Perceptions Index averaged 3.6, compared to 2.4 in countries with above average costs – suggesting higher costs in countries perceived to be more corrupt (Kenny, 2007).<sup>8</sup> Theft of materials and outputs is an additional economic cost of corruption. In Indonesia, a physical audit of roads built under the oversight of village heads uncovered ‘missing materials’ worth 24 percent of total expenditures (Olken, 2004). In Bangladesh and Orissa, in India, leakage due to illegal connections or underbilling accounts for as much as 30 percent of generated power (Gulati and Rao, 2006). Similarly, Davis (2004) suggests that unaccounted for water makes up 35 percent of total flows in India. Utilities are also saddled with the cost of staff in place purely to extract rents. Overstaffing in public utilities can be significant, as can bribe payments to obtain ‘ghost’ employment positions (Castalia, 2004).

Consumers pay additional bribes for connections, raising the final cost of infrastructure services. The average firm in enterprise surveys of Eastern Europe and Central Asia spends 11 percent of its bribe budget on facilitating connections to utilities, for example (Kenny, 2006). Davis (2004) used a survey approach to estimate that the average speed payment or bribe made to get connected to piped water in India works out at $2.64 per legal customer. Davis also reports on the widespread practice of bribing for falsifying meter-reading, which reduces the sustainability of service provision.

But the larger impact of corruption extends beyond inflated prices and staffing and the financial cost of theft. In the case of the Indonesian roads project, for example, each dollar’s worth of stolen materials reduced returns to the project by $3.41, because the poor construction which resulted significantly reduced road quality and life. Again, in the Dabhol power project in India, Enron’s $20m in payments for what was euphemistically described as the ‘education and project development process’ led to the construction of a power plant that is financially unsustainable to run, at a cost of around $3 billion (Kenny, 2007, see Box 1 for a discussion of the health impacts of corruption in water).

As the Enron case suggests, failures of governance are often connected to mistargeted spending. In Indonesia, at the start of the 1990s, road maintenance accounted for about 47 percent of the central government grants to districts for roads. By the end of the decade this had dropped to 15 percent. Expenditures should be more than 17 times their current level to maintain the existing road stock in good condition (Kenny, 2006). There is anecdotal evidence connecting this fall in maintenance expenditure to the greater opportunities for rent-seeking presented by new construction.

Finally, bribes to regulators can lead to the provision of low-quality services or overgenerous contract terms. Construction-related permitting appears to be a regulatory area particularly prone to corruption, and this can carry a high human cost (Kenny, 2007). In 1999, more than half of all buildings in Turkey failed to comply with construction

> 8 A regression analysis suggests that lower corruption is significantly associated with lower costs in this sample, a result weakly robust to the inclusion of GDP –see Kenny (2007) for more details.

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