Sub-saharan africa next global economic powerhouse?
Fraud and corruption are damaging the economies of many African countries. A recent report by the African Union publicised by Thabo Mbeki alleged that illicit financial outflows were costing $50billion every year as governments and multinational companies engage in fraudulent schemes aimed at avoiding tax payments to some of the world’s poorest countries.
This figure may be an understatement. Procurement fraud alone will be somewhere in the region of $30-50billion when one takes into account the size of the sub-Saharan economy – at about $1.6trillion a year – and the high level of corruption in many countries, according to Transparency International.
Procurement fraud
Despite its huge scale, the outflow of funds will often be the least of the problems resulting from procurement fraud. Most fraud takes place after contracts have been let. Few organisations put sufficient effort into managing contracts and that gives contractors opportunities to cut corners and save money. Those managing the contracts may turn a blind eye and some will receive some form of payment or gift for doing so. Most may not be aware that it is happening or have the resources or expertise to prevent it.
So, the cost to African economies will be much greater than the headline figure of $50billion. When I represented the Chartered Institute of Purchasing and Supply at the inauguration of CIPS, Zambia, in 2004, the then finance
minister stated that fraud and corruption damaged the Zambian economy even more than malaria. How could such a statement be possible? Take roads, for example. It is possible to increase profitability greatly through the use of substandard materials or reducing quantities used. The difference may become apparent only when the surface starts to disintegrate a year after construction. The impact on the economy and people served by the road can be huge, damaging job prospects and ruining livelihoods. Why is it fraud? Simple, one is paying for one thing and getting something worth much less, a much cheaper product that may not be fit for purpose.
Construction delays can be equally damaging to economies, when companies winning the contract move resources onto other contracts and produce a wealth of excuses for delays.
Procurement fraud and corruption kill. When in Kuala Lumpur, Malaysia, last year, a bridge being constructed for a new city metro railway line. Two workers were killed due to health and safety rules agreed in the contract apparently not being observed.
Procurement fraud in private business
Corruption and procurement fraud take place in all industries and can be widespread in the public sector. However, none is confined to the public sector. Private sector businesses can be badly hit, driving some out of business and hitting profits badly in others. In an increasingly competitive global economy, tackling procurement fraud in one’s own organisation and of one’s suppliers can make the difference being a winner or a loser. Nations need winners!
The motivation for fraud can vary considerably. Sometimes it is senior management who want to boost profitability; sometimes it may be middle management who have hard profit targets to hit and find it easier to do so by using cheaper and sub-standard materials or who may collude with the supplier and share the proceeds. Or, they may use bribery to win business. Sometimes it can be lazy or dishonest workers, an example of which I came across recently in the UK. Also, sub-contractors may be cheating the main contractor.
Notwithstanding the high level of fraud after contracts are let, fraud and corruption in the letting of contracts must not be ignored. There are several well known cases where contracts were let purely so someone could receive ‘commission’. There was no other rational reason for the contracts. In other instances, corruption can distort competition. Contracts are let to those prepared to pay the biggest bribes, as opposed to those most capable of providing the goods, services and works that are needed.
Cutting corners
It is not all the fault of suppliers and contractors. How do they cope with late payment, sometimes waiting two years because the money is not available to pay them? Simple, they have to cut back on specifications, health and safety and quantities of materials – and in paying their sub-contractors – who in turn have to delay paying their employees or only part pay them. Otherwise they would go bankrupt. Late payment gives suppliers and contractors an excuse not to perform to specification. So, late payment, the curse of so many African countries, damages whole supply chains and economies. Would it be too controversial to suggest that global corporations frequently get paid more quickly than national and local suppliers?
There are various ways to tackle the issue of procurement fraud and include training, awareness of the risk and potential impact, understanding how fraud is committed, understanding the motivations, understanding the areas of risk, the most effective internal controls to combat procurement fraud, creating an anti-fraud culture in one’s own organisation and that of one’s suppliers, creating a first class procurement operation, applying the best terms and conditions of contract, recognising behavioural and financial red flags and taking stern action against anyone who commits fraud. Governments must also find ways to pay suppliers promptly and stamp out any excuse for fraud. All these elements must be part of an anti-fraud plan. Implement it and the benefits will be much less fraud and corruption, much better quality infrastructure, better public services and lower priced contracts.
So, what is the real impact of procurement corruption and fraud on sub-Saharan Africa? Some of the money will stay in the economy. However, for reasons stated above, the damage to economies will far outweigh the amount of fraud. The growth of sub-Saharan African economies sounds good, typically 5% per annum. However, analysis of World Bank, Transparency International and Association of Certified Fraud Examiners’ information would suggest that annual economic growth in some countries could be 10 per cent higher than now if fraud was effectively combated.
A key deterrent to public sector fraud is a free press, able to highlight instances. Many sub-Saharan African countries do have a free press and there are encouraging signs that procurement fraud is being taken seriously .Nations like South Africa are taking radical steps to improve the quality of public procurement. The prize for nations and businesses that combat it effectively is enormous. If sub-Saharan Africa gets to grips with the issue, it could be the next global economic powerhouse.
The writer is an official of Harley Reed
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