in regulating the industry –overseeing the quality and safety of the construction process and outputs.

# **The Extent and Diverse Nature of Corruption in Construction**

Because the industry involves complex, non-standard production processes that foster asymmetric information stocks between clients and providers, and because of its many close ties to government, it is perhaps unsurprising that construction is frequently held up as one of the most corrupt industries worldwide. Cases of corruption uncovered in construction are legion. The Deputy Mayor of Beijing in charge of urban development and Olympic projects was removed from his post in 2006 along with nine vice-mayors because of allegations of corruption related to construction. In the same year an audit of 21 Chinese highway construction projects with a combined value of over $605 million found that as much as a third of that amount had been misappropriated by officials.<sup>4</sup> Corruption has been uncovered in World Bank-supported projects in road construction in Vietnam and Indonesia, as well as a large dam project in Lesotho. On the regulatory side, in the Philippines, 57 percent of new construction is illegal and in Egypt the figure might reach 90 percent (World Bank, 2006).

Looking at business perceptions, Transparency International’s 15 country poll ranked construction as the most corrupt industry (Figure 2).<sup>5</sup> Similarly, a Control Risks survey of international companies which asked if they had lost a bid in the past year because a competitor paid a bribe found that public works/construction firms were most likely to suggest this had occurred (Figure 3).

Survey evidence of local and international firms at the country level suggest once more that construction is an industry particularly prone to corruption –both related to government contracting and to circumvent regulation. The Business Environment and Enterprise Performance Survey (BEEPS) covers over 4,000 firms in 22 transition countries and was conducted for the first time in 1999-2000.<sup>6</sup> In 1999, the median firm in BEEPS reported spending one to two percent of its revenues on unofficial payments to public officials.<sup>7</sup> At the aggregate level, across the region, the average firm suggested that it spent 28 percent of this sum to deal with licenses, health and fire inspections and 15 percent on securing government contracts.<sup>8</sup> Figures were broadly similar for construction, but there were a number of notable differences (see Tables 1 and 2).

Construction firms represented in BEEPS have significantly larger ‘bribe budgets’ than the average firm, and they bribe more often. Of their total bribe budget a larger percentage goes to gain government contracts –an average of 23 percent for construction compared to 15 percent for all firms in the sample (see Figure 4 for data on percentage of

> 4 _International Construction_ July-August 2006 p. 6. 5 http://www.transparency.org/policy_research/surveys_indices/global/bpi.

> 6 http://info.worldbank.org/governance/beeps/.

> 7 This amongst firms which reported a percentage and did not answer “don’t know.” 8 These are unweighted country average responses.

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