Rio+20 Business Focus: Protecting investments in a sustainable future from corruption

Politicians make the policy. But it’s often left to business to implement it. For this reason RioPlus Business is featuring submissions from the private sector across the globe in the lead up to Rio+20.

The aim is to demonstrate how Sustainable Development is becoming a reality in every continent, country and city.

With billions of dollars in climate finance being mobilised to enable sustainable development projects around the world, the private sector will play a crucial role in ensuring that it is effective. Alice Harrison from anti-corruption NGO Transparency International explains why the future we want is one without bribes.

Low carbon development is not only an existential necessity; given the ambitious transformations in infrastructure and technology required it also offers a huge market with substantial returns.

Huge infrastructure projects are on the horizon as we pursue sustainable development, creating huge opportunities for corruption. (Source: Flickr/JimMedia)

Public coffers are not enough to bear the costs of mitigating and adapting to climate change, so governments will also be looking to stimulate investment in the form of grants, feed-in-tariffs, tax breaks and soft loans. Despite this, many businesses are hesitant to invest. Why?

Corruption risks

In part because of corruption, which blights clean business in many of the countries for which climate finance is destined. Corruption distorts competition, notwithstanding the reputational and legal risks entailed when bribery is exposed, data found to be inflated or falsified, or money siphoned off.

Current enforcement trends mean that companies are also increasingly being held accountable for their supply chains, subsidiaries and equity holdings. Since 2008, 58 companies settling foreign bribery cases with US authorities have paid $64.5 million per case, in total $3.74 billion in penalties, disgorgement, and interest.

Where do the biggest risks lie?

The grand majority of climate finance will be channeled through the construction sector; one of the most corruption-prone industries. It can involve a myriad of contractors and sub-contractors, complicating the tracing of payments and promulgating standards of practice.

With projects often large and unique, it is harder to spot irregular payments made during construction. (Source: Creative Commons/WiliHybrid)

Contracts are also usually large and the projects unique, making them difficult to benchmark for costs and time. Corruption in construction can lead to key infrastructure projects being overpriced and delayed, not to mention sub-standard and even dangerous. If money destined for climate mitigation technology or the infrastructure required to guard us against extreme storms, droughts and floods is lost to corruption, we’re all in serious trouble.

How do we mitigate those risks?

Shying away from climate investment is not the answer. Rather, businesses need to take proactive measures to address governance challenges. Managing risks well will give companies a competitive advantage and a strong reputation; both crucial tenets of sustainable business.

Proofing private investment against loss or reputational damage means adhering to high standards of transparency and accountability, and guarantees that business does business with integrity.

One tried-and-tested corruption deterrent is a Transparency International integrity pact: an agreement between a government agency and all bidders for a public contract. The pact stipulates rights and obligations to the effect that neither side will pay, offer, demand or accept bribes; collude with competitors to obtain a contract; or engage in corruption while executing it. Independent experts monitor the process to ensure compliance throughout.

Integrity in action

Transparencia Mexicana oversaw the contracting of the El Cajón hydropower project. The winning bid was 8.5% less (approximately US$64 million) than the expected price based on previous bidding trends.

When TI Pakistan introduced an integrity pact to the country’s Greater Karachi Water Supply project it was completed ahead of schedule at a total cost US$10 million less than estimated.

In both countries integrity pacts have been made mandatory for national level contracts above a certain threshold.

Benefits of cutting corruption

The pacts pay off. They allow businesses to compete for contracts on a level playing field, knowing that competitors cannot bribe their way into a contract. The agreements also simplify administrative procedures and decrease litigation, and translate to better value for taxpayers’ money, a more hospitable investment climate and increased public support for government and companies alike.

Rio+20 delegations have called on business and industry to show leadership in advancing a green economy. Working with governments and civil society to safeguard climate and development investment against corruption will be a crucial component of fair and effective growth. Ensuring that the green economy is a clean economy is the only way to guarantee that it’s truly sustainable.

Alice Harrison is Communications and Advocacy Coordinator for the Climate Governance Integrity Programme at Transparency International


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