gas pipeline (Camisea) has a minimum revenue guarantee for the service provision. The guarantee is financed through a fee included in electricity tariff —assuming that those who consume electricity benefited the most from cheaper natural gas in power production. No taxpayer money is involved in the payment. If private agendas in politics are a concern, this mechanism would help limit the risk of corruption and reduce potential biases in sector decisions at the government level—particularly those that could reduce commitment to the revenue guarantee.<sup>37</sup>

# **3.4. Corruption: Maximizing personal wealth illegally**

While the empirical evidence for political corruption is scarce, the incentives and potential impacts of such criminal acts when they happen are more predictable. Moreover, it might be difficult to single out corruption as the explanatory factor behind a given weakness in sector performance. By intuition, corruption will affect performance differently than the other agendas discussed, including decisions about market structure, privatization, and modes of service provision. It is particularly likely that corruption in sector governance will weaken the function of sector oversight systems.<sup>38</sup> Despite the data difficulties, there is a growing volume of empirical evidence of correlations between corruption and performance in the utility sector.<sup>39</sup> However, most results describe corruption at the bureaucratic level, often referred to as “petty corruption” (for an overview, see Clarke and Xu, 2002; Kenny 2006, Dal Bó and Rossi, 2007). One of the most thorough surveys of corruption, by Hellman et al., (2000), finds that petty corruption and political corruption tend to coexist. Other empirical studies point at the links between general perceptions of corruption and sector performance. According to Estache (2006a) corruption reduces sector performance in all the utility sectors. The impacts of political and bureaucratic corruption are difficult to separate, however.

Political corruption is related to industry-friendliness and other dimensions of rent-seeking. Even if few cases come to the surface, there is enough evidence to know that there are politicians in most countries who would accept payments or other personal benefits by steering a political decision in a certain direction.<sup>40</sup> For developed countries as much as for developing countries, press accounts relate cases where politicians have benefitted personally from decisions made in relation to infrastructure projects, whether at the construction phase or through renegotiation during the operations phase of the projects. From an economic perspective, the question if corruption has actually taken place may appear irrelevant since nonoptimal solutions—whatever their underlying causes—are what obstructs welfareimprovements.

Even if there are grey zones between corruption and lobbying, however, there are conceptual differences between legal and illegal influence. In contrast to legal lobbying, both parties to the deal benefit, and besides, a corrupt deal is usually secret.<sup>41</sup> Corruption entails an exchange of benefits; a political decision is traded for something of value to the politician in his or her personal sphere. The fact that a bribe benefits the politician personally implies that it can be of miniscule value compared to the possible consequences of an unfavorable decision for the society. These values are of different scales and cannot necessarily be compared. The bribe nevertheless compensates for the politician’s cost of deviating from what is welfare-enhancing—and can even incentivize decisions that clearly are harmful to society. As a result, the consequences for choices in sector governance can be more severe in the case of political

> 37 See World Bank (2010).

> 38 Kenny and Soreide (2008) provide a literature review of political corruption in infrastructure and discuss empirical estimates of the magnitude of the problem. See also Kenny (2007).

> 39 Estache. (2006a).

> 40 For information about cases or corruption more generally, see U.S. Securities and Exchange Commission: <u>http://www.sec.gov/; UNICORN: www.againstcorruption.org; Transparency International: www.transparency.org; and U4</u> Anti-corruption Resource Centre: <u>www.u4.no, for example.</u>

> 41 Party contributions may result in benefits for individual politicians. In those cases, the difference between lobbying and corruption can be blurred (Harstad and Svensson, 2008).

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