GPM First
Chapter 13 of The Project Manager’s Guide to Purchasing (978-0-5660-8692-2) by Garth Ward

Other Influences

13

The political system, the cultural norms and the state of development of a country all influence the manner in which the purchasing of goods and services deviates from the theoretical ethical process. Nevertheless, it is up to the project manager to set and maintain the ethical standards on a project.

Of course, corruption is most likely when buying a standard product, where price and delivery are the only factors to be considered in making the buying decision. There are two reasons for this. Firstly, if the technical merits of the tenderer’s proposals differ, either because of the solutions offered or the standard of design, then to prefer the wrong tender could result in the purchase of inferior materials or equipment. A more serious matter and one that is less likely to occur than if all the offerings were technically equal (for example with standard materials). Secondly, if there are both technical and commercial aspects to the purchase, then the decision is a joint one between the technical and commercial people. Consequently, any funny business must involve collusion.

Politics

Naturally government policy, the United Nations, the World Bank and other lending banks, the European Union Directives and other official organizations’ rules will be primary determinants in awarding contracts, whether for goods or services.

Dealing with contracts at the highest levels of government can be a hazardous business:

1[60]ONE of Britain’s richest men has launched a record £200m legal claim against the French oil company Elf in the high court.

Nadhmi Auchi, an Iraqi-born billionaire, started the action after being convicted of corruption in France, an outcome he insists was caused by the actions of Elf.

A French court will this week rule on an appeal launched by Auchi against his conviction but the billionaire claims that his relationship with the multinational oil company has caused him huge financial damage.

The case centres on a deal involving Elf, then state owned, to buy a Kuwaiti oil refinery from Auchi during the first Gulf war.

Elf asked Auchi to buy the refinery – which the Kuwaiti government had to sell within days after being invaded by Iraq – and then sell it on to the French oil company after getting approval for the deal from the EU.

French investigators claim that Auchi paid bribes to Elf. The billionaire says any payments were legal and proper and were made at the behest of a French Government entity. He was personally thanked by President Mitterrand for his role in the deal.

 

Organizations representing government tend to change their minds or change the rules. On a project in Algeria we discussed (with the owner client) all the taxes and duties that would have to be paid. They suggested that we talk to the tax authorities, which we did. We then followed the rules and regulations that they said applied, only to be presented with a substantial fine towards the end of the project. Naturally we protested to the tax authority, pointing out that we had followed everything that they had advised us to do. They agreed with us but said, ‘We were wrong,’ and further, ‘because you have not paid the right duty on time, not only do you have to pay the duty, but we also have to fine you an additional 100 per cent!’

In the very early days of the development of the North Sea oil industry the company I was working for was the leading contender for a major design contract. However, we were told by the client, at the very last moment, that we could not be awarded the contract because we were owned by an American company. That Christmas we gave a 51 per cent present to a British company, and the new joint venture signed the contract.

In South Africa a Black Economic Empowerment (also known as BEE) policy of preferential procurement takes place whereby all contracts are awarded to ‘black’ businesses. The average size of contracts handled by black economic empowerment companies is £5m and some companies can handle projects up to £55m. However, it is acceptable to facilitate joint ventures and partnerships with established non-compliant companies. So that ‘white’ companies are only likely to be awarded contracts when the work involved is too big for the local black companies. In one advertised request2[61]for Expressions of Interest, 10 points were ‘allocated to the black economic empowerment credentials of the bidder measured in terms of the Codes of Good Practice issued by the National Department of Trade and Industry of the Government… .’ The purpose of black economic empowerment procurement is to create an economy where all businesses compete on an equal footing regardless of the status of the owners.

3[62]Over the next decade or so, the playing fields are going to be levelled and companies won’t be able to rely on their BEE status to secure business. Companies will be looking for service providers that can deliver, full stop. Instead of waiting for this to happen, we are focusing on the future, now. Delivery is the number one attribute we strive for, along with honesty, commitment and passion. Our BEE status may open doors for us, but it is not what will keep the doors open. Once you have been given an opportunity you better be able to prove that you can do the job.

Facilitation Payments

On the whole it is the relationship that matters most. People like to do business with people who they know and like and who understand their way of doing business. All things being equal it is the quality of the relationship that will influence the decision-making process. To quote from the Holyrood Inquiry, ‘Although their tender bid was not the lowest one it was crucial that a company that the client and Design team felt comfortable with was selected for this most crucial of roles in the Project.

Corporate entertainment is not offered or accepted as a bribe, but as a means of promoting good relations and securing access. It is difficult to refuse to see a salesperson if you were at a rugby match with them last month. All the same, there are limits which are difficult to define and, perhaps, easy to cross. Consequently, it is when people prey on our more basic instincts that one should be wary.

The predicament starts with gratuities paid as appreciation for services already rendered. They are paid after the performance of the service, but, in a continuing relationship, it is also in expectation of something better in the future. This escalates into a generous gratuity in order to influence the relationship and is on the cusp of changing from appreciation of a service to a bribe to obtain some additional service other than the norm. In the days of traditional restaurant cars on trains my mother always sought out the attendant and ‘tipped’ him to let her know when the meal was ready to be served. At the appropriate time the attendant would come and tell her, and we would be shown to the seats especially reserved for us. Thus, is it still a gratuity if a crisp note is slipped into the hand of the Maitre d’Hôtel, before the event, in order to reserve that prime table in the window where you want to celebrate your wedding anniversary? Surely it has become a bribe once a payment of this nature is made in advance. In the 1980s in Indonesia it was often necessary to pay a bribe, euphemistically called a Facilitating Payment in order to pay a bill.

The Italians could be quite subtle in the way that they crossed the line and bought clients’ goodwill with facilitation payments, or should I say bribes. Overseas missions are regarded as perks to personnel in less developed countries, and are often apportioned out as rewards or bonuses for good work. In order to reduce foreign exchange costs a per diem is paid rather than expenses. Knowing this, the Italian vendor pleads urgent need for a client specialist to visit the vendor for every little problem. The client visitors are met, transported, dined and accommodated, and so on. The vendor then quietly picks up the bills. UK vendors, on the other hand, always preferred to visit the client and see the sights. On the rare occasions when the client is invited to the UK they are booked into expensive hotels and left to pay their own bills.

Bribery and Corruption

In business transactions the equivalent of the gratuity is the Christmas gift made as a goodwill gesture for the orders or contracts received during the year. But it is also in expectation of enhancing relationships, and influencing the recipient to look more favourably on the giver. For project, and particularly purchasing, personnel this can easily get out of control and, by the 1970s in the UK, this culture was out of control.

I remember one contractor presenting me, as project manager, with a whole series of extras that I could not understand. The contractor explained to me in a hushed voice that these were for resurfacing the private access road to Mr G’s (my boss’s) mother’s house. I told the contractor, firmly, that I would not authorize them and that they should present the bill to the person who had asked for the work. Other experiences demonstrated that he was, and had been, benefiting from ‘favours’ from contractors over a number of years – I do not believe that he was ever brought to book.

The Aberdeen based company, Aggreko, that rents out power generators has become one of the major suppliers of energy to Kenya, Uganda and Rwanda4[63]. Their chief executive said ‘…that the African governments, contrary to popular perception, were excellent to do business with. “We have more bad debts and more stolen equipment from within the M25 than we do from Africa.”’

Bribery seems to be endemic in most countries. There are certainly cultures where people, who have achieved positions of power, are expected to use their positions and influence for their own benefit.

As a contractor, buying goods and services and letting contracts in an Afro-Caribbean environment, you will need a local partner. You will also need the services of someone of influence – a Sponsor, to help you win the main contract work. The sponsor will find a local partner for you who will have a 25 per cent stake in the project. For, say, a US$250m project their loss will be capped at US$7m and their profit capped at US$5m. The local partner’s involvement will be restricted to providing one site representative (who, incidentally, will do absolutely nothing for the duration of the project). The sponsor will not require any commission or fee for their advice and influence. However, the sponsor’s wife will own a services company and her company will want the opportunity to match the lowest price of any tenders submitted. This process will operate for up to an overall limit of US$5m worth of orders. Accordingly, the wife’s services company is presented with the lowest tender in order to match the price. The services company then says to the local company, ‘You will not win this contract unless you can reduce your price by 5 per cent.’ The local company agrees. The wife’s services company matches the tender price and passes on the work to the local company at the 5 per cent lower price. Whilst one might be critical of this process it has to be acknowledged that when operated ‘properly’ projects get completed on time. The alternative is for governments to spend hundreds of thousands and millions of dollars for no results.

Using ones position for ones own benefit might be seen by the, possibly, more arrogant business person in the West as only applying to less developed societies. I believe it is alive and well in, for example, Italy and other parts of Europe.

5[64]Corporate Germany was in the dock last week when a former Volkswagen boss was convicted of bribery. [The] former personnel director… shuffled his way across a cobbled yard to a courthouse in Brunswick to confess to bribery and corruption on a grand scale.

At the precise moment Hartz stood before the court, in Munich the supervisory board chairman of the engineering giant Siemens was… apologising for another corruption scandal – the worst in German corporate history. …

It was the moment Germans began to ask themselves who else is guilty. How deeply ingrained is institutionalised corruption? Who let them get away with it for so long?…

‘In the past, cases of corruption in a company were more frequently covered up or played down. Nowadays there is more public awareness and people are more sensitive to the issue.’ said Peter von Blomberg of Transparancy International, a group that fights corruption around the world.

As indicated above, what might be argued as simple facilitation payments to low paid officials can easily escalate to bribery and corruption on a grand scale. Consequently, it was a breath of fresh air when Exxon wrote to their suppliers and contractors in the early 1980s saying in effect, ‘Please do not send us gifts at Xmas. However we are happy to exchange diaries and calendars.’

This fresh approach, together with awareness of the problem and better procedures has, hopefully, eliminated the worst excesses at the lower ranks of an organization; however, it seems to be worse than ever at senior levels.

The Dutch anti-cartel watchdog the Nederlandse Mededingingsautoriteit (Nma) fined 344 civil engineering and infrastructure contractors £162 million for price fixing and market-sharing behaviour.6[65]

The initial Nma investigation which resulted in fines totalling € 100 million, revealed that contractors, by coordinating their bids, had increased the cost of building a major tunnel near Schipol airport by 8 per cent. …

Britain’s OFT [Office of Fair Trading] is watching the Nma investigation, in particular its success in encouraging 140 companies to act as whistleblowers. Companies that voluntarily provided information will have their fines reduced by up to 50 per cent.

The Office of Fair Trading said that there was rampant bid rigging among construction companies tendering for public sector contracts.7[66]

A large amount of evidence of collusion… was provided by whistleblowers hoping to escape or minimise punishment by cooperating with the OFT.

…some building firms had paid money to rival companies to persuade them to stay out of bidding for contracts. In other cases, construction companies were operating a so-called ‘slate’ system, in effect secretly dividing up contracts among themselves.

‘We consider such arrangements are likely to meet the dishonesty test as set in the criminal jurisprudence,’ [said the director of cartel investigations at the OFT].

He said that even cases of ‘cover bidding’, although not regarded as particularly sinister by many in the industry, still breached the Companies Act. Cover bidding is the common practice of firms putting in an uncompetitive bid to ensure that they stay on the tender list for future contracts rather than with any intention of winning business.

…The Competition Act 1998 prohibits agreements, practices and conduct that have a damaging effect on competition in Britain.

The Taiwanese Chinese were very easy to deal with in the 1980s, easier than most UK contractors. Where a continuing relationship existed they expected to recoup a loss on one contract by charging a bit more on the next. However:

8[67]The sad fact is that the [mainland] Chinese system today is almost incompatible with honesty – almost everybody is at least a little bit dirty.’… here is some of his advice ‘Once you get below the level of the big multinationals doing large deals, China becomes a swamp.’…To be fair to McGregor, he says there are honest Chinese firms and honest officials, high and low, but his 20 pages on the details of official and business corruption are followed by barely one on how to function honestly … Although McGregor says occasionally that not all Chinese are corrupt and many companies ‘insist on high ethical standards’, overall he warns businessmen to keep a tight hand on their wallets.

 

In Korea, copies of competing contractors’ tenders were easily available to the competitors. In Thailand, matters were not as bad, but one could not rely on anything being as it seemed. The following project example in Thailand9[68] describes more convoluted relationships than the more straightforward Afro-Caribbean example above.

Again the client, (in this case an owner client) had a local (40 per cent participation) partner. However, the local partner formed a joint venture with a Korean company to tender for the construction work that was part of a main contractor’s (Davy McKee) tender for the whole project. The project manager soon realized that anything that was said to the local Thai partner was passed on to the company (Davy McKee) tendering for the main contract. Consequently, the project manager made sure that nothing about any of the tenders was ever discussed with the local partner until his final report and recommendation.

The project manager received a few messages from companies that were tendering for equipment saying that Davy McKee believed that they had more influence on the awarding of contracts than the project manager. As a result, when he recommended that a contractor other than Davy McKee be awarded the main contract, all hell let loose.

By containing information the project manager was able to obtain the agreement of the project’s joint venture board (ICI and local partner), because the local partner’s representatives were caught by surprise, assuming that the construction contract was in the bag. The local company then pressurized the ICI business manager to instruct the project manager to re-tender the contract on the spurious grounds that Davy McKee had not been treated fairly. They did not believe that an employee could refuse an order (in Thailand this would be unthinkable). The project manager refused and resigned from the project. The ICI Engineering Director said if Roy Whittaker was not doing the project, ICI Engineering was not doing the project. Then the ICI Deputy Chairman said that if Roy Whittaker was not doing the project, then ICI would not do the project, even if it had already been sanctioned by ICI. Now that is management support! So the project was cancelled.

In 1985 the Al Yamamah (meaning the dove) arms deal, worth £43bn, was signed between the British and Saudi Arabian Governments. The contract included a £60m fund to pay various expenses, such as: buying property and limousines, providing security, arranging visits to London/Cannes/Milan, paying TV bills and so on. This fund was run by a travel agent acting for BAE Systems. BAE consistently denied any wrongdoing and was quoted as saying on BBC Newsnight:

On December 14th 2006 the Attorney General announced that the Director of the Serious Fraud Office had decided to discontinue that part of the investigation which related to the Kingdom of Saudi Arabia.

 

This was a contract with a culture where ‘gift giving’ is an accepted part of doing business. However, there was a culture clash with the British where ‘gifts and personal expenses’ are seen as bribes, and as such, against the law.

The fundamental issue is that if the bribe is big enough, ‘We will cancel our latest £10 billion defence contract for Eurofighters unless you drop your investigation into alleged bribery,’ even governments will succumb. The Attorney General’s10[69] explanation was shocking, ‘It has been necessary to balance the rule of law against the wider public interest.’ What kind of message (from the top) does it give the business community? It says to me that there are issues that are regarded as more important, such as winning the next contract or that the client can be persuaded with the right influence. The issue continues to rumble on:

11[70]The UK is covertly trying to oust the head of the world’s main anti-bribery watchdog to prevent criticism of ministers and Britain’s biggest arms company, BAE,…

The effort to remove [him] comes as his organization has stepped up its investigation into the British government’s decision to kill off a major inquiry into allegations that BAE paid massive bribes to land Saudi arms deals.

British diplomats are seeking to remove … a Swiss legal expert who chairs the anti-corruption watchdog of the Organisation for Economic Cooperation and Development (OECD) claiming he is too outspoken.

…A source at the OECD added, ‘The UK’s representatives were sent to Paris to emasculate the [watchdog] and ensure they did not say anything publicly. They failed and were not pleased. They behaved in a manner that would not have been out of place in a boxing ring.’

…It also rebuked the UK for failing to keep its promise to modernise its inadequate corruption laws, under which no one has yet been prosecuted.

The UK also faces a legal challenge in London. Two campaign groups, the anti-corruption group The Corner House and the Campaign Against the Arms Trade, filed detailed pleadings last week alleging that Britain had broken the treaty banning corrupt payments by companies to foreign politicians and officials.

 

Controlling the Money Flow

A project manager working in one of the states of the former Soviet Union summed matters up correctly, ‘There is no doubt that there are countries where the “brown bag culture” exists. Consequently, the project manager needs to be involved in the purchasing process if they are to stop the money running out of the door.’

Arabs in general, and Egyptians in particular, are naturally of a suspicious nature 12[71]. The chief executive of a company providing engineering and procurement services in Egypt believed that sellers of goods and services employed the most capable and expensive experts to deceive buyers. Sellers hire, reward and promote their personnel on the basis of the relationship they have with someone in the potential buyer’s employment. Consequently, this CEO operated on the basis that persons involved in the buying and selling of goods and services may be dishonest or, if not, they were potentially corruptible.

The Ford Motor Company, for example, would rotate buyers from one specialist component buying role to a different specialist component buying role in order to prevent too cosy a relationship from developing.

As a result, this Egyptian CEO believed it was essential to have a well defined and detailed process for controlling the procurement of goods and services. Key components of this process being;

  1. The management of a Technical Tender Opening Committee.

    and

  2. A Commercial Tender Opening Committee.

 

In his book ‘Project Management in the Process Industries’13[72] Roy Whittaker states that the project manager must resist, to the point of resignation, pressure to behave unfairly. The price of freedom from corruption is eternal vigilance and Roy Whittaker’s rules for dealing with it are:

Rule 1:

Assure staff that you are not going to preside over a corrupt organization, and that you take it personally.

Rule 2:

Avoid temptation. Ensure that every order needs two signatures so that corrupt behaviour also requires collusion.

Rule 3:

Investigate every rumour diligently and make it known that you are doing so.

Rule 4:

Make it very clear to staff that the taking of bribes means instant dismissal.

 

He states that he never got to the bottom of any rumour but believes that he frightened a few people on the way! Where he was sure that there was something not quite right, but could not prove it, he had no compunction in calling in the offending supplier and telling them that they would get no further orders, and why.

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