$45M lost to bribes for ‘cartel’ backed by govt officials

Corrupted to the core—and entirely—by a “cartel” of kickback-takers with support from the highest levels of the Philippine government.

In gist, this is the damning conclusion of the World Bank’s anti-corruption unit, the powerful and dreaded Department of Institutional Integrity (INT) regarding the bank-funded National Road Improvement and Management Project-1 (NRIMP-1).

According to the department, “the entire NRIMP-1 Project has been corrupted,” and had put “at least $30 [million to] $45 million of the entire $150-million loan at risk,” or lost to “a cartel” of contractors, bureaucrats, politicians. Two witnesses said bribes were also “shared” with “relevant local media and non-government organizations . . . to avoid bad publicity.”

The cartel has been “institutionalized and has operated with impunity for at least a decade, possibly longer,” on account of the “systemic corruption and bid rigging” in the Philippine public works sector.

Even worse, “evidence suggests [that] the cartel may enjoy support at the highest levels of the Government of the Philippines, including several officials of the DPWH [Department of Public Works and Highways] and even reaching the husband of the President [Gloria Arroyo] herself.”

“Ultimately,” said the Department of Institutional Integrity, “the cartel harmed development itself—NRIMP funds were not disbursed because of the fraud and corruption, and the roads were not rehabilitated with the development funds allocated to this purpose.”

60 witnesses, piles of docs

The Department of Institutional Integrity said its investigation—which eventually implicated 16 individuals and had the unit’s acting director Johannes Zutt recommending sanctions against 17 companies—involved 60 separate witness interviews and the evaluation of hundreds of documents.

“Despite fears that they risked their physical and economic well-being,” the department said, “over a dozen witnesses confirmed the existence of the cartel and provided details on its practices.”

By the department’s reckoning, “a syndicate made up of contractors and corrupt officials in the DPWH had organized and had been operating a cartel to control road projects at least as early as 1998.”

But “Filipino politicians later took a managing role in the organization,” while public works officials “arranged for contracts to be awarded to particular contractors in exchange for bribes and kickbacks,” said the Department of Institutional Integrity.

With the cartel’s operation, it continued, “the entire system operated [and may continue to operate, with respect to other contracts . . .] under ‘a gentlemen’s agreement,’ with implicit understanding that those who violate the agreement will be denied the prospect of winning future contracts.”

The cartel provided “the illusion of competition—the appearance of a free market [that] was entirely simulated,” the Department of Institutional Integrity said.

According to the department report signed by Zutt, “The evidence is sufficient for a determination that it is more likely than not that the respondents, with the active cooperation of numerous officials of the Government of the Philippines, participated in an institutionalized cartel replete with collusive tendering, bid rigging, price fixing, and the routine payment of bribes and kickbacks.”

In the 260-page report on the findings dated March 20, 2008, Zutt also recommended sanctions against a Filipino contractor and 17 construction companies that joined the three rounds of project biddings.

(A separate 230-page Part II of the Department of Institutional Integrity report enrols the “Record of Interviews” that the investigators conducted with 54 named witnesses from April 2003 to November 2006, in the Philippines, Japan and South Korea.)

‘Affirmative deception’

Thirteen of the 17 firms were put under the category of respondents who “either refused to cooperate with the Bank’s investigation or affirmatively misled the INT.”

Such “affirmative deception” of the Bank and “obstruction of its investigative mission should be an a priori disqualifying circumstance from doing future business with the Bank.”

These 13 companies are:

Cavite Ideal International Construction and Development Corp., based in Pasay City;

China Road & Bridge Corp, a state-owned firm based in Hong Kong;

China State Construction Engineering Corp., a state-owned firm based in Beijing;

China Wu Yi Co. Ltd., a state-owned firm based in Fuzhou City;

CM Pancho Construction Inc. in Quezon City;

Daewoo Engineering & Construction Co. Ltd., based in Seoul, South Korea;

Dongsung Construction Co. Ltd., based in Gyeongham, South Korea;

EC de Luna Construction Corp. and Eduardo de Luna, San Juan City;

EEI Corp., Quezon City;

Hanjin Heavy Industries & Construction Corp., based in Seoul, South Korea;

Italian-Thai Development Public Co. Inc., based in Bangkok, Thailand;

Sammi Construction Co. Ltd., based in Busan, South Korea; and

Shinsung Corporation General Contractors and Engineers, based in Kangnam-Gu, South Korea

Five of the 17 respondents were judged to be “affiliated with the organizers of the cartel also [and] should receive enhanced sanctions as they are the perpetrators of fraudulent and corrupt practices.” These five respondents, the department asserted, “had the greatest extent of corrupt relationships with government officials, directed the submission of fraudulent bids, and controlled the fraudulent distribution of contract awards.” The five are:

China Geo-Engineering Corp. based in Beijing;

China Road & Bridge Corp.;

China State Construction Engineering Corp.;

China Wu Yi Co. Ltd.;

EC de Luna Construction Corp. and Eduardo de Luna.

Open secret

The witnesses who spoke with the Department of Institutional Integrity, including “multiple cartel participants and government officials,” described the “collusive and corrupt practices surrounding these contracts as an ‘open secret’ and said the bribery the cartel managed was known in the Philippines as ‘standard operating procedure.’”

The report exposed the modus operandi of the cartel:

“The cartel was aided by officials within the Project Implementation Unit, the Philippine DPWH, which disqualified uncooperative bidders without basis before formal bids could be placed.”

“Cartel managers would anoint contract winners in advance of bid submission and would designate losing bidders, who were compensated to cover their costs in bidding.”

“Cartel managers told bribers what to bid, days before the bid submission date, down ‘to the last peso.’”

“Cartel backers thereafter redrafted their unit bid prices to comport with cartel-mandated total bid amounts, frequently 20 [percent to] 30 percent in excess of estimates.”

“The prearranged bidding was made all the more evident when, to the final round of bidding in 2006, an anonymous informant provided investigators with advance notice of the correct outcome of the third round of bidding before the bid opening had occurred.”

Besides interviewing 60 witnesses, the Department of Institutional Integrity said it conducted “in-depth analysis of the three rounds of bidding” and established that “bids in all rounds showed abnormally high and unexplained unit and total costs.”

This bids analysis yielded, the department said, the following findings:

“Bids bore lockstep relations to engineer’s estimates [i.e., one round’s bids were 31 percent, 32 percent, 33 percent and 34 percent above the estimate].”

“Bids contained numerous, large calculation errors suggesting last-minute revisions pursuant to cartel instructions—one bid contained an error in excess of US$3.6 million.”

“Two bids on a US$26 million total contract, with widely disparate subtotals, totalled to values only US$31 apart.”

The lowest bids investigated, the report continued, “were routinely 20 [percent to] 30 percent above cost estimates, threatening the Bank’s borrower with tens of millions of wasted dollars had the cartel not been exposed.”

Sanctions vs. 7 firms

The World Bank’s Evaluation and Suspension Officer, who evaluated the evidence gathered by the Department of Institutional Integrity, later issued in May 2008 a Notice of Sanctions Proceedings to the respondent bidders.

But on January 12, 2009, the World Bank sanctions board decided to impose penalties on only seven companies:

EC de Luna and Eduardo de Luna, debarred indefinitely from participating in World Bank-funded projects.

China Road, debarred for five years. China State and China Wu Yi, debarred for four years. Cavite Ideal and CM Pancho, debarred for four years.

In August 2008, the Korean firm Dongsung was separately debarred for four years, “for fraudulent and corrupt practices in relation to the NRIMP-1 case.”

According to the Bank’s sanctions board, the Department of Institutional Integrity had not presented sufficient evidence that the respondents may have engaged in “fraudulent practices separate from collusion.”

In its report, however, the department said it had “direct evidence of fraudulent or corrupt practices such as the submission of fraudulent documents or the payment of bribes derived from admissions of participants or the direct testimony of witnesses,” and “circumstantial proof of collusion detected through an analysis of the fraudulent bids the cartel submitted.”

“At a minimum, the totality of the evidence reflects that each of the bidders on the contract packages at issue had knowledge of the cartel’s practices and willingly participated in the systemic fraud and corruption,” the department said.

The “evidence accumulated in this case,” it said, “is sufficient for a determination that the respondents violated Bank procurement guidelines.”

Still, it admitted that the evidence collected “does not reveal any exculpatory factors” or “any further mitigating factors” to be considered in the case, in favor of any of the respondents.

The department said, it determined that “among the aggravating factors to be considered are: the egregiousness of the misconduct, including multiple instances of misconduct; the degree of involvement of the respondents in the misconduct; damage caused by the respondents to the credibility of the procurement process; and harm caused to the borrowers.”

Thus, it said, “without exception, it is the INT’s contention that all of the respondents . . . acted in a manner that permits the charge of engaging in corrupt practice to be levelled against them as a principle or, in the alternative, as a secondary party.” –Malou Mangahas, Philippine Center for Investigative Journalism