Imagine instead that the bidder agreed a contract price of $1 million, but used insufficient and substandard materials to build the road, spending only $800,000 on construction and pocketing the remaining $200,000. This reduces the road’s traffic capacity so that yearly economic returns fall by a quarter. It also shortens the useful life of the road to five years. This would reduce the overall ERR to 15 percent. The same financial level of corruption has a considerably larger economic impact in this case, reducing the ERR by 15 percent rather than 4 percent.

What if construction firms had used $200,000 to pay off legislators to divert money from operations and maintenance funds for the construction of this road, and recouped their expenditure through overbidding or poor construction? At this point, with the new road project sucking up resources from maintenance of existing roads, reducing traffic capacities and road life across the network, economic rates of return might turn negative.

In short, the nature of corruption can have a significant impact on the economic damage caused by that corruption, even if the financial losses are the same size. Bribery payments which are made to deliver quality projects and services at inflated prices may be far less damaging than corrupt activities which impact the quality of delivery or the type of projects undertaken.

Benjamin Olken’s (2004) experiment in Indonesia, monitoring corruption in road construction, provides a real-world example. In the case study by Olken, nearly all of the corruption took the form of missing quantities, not price mark-ups. The prices that project managers reported paying for goods were the prices actually paid. Project managers made corrupt incomes by purchasing lower quantities or stealing construction materials. Olken trials two approaches to the reduction of corruption in road-building -- extending project audits and encouraging greater community participation. In both cases, the cost in terms of money and time of the anti-corruption interventions is larger than the financial cost saving from reduced theft of materials and wages by corrupt officials. In other words, using a purely financial metric of the benefits of anti-corruption activities based on the cost of the activity and the size of the theft suggests that the best approach is no approach –it isn’t worth the cost of trying to reduce corruption.

Taking a broader view of the impact of corruption suggests a markedly different conclusion, however. Olken estimates that a marginal dollar of materials stolen from a road project reduces the discounted benefits from the project by $3.41 because of the shorter life of the road when built with insufficient material. When accounting for the reduced value of the road due to corruption, the net benefit of both anti-corruption interventions becomes positive. The fully-costed $500 expenditure on an audit produces gross economic benefits of $1,155, for a net benefit of $655, for example.

At the national level, the recent rural investment climate survey in Indonesia reported that a growing percentage of the country’s road network is falling into disrepair. This is in part because of a considerable and growing misallocation of financing from maintenance to construction. 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 17