante Tan acted as seller of BW shares via an investment contract outside the exchange. The contract provided that the buyer/investor could not sell within a certain period, say, 180 days. In return, the shares were sold at a discount. If the market price fell below a prior agreed upon level, then the shares were to be freed from the lock up provision. The aim was to

114 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam create a shortage of BW shares by locking them up in these contracts while raising money to finance Dante Tan's manipulative transactions. The device was success­ ful in drivi~g up the price of BW shares. Fig. 2 shows the volume of shares locked up under these agreements during the period from May-October 1999. The rise in the number of shares taken from the market coincided with the steep rise in the share price over the same period. The BW scam is remarkable for its sheer boldness. The average value of daily trades in 1999 reached P3.1 billion compared with P2.7 billion in 1996 at the height of the stock market boom. (See Fig. 3) At the beginning of the year, BW shares, which then traded at P2 per share, accounted for a mere one-fourth of one percent of total market turnover. By October 11, the value of trades of BW shares hit P3 .2 billion or half the market turnover. The share price reached an astonishing P 107 during the day only to collapse the following day and then lost 60 percent of its value within the week. The BW scam involved more than a few brokers, including influential mem­ bers of the PSE. Investigations conducted by the Compliance and Surveillance Group (CSG) of the PSE and the SEC identified 19 domestic brokerages which had repeatedly violated trading rules and regulations. Six of those implicated occu-

80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000

Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> Cl> ~ Cl> Cl> ~ ~ Cl> ... ~ as ~ ~ 2S -.:1" .... ~ ~ ~ ...... ~ ~ (') ~ ~ co ..... N N .... N Cl> N 0~ ...... - -- (i5 (i5 ;::::: ;::::: .... 2S ..- .... C\1 co co as .... -... -...... ~

Figure 2. Number of BW Shares Shares Under Lock Up Agreement

VOLUME V NUMBER I January-June 200 1 115 Pascual & Lim

3.5

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Figure 3. Average Daily Market Turnover (Source of basic data: Technistock) pied a seat in the PSE Board of Governors either concurrent with or in the last four years at that time. Among them was the Chairman Emeritus. Over a period of 10 months, an eternity by stock market reckoning, almost every rule in the book was violated. Tan and his accomplices, brokers and officials of BW Resources, were found to have violated a dozen rules, all for a single purpose: to drive up the price of 3 BW shares.

Vulnerable institutions

The apparent ease with which the stock market was transformed into a play­ ground of Estrada and his cronies raises a number of questions. For one, price manipulation was independent of political corruption. It did not require the exer­ cise of state prerogatives or political power, although it did refer to assets acquired through political corruption and the backing of the Office of the President. More­ over, Tan, a distributor of imported tires before becoming a business partner of the Estradas, was new to the stock market, naive in the cunning ways of stockbrokers and dealers. He could not have planned or orchestrated the scheme. He had to work through a group of brokers familiar with the intricacies of stock trading and

116 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam price manipulation. This raises the question: why is the stock exchange vulnerable to manipulation and corrupt trading practices? The answers are found in the history and institutional nature of the stock exchange. First, the PSE is a cartel controlled and managed by brokers. Stock trading in the country takes place in the PSE which is an organization of brokers and traders. The result of a merger in 1993 of two rival exchanges, the Manila Stock Exchange and the Makati Stock Exchange, the PSE is the sole stock exchange in the country with membership limited to 200. Members elect a Board of Governors on a one­ seat-one-vote basis. The Board of Governors oversees the management of the ex­ change and the enforcement of rules. It appoints members to the various commit­ tees, including the Listing and Disclosures Committee (LDC) and the Business Conduct and Ethics Committee (BCEC). The latter decides on sanctions against erring members based Tan and his on the recommendations of the Compliance and Sur­ accomplices veillance Group (CSG) and the PSE President. violated a dozen Despite the existence of a professional staff to rules, all for a manage the daily affairs of the exchange, the Board of Governors and the various committees exercise single purpose: to enormous influence over management, creating seri­ drive up the price ous problems of conflict of interest. The conflict of of BW shares. interest engendered by the current setup was played out for all to see in the BW case when the BCEC refused to endorse the findings of its own CSG investigation into the case, prompting the latter to resign en masse. As discussed below, the same qwnership and control structure has created a weak regulatory mechanism within and outside the stock market. Second, small privately-held brokerages dominate the leadership of the PSE. While a handful of brokerages, mostly foreign, are affiliates of large financial insti­ tutions such as banks and investment houses listed in their respective countries, the majority of securities firms in the PSE are privately held, family-controlled busi­ nesses. Of 17 4 active members of the PSE, 36 are foreign houses accounting for 40 to 45 percent of market share. Serving mainly foreign institutional investors, eight are in the list of top 10 brokers in terms of sales.

VOLUME V !\:UMBER l January-June 2001 117 Pascual & Lim

100% ••••••••• •••• 90% ~ 80% / 70% / 60% I 50% I 40% , 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market Share

Figure 4. Cumulative Voting and Market Shares of PSE Member Brokers, 1998 (Source of basic data: Technistock)

The rest of the market is divided among domestic corporate members ( 120) and individual members (63). Except for a few established brokerages and local bank affiliates, domestic brokerages are mom-and-pop operations which have their roots in the old stock exchanges catering to domestic retail clients-high networth individuals - and making money trading their own accounts. Fig. 4 plots the cu­ mulative market share of member firms against votes held, illustrating the dispro­ portionate influence of small brokerages over the PSE. Indeed, the composition of the Board of Governors reflects the collective power of small brokerages over the exchange. Between 1996-2000,25 brokerages held 79 4 Board seats available to members. Of the 25 brokerages whose nominees were elected to the Board, only six were in the list of top 20 brokers during their year of tenure; the rest were small firms whose market share ranged from 0.03 percent to 5 0.76 percent. It was only in 2000 that nominees of foreign brokerages were elected to the Board. The structure of ownership and control of the PSE explains many facts regard­ ing the BW case. For one, all of the brokers implicated in the scandal were domes­ 6 7 tic brokers, each controlled by one or a few large shareholders. While some of the key players in the scandal had a corporate/institutional character-PNB Securities

118 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam is the brokerage arm of PNB and PCCI Securities is part of an investment group of the same name- the mother institutions were also dominated by large single share­ holders, Lucio Tan and the government in the case of PNB and the Galang and Lopez (of Meralco fame) families in the case of PCCL The presence of effective minority shareholders put pressure on the controlling shareholders to disclose in­ formation about the firms' operations. In the securities industry, minority share­ holders acted as a counterbalance against the controlling shareholders decisions and actions, including engaging in fraudulent trading. 8 Moreover, six of the brokers implicated by the PSE and SEC reports were members or had been members of the Board of Governors. Most notable was Belson Securities owned by the Lims. Belson nominee Federico C. Lim was Governor from 1997 to 1999; Eduardo C. Lim Sr. is the Chairman Emeritus of the PSE and presidential adviser to Estrada. Formal control over the PSE is reinforced by kinship, friendship and business ties. Social ties were indispensable in manipulating the market owing to the illegal nature of the transactions involved. In the BW case, a web of relationships leading all the way to the President kept the parties together and ensured loyalty to the group's objective. To give a few examples, Eduardo 'Moonie' LimJr, President ofBW Resources is the son of Lim Sr, a presidential adviser. A veteran broker, he is believed to have orchestrated the price manipulation scheme. Moonie Lim's daughter is married to Francisco Liboro, the chief executive officer of PCCI Securities which facilitated the private placement of BW shares. Liboro moved to PCCI from Belson-Prime East Securities which he used to head until it folded up following the Asian crisis, bringing with him his traders and staff. He is known to be a close friend of Raul de Castro who runs the family-owned AT. de Castro Securities. PCCI is owned by the Galangs and the Lopez family (of Meralco), a scion of which recently married Estrada's daughter. Armstrong Securities, which is owned by the family of George Go (of Equi­ table PCI Bank), an old friend of the Estradas, is another local broker found to have violated trading rules by the CSG. Go's name is mentioned in the PSE report as the original recipient of 10 million shares from Tan's account with Armstrong.

VOLUME V NUMBER 1 January-June 2001 119 Pascual & Lim

Tan later instructed Armstrong to transfer the shares to the account of Ramon Lee. The same report noted that the Tektite branch of Equitable PCI allowed a check with payee '3707' to be deposited to a checking account maintained in the bank. The same social ties bound the individuals involved in the scam. Besides Dante Tan, others implicated were known presidential cronies Lucio Co and Carmelo Santiago. Co brought his wife, two sisters-in-law, a business associate and several friends into the picture. Ramon Lee, who figured in the transfer of shares to various accounts, was a business associate of Tan and a former Director of BW Resources. Most of the shares sold through private placement arranged by PCCI were bought by members of the Galang family, various investment accounts ofPCCI and staff members. The third factor that renders the stoc~ exchange vulnerable to corrupt trading practices is the fact that companies listed in the exchange are publicly owned only in name. For most of these companies, operating High ownership (simple majority) and strategic control (two-thirds majority) were in the hands of a few large shareholders. concentration Ownership data for 194listed firms in 1997 reveal that encourages the top shareholders owned an average 41 percent of corrupt trading the market value of non-financial companies and 27 practices. percent of financial companies. The same data show that the top five shareholders controlled 65 percent of listed non-financial companies and 59 percent of financial ones. In other words, five shareholders had majority control over a typical listed company. Control was virtually complete for the top 20 shareholders: 7 6 percent for both financial and non-financial sectors. High ownership concentration encourages corrupt trading practices in two ways. First, through its impact on the quality of corporate governance in which ownership is a key element. Effective participation by minority investors in the firms improves corporate governance by ensuring that management and large shareholders do not expropriate company assets for their private benefit. Information disclosure is cru­ cial to the ability of minority investors to effectively exercise control over company decisions. Dispersed ownership then improves transparency.

120 PUBLIC POLICY Corruptton and Weak Markets: The BW Resources Stock Market Scam

Second, ownership affects share price formation through stock liquidity. Dis­ persed ownership implies that a greater proportion of equity is traded in the ex­ change. The data on ownership however shows that listed companies barely trade the required minimum number of shares -10 to 20 percent of outstanding shares. The lack of liquidity renders stocks vulnerable to manipulation. A related issue is the continued trading of shell companies and the use of these companies for speculative trading and 'backdoor listing'. This practice and the danger it poses to market integrity became evident in the B\X' scam. If things had worked out the way Tan and his cohorts planned it, BW Resources would have served as a vehicle for the public listing of Best World Gaming and Entertainment Corp., a privately held company owned by Tan which was granted two online gaming fran­ chises by PAGCOR. As a small capitalization stock (roughly a billion pesos at the start of 1999, 25 percent of which was floated on the exchange), BW Resources was ideal for manipulating the market. Last in this list of institutional weaknesses is poor market governance. The absence of an effective regulatory system is a product of the history of the market, the balance of economic interests within the exchange and the nature of the politi­ cal regime whose influence permeated the market. We discuss the state of market regulation in more detail below.

See-no-evil-hear-no-evil regulation

The BW case highlighted the failure of market regulation. Estrada's interven­ tion in the investigation of the case was only the tip of the iceberg: at bottom was a system that had been rendered ineffective by deliberate design and neglect. Failure was evident at all levels of regulation - from the PSE which briefly enjoyed self­ regulating organization (SRO) status, to the Securities and Exchange Commission (SEC), the watchdog of the capital market, all the way to the Department ofJus­ tice (DoJ) which is tasked to prosecute parties found in violation of the laws on stock trading. Several weaknesses are evident in the existing regulatory framework. For one, self-regulation in the context of control of the exchange by brokers gives rise to issues of conflict of interest. Moreover, regulatory capacity is weakened by

VOLUME V NUMBER I January-June 2001 121 Pascual & Lim the lack of clear rules governing illegal trading activities and the inability of the PSE and the SEC to implement existing rules. Finally, regulatory agencies lacking a tra­ dition of independence are permeable to external influences.When the BW scam occurred, the PSE had just become a self-regulating organization. Using self-regu­ lation, it writes and enforces its own rules and regulations in accordance with the Securities Act governing stock trading, even as the SEC continues to exercise its regulatory powers. There are two advantages in a system of self-regulation. First, a self-regulating body derives status, respect and self-respect since it is trusted to regulate itself, motivating it to make the system work. Second, a body in charge of its own standards and their enforcement is well placed to develop appropriate and workable methods to maintain these standards, whereas externally imposed regu­ lation may prove inappropriate, inflexible or unworkable. 9 Revoked in the wake of the price manipulation scandal , self-regulation was doomed to fail in the face of ownership and control by brokers of the exchange. Self-regulation requires a high degree of separation and independence from the affected parties, thereafter, serious conflicts of interest arise. The dominance by small brokers of the Board of Governors and key committees of the PSE explained the reluctance of the PSE leadership to look into the BW scam and to punish the parties involved. This despite sufficient evidence gathered by the Compliance and Surveillance Group (CSG ), the PSE's internal regulator, and mounting public pres­ sure to do so. Self-regulation is also undermined by weak regulatory capacity. The problem is not so much in the law as in its implementation. Many provisions of the RSA have no implementing rules and regulations, making it difficult to prosecute erring bro- w kers. The adoption of the system of self-regulation in 1998 was not accompanied by procedural guidelines, leaving the PSE and the SEC to do as they pleased. In some cases, the PSE and the SEC conducted joint investigations. In others, the SEC took the initiative. In the BW case, the PSE complained that it was left alone to deal with the fiasco. The SEC sent two teams of investigators to the PSE to look into the BW case, only to pull them out two days later without explanation. On November 25, 1999, the SEC suspended all investigations related to the case to avoid duplication of the PSE' s efforts.

122 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam

Where the rules are clear, there was readiness to set them aside. For example, the share-for-property swap between BW and Megaworld, another publicly listed company, was signed on October 1999. The agreement required BW to issue 1.2 billion in new shares, raising the company's outstanding shares to 2 billion. But a month later, the additional shares had yet to be listed with the PSE as required by the rules. Weak regulatory capacity combined with a laid-back attitude allowed the BW scam to proceed unchecked. As a rule, company disclosures are rarely, if ever, ex­ amined critically. Trading was suspended several times when the price breached the range within which it was allowed to move during the day. But no action was taken beyond asking the com­ pany the reason behind the unusual price movement. Weak regulatory The response of company officials was unvarying: 'We capacity combined have no knowledge of any material information that with a laid-back might have affected prices." attitude allowed Neither did PSE regulators question BW officials the BW scam to who presented a number of acquisition plans to the proceed public which would have involved the issuance of sev­ eral billions of new shares despite the fact that the unchecked. company's outstanding shares amounted to no more than 425 million. Company officials were not required to present business plans and the necessary financial projections. Instead, they adopted a company report issued by PCCI Securities as part of company disclosure, but even this was based on overly optimistic assumptions and was not supported by the necessary financial statements. The entry of Stanley Ho into the company did not alarm the PSE regulators. Instead, Ho was shown the red carpet by PSE officials and given the honor of ringing the trading bell at the Ayala trading floor. Company officials claimed that Macau's gambling tycoon, who was elected chairman, infused some $30 million into the company. Records, however, showed he had no more than 10,000 shares to his name.

VOLUME V NUMBER 1 January-June 2001 123 Pascual & lim

Under the existing regulatory framework, regulatory authority is lodged prima­ rily with the SEC. Self-regulation by the PSE provides an additional layer of market regulation; it does not diminish the responsibility of the SEC to act as watchdog of 1 1 the capital market. Ensuring that the PSE meets its responsibilities as a self­ policing institution is an important task of the SEC. Its primary function, however, is to prevent and to punish fraud in order to maintain the integrity of the securities market. The BW case brought the long-standing weaknesses of the SEC as a regulatory institution out in the open. The watchdog of the capital market, it adopted a see­ no-evil-hear-no-evil attitude in regulating the market. In its 50-year existence, no person had ever been convicted of insider trading or any illegal trading activities, a fact that speaks more of the poor state of market regulation than of the integrity of the stock market. While constitutionally independent, it has not been beyond the reach of politics and the influence of vested interests. As a quasi-judicial body, it has not avoided charges of corruption from lawyers and litigants. As a collegial body, it has, during critical moments, failed to speak with a single voice, effectively undermining its authority. The inaction of the SEC was most evident in the BW case. It issued its first official directive regarding the trading of BW shares on 30 September 1999, only two weeks before the stock hit its peak on 11 October. The SEC directed the PSE to inform the Commission within five days of any surveillance measures the PSE was undertaking to ensure there were no irregularities in the trading of BW shares. In late October after the stock had collapsed, the SEC sent two investigating teams to the PSE but recalled them two days later. On 25 November, it suspended all investigations relat~d to the BW Constitutionally independent, the SEC was subjected to intense pressure from the highest office of the land. Preparatory to the manipulation of the market, EO 63, issued on 13 January 1999, placed the SEC under the direct supervision of the Office of the President. On 6 September, the President issued Memorandum Or­ der 73 which required that 'investigations of any transactions or entity under the supervision or regulation by the SEC shall not be conducted ... except by authority of the Commission en bane.' The order likewise provided that any case or matter

124 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam

handled by any hearing officer, auditor, investigating officer or examining officer shall not be reassigned to another without the consent of the Commission en bane. This order effectively clipped the powers of the SEC chief who was then at odds with Malacanang. The President issued a gag order on the SEC Chairman. The order directed the Chairman 'to refrain from issuing public statements and policy declarations affecting the securities market. .. without prior clearance or approval of the Office of the President.' Finally, there was the series of calls from the Office of the Presi­ dent to SEC officials, including the Chairman, to influence the ongoing investiga­ tions. Malacanang' s intervention took a heavy toll on the effectivity and integrity of the SEC. An SEC order issued on March 7 suspending trading in the PSE was set aside the following morning by another order signed by four commissioners, not including the SEC chairman. At a most critical period, the SEC could not get its act together. To its credit, the SEC conducted its own probe of the scam and in the process came up with three reports which served as the basis for the filing of charges against the parties involved. Issued after the PSE report on the scam, they improved on the report and offered comprehensive documentation of the build up of the bubble until it burst in October 1999. The emasculation of the regulatory mechanism did not end with the SEC. Malacafiang's influence was likewise only too apparent when the case reached the Department of Justice (DoJ). Mter months of stalling, the Do] finally issued the result of its preliminary investigation into the complaint filed by the SEC. In the midst of the impeachment process, the DoJ agreed to file charges against Tan but only for the lightest offense- nondisclosure of significant ownership of a listed company. It cleared all the brokers involved on the grounds that one could not possibly arrange a wash sale or a matched order since trading at the stock exchange was done through a computer system. This, despite documents showing that such illegal trades were done - and done many times over.

VOLUME V NUMBER 1 January-June 2001 125 Pascual & Lim

Concluding remarks

The change in government following the aborted impeachment trial changed the course of the BW case. The new administration has taken the first steps to close this dark chapter in the history of the stock market. The SEC filed a new complaint with the DoJ against a dozen brokers and close to 50 individuals led by Tan and other Estrada cronies, accusing them of market manipulation and other violations of the securities law. Charges of graft and corruption against Estrada on the basis of the BW scam have also been filed with the Sandiganbayan. Beyond the legal battles, the more difficult task of reforming and of strength­ ening the stock market and its regulatory framework lie ahead. The current struc­ ture of economic interests that underlie the stock Poor regulation is exchange and the market's governance mecha­ nism renders it vulnerable to market manipula­ less an accident of tion. The major obstacles in promoting transpar­ history than a ency of transactions and therefore of fair price for­ product of the mation are the dominance of small, family-con­ balance of interests trolled brokerages, high ownership concentration that has dominated among listed firms, control by brokers of the PSE the market. leadership reinforced by informal networks and channels of authority and the lack of independent regulators. Poor regulation is less an accident of history than a product of the balance of interests that has dominated the market. It is these weak institutions within the exchange that allowed political corruption as exemplified by the BW price manipulation scandal to work its way through the market. Our discussion of the BW case carries several implications. One, corruption is not the monopoly of the state. It also afflicts the market. What produced an explo­ sive case like the BW crisis was the combination of state and market corruption. While related, these two processes are to a large degree independent of each other. It did not take the exercise of state prerogatives to manipulate the price of BW

126 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam shares, although such manipulation referred to state franchises and contracts with government. Two, the need for strong regulation in the financial and capital markets. Finan­ cial markets, in particular the capital market, present a special case because these markets are inherently prone to fraud. It should not be a surprise that the most sought after stock exchange in the world- the New York Stock Exchange- is also the most heavily regulated. In the absence of an effective regulatory framework, we should be very cautious about developing the capital market. Three, the importance of institutions within the market and the link between interests and institutions. Most crucial at this point is the ownership structure and control of the PSE. Reform in this area is critical if the self-regulation adopted by the new securities code is to become meaningful. SRO or not, market regulation is implemented by or filtered through the workings of the PSE. That is why it is necessary to restructure the Exchange. Many of the issues brought out by the BW scandal have been addressed by the Revised Securities Act of 2000. Reforms, however, have met vigorous opposition from affected parties. Reforms such as demutualization of the PSE which aims to separate ownership and management of the Exchange, the removal of the broker­ dealer rule, the increased power of the SEC to examine the books of brokers, have been effectively stalled and opposed by affected brokers. What makes the task doubly difficult is that the domestic brokers who domi­ nate the PSE have been regaining lost ground in terms of market share as a result of the prolonged weakness in the market. The weak market recovery since the crash of 1997/1998 has been propelled mainly by local players. A strong resolve combined with creativity will be needed to sustain the momentum of reforms so far.

VOLUME V NUMBER 1 J anuary·June 2001 127 Pascual & Lim

Notes

1 A similar application filed by Tan before Estrada assumed the presidency was rejected by PAGCOR. 2 Market price is misleading as an indicator since it is grossly inflated. 3 The illegal acts included wash sale, matched order, marking the close, over-the­ counter transfer of shares, private placement with lock up, short sale rule, kit­ ing, 'done thru' trades, improper extension of credit, net capital rule, listing and disclosure rules, broker-director rule. 4 One board position per year is counted as one. The rest of the board seats are reserved for non-brokers. 5 ING Baring and Merrill Lynch. 6 Foreign brokers did not play an active role in the sc~m, not only because of internal controls but also because foreign institutional investors as a rule cannot invest in stocks like BW which do not meet certain criteria such as stock liquid­ ity, track record of dividend payments, etc. 7 Firm size does not say much about willingness to engage in fraud. Abacus, PCCI, Securities 2000, Angpin and Associates, and Wealth are among the top domestic brokers in the country found to have been actively involved in the BW scandaL 8 The following are the brokers who held a seatin the Board and the year they were members of the Board: Aurora (1998), PNB (1998), Wealth (1996), Belson ( 1996-1999), Abacus ( 1997-1999), and Angpin and Associates ( 1996). 9 The concept of self-regulation is formally adopted by the Revised Securities Act of2000. 10 Until recently, the lack of clear rules and procedures was not confined to the Securities Law. In 1999, the SEC finally adopted corporate bankruptcy proce­ dures on the basis of PD 902-A promulgated in 1972. 11 When the US Congress created the US Securities and Exchange Commission in 1934, stock exchanges had had a 140-year history of regulating their own members. The SEC was superimposed on this system of'self-regulation' as an addition level of regulation. (Ilano and Mariano, 1995, p. 61)

128 PUBLIC POLICY Corruption and Weak Markets: The BW Resources Stock Market Scam

References llano, A. and R. Mariano, eds. [1995] Investment Management and the Philippine Stock Market, Development Center for Finance. Lim, J. Y [2001]. "The Detrimental Role of Biased Policies," Transparent and Accountable Governance. North, D. [1984], "Transaction Costs, Institutions, and Economic History," Jour­ nal of Institutional and Theoretical Economics, no. 140. Securities and Exchange Commission. Probe on the Phenomenal Rise and Fall of the Price of BWRC Shares, July 17, 2000. Securities and Exchange Commission (SEC). "Partial Report of the Investigation Conducted by the Commission Pursuant to its Authority under Revised Secu­ ritiesAct, March 23, 2000". Senate of the Philippines, Committee on Banks, Financial Institutions and Curren­ cies. Transcript of Stenographic Notes, Public Hearing on P.S. Res. No. 609 (Investigation, in Aid of Legislation, on the Reported Violations by Several Stock Brokerages of the Rules on Full Disclosure), Nov 19, 1999, Dec 1, Jan 19, 2000Jan 28, Feb 7, Feb 18, Feb 28, Mar 14,2001.

VOLUME V NUMBER 1 January-June 2001 129

Book Review John N Schumacher S J. Father Jose Burgos A Documentary History 1999. Ateneo de Manila University Press. The Subversive Semiotic Shifts of Padre Burgos (from Clerico Secular to Clero Indigena to a Distinct Filipino Identity and Raza)

ARNOLD MOLINA AZURIN

Having been cited too often in history textbooks, scholarly conferences and journalistic tidbit annota­ tions, Teodoro Agoncillo' s resonant witticism to the effect that before 1872, there was never any Filipino history but merely a variety of chronicles on the Span­ ish colonial experience in this archipelago has become almost a cliche. Well, nothing can save Agoncillo's quip from be­ coming trite better than clear evidence showing oth­ erwise. Mter all, scholarship is revitalized mainly through the contention of diverse findings of research­ ers. This compendium of primary documents gathered by Schumacher (with the help of other scholars, he admits gratefully) clearly presents a historiography that underscores the earlier emergence of Filipino nationalism, along with the concomi­ tant struggle in pursuit of this newfound self-identity and self-determination in the decade prior to the 1870s. Reconstructing the motive vision and action plus the counteraction is what history is made of. This book is persuasive enough in revealing that there was a nascent Filipino history prior to Agoncillo' s 1872landmark. The evidentiary corpus delicti is embedded principally in the writings and activism of Father Jose Burgos (among others). Secondarily, it occurs in the series of reactive correspondence among Azurin/Schumacher

Spanish colonial officials (both from the government and church hierarchy), as well as in some newspaper articles in Spain, either conservative or liberal. The historiographic standpoint and synthesis bared in Schumacher's Intro­ duction is cogent and well rounded, although there are a few points that stimulate further disputation which shall be discussed later. Simply put, being a Filipino in the stressful milieu of the 1860s was to inexora­ bly undergo a sociopolitical fermentation, resulting in the creation of a class dis­ tinction within the ranks of Filipinos-between espafioles filipinos and indigenas or hzjos del Pais. Those who regarded themselves as belonging to the latter category were beginning to regard their Pais (country) as distinct from Mexico (which had won its independence from Spain), and La Madre Patria in reference to Espana was starting to be effaced by their Pais, at least among the political visionaries. This group, according to the surveillance files of the governors-general, was then com­ prised mostly of lawyers, academicians and priests who relished the label cura indigena. In other words, these documents culled by Schumacher and others reveal that as early as the 1860s, the label "Filipino" was undergoing a semiotic somersault. It no longer referred exclusively to scions of Spaniards born in Islas Filipinas, as many of today's historians and some journalists are still wont to assert in their unhistorical unilinear fashion. Father Burgos himself provides the unequivocal evidence of this shift in the meaning of "Filipino" when he cites in the Manifesto of Filipinos some portions of a derogatory article in the Madrid-based newspaper La Verdad: "The Filipino by his nature, by his character, by the influence of the climate or the race, is not good for undertaking lofty offices. It is a com­ mon saying that the Tagalog is an excellent soldier, an ordinary corporal, a bad sergeant, cannot discharge the post of an officer at all, because he is unfit for it. In the same way, the Filipino who is consecrated to the service of the altar ordinarily carries out well the discharge of the routine offices in the church, but he never succeeds in excelling when he is found pos­ sessing the priesthood ... "

132 PUBLIC POLICY Book Review

There is no doubt that this eliding semantic from Filipino to Tagalog and then from Tagalog to Filipino is truly reflective of the fermenting period's transformation of self-valuation and class identification. In the same document (Manifesto of Fili­ pinos), Burgos rubbed in this emergent semiotic signification of "Filipino" when he wrote: " ...We have been provoked, and we consider it our duty to come forth in defense of our race, of our class {underscoring mine) and of our honor ... " Hence, Burgos's polemics provided the colonial authorities a multiple choice for the evolv­ ing meaning of the Filipino identity way back in the early 1860s, while brazenly asserting a new sense of Filipino nationhood "a la defensa de nuestra raza, de nuestra clase, y de nuestra honra." Small wonder that Schumacher has tirelessly blazed a lonesome trail toward the origins of Filipino nationalism to the psychoiogical shift in the consciousness of the Filipino clergy, a full generation ahead of los indios bravos expatriates in Spain like Rizal, del Pilar, Jaena, the Luna brothers, etc. that goes against the grain of conventional nationalist historiography articulated mainly by Agoncillo, Renato Constantino and Onofre Corpuz, which has overfocused on the Katipunan move­ ment and the Philippine Revolution of 1896-98 as the historic hotbed of national­ ism. I wrote a critical analysis of the Agoncillo-Constantino-Corpuz historical nar­ rative of Filipino nation building for the UP..CIDS Chronicle (Centennial Issue) in which I painstakingly pinpointed the blinders and blind spots of this ideological complexion. Similarly, one can discern a kindred but subtler tendency of interpre­ tive overfocusing or spotlighting in the hands of Schumacher regarding the ques­ tionable conduct of the friars exposed to ridicule by Burgos's letters to the Spanish­ based newspaper Ul Discusion, as well as Burgos's primary diatribe against the mis­ sionary or religious orders above-cited (Manifesto of Filipinos). For instance, in the Manifesto, Burgos cited the stinging criticism of Governor­ General Simon de Anda against the overall misconduct of the friars, written nearly a hundred years before Burgos's time: "It is a disorder that the fathers from the time of conquest have de­ fended and protected the Chinese, idolaters, apostates, traitors and sodomites, without any advantage to the commonwealth, but rather with great harm in the spiritual and temporal sphere ...And they have perse-

VOLUME V !'\UMBER 1 January-June 2001 133 Azurin/Schumacher

cuted with such great intensity and bitterness the poor Spaniard, because one sees that if a Spaniard unfortunately goes to the province to seek his livelihood, the father commands him to leave. In this way, he [the friar] remains alone in the town without witnesses, for God knows what ends, and intelligent Catholics lament. It is likewise a disorder that contrary to what is commanded by the laws and by so many cedulas, the fathers do not permit, and even punish the Indios if they speak Spanish, though they are very much inclined to do so ... " Oddly, Schumacher's footnote to this observation of de Anda's in the 1700s exculpates the friars through a very flawed logic. After judging de Anda to have been "less than just," Schumacher rationalizes: "Though there were no doubt friars who discouraged the learning of Spanish, particularly in the nineteenth century, with the purpose of protecting their flocks from what they considered to be danger­ ous ideas from abroad, the principal reason for the failure to spread Spanish was the physical impossibility because of the tiny proportion of Spaniards to Filipinos." Schumacher's annotation is a non sequitur, to say the least. He foregrounds the motives of the friars a century after de Anda's observation of friar misconduct. And he misses de Anda' s charge that a friar would drive away a Spaniard trying to seek a livelihood in a faraway parish. So what is the pertinence of the ratio of Spaniards to the populace when what de And a scored was the friars' persistent violation of so many royal decrees regarding the mandatory teaching of the Spanish language to parishioners? Apropos of this, the so-called American Thomasites were very few in proportion to the much-increased Philippine population but they succeeded in spreading the English language even in the hinterlands ofPalawan and the Cordil­ lera. Again, there is an overarching rationalization in Schumacher's Historical In­ troduction to this compendium of documents pertinent to the life, death and mi­ lieu of Father Burgos,: "The friars, as well as the Filipino secular clergy, were victims of the structures of the decadent patronato, where the interference of the govern­ ment nullified all efforts at reform from within the church and turned ecclesiastical questions into political matters. All parties were led into taking positions and em-

134 PUBLIC POLICY Book Review ploying strategies at times quite foreign to their proper character as priests by the poisoned atmosphere in which they lived." Schumacher's attempt to lay the blame principally on the patronato real for the turf war between secular parish priests and the religious orders obfuscates Burgos's main charge concerning the "trickery of the friars," and which Burgos himself un­ derscored as "que esta sistematico oposicion" to the royal and pontifical decrees. Going by Schumacher's theory of "the poisoned atmosphere," one should ask when reading these documents, who brought the poison in the first place? The answer, according to de Anda back in the later half of the 1700s, could be traced to the avarice of the friars for power and pomp: "It is a source of horror to see, that scarcely having arrived in Manila from those kingdoms, a religious (friar), his expenses paid by and given support by His Majesty with the character of an apostolic missionary, immediately publicly defends that it is not the King who is the lord of the islands, but they who have conquered them ...Thus the King is called King, the president, audiencia and governors similarly are so named, but in reality, all these offices are held by the fathers." Just how did the friars manage to be omnipotent in the colonial regime? By neglecting their missionary work and holding on to the parishes and conventos as if these were their combined thrones and castles. At about the time de Anda bared his sardonic perception to the Spanish Court, Basilio de Santa Justa, Archbishop of Manila, proposed an antidote to the poison: "Unburdening the regulars of the charge of the parishes [so that] they will be free to be deployed by Your Majesty in under­ taking new conversions. For in spite of the fact that this is the principal end for which they were sent from the beginning, for many years now, these missions have ceased completely." That sarcastic overview of the archbishop's was made a hundred years before Burgos became a militant critic of the domineering friars. In his own time, the same charge was hurled by the Archbishop of Manila's office, although with more bitter­ ness: " ... that the progress of the active missions has ceased or at least greatly di­ minished since so many parishes have been lavished on the regular clergy (friars)." And yet, such a "poisoned atmosphere" would be aggravated further by the systematic lobby in the Spanish press glorifying the friar religious orders while vili-

VOLUME V NUMBER 1 January-June 2001 135 Azurin/Schu mac her fying the secular clergy to which Burgos belonged. He thus pounced on these ho­ sannas to the entrenched friars written by Father Coria, reducing the self-glorifying friar tales to ridicule. In his retort published in La Discusion, he first quoted Father Coria's acclama­ tions to the legacy of the friars: "We who have lived long years in the Philippines, who have penetrated into its age-old forests, who have crossed its most rugged mountains ... " And then Burgos responded with a stinging rebuke: "\X'e know His Reverence personally; and although it is true that he has been in these islands more years perhaps than we have lived, we know very well that he has spent them either in the convento or in the parishes situated in the provinces of Laguna, Manila and Tayabas-a region which is so beautiful, healthy and comfortable ... so that it may be said that there is no journey which does not deserve to be called a pleasure trip." Then comes the typical Burgos punch line: " ... that in penetrating those forests and crossing those mountains, it has certainly not been to bring the light of faith to the pagans, but only to take possession of some parish ... " And Burgos the polemi­ cist could make such assertions with conviction and rapier-edged language because he was spiteful of self-aggrandizing Spanish friars. It should be noted, however, that the published reaction of Burgos's is among the gentlest he could muster. In most instances, he was devastating as he cited religious and historical documents, including scientific treatises and Latin maxims, to demolish the vacuous claims of his adversaries who had more power and cunning to deploy against him and his cohorts. I have dealt at length on this aspect of the documents collected and annotated by Schumacher if only to highlight the crucial point of Burgos's writings cited here. And to show as well, though not definitively (it can't be done in a mere review), that Schumacher's overview that the Spanish friars and the Filipino secular clergy were both victimized by the "poisonous atmosphere" issuing from the patronato real is an oversimplistic camouflage for the avarice and deviousness of the friars at the time Burgos was incensed enough to stick his neck out. Until, of course, the garrote squeezed an life out of it and with it, all possibilities of articulating the dream of strengthening what he called the Clerigos Indigenas de Filipinas.

136 PUBLIC POLICY Book Review

It is obvious in Burgos's text and context that clero secular is synonymous with clero indigena. How indigena crept into the vocabulary of the era (while apparently illicit semanticallv) is traceable to the fact that the friars were all Spaniards and continually debased the clergy with racist slurs. It is therefore not surprising for Burgos to counterattack "in defense of our race." Thus the reform-the-church move­ ment to hasten the secularization of parishes transformed into indigenization, which was calibrated further by the tempestuous turn of events into Filipinization and finally, emancipation. This last semiotic twist directly issues out of the colonial rulers' paranoid per­ ception of, and violent response to, the fast-changing and turbulent events. As ex­ pressed by Governor de Ia Torre in his confidential report (1870) to Spain's Over­ seas Minister: " ... With very rare exceptions, there is not a priest or a lawyer born in this country (hijos del Pais) with some education and influence who ... has not em­ ployed them in creating around him aspirations for independence." Owing to the intensifying repression, the following generation of activists had therefore very lim­ ited option but to translate such aspirations into revolutionary action to wrest their sanguine sense of country or identity from the shackles of the colonial regime. Schumacher's thesis ofpatronato real-as-venom in his Introduction to this docu­ mentary history of Burgos and his fellow secular patriot priests ( as well as those of lawyers and propagandists exiled to the Marianas after the execution of Fathers Gomez, Burgos and Zamora) is very likely Schumacher's way of mitigating, if not exculpating, the vicious regime of frialocracy, as M.H. del Pilar once called it with derision. The documents gathered in this book, whether written by Burgos or the Arch­ bishop or the Governor-General, show that the Spanish religious or regular clergy were the group favored to tighten the stranglehold of colonialists on their colony in the Far East. Otherwise, why should the policy of secularizing the parishes (dis­ placing the friars and installing secular priests like Burgos who owed their alle­ giance to their bishops and the Spanish King), which had been carried out as the official policy for centuries be suddenly rescinded in 1826! And why should the parishes in Cavite, adjoining Manila, be taken from the secular priests in favor of the friars?

VOLUMEV NUMBERl January-June2001 137 Azurin/Schumacher

Schumacher at least provides the foreground of historic events: Mexico had fought against Spain and won its independence; the other independence move­ ments in Latin America were sparked or led by secular priests; Spain itself was in turmoil, culminating in the Republican movement's takeover of the Spanish gov­ ernment in 1868. One document, a letter of the Archbishop of Manila to Governor­ General Izquierdo, shows that by 1869, Manila's rumor mill already included Burgos in the ranks of anti-espaiioles. The political tension in Iberia was virtually percolating the nationalist propaganda of the hijos del Pais around Manila. Burgos, too, provided the local background (or was it a deliberate psy war?) for the political paranoia within Manila and surrounding provinces. He cited in one document: "Those revolts of Novales, ofTayabas, of Malate and Nueva Ecija which they recall to us at every step and which continue to inspire fear ... " Such recollec­ tion precisely referred to those violent confrontations around Manila occurring only in the previous generation. That would have been too recent for the colonialists' comfort. The Spanish authorities headquartered in Manila might have felt they needed Cavite for their fallback position (some of their ships were moored off Cavite's coast) or equally important, as a steady supplier of fresh recruits and foodstuffs. But the seemingly strategic takeover by the friars of most Cavite parishes from the hands of the clerigo indigenas, which had caused so much bitterness and outrage among the secular priests now led by Burgos, proved futile. Worse, it made the area more volatile. Somehow, the contemporaneous documents written by the governors-general to their superiors in Madrid exuded a siege mentality, although taking pains in reas­ suring fa Madre Patria that they had everything under control in the restive colony­ a de rigueur assurance that betrayed otherwise, by its very articulation. Other documents here show that the dialectic of distemper was not only in­ tensifying among the ranks of the hijos del Pais but also within the powers-that­ were. This is evident in the planned repressive countermoves of the top officials who used to be the republican revolutionists in Spain and were appointed by the liberal administrators in Madrid. Governor-General Carlos Ma. de la Torre repre­ sented this Jekyll-and-Hyde type by befriending the militant lawyers and priests

138 PUBLIC POLICY Book Review who gave him their trust because of his revolutionist career even as de Ia Torre subjected them to intense surveillance, including their letters in the post office. It is thus such a raw and dynamic vista of the actors, motives and events in this historic stage which is opened to present -day readers of this documentary history that makes it a good source of illumination for that yet-dim period when the vision of the Filipino nation was an intense wish and a dangerous secret. Schumacher's Intro­ duction gives an insightful perspective or better, a clear point of entry, but readers need not take it wholesale. The documents may reveal other things such as Father Burgos's charges of greed and despotism against the friars which persistently reso­ nated over at least two centuries via the official reports of governors-general, arch­ bishops, academicians, lawyers and priests. For this reason, I regard Schumacher's laying the blame for the conflict between the clero indigenas and the Spanish friars on the patronato real an alibi for his comrades-in-cloak, aQ appeal to a remote and abstract machina way beyond the control of mortals, thus absolving the friars. And thus, I say, the reader may well delve deeper into these documents. It is rather odd that nowhere in this documentary history is the transcript of the court proceedings that condemned the martyred priests and some lawyers. Schumacher assures us he is still searching for it. But a document here, Father Bertran's letter to the Jesuit Superior, can give a hint as to why the martyrs were arrested long before the leaders of the Cavite Mutiny were captured. In such a setup, any solid evidence of complicity is unnecessary; mere suspicion is tanta­ mount to conviction. In the letter, Father Bertran admitted having forewarned Burgos, "perhaps you may not be able to prevent a hand doubly criminal from writing your name on a banner waved by deluded men and traitors ... If you do not cease, I ask you not to call any further at our door."

VOLUME V NUMBER 1 January-June 2001 139 ABOUT THE AUTHORS

ARNOLD MOLINA AZURIN is a Research Fellow of the UP Center for Integrative and Development Studies. An anthropologist by training, he is also a poet whose work has won various literary prizes. His latest book, Reinventing the Filipino Sense ofBeing and Becoming is a UP Press best seller and has recently been reprinted. EMMANUEL S DEDIOS is a Professor at the UP School of Economics and Fellow at the Philippine Center for Policy Studies. His research interests include the role of institutions in development and the history of thought. RICARDO FERRER is a Fellow at the Philippine Center for Policy Studies. A full-time faculty member with the UP School of Economics, he maintains an appointment as Professorial Lecturer there. MELCHOR P LALUNIO is a Project Consultant of the Development Acad­ emy of the Philippines until his early retirement. JOSEPH Y LIM is a professor at the UP School of Economics and a Fellow at the Philippine Center for Policy Studies. He has written extensively on macro­ economic policies, globalisation and their social impact. AMADO M MENDOZAJR is an Associate Professor, Department of Politi­ cal Science, College of Social Sciences and Philosophy at the UP Diliman. Along with the other authors in this volume, he is a Fellow of the Philippine Center for Policy Studies. Formerly a Vice-President of the Freedom from Debt Coalition, Prof. Mendoza is active in research and is currently working on his dissertation proposal. CLARENCE PASCUAL is a Fellow at the Philippine Center for Policy Stud­ ies and is working toward a Ph. D. in Economics. He did a research for a securities trading firm until the Asian crisis hit. MARIE ANTOINETTE G VIRTUCIO is the Director of the Policy Re­ search Office of the Development Academy of the Philippines (DAP). Together with M. Lalunio, she gratefully acknowledges the guidance of Dr. Eduardo T. Gonzalez, President of DAP in writing their paper and the excellent research assis­ tance of Ms. Iris Samson.

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VOLUME V NUMBER 1 January-June 2001 143 IN THIS ISSUE

Corruption in the Philippines: Framework and Context EMMANUEL S DEDIOS and RICARDO D FERRER The paper argues that there is a larger dimension to co rruption determined by the historical and social context. Here. the ultimate factors are those affecting social cohesion (e.g., income and \\·ealth, ed ucati on, ethnic and other differences), the economic strategies pursued by the gO\·ernment (e.g., minimalist \·ersus interwntioni st), the poli tical system (the autonomy of the bureaucracy, the degree of centralisation), the extent of market transactions (local, global) and the rate and sources of economic grO\\·th. It is these facto rs that determine the credibility of the formal institutional constraints (hO\\·­ eYer designed) on the beha\·iour of public officials and pri\·ate agents alike.

The Industrial Anatomy of Corruption: Government Procurement, Bidding and Award of Contracts AMADO M MENDOZA JR This paper investigates the industrial anatomy of corruption in the area of go\·ernment con­ tracting, which im·olves go\·ernment procurement and the bidding and award of contracts funded both by the government and by international financial institutions such as the \Vorld Bank and ODA (offi cial deYelopment assistance). By industrial anatomy, we seek to identify and to describe the technologies used in the corrupt practi ce, the politico-economic players invoked and the enabling / di sabling policy and socio-political environment.

Tender Mercies: Contracts, Concessions and Privatization MARIE ANTOINETTE G VIRTUCIO and MELCHOR P LALUNIO This paper examines corruption in gowrnment contracting in the priYate sector for in frastruc­ ture or development projects that the government normally finances and operates but now, will be wholly or in part, constructed, operated and maintained \\·ith the private sector. To examine con·up­ tion of this nature, the study used the government's established system for contracting as articu­ lated in RA 6957 (May 1990), later amended as RA 7718 (July 1994) \\ hi ch is known as the Philippine Infrastructure Privatization (PIPP) or Philippine BOT Law as reference. To determine the in stitutional fa ctors and to account for the circumstances that allow· corrup­ tion to transpire and take root in the goYernment-private contracting system, the paper examines in detail three government-private sector PI PP deal s in infrastructure or de\·elopment projects in­ cluding: the Cebu Pond A Reclamation Project, the North Harbor Privatization Project and the

Gt·eater iV!etro ~Vlanila Solid !Vaste Management Contract.

Corruption and Weak Markets: The BW Resources Stock Market Scam CLARENCE PASCUAL This paper examines the role of political corruption in the scandal, the nature of institu­ tions within the stock exchange and the state of market regulation. The BW scandal pro\·id es a fascinating study of how political corruption during the Estrada administration underwent sig­ nifi ca nt transformation in both magnitude and scope. Gains acqui red through traditional methods of political corruption-grants of franchi ses, government contracts and behest loans-were le\·er­ aged in the securities market for greater profit, albei t throug h fraud. The use of state-controlled fin ancial in stitutions to abet th is process marked another milestone in the hi story of corruption in the Philippines.