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Markets & Geopolitics

The cost of corruption in construction

Corruption has always plagued the construction sector. Why, and how can we fight it?

24 November 2021

It is no secret that the construction and infrastructure sector is particularly vulnerable to corruption.[1] The last time Transparency International included industry sectors in its Bribe Payers Index (2011), construction ranked first across all types of bribery (petty, grand, and private).[2]

But corruption does not stop at bribery; the Global Infrastructure Anti-Corruption Centre (GIACC) includes extortion, fraud, cartels, abuse of power, embezzlement, and money laundering in its definition.[3] And although the problem is more significant in developing countries, developed ones are certainly not immune to it. A 2016 survey by the Chartered Institute of Building (CIOB) revealed that nearly half of the respondents felt corruption to be commonplace in the UK. Over one-third of respondents stated that they had been offered a bribe at least once.[4] According to another survey carried out in 2020 by YouGov, 97% of middle-market UK construction companies admitted feeling at risk of breaching anti-money laundering and bribery legislation.[5]

But why is this sector so prone to corruption? The GIACC points to the inherent features of construction projects as the main reason. Especially in large projects, the complex structure of contractors and subcontractors creates opportunities for bribery and extortion at every contract. As construction proceeds on a project, works are concealed under successive layers (e.g. masonry is covered by cladding). This provides an opportunity to overstate material quantities and/or hide poorly-executed works in exchange for a bribe. The involvement of governmental authorities also creates chances for corruption. Public officials can favour a project for personal benefits, or simply request a ‘gift’ from a company to expedite a planning permission or award a contract. Moreover, the sector generally lacks transparency and effective anti-corruption measures, and is slow to enact changes. Project funding sources and execution costs are not disclosed due to commercial sensitivity, which makes it difficult to detect potential fraudulent practices. All these factors create an environment where corruption is difficult to prevent and uncover.[6]

97% of middle-market UK construction companies admitted feeling at risk of breaching anti-money laundering and bribery legislation

Corruption can occur at every stage of a project, from inception to completion. The choice of what to build and where to build it can be influenced by the private interests of public officials and landowners, especially where planning instruments are weak or easily amended. A fictional but very poignant example is the acclaimed 1963 film Le mani sulla citta’ (Hands over the city). Set in Naples, Italy, the film follows a real estate developer who uses his political leverage to hide dangerous works, override the city masterplan and start a profitable suburban development. Six decades later, not much has changed in the links between development planning, corruption and politics in Naples;[7] or Milan, for that matter.[8] After the project inception, the stages of financing, design, tendering and execution also present several opportunities for money laundering, unfair competition, price cartels, over-specification of materials and works, record falsification, and other fraudulent practices.[9]

Some people in the sector may see a bribe as the ‘cost of doing business’. However, corruption has significant negative impacts across the industry and beyond, from the provision of unsafe and unhealthy buildings to the discouragement of foreign investment.[10] Exact quantification of the overall losses to corruption in construction is nearly impossible. The very nature of the practice makes it difficult to uncover every instance of corruption and determine its full impact. Estimates range from 10% to 30% of project cost,[11] and even up to 45% in developing countries.[12] Some data is available on specific practices and projects. For example, UK construction firms are estimated to lose over £1.8 billion annually due to invoice frauds.[13] In Ethiopia, the national Government saved US$3.5 million and six months of works on the construction of a rural road. This was thanks to a project revision prompted by the local branch of the Construction Sector Transparency Initiative (CoST). Without significant interventions, by 2030 up to US$5 trillion could be lost annually to corruption in construction across the world.[14]

Without significant interventions, by 2030 up to US$5 trillion could be lost annually to corruption in construction across the world.

So, what can be done to start fighting corruption in construction and avoid such losses? The first step, according to the GIACC, is fully acknowledging the extent of the problem and that no project, stakeholder or organisation can be considered immune to it. Secondly, both public and private organisations must develop and implement anti-corruption programmes, which include specific measures and training to establish how people can avoid corruption as well as detect it and take action.[15] For example, ISO 37001 is an anti-bribery management system standard designed to be used by any type of organisation to prevent bribery as well as to identify and deal with any occurrence of bribery. Changes in the way construction contracts are awarded can also reduce the likelihood of corruption. In recent years the UK has chosen to move away from lowest price bidding. Evidence showed that instead of delivering cost savings, this method often led to increased time and costs as well as poor quality of execution. Contractors compete to out-do each other with the lowest bid, resulting in unrealistically low prices. This in turn pushes them to deliver low quality works and engage in fraudulent practices in order to make profits.[16]

Globally the fight against corruption in construction is led by the CoST initiative, launched in 2012 and rapidly growing. CoST supports public, private and not-for-profit organisations in the disclosure and analysis of infrastructure project data to identify opportunities and occurrences of corruption, as in the Ethiopian example cited earlier. CoST is now present in 15 countries across four continents and trains thousands of people annually on the use of infrastructure data. This has enabled data disclosure on 38,514 projects worldwide.[17]

Fighting corruption in the construction sector is essential for a sustainable future, and not just for the sector itself. The full impact of corruption in construction projects is clearly felt across the economy. It is evident in the poor provision of services and infrastructure necessary for development. Growing mistrust, inequality, labour exploitation and a lack of opportunities are also evident. And throughout the natural environment, ecosystems often pay the ultimate price for the mismanagement of construction waste.