Creating a Competitive Private Sector Transcript

Frank Vogl, Jean Lemierre, Seiichi Kondo, Daniel Kaufmann, Ricardo Semler, Heinz Rothermund, Patrick Alley, 10th IACC, Plenary transcript, Private Sector

 

Frank Vogl, Vice-Chairman, Transparency International - Chair

  • Jean Lemierre, President, European Bank for Reconstruction and Development, United Kingdom - Keynote speaker

  • Seiichi Kondo, Deputy Secretary General, Organization for Economic Cooperation and Development, France

  • Daniel Kaufmann, Senior Manager, World Bank Institute, The World Bank

  • Ricardo Semler, President, Semco Industries, Brazil

  • Heinz Rothermund, Regional Business Director, Latin America and Sub-Saharan Africa, Royal Dutch Shell

  • Patrick Alley, Global Witness, United Kingdom

Frank Vogl:

Good morning, welcome, I am Frank Vogl, we are delighted that you are here. I am already going to be controversial and change the title of our program. You will see that the title is "Creating a Competitive Private Sector". Unless there are objections, I am going to change it to "Creating an Honest Competitive Private Sector". Our focus, of course, is not on capitalism, our focus is on corruption and business and the relationships between business, government and civil society. Transparency International started a few years ago when corruption was everywhere, and nobody was doing anything about it on an organized international level. We believe that we must work on constructive coalitions against corruption. Our panel reflects the coalitions: government and official institutions, business, and NGOs. We have a wonderful panel with us today.

Starting on my right, we have Mr. Kondo from the OECD whom shortly I will introduce more fully, Mr. Kaufmann from the World Bank, Mr. Lemierre, President of the European Bank for Reconstruction and Development, Mr. Semler who runs a major company in Brazil, Mr. Patrick Alley from Global Witness, an NGO, and Mr. Rothermund who is involved in another major international company, one from the United Kingdom and Holland.

Time is not on our side, as we seek to build a constructive coalition. The forging of coalitions against corruption takes patience. However, we have been seeing, from Seattle, to Davos, to Washington, to here in Prague, just outside this building exactly one year ago, and then to Geneva, that there is an intense opposition on the part of an increasing number of people against business, against globalization. If, indeed, we are to forge constructive coalitions and to maximize the potential benefits of globalization in fighting poverty, in strengthening international exchange, in building democracy around the world, then we must ensure that everybody in this coalition goes an additional mile to demonstrate that what we are about is not just rhetoric but real action, that we are walking the walk, as they say. How do we demonstrate this? We, in TI, have tried many different initiatives and we will continue to encourage business, to encourage the private sector to work with us. This afternoon there will be a workshop which will look at the draft of TI's new business principles for countering bribery. I encourage you to come because this document, we hope, will set a standard.

Ladies and gentlemen, we are faced today with a situation when multinational corporations and international institutions such as the World Bank and the WTO and the IMF are all under attack. They must go the extra mile to demonstrate that they are transparent, that they do not just talk with ethics, but act with ethics. They must prove it because trust in them, rightly or wrongly, is waning. So this is at the center of our discussions here this morning. We have, as I say, a panel that reflects the diverse views, but all want to see a constructive coalition built so that we can progress together.

Our first speaker is Jean Lemierre. He has been President of the European Bank for Reconstruction and Development for just over a year and before that he was the Head of the Treasury in France. In his role as the head of taxes in France he became very familiar with the whole notion of fighting corruption from the perspective of the government, and he is very dedicated to that cause. It gives me great pleasure to ask him to open our plenary this morning. We have requested him to look at a series of questions. Where are we now and where are we going in Central and Eastern Europe in establishing a vibrant, globally competitive honest private sector and the appropriate public policies to support an environment in which businesses can thrive, compete and operate with honesty and integrity. How is the EBRD serving as a catalyst to secure these positive outcomes? Mr Lemierre.

Jean Lemierre:

I will try to answer these questions which are quite challenging indeed, but first I wish to say that it is good to be here with you this morning, it is good to be in Prague, it is good to see your organization in the region of operation of the Bank. This is the first time since your creation, and we are indeed very happy that you are paying some attention to this region. Ten years ago, it was the fall of the Berlin Wall, ten years ago the countries of Central and Eastern Europe embarked in an extraordinary process, that of creating a market economy. And from a more humble viewpoint, ten years ago the EBRD was created to try to support this process. Where do we stand today? And why is anti-corruption action so important?

In ten years, the twenty-seven countries of the region have made tremendous progress. Positive growth has been resumed, many liberalization issues have been decided, a freer trade market has been created, reform of the banking sector has been performed, many privatizations have been implemented; in short, huge progress can be seen everywhere. The progress is not the same everywhere yet; it is clear that Central Europe has made more progress driven by the accession process to the EU. However, the whole region is making progress today, especially after the very strong 1998 crisis which has created a lot of difficulties not only in Russia, but everywhere. So, progress, transition are moving forward very quickly, and we can say today that the region is certainly more sound, more stable than it was a few years ago. In this connection, may I pay tribute to the people of the region because these people have paid a high price. Transition, progress, modernity may bring and do bring hardship, and this was and still continues to be very difficult for some of them. I wish to say here this morning that we need to take this into account and help them.

Corruption, governance? I will not try this morning to build a league table. I will not compare regions of the world, I will not compare countries of the region, I will simply mention the work we have done with the World Bank concerning the situation in the various countries of the region. I will not make a league table, but I will say there are problems, and, of course, there are many problems. What are the key problems as I see them? I think we have to understand where the difficulties are so as to be able to move forward and act. Certainly, the first main obstacle we have seen at the very beginning of the process is the risk of a lack of transparency, the risk of corruption in the privatizations of many companies. This has been certainly the first huge main problem affecting these countries. There are some elements that are linked to this problem; as you know, it is asset-stripping. And, unfortunately, there have been some cases where the behavior was not really transparent in the privatization process, in the ways state assets were shifted to the private sector. The second key point, key area, in my view, concerns all the sectors related to such commodities as oil and gas (and the region is very rich in gas and oil), and also mines. The third difficulty I see is the process of reconstruction where you have a huge flow of money going to some countries, let us talk these days about the Balkans, for instance. You see a risk, a huge risk of misuse of the international money. I would like to mention today a fourth point which is probably new because the countries are moving forward, which is the need to pay more attention to the procurement rules in public questions. This is true at the level of the state, but I say today that this is certainly more true at the level of local authorities. This constitutes a new challenge in all the regions. You see many key questions on the table, probably moving as the transition moves forward, and you see new challenges and new difficulties. Why is this a problem? How do we regard this problem from the EBRD´s point of view? I will tell you later what we are trying to do.

Why is this a problem then? It is certainly a problem for three main reasons. First of all, and you mentioned it a few minutes ago, there is the ethical point of view, and this is very clear. As a public institution we cannot accept corruption and wrongful practices. There is a second reason, too, a more macroeconomic reason. Corruption and a lack of transparency bring misallocations of resources, and in a market economy this is a huge problem. In the case of countries that have to learn how to shift from a centralized economy to a market economy, this question becomes really crucial, as the risk of misallocation of scarce resources can create many difficulties. But, as I have said, there is a third reason which, to a large extent, is as important as ethics. In the countries of the region there is a huge need for investment, these countries are specific, they have not been able to invest during years and years, and there is a lack of investment, both public and private. These countries need to improve their situation rapidly.

How can they do it? Probably by talking to us, but we are not a huge institution, the World Bank is richer than we are. We have some resources, but not at the level of the needs of the countries concerned. There remains only one way to obtain the money in order to improve their situation - to go to the market, to private investors, to raise funds. And there is a rule that is quite obvious - the investors do not like a lack of transparency. They may like high interest rates, but they do not like to take risks. Probably this is the key element, the key motivation through which important public and private entities in our world region can make progress, as far as the questions related to corruption and governance are concerned.

Transparency is key there, totally key. Today you may see that many of these companies try to go to the market, and the reaction of the market, of the Western regulators, of private investors is: "Yes, but disclose information, give information about this, this and this". This is certainly one of the key elements, the reason why I am paying a lot of attention to this point.

What do we do at the EBRD? I want to say only a few words, as I see some of my colleagues here this morning and I am quite sure that during the panels today they will give you many more concrete examples and elements. I would simply like to say that we are a public institution created ten years ago, we use tax-payers´ money, and we have to respect three principles. The first one is sound banking, and it is of key importance, as far as the question we are talking about is concerned. To respect and to be able to respect sound banking principles, meaning no loss, is a crucial element of transparency and understanding of the projects. The second point is additionality. We do not compete with the private sector, we work with the private sector. So maybe you have, Mr. Chairman, the type of coalition you were mentioning there; the additionality clause in the EBRD approach is this type of coalition. We do not compete, we work together, we put our strength together to promote action.

The last point that is important for me is the transition impact. If there is no transition impact, we do not finance. What does this mean in concrete terms? This means that we pay a lot of attention to anti-corruption behavior, but, moreover, to good governance, public and private governance. What are the lessons we may offer? Firstly, you must know that the EBRD has the obligation to invest more than sixty per cent of our own resources in private deals, so we are private, mainly private sector operators. Over the past ten years we have invested more than $17 billion in the region, and because we are additional, we have helped the private sector to come with us, or we have been with the private sector. The total amount of investment we have attracted in the region is more than $60 billion. We are certainly the first institution or private sector investor in the region.

Governance is a key issue for the reasons I have mentioned earlier. What we try to do is perhaps to set rules, but mainly to change behaviors. This is the key word - behavior and implementation. It's a daily commitment to move forward by changing behavior. Speeches are fine, but changing behavior is much more important. How? First, we make very clear and strong integrity checks before doing any kind of business. After ten years, I think we know quite a lot. All of our projects are submitted to conditions, and all the conditions related to transparency are key to us. Accounting standards, respect of internationally agreed accounting standards is one element. Having a member of the EBRD, member of the board of the companies where we have an equity stake to promote governance in the company is another one. When there is a problem, we don't try to find a compromise, we go to court, in order to push forward the legal system and to be sure that there is a response and understanding of what is happening.

We promote procurement rules in the deals we do, not only in the public sector, but we try to do the same in the private sector, and I may say that they agree because it is their protection. The governments agree as well, which is much more important. Of course we promote policy dialogue. We have many discussions with the governments, we have a specific program about law, which we call "Law in Transition" that is related to this issue. I would like to mention a specific element to which we pay a lot of attention, it is the protection of minority shareholders against mainly asset-stripping, for instance. We try to act in various fields.

May I add one more point. It happens that we say no, we do not accept doing a deal with you, we do not accept making a loan to you, we do not accept taking an equity stake in your company because you are not transparent, because you do not behave correctly. Usually we then say we will do it at the moment you do such and so, and we say it in a clear and transparent way. This is the main element through which we can try to move forward. You may feel that I could speak the whole morning about these questions. However, you would find it boring and my time is limited. So, as a concluding remark, I would like to simply address one last point, which is crucial for the Bank.

For us, market economy and democracy are interlinked. This is stipulated in Article 1 of the Bank´s founding rules. We have a political mandate to promote democracy. Democracy - what does it mean? It means transparency, a capacity to criticize, public information, normal disclosure of information, freedom of speech, a possibility to create political parties, free elections. And not only this is important; we make assessments of the situation in each of the countries in the region, and we publish these assessments. You can look at them on the Bank´s web site. I will not mention any countries but in some cases we have concerns. It goes together. And this is really crucial for us.

I will give you one example, by which we try to promote both market economy and democracy. It is the importance we pay to small businesses. The Bank has financed more than 120,000 loans to small businesses in Central and Eastern Europe in the past years. We have put a little less than $1 billion 850 million. This is a lot of money and it has been a huge success. We are paid back in 90.7 percent of the cases. Can you imagine what this means? This means one thing - entrepreneurship does exist in the region. They are very good people, they want to work hard, and they understand what it means. This is really crucial. When we do this we have not only the full support of the authorities, but they even want us to do more. What I mean by this example, which is one element of our activities, is that the capacity to create business and the capacity to be a citizen is the same element - it is transparency. It is the capacity to behave on one´s own.

My last remark is this: When we do this, we are working, and we like to work, with the private sector, which is of key importance, as well as with the public authorities. These authorities have a crucial role to play in improving the business climate and the rules, and in implementing those rules. We need to work with you, we need to work with the NGOs, we need to work with the civil society. Once again, it is impossible for the EBRD to create a market economy without democracy, and democracy goes with transparency. This is the reason, if I may come back to my initial words, why we are very happy that you are in Prague today. Thank you for listening to me.

Frank Vogl:

Thank you so much. You have set a stage for us and we need to dig deeper into understanding that if we are to make the market economy and democracy truly go hand in hand in an age of globalization, we need to understand the rules of the game. Nobody has been more involved, no organization has been more involved in the recent years in struggling to find ways, to find consensus among governments, and to find ways to set a variety of basic rules of the game, or let's call them guidelines at this stage, for globalization than the Organization for Economic Cooperation and Development in Paris. And the leading individual in this effort is Mr. Seiichi Kondo, who is the Deputy Secretary General of the OECD and who has often been assigned some of the toughest jobs that one could possibly imagine, including for example the whole issue of money laundering and offshore tax havens. There is much more to the OECD, as it seeks to be a genuine catalyst for the development of what I consider to be the rules of the game of globalization. To tell us much more about this issue and to put it into context of the conference, I have the great pleasure of calling upon Mr. Kondo. Thank you.

Seiichi Kondo:

Thank you, Frank. Distinguished participants, ladies and gentlemen. I am so delighted to be here in Prague and I would like to thank the organizers for inviting me to address such a large and distinguished audience. The end of the Cold War enabled democracy and market economy to proliferate throughout the world, and globalization accelerated the process. However, in order to ensure the smooth and proper functioning of democracy and market economy, we need a sound international system or framework, not allowing the abuse of free market. We call it global governance.

Global governance is a framework that requires governments to be effective, clean and accountable. Global governance requires companies to be transparent, fair and competitive. This framework should be established and maintained by four major players - governments, business, civil society and international organizations. Governments have a role to play because we need a legal and institutional framework. Business has a role to play because we need to rely on market forces. Civil society has a role to play because our system needs to be accountable. We need international organizations to ensure international harmonization of rules. Today, I would like to talk about the efforts that the OECD is making to help build these framework conditions to ensure that companies are transparent, fair and competitive at the international level. An international organization such as the OECD is not an independent source of power, but it provides a forum, a meeting place so to speak, where economic and social problems can be analyzed, discussed and tackled creatively. Over 30 member governments sharing a commitment to democracy, market economy and human rights have turned to the OECD because it has the will and the capacity to respond quickly and effectively to calls for enhanced cooperation to fight against the abuse of free market. In recent years, the OECD has opened dramatically, and full membership has been granted to six new countries, including our host country today, the Czech Republic. Such an extensive outreach allows a rich policy dialogue with emerging and transition economies. The engagement with civil society is becoming ever broader and deeper.

I will now focus on OECD's three main areas. First, the fight against corruption. The international fight against bribery and corruption has made remarkable progress in a short space of time. The cornerstone of these efforts is the OECD convention, which took effect in 1999 with 34 signatories, all but one of which have now completed the ratification process. The convention requires countries to make the bribery of a foreign public official a criminal offence with effective means of detection, sanctions for non-compliance and procedures for cooperation with other countries. An OECD working group verifies the conformity of implementing legislation and publishes its findings. The group will now examine, country by country, how effectively the legislation is being applied in practice. While the convention focuses on the supply side of the bribery problem, the demand side is also tackled in other ways. The OECD Public Management Committee has identified the institutions, systems, tools and conditions that governments need to promote ethics in the public sector. More broadly, the OECD is working beyond its membership with other international organizations, regional bodies, the private sector and other parts of civil society to help build a culture of fighting corruption and to help others to build the necessary rules.

Second, corporate governance. The OECD principles of corporate governance are only two years old, but have already become the international reference point for dialogue on corporate governance. The principles have been adopted by the financial stability forum as one of the 12 key standards for a sound financial architecture. The OECD is now working in partnership with the World Bank to encourage corporate governance reforms worldwide, mainly through regional round tables in five regions.

Third, responsible corporate behavior. Responding to public concerns, OECD governments in close cooperation with business, trade unions and civil society have drafted guidelines for multinational enterprises and an internationally applicable benchmark for business conduct. The guidelines are voluntary and do not override national law, but help business and civil society by indicating what can reasonably be expected of a reasonable company in such fields as transparency, human rights, environmental protection, consumer interests, competition and taxation. The guidelines and recommendations on bribery are comprehensive and deal with such issues as solicitation, appropriate use of commercial agents, public commitment and transparency in the fight against bribery, management systems, training and political contributions.

We also have a project to prevent criminals from using companies and secret bank accounts to hide dirty money and evade taxes. In conclusion, ladies and gentlemen, I would like to emphasize that the challenge of global governance in today's world can only be met by a flexible, creative and cooperative approach among all stakeholders. The OECD has taken the lead in certain areas including anti-corruption, governance and the standards of responsible behavior among international enterprises and the fight against money laundering and tax havens. All these instruments are open for adhesion by other governments and they all involve an open process of consultation and dialog with non-OECD members, private sector and civil society. Of course, more needs to be done; the effective creation of sound framework conditions for the private sector depend on our further efforts. So, ladies and gentlemen, let us work together and let us fight through.

Frank Vogl:

Thank you very much, Mr. Kondo. Since time is so limited and therefore presentations have to be limited, I hope that many of you will go to the OECD web site and check out on their governance guidelines and the OECD convention against bribery and other such sources to become fully acquainted with what needs to be more broadly understood, supported and basically lobbied for in order to make a change. Now, are all these issues we keep on talking about in terms of making anti-corruption work really valid? Do people get the message? Is there real progress? The World Bank's guru on all this is named Daniel Kaufmann, officially the Senior Manager of the World Bank Institute. Denny, it is a great pleasure to have you here. Thank you.

Daniel Kaufmann:

Thank you, Frank. Thanks for the welcome and invitation to Transparency International, IACC and to Prague. Let me be very frank since you have asked us to be transparent, coming from the World Bank. Yesterday we had a wonderful whole day with seven Latin American countries presenting their very concrete programs that they have been working on for the past six months and some beyond. I am not going to mention all the wonderful things that came up because I would exhaust the seven minutes, but at the end we thought there were two factors still missing, which are a major challenge. One: In some of the countries there is no political will. This is a major challenge. In spite of the fact that some countries have new governments, there is still the political will issue, in contrast to great new examples such as Bolivia and Mexico. And second, the missing pillar: These are countries that would be working in collective action, in great groups on anti-corruption programs. What is the missing link then? It is the private sector. This is an extremely welcome issue. However, you have posed questions I cannot possibly answer in seven minutes. And so, instead, I will quickly go through some data, some slides. I apologize in advance if I go too fast, but all the data will be available on the web and in handouts. Within this context, I will try to debunk a few myths. Let me go through six of them in particular because you asked me that it is very important to change the format of these plenary sessions, to be more debating and to put issues on the table. So let me do just that.

Myth No. 1 is that firms always naturally tend to be competitive; two, their investment climate is basically always government-determined; three, the government policies are always the obstacle to competition; four, the governments discriminate particularly the smallest, micro firms. The implications of all those four myths are that a) one needs to adopt more laws, to deregulate, to de-monopolize, to combat bribery, and implication b) one has to direct more and more help to the smallest firms. While there may be elements of truth in this view, there are significant elements of myth in all of them. This will be the main point of my presentation.

We will start with the joint research and the work we have done, referred to earlier by Mr. Lemierre of the EBRD, in particular with such people as Joel Hellman. There the partnership has been so good in fact that he has moved to the World Bank, where basically we show that many firms are far from being competitive, at least in transition. Taking the rules of the game and the investment climate as given by the government, they shape the investment climate. One can think about the vision of the oligarchs, and so on. Basically, they shape the rules of the game to their advantage.

The privates purchase legislative votes, executive decrees, court decisions, parties through illegal party financing, favors, and so on. To summarize briefly: We have about 24 countries, and about half the countries in transition have become, as we call it, state-captured; the state has been captured by these firms in terms of its parliamentary legislation or the other elements we have defined. Countries such as Ukraine and Russia in the former Soviet Union stand in great contrast to Estonia, Hungary and other countries in Eastern Europe and the Baltics. As a result, these firms receive enormous non-competitive gains and rents in those high-captured economies. This does not benefit the captors in those economies that have not been captured, but in the captured economies they receive enormous gains, private gains, and their incentive is to continue doing so. This is opposed to administrative or petty corruption, where usually for a long time they do not benefit.

Those private gains are obtained at an enormous socio-economic cost to the society as a whole and to the entire private sector as well. Basically, in the high-captured economies, the rate of growth, output of sales and investment are much lower than in those economies that have not been captured by these elite enterprises, and the protection of the property rights is much worse. These are enormous costs originating from the elite firms in the private sector. Nobody gets off the hook in the results seen here. This is late 1999 and we will do this again with the EBRD next year. What we see here is that, on the average, firms with foreign direct investment and multinationals are not behaving any better than the domestic firms. Therefore, this whole notion, or myth, according to which simply getting the FDI in improves governance is not the case, particularly not in the high-captured economies. In the low-captured countries, more market-driven economies as in Eastern Europe are improving governance, but not so in the high-captured economies.

What are the key results ensuing from this? What do we find in terms of moving towards a solution? What are the causes behind state capture? What are the worst aspects leading to state capture? A) partial economic reform, but b) - and this is important - the lack of political competition, the lack of civil liberties. The entire political-civil liberties nexus is very crucial, a fact which can be seen very quickly in this graph. On a more specific, concrete level: In countries with very active competitive business associations, such as Hungary, for instance, there has been much amelioration, mitigation of state capture. The role of business associations comes out clearly as a very important one.

This is not only a problem in transition economies. From the first body of research we now move on to look at other countries. The diagnostics of Peru shows a very similar picture, particularly during the Fujimori era. I will not go through the whole graph, but basically it shows how much the judiciary, the presidential decisions had been purchased by vested elite interest, including drug cartels, economic conglomerates, multinationals, organized crime other than cartels, and so forth. These are very much in contrast with labor unions and professional associations, which, at least in the case of Peru, came out very well. That's an illustration. We are doing the same in Columbia, it is not very different, and in other countries as well. So there is not only a challenge in transition.

Only one minute and fifteen seconds left to discuss another aspect related to the black hole. There is in fact so much interest in this issue nowadays that I do not need to say much more. However, corruption in the banking sector is another crucial aspect where the private sector must be improved. We see enormous variations here, such countries as Iraq, Libya, Syria, Ukraine and Russia are rated by the Economics Intelligence Unit as being at the top in terms of the worst corruption in the banking sector. This is very much in contrast with such countries as Chile and Singapore, which rank on the other extreme. So the real message here is what needs to be focused on. This is very much related to the absence of quality of financial regulations, yet another factor in which we see a very close correlation between financial regulation and its quality and bribery in banking.

One last point before I begin to conclude, another major aspect of the findings in our research, which is broader than just transition economies, is that we have a database on almost 10,000 firms in 80 countries. In terms of the investment climate, it is beginning to show than the notion according to which the smallest firms are always the most discriminated against by the investment climate is being challenged. This discrimination does not only affect the small firms. We tend to forget what we call "the forgotten middle." Middle-sized firms are also greatly discriminated. Arranged in the graph by region, we see the blue which at times sticks out; in many cases the middle-sized firms are as discriminated as the smaller firms. We should therefore not lose sight of the importance of the middle-sized firms in terms of the competitive environment.

My last point is the fourth pillar. I've talked about the competitive sector, the captor sector, the black-hole banking sector. Now we have the unofficial underground sector, which we tend to underestimate in terms of its importance. In countries that have moved in terms of governance and improved governance over time, countries in transition such as Poland, the unofficial, underground economy has been dropping since that transition started, in contrast with other countries in the former Soviet Union. The unofficial economy is yet another aspect that we need to face much more head on. In sum, here are some implications ensuing from this work. First, the corporate sector cannot be one uniform sector; instead we can divide it into four very segmented sectors. One, which is market-oriented, transparent-oriented, honesty-oriented, is represented here. The second one is the captor sector, which has a real interest in capturing the laws, regulations and policies of the state for its own private interest, at the expense of the rest of the economy and the society. The third sector is what we refer to as the black-hole banking sector, and the fourth is the unofficial, underground economy.

Thinking about number one, it is competitive. Then there are the captor sector, black-hole banking and the underground unofficial economy... In this connection, a major challenge exists for our institutions and many others in terms of how to move ahead. Actions to address capture and a major information outreach are necessary. The private sector is beginning to take some initiative in collecting ample information in terms of procurement and other such issues, in disseminating the information and fighting information asymmetry, and in doing so both graft and costs can be reduced. Within this context, TI has very good initiatives pending in some Latin American countries, for instance.

Second, the need to focus much more on the role of business associations and third, political competition. We have already discussed this issue, in which major results have been achieved. In terms of the forgotten middle, we need to focus much more on the middle-sized firms, too, not only on the smallest of the small. Fourth, the issue of collective responsibility, including the responsibility of foreign direct investors. In this connection, the OECD is doing a great job, but more is needed to complement it, to ensure that some of these laws are put into practice and are complemented by real incentives. Also needed are incentives in the private sector in order to achieve better governance in the country that received the investment.

Fifth, the missing link. What are the incentives for private sector involvement in anti-corruption and anti-capture activities? Rather than doing this only by a decree or by law, in the future there has to be a confluence of interests and interest alignment, as this is in the interest of the private sector. The bottom line is joining this interest; this is beginning to happen in some segments, but not sufficiently yet. And the sixth incentive, which is forgotten sometimes, is to reclaim the underground economy. What incentives should be focused on more? These include the provision of a better framework and the reclaiming of underground economy, which in many countries we work with is huge. Thank you.

Frank Vogl:

Mr. Kaufmann, thank you very much. At the very beginning you said that the missing link was the private sector. Well, we are going to try and find out whether the link is really missing, as we now turn to hear a little from the private sector. No emerging market country, apart from China, has attracted as much foreign direct investment in the recent years as Brazil. And few major emerging market countries have made such a determined effort in the recent times to come to grips with the issues of corporate governance and competitive entrepreneurship. It is very important in a conference like this that while we hear from leaders of major multinational corporations from the North, that we also take into account major corporations and emerging corporations in the South. Globalization, after all, involves us all, including all forms of business in all parts of the world. Ricardo Semler is President of Semco Industries of Brazil, a large services company with lots of global links. He will tell us now about whether Mr. Kaufmann is right when he says there is a missing link, or whether indeed business is taking on the corruption challenge.

Ricardo Semler:

Good morning. It has occurred to me as I looked around here that this is not a very democratic conference, as I don't see many corrupt people to defend themselves, and I hope this is not one of the reasons you invited me here.

Recently, we had an issue with a very large Japanese trading company. We were dealing with this company and the director who was dealing with us told us that in order to receive the order we would have to give them a three-percent commission. What kind of commission, we asked. Well, he answered, it will be divided, 1.5 percent goes to me and 1.5 percent to the president. Our people said, we are going to fight this. So we set up a meeting with the president and when they arrived, we said: "Look, we have a very grave accusation to make. These people were trying to sell and insisted that we had to give a commission of 1.5 percent to the director". And he answered: "Yes, and 1.5 percent goes to me". With that the conversation ended and too many conversations have ended for us on the same note over the last few years.

Semco as a company has grown very much; it is now a $200 million company in the services area. We have had several encounters with corruption in Brazil. On three separate occasions we decided - and I think we decided way back and more conceptually - that the advantages of playing along with a corrupt economy (and Brazil was and still is to a large extent a corrupt economy) gave us a lot of opportunities which we decided not to take. In our view, not taking those opportunities has been, and in some respects, will always be a very highly ethical and philosophical decision, which has much to do with the issue of what is worthwhile.

We did a calculation recently. Our people calculated that at $200 million we are about one-third the size of the company we think we would have been if we had accepted to play along with the famous rules. This comes down to some very basic issues of why people are in business at all and why corruption exists at the start. To combat corruption as we do in the sense we combat drugs, for example, means that we are working at the tip of the iceberg. The question is, why is it that there is this tendency for companies to become involved so easily with corruption to begin with. How does one deal with the fundamental issue of how this comes along?

We have come across three cases of corruption: on the municipal, state and federal levels. Each of the three times that these opportunities for corruption came up we decided to be whistleblowers. In each of the three instances we had these people arrested. What followed were long stories and very, very long trials, with one of them taking eleven years to end. We ask ourselves how institutionally we turn out as a company, one way or the other. We recently had a case, three or four weeks ago, with the social security sector in Brazil, where we had an opportunity to sell to the social security services. Our people learned that we were selling to a subcontractor, who in turn was selling to social security. We were therefore not directly involved with corruption, but we knew that the company that was buying from us was indeed paying off people in social security. An internal e-mail went around from that person asking people what they should do, whether they should take the opportunity or not, as this was not an issue of direct corruption. In the end, within a day, a lot of e-mails flew in from the rest of the people, saying that we should decline the opportunity even though it meant a $1.1 million order for us, and this started becoming an institutional issue.

If we go down to the core of the matter, the real question is such: If we are one-third of the size we could be providing we accepted all of this, but at the same time we are a $200 million company and we are happy with the size we are, what is the original goal? Why is it that this is such a big issue? Why are people in business in that sense of the word itself? I participated in a workshop at the Ritz Hotel sometime ago held for one hundred of the world's largest billionaires, hundred people who were all billionaires. My question was: When you had set out for yourselves ten, twenty, fifty years ago to get into business, your goal was to make, let's say, a $10 million company, a $50 million company, or a $100 million company. If all of you are billionaires now, what makes you all go to work on Monday morning? This issue has much more to do with Freud or Jung than it does with Peter Drucker or with Interpol. The fact is that many of these people are in the game as this is how they gratify themselves, this is how they test themselves against the world. There is the issue of a game being played, as to what people do after a certain amount of this has been achieved. If this is true, it is also true that a lot of these people would be willing to close their eyes to certain opportunities that are done in a way we are saying should not be the case. The fact is they are playing a game, there´s a scoreboard out there, and to be bigger makes a big difference and to make more money than someone else makes a difference.

There is the success issue, which is a scoreboard issue for business. This could actually be at the root of much of this, add to it education and culture. This takes a long, long time to change, as it does for example in the case of environmental issues. We are involved, for example, in environmental site remediation. Ten years ago we could not sell anything to anybody because ten years ago the pressure was not there for that kind of environmental issue. The same is true with corruption. It's been accepted, and it's more accepted the younger the companies are in terms of the markets that are forming. Such corruption is a necessary part of business, and you look away from it and say: "Well, what can I do, apparently that's the way things are done". I hear people all the time telling me that it is not possible to survive in business, if you are not willing to look the other way in certain situations.

If we look at what's happened, if we take for example the 200 largest GNPs in the world, we find that today out of those 200 largest GNPs in the world almost 130 would be those of companies and 70 those of countries. I am equating company GNPs and country GNPs, revenues of both sides. Now, the interesting part here is that we are saying democracy has a connection with transparency and that in turn has a connection with corruption. Interestingly, I have never met or seen a democratic company. I don't think such a thing exists. And if there are no democratic companies, and the companies per say are now larger in GNP in terms of quantity, if 130 of the 200 are companies, isn't the world becoming less democratic instead of more? Isn't there an issue with globalization that really has nothing to do with just saying we are now operating in many countries? Where is this democracy and why is it necessary for business as a whole? People will say: "I don't have to run a democratic company or organization, why is it so important?" At the same time in other places of the world as yesterday and the day before, people are being sent around the world to fight and die for democracy. This is a very interesting comparison that, we find, does not apply to us, does not apply to business as a whole.

If you look at it that way, and if you ask what was wrong with a lot of these Soviet and pre-Soviet companies, you will find that much of what was wrong with them, much of what we did not like about them, we find in most of these global companies. What are these? These are central planning, five-year plans run by committees; there is an entire intelligentsia, there are troikas that run the company. What has happened that is so different from what there was before? I think that much of what we have done in terms of displacing the former economic climate and creating a new one is a good reason for understanding why this displacement has left so many people behind. This is why we are asking ourselves constantly why is it that globalization is doing nothing of any importance about the amount of corruption, about the amount of poverty and the bad distribution. There are entire continents that do not exist for global purposes. There are companies that do not care at all if you say: Africa has ceased to exist, or a part of it - this is irrelevant to most multinational companies.

So my question to you at this moment is the following: If the world is changing in that respect, then we are starting to use the right word. We are saying we want to be environmentally correct, we want to be more transparent, and so forth. The question is: What does it take to do that? Does it take more conferences, more Interpol, more verification, more auditing, more monitoring? Or does it effectively take a situation that says: The source of this entire pyramid is in education, it is in a culture that is changing very slowly, and we must be patient about it?

In our outsourcing work - which is one of the things we do, we manage the outsourcing process for a company - we have never taken on a corporate customer, who did not have corruption inside the company. It has never happened to us. It is always one of the things we deal with. Throughout all these years, the private sector has been contaminated so that not only the companies involve themselves in one way or other in corruption, but the amount of companies that are corrupt internally and whose own purchasing departments are corrupt is rising tremendously. This is very difficult to measure if you are doing this countrywide. However, we have determined for our purposes (we did an internal exercise also to determine this question) that one out of every three multinational private companies we tried to sell to involved corruption - the directors, the managers of those companies. We are talking here about giant multinational companies.

The entire issue is in saying that perhaps the private sector is a corruption agent in many places, wherever there is an economic advantage to it. It is also true that you cannot do this without contaminating yourself. There are countries in Europe today, which will allow you to write off legally the expense of bribing somebody in a Third World country. This is a legitimate business expense in Europe, fortunately not in most countries, but in some countries it is. Even if you look around you see some European countries constantly reelecting people who have been accused of corruption, people who have been sentenced for corruption. These people are the new presidents of some European countries. And so, my last point I wish to make to you is this: What does this really involve?

I had an issue recently with an environmental inspection that happened in our company and these people were badly intended. This was a group of people who were ex-police and who were now involved with the environmental inspection authorities. They found that our paint tanks were on the left side whereas on the drawing they should have been on the right side. So they came to us and asked for a bribe, otherwise they would take police action, that is criminal action. In Brazil, the environmental laws have changed very quickly, and as it happens in these cases, they have become very radical very quickly. Perhaps rightly so, but in any case they now constitute very serious offences. Once again we said: Do we blow the whistle here for the fourth time?

We have had altogether eleven people who have been in prison for ten years now. There is no satisfaction in knowing that these people are now in prison, it is a very difficult decision to make. In this case for the first time, the fourth case altogether, I had a two-and-a-half-year old son. These people told me directly: "Look, you have a two-and-a-half-year old son. Are you sure you want to do this?" These are issues that a lot of people have never come across, and when you do come across them, you have a very difficult decision to take. My decision in this case was that we were going to follow the legal procedures and fight the actual criminal indictment that they were going to make, that we were not going to pay them off, but that I also was not going to blow the whistle on these people. I felt I could not take the risk and I could not live with myself in dealing with four or five police people who were known to be extremely violent and who were just telling us that they knew exactly where we walked every day, how my kid walked to school. This is not an easy situation, this is not a heroic issue where I will be the hero forever and say that my greatest wish in life is to be introduced by Frank Vogl as one of the posthumous small photographs that he shows.

So what I am trying to say and the message I would like to leave with you is that I think this whole issue is a cultural issue, an education issue. While combating and working against it is something we need to do, we must remember at the same time what are the three dimensional components of what we are doing as a whole and not forget them in this discussion. We will all be cut with mission statements and credos and all those meaningless statements that have all the right words in them, but anybody knows - and Frank is also in the PR business - that anybody can write up for a company any amount of statements always saying the same thing. If you take any amount of credos all over the world, they will always say that we will make the best product, with the highest quality, for the lowest price, with the happiest people, with the best environment, and with no corruption. You cannot say anything else. Can you say I will be corrupt, but not very much? I will discriminate, but not so that you will notice? There is no option. And so my point is: If there is no option, there must be other issues and so I am inviting you to look at those issues, too. Thank you very much.

Frank Vogl:

Thank you, Ricardo. As I am fearful that other representatives of the private sector are going to say similar things, I am going to change the program. I will ask, as our next speaker, Mr. Patrick Alley of Global Witness. Why not put an NGO in between our business speakers? He is really a brilliant advocate of various causes and Global Witness is what has made many people stop and think about business practices in some of the very poorest countries of the world. I would like to recommend to all of you, because, unfortunately, Patrick's time is going to be short, a brand new book called "A Global Corruption Report". You may learn much more about it at the TI stand outside. It is a fabulous document that the Transparency International will launch next week. It contains not only words of wisdom from Daniel Kaufmann - for there is a section by him in there - but also a very important section by Global Witness, a special report, and I recommend this book to you. Now, we have asked Patrick to do something a little unusual. We have asked him, in a sense, to say: Look, civil society is increasingly visible as protesting globalization, and the evidence is abundant that many multinational corporations are, indeed, the agents of governmental corruption, and the partners, perhaps unwittingly, of weapons dealers, too. Let us not forget corruption in the arms trade, which is so critical in so many areas. However, we have said: "Patrick, let us turn things around. If you were the head of a multinational firm engaged, say, in Angola or similar countries, rather than the representative of Global Witness, what actions would you advocate to ensure that your company acts with integrity and in support of transparency?" Thank you.

Patrick Alley:

Thank you. I would like to open just by saying that at a total worldwide staff of twenty-five people and an annual turnover of around a million dollars we are very much the junior partner in all this, I think. Having said that, it shows the position of civil society, I think we can have a voice, but we are certainly under-resourced perhaps. I would also like to ask Ricardo Semler if I can have the addresses of the millionaires and billionaires at his clubs so I can go to them as a fund-raiser. I think that would be very helpful.

Global Witness seeks to identify the economic agendas that underlie certain conflicts, and particularly where the revenue from natural resources funds these conflicts. We look at states that are often run as businesses where the rights of the investor supersede the rights of the people, and where the resources of the state that should belong to the people are looted and laundered through the global financial system. A lack of transparency is the common denominator, corruption is the common denominator, it creates a environment conducive to conflict. That is what we all have to fight, that is why we are all here.

I have been with Global Witness since the beginning when we looked at the Khmer Rouge timber trade in Cambodia in the mid-1990s through the issues of conflict diamonds in Africa. That kind of research scandals such as those that Eva Joly was very much involved in looking at show that world conflicts, particularly conflicts in sub-Saharan Africa are primarily caused by the scramble for resources. So transparency is a vital tool of peace. Many African governments are aided, either wittingly or through the ethical apathy of multinational companies who are exploiting weaker regulatory systems without the constraints that govern them in their home countries. The war in Uganda has been funded by diamonds on the one side and oil on the other. As for the diamond giant De Beers that we spent many hours, many days, many years looking at, now we commend them for their efforts to produce conflict-free diamonds, but these efforts only came about after the pressure from civil society, from the government. There is no reason at all why they could not have done this v docCreating a Competitive Private Sector Transcript

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