High-level corruption

In the troubled and mismanaged economies, as the squeeze gets tightened, it is rather predictable, that

unscrupulous political bosses and their rent-seeking cronies double down to skim the last few billions before everything comes crashing down. Generally, in these countries, there exists a nexus between the political leadership and wheeler-dealer business elites; a relationship built on the convergence of interests. The perpetuation of the political power of the political class in return enable their monied cronies to milk the state coffer, by the commission, such as backdoor access to state contracts and by omission, such as through extensive and ad hoc tax concessions tailor-made to the cronies.

Corruption is not one country’s problem. It exists in many forms. The vested interests of special interest groups are advanced through both ‘ legal’ and illegal means. For instance, influence peddling in the United States through extensive and expensive lobbying by special interest groups does in all but name amount to grand corruption or high-level corruption. That is corruption that pervades the highest levels of government, engendering major abuses of power.

However, in countries, where political leadership is unrestrained by checks and balances, corruption takes an increasingly sinister form. As the leadership is unchecked by the state’s independent mechanisms, so is corruption. As the economy is further squeezed due to consistent mismanagement and plundering, the nexus between the political hierarchy and their wheeler-dealing cronies inversely strengthens. Effectively, a corrupt oligarchy that was once an extension of the political leadership now becomes an extension of the state itself. State policies are restructured to enhance the interests of this corrupt few. Their existence and their pervasive influence not only become normalized; it gets institutionalized.

The fallout is dire. Some of the misgoverned South American states have been reduced to narco- states by an ever-enlarging partnership between the political leadership and drug kingpins. Recently, the ex-president of Honduras was arrested and is facing extradition to the United States over charges of drug trafficking. His brother is already serving time in prison in America for similar charges. The nephews of Venezuela’s first lady is also extradited to the United States and convicted for drug trafficking and is serving a sentence. First Lady, Cilia Flores is also indicted for narco-terrorism and drug trafficking and her husband, Nicolas Maduro for plundering the state wealth.

Sometimes, states use the regime-aligned wheeler-dealers to circumvent international sanctions, as Iran did in the past to evade the US sanctions. Iran used billionaire businessman Babak Zanjani to channel its oil revenue to circumvent the US sanctio ns and later found their henchmen has have embezzled money owed to the state through black market oil exports. He was sentenced to death.

Sri Lanka has sadly stooped to a level where high-level corruption is not just unchecked, is it institutionalized. High-level corruption is the most pervasive form of corruption where the state policies are changed to align with the interests of special and privileged groups at the expense of the public. This creates a major disjuncture between the government policies and the public interest and often results in large scale plunder of state wealth.
It is rich that the latest allegation of high-level corruption is being made by a key development partner, China, whose high profile Chinese loan-driven infrastructure deals with the government itself had long been lacking transparency.

China’s State-owned the Metallurgical Corporation of China (MCC) Ltd, a Fortune 500 company has alleged that the tender for the construction of the Central Expressway Project’s (CEP -03) Rambukkana to Galagedera section, for which there were only two bidders, had been awarded to a local company for 164 billion rupees more than as quoted by the MCC. MCC has alleged that the relevant authorities have only reviewed the local company›s financial proposal. The local company is a consortium of local contractors. Writing to President Gotabaya Rajapaksa, the MCC argues that the total cost for the Government of Sri Lanka for 15 years (@ Rs 200 per US dollar) – of the bid by LIDC (local consortium) is Rs 374.4 billion whilst that of the MCC (with discount) is Rs 210 billion. The difference is a whopping Rs 164 billion.

"Sri Lanka’s current dire economic conditions further foster the opportunity for wheeler-dealing. The government’s unusual eagerness to pay off sovereign bonds against net negative foreign reserves in the guise of maintaining non-existent creditworthiness itself smells fishy"

While empowering the local industry is salutary, massive price differences raise grave concerns. The entire episode smacks of yet another case of rent-seeking crony capitalism. The government had not yet commented on the allegations, though the involvement of a Chinese state firm, might compel for a reappraisal of the tender. However, one can guess the motives; patronage networks ought to be well-greased as the government would be compelled to go for local government elections sooner or later.
Another instance reveals the extent of normalization of the corruption and entrenchment of the racketeers within the state.

As our sister newspaper Sunday Times revealed, the individual who has been picked to be the chairman of the proposed state-owned oil and gas exploration company, Lanka National Petroleum Company (LNP) has been investigated by Britain’s official Insolvency Service which found he had failed to maintain and preserve adequate accounting records of a company, and Britain’s Secretary of State for Business Innovation has barred him from acting as a director of a company for six years from June 21, 2016.
A person with a disqualification order cannot act as a director of a company in Britain; take part, directly or indirectly, in the promotion, formation or management of a company or limited liability partnership; or be a receiver of a company’s property.

This points to another problem: the emphasis on sycophantic loyalty over integrity and tangible qualifications and experience. That may explain why much of the State-owned enterprises are run by half-baked nincompoops - an aspiring and meritocratic state would have opted for a transparent and competitive hiring process to pick the best individuals, local and foreign, based on sheer skills and potential. Still, bringing in a crook to run the newly formed state company is a new low.

Sri Lanka’s dire economic conditions create permissive conditions for wheeler-dealing. While the current economic crisis had been in the making over decades under successive governments, Gotabaya Rajapaksa expedited the downfall with a series of decisions. In retrospect, some of these decisions smack the result of influence peddling and therefore high-level corruption.

Consider the following:

He kicked off his term by announcing extensive tax concessions, fulfilling an election promise, which effectively cost the government revenue to the tune of 1.5 per cent of the GDP. However, the reduction of VAT from 15 per cent to 8 per cent had a little practical effect. Inflation increased by 14 per cent in January from the previous month alone.
However, a section of the local business class, many of whom were financiers of his election campaign extensively benefited from reduced income tax. Extensive tax cuts worsened already tricky public finances, even before the economic fallout of the Covid-19 took the toll on the economy.

Certain other ad hoc tax concessions of the government were strangely timed to favour the state-aligned businessmen. For instance, in what was later known as the Sugar scam, the government overnight cut import tax from Rs 50 per Kg to 25 cents, when one particular trader, who is known to be a key finanicer of the Rajapaksas had imported large quantities of sugar. The whole episode cost the government Rs 15.6 billion in lost tax revenue.
In another instance, the increase of tax on ceramic ware and floor tiles in the guise of fostering local industry only resulted in shortage and doubling of prices as the few local ventures milked the opportunity, rather than increasing the production.

Sri Lanka’s current dire economic conditions further foster the opportunity for wheeler-dealing. The government’s unusual eagerness to pay off sovereign bonds against net negative foreign reserves in the guise of maintaining non-existent creditworthiness itself smells fishy. No rational explanation exists, except a behind the scene understanding between the regime leaders and the bondholders, many of whom bought it at over 50 per cent discount in the secondary market.

As the country is in the middle of a power crisis due to the inability to pay for oil imports, it may be another sector that one should keep an eye on for the next mega scam.
To a certain extent, plight in Sri Lanka resembles the South African experience of state capture under ex-president Zuma. We might not yet be there, but, our economic conditions are direr and the integrity of the state is in a steady fall. Even the 6.9 million, no matter how gullible, who voted for the change would not have expected this in their worst dreams!

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