opportunities to obtain market power, for instance because of regulatory intervention or entry restriction. The relationship between competition and corruption is particularly interesting when it comes to infrastructure, because competition is often _for_ rather than within the market. Even competition for infrastructure contracts is often limited, with only a few firms involved in the tender processes. Complicating the calculus is the fact that the decision to corrupt is likely to depend significantly on the perception of the likelihood of corrupt behaviour amongst competitors. The theory predicts more corruption when there is asymmetric information about the way tender rules are being practiced and when the strategies of rivals are hard to observe. A connection between cartel-behaviour and corruption is another implication and also supported empirically (Søreide, 2008); collusion (including bid-rigging) is easier to carry out if supported by corruption.<sup>14</sup> The pilot survey included questions about collusion. Respondents’ attitudes differed significantly in the two countries. What we usually consider bid-rigging strategies were defended by several respondents in one of the countries, suggesting that such practices may occur in wide scales in some environments in the utility sectors.

Factors described by theory as important to understand firms’ incentives to influence through corruption are the size of obtainable rents, regulatory choice, incentive designs, and procurement or privatization-related issues. It is nevertheless difficult to come to general conclusions from the industrial organization literature regarding corruption in utilities since utility industries vary significantly in their economic characteristics, as we have seen in Chapter 2. Electricity and Water concessions often involve long-term pricing agreements and subsidy payments to private providers --both factors may increase the opportunities for corruption (Shleifer and Vishny, 1994). On the other hand, the significant profits which can accrue to holders of mobile spectrum licences create a large incentive to corrupt during the license award process. The role of interconnection pricing on competitiveness and profits is another opportunity to extract rents, especially given that it is an extremely complex process frequently carried out in secrecy.<sup>15</sup> Different deal structures –from management contracts to full privatization—carry significantly different sunk and up-front costs, again altering the potential payoffs to different corrupt acts.

# _iii. At the sector level and regulation theory_

The extent and impact of (grand) corruption will depend on the nature of regulation, and of regulatory institutions, in a number of ways. An important proposal, based on regulation theory, relates to the independence of regulatory institutions. If not sufficiently independent, politicians might influence regulatory decisions, for populist benefits, clear-cut corruption or for patronage (i.e. to secure benefits to clan members, elite groups and other supporters). Of course, independent regulation may merely change the structure rather than the extent of corrupt payments unless the regulatory body is transparent, well managed and under effective oversight. Regardless, ensuring the independence of regulatory bodies has proven difficult in many countries, since politicians will hold the monopoly on jurisdiction, and regulatory independence will depend on political benevolence. According to one of the respondents interviewed for this survey, the financial situation of a formally independent regulatory body may depend heavily on how the institution’s decisions have corresponded to political signals.

> 14 The risk of losing cartel profits may explain the low propensity among firms to respond proactively if losing contracts because competitors are involved in corruption; firms may not want to risk the potential of obtaining future cartel profits.

> 15 It is also relevant to ask how the form of influence on regulators might depend on the organization of regulation and the prioritizing of political goals. Consumer surplus has not always been priority number one, see Auriol (2007) for discussion.

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