Posts Tagged ‘Augusta-Westland’

“Bribes are necessary” – Berlusconi; but he does hit a nerve.

February 18, 2013

Bunga-bunga Berlusconi is at it again!

But he is describing a reality which applies not only in 3rd world and developing countries but also in the EU and Japan and the rest of the “developed” world.

This time he was reacting to a string of corruption cases in Italy culminating in the arrest of the Finmeccanica CEO Giuseppe Orsi for involvement in bribes allegedly paid to Indian government officials to secure a helicopter contract. This follows ENI’s CEO Paolo Scaroni being investigated for alleged bribes paid by its Saipem subsidiary to win contracts in Algeria.

From the FT:

Former prime minister Silvio Berlusconi has defended the need for bribery in winning contracts for Italy’s multinationals, as politicians campaigning in general elections have been forced to respond to a welter of corruption scandals revolving around the nexus of politics and business.

“Bribes are a phenomenon that exists and it’s useless to deny the existence of these necessary situations when you are negotiating with third world countries and regimes,” Mr Berlusconi, leader of a centre-right coalition and seeking his fourth stint in office, said on Thursday.

“These are not crimes,” said Mr Berlusconi, describing payments as “commissions”. He also defended state-controlled energy group Eni, whose chief executive Paolo Scaroni is under investigation for alleged bribes paid by its Saipem subsidiary to win contracts in Algeria. Mr Scaroni denies the allegations.

Corruption generally takes two forms:

  1. According to rule: Where a bribe is paid for preferential treatment  in an otherwise lawful process (i.e. to be preferred over a competitor, to have an application approved “out of turn”  or generally for the facilitation of a lawful process in favour of the briber)
  2. Against the rule: Where a consideration is provided to obtain some service that the receiver is not legally authorised to provide (i.e. to a judge for a favourable judgement or to a policeman to not do his bounden duty or to a Professor to pass a failing student).

For both the cases above of Finmeccanica and ENI, the corruption alleged is primarily of the “According to Rule” type. In the first Finmeccanica’s subsidiary Augusta-Westland apparently payed bribes totalling some €51 million to first have specifications altered so that they could bid and then paid bribes for preferential evaluation during technical trials where the trials themselves were tailored to suit their product. The value of the helicopter contract is about €480 million. In the ENI case, CEO Scaroni apparently arranged to pay some €197 million through a Hong Kong company who then paid bribes to Algerian officials to win Sonatrach and other Algerian contracts for their Saipem subsidiary. The contract values add up to some €8.5 billion.

In the Finmeccanica case the “bribes” make up some 10.6% of the contract value whereas for the ENI case the alleged bribes amount to some 2.4% of the contract value. This difference is itself interesting. Profit margins in energy contracts (oil and gas pipelines or equipment or power plants and power equipment)  are generally significantly lower than in defence contracts. Certainly in the power industry – from my own experience – “consultancy” and “agent” contracts – always ostensibly for the supply of specific services – were considered to be at an “acceptable” and justifiable level if they amounted to less than than about 3% of the contract value in a contract with a profit margin of something less than 10% and typically around 7 – 8%. This suggests to me that the helicopter contract probably has a true profit margin of around 25% with a visible margin of around 15% after paying the “commissions” and “software consultancy contracts” of around 10%.

This is bad enough but there is a particular kind of case where I am a little less certain of what the correct and ethical course of action is. I have seen many cases where the “bribe” is effectively structured as a kind of ” private tax” applying to whoever the winner is. A sort of level playing field as regards bribes.

It is made clear to all bidders that the bidder with the lowest visible evaluated price will win. But it is also made clear – privately – to all bidders that there is a minimum “commission” payment  – usually expressed as a percentage – which will apply. The bidder who makes the best (highest) private bid above this minimum also receives the largest amount of “support” during the evaluation procedure  to be able to declare his bid L1 (lowest evaluated price). The highest bribe-bidder does not necessarily win if his product/bid are not quite good enough to also achieve the lowest evaluated price.

The real question for a CEO then becomes:
“Should I decline to bid and jeopardise jobs – and profits – at my own factories, or join the prevailing game and pay the lowest possible bribe I can?”

And by the way – it is not only 3rd world and developing countries where this dilemma appears. And anybody who thinks this does not happen every day in the EU is living in a fantasy. Not least in the area of public procurement.

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