State Contracts, Corruption and the way forward (5 April 07)

State Contracts, Corruption and the way forward By Abhisit Vejjajiva 5 April 2007

  State Contracts, Corruption and the way forward By Abhisit Vejjajiva 5 April 2007

As all eyes are focusing on current anti-corruption efforts, most of the attention is on how successful the authorities will be in bringing the alleged perpetrators to justice. In any case, it is clear that all the responsible agencies including the Assets Examination Committee (AEC), the National Counter Corruption Commission (NCCC) and the State Audit Commission (SAC) have been working overtime as well as against time to conclude their tasks in a swift and thorough manner.

The efforts of the above agencies are important in order to uphold justice as well as to deter future politicians from engaging in fraudulent activities. However, apprehending corrupt politicians is only one part of the solution. In order to fully protect the public interest, the current administration will also need to find ways to seek compensation for the damages that have been made in the recent past. Equally important, the administration urgently needs to overhaul the governments private public contract system. Besides increasing the cost and reducing the quality of public services, manipulation of private public contracts have become a significant channel for public officers to abuse power.

The following quick survey of some private public contracts which have made the headlines reveal the extent of the damages and corruption from which the country has suffered:

- problems pertaining to concessions which may be invalidated due to improper practices, such as ones involving the on-line lottery system and King Power International

- problems pertaining to inflated prices such the purchasing of the CTX scanners and fire trucks

- problems pertaining to contracts which are currently in dispute, such as contracts involving the Expressway and Rapid Transit Authority of Thailand (ETA), TOT and True Corp., as well as the now defunct ITV.

- problems pertaining to contracts where the interest of state or that of the public was not upheld, such as the contract with Bangkok Mass Transit System (BTS)

For many of the above cases, no easy resolution has been found. For some cases, such as the one involving ITV, the end is no where in sight.

A serious reevaluation of private public contract processes will be vital to political and administrative reform in our country as well as ensuring a more transparent system and better services that would do justice to all taxpayers and service users.

The nature of the problem with private public contracts can be categorized as follows:

1. Process and approach of drafting contracts: In 1992 an effort was made under the helm of the first Anand Panyarachun administration to ensure transparency and care in the approval of projects and the drafting of state contracts by passing the Act on Private Sector Participation in Government Operations of 1992. The Act has required that projects be subjected to the stringent scrutiny of various relevant government agencies. Despite these efforts, there have been many attempts to evade public scrutiny, such techniques include:

- Dividing contracts into smaller sub-contracts with values of less than one billion baht, as the Act only covers contracts with a value of one billion baht or more.

- Misrepresenting the nature of the relationship of the parties involved by reporting partners as contractors or service providers, thereby bypassing the Act.

Moreover, many contracts include complicated clauses that may even be linked to foreign jurisdictions, involving many layers of agreements, tied loans or aid. A case in point is the agreement of understanding (AOU) between the Ministry of Interior and the Austrian government for the fire truck contract with the Bangkok Metropolitan Authority (BMA) obliged the latter to open a letter of credit (L/C) even though the BMA felt the contract should at least be renegotiated.

2. Interests of the state agency and the public may not coincide: Although it is widely believed that contracts are agreements between the signing parties, one has to recognize that contracts that are signed with the state inevitably involve the public interest because ultimately the public are the benefactors or users of the agreement. In many cases, these contracts may actually run contrary to the interest of the public, as in contracts which involve profit sharing agreements or when the public are unfairly charged for a service or in instances when the actions of the authorities negatively affect the end users (such as with ITVs blackout).

3. Supervising contracts: It is normal that unforeseen circumstances force changes upon an agreement as when the BTS was prohibited to use Lumpini Park, when the ETA was unable to appropriate land on schedule, or when the prepaid system for mobile phones was introduced causing DTAC (who complained that it could not feasibly pay access charges) and AIS (who didnt have to pay such charges!) to reduce the revenue shares of the state. Such changes may arise from unforeseen circumstances but at times they are cases of policy corruption. In most circumstances however, the public were kept in the dark about how and why contracts have been amended, yet they had to bear the burden of costs from the amended contracts.

4. Resolving disputes: Presently, most contract disputes end up using an arbitration process. The arbitrators usually consist of one state representative, one private sector representative and one neutral representative. With few exceptions, the decision of the arbitration process almost always favors the private sector and the decision is subsequently endorsed by the courts. Only when additional concerns are taken into account are these decisions overturned. Examples of this include the ITV case where the arbitration process had decided that ITVs fines should be reduced but the decision was later overruled by the Administrative Court and the ETA scandal where the Court of Justice overruled a decision on the basis that the contract had been fraudulent from the very beginning. As for the TOT and fire truck cases, the former also resorted to an arbitration process even though one member on the panel has conflict of interests, the latter would, by contract, have to go to arbitration abroad. 

5. Investigating corruption charges and seeking settlement: A guilty verdict does not automatically ensure that justice is served; the settlement and compensation process may prove to be an even bigger obstacle. In terms of seeking compensation, there is still no end in sight in the ITV case. In the CTX scanner case, when the U.S. authorities discovered that there were irregularities in the contract, the parties involved resorted to drafting a new contract for purchasing new scanners at the same inflated prices. In the fire truck scandal, the public prosecutors office has yet to rule whether the contract can be terminated. Nevertheless, in order to minimize the risk of being counter-sued, the Department of Special Investigation (DSI) would have to reveal any incriminating evidence it had reportedly claimed to have had on the part of the company. Alternatively, the Ministry of Foreign Affairs would have to open dialogue with the U.S. company which has taken over the previous company to reveal what they had found in the accounting books to have warranted the dismissal of the companys former senior executives. The above needs to be done in a swift manner in order to enable the BMA to terminate this contract.

Many times we hear that corruption investigations are merely a part of manipulative political games. In reality, regardless of the motives - acts of corruption prove to be an enormous economic, social and political burden. Any effective solution must take into consideration how to best protect the interests of the general public at all stages from the drafting of the contract to the investigations of corruption. Here are a few suggestions.

1. Amend the Act on Private Sector Participation in Government Operations of 1992, by closing all loopholes. As previously stated, despite its flaws, the spirit of the Act should be upheld. What the current administration needs to do is to close any loopholes and to pass an amended version of the Act. Alternatively, the government may even choose to introduce a new bill altogether to better regulate private public contracts. Such measures would go a long way to prevent problems in the future.

2. Set up Independent Regulators to monitor the quality of public services in order to protect the public interest (not those of the state agency). The need for this is urgent as more private companies (including privatized ones) replace the state in public service provision.

3. Review the use of the arbitration process for state contracts.  Past experiences prove that such a system is often biased against the public interest.

4. Establish a process to deal with contracts after the conclusion of investigations. Uncovering acts of corruption should not be the be-all and end-all of the process. There has to be a well-defined follow up process in order to resolve the issue/dispute in such a way as to continue and improve services and prevent future problems from recurring.

Many remain hesitantly hopeful that the AEC can achieve all its goals in the remaining timeframe. Unfortunately, it is clear that the sheer amount of corruption charges that have accumulated in recent years will require more than six months to resolve. Many of these pending cases will surely outlive the AEC. It is high time that all parties learn from the expensive lessons of the past to create a better system for the future.

(Abhisit Vejjajiva is the author of Kian Rat-tam-manoon Yang Rai Mai Took Cheek [How to write a lasting Constitution] and leader of the Democrat Party.)