Corruption eats up 15-35% ‍of construction firms’ budget

Think tank’s confidential interviews reveal extent of industry problem

by Philippine Daily Inquirer, 9 Jan 2020

Construction companies allot up to 35 percent of their budgets for infrastructure projects to pay off government officials and employees and prevent them from causing any further delays, a think tank said, citing confidential interviews with industry players.

In some cases, companies have had to compromise other parts of the construction— such as the quality of raw materials—in order to accommodate the additional cost and to keep the projects moving.

In a presentation on Wed­nesday, the Reid Foundation gave a breakdown of the expenses that construction firms spent on average in putting up new infrastructure both for the public and the private sector. All the commonly disclosed expenses were there such as raw materials and labor. But the breakdown shaded a part of the graph in an ominous black, which claimed 15 to 35 percent of the expenses were spent on “other costs of doing business.” These “other costs” referred to a company’s budget for corruption as small and big companies were left with no choice but to play along in an abusive cycle that rarely gets brought to light, let alone stopped. “This is the problem that we want to address but nobody wants to talk about,” said Ronilo Balbieran, Reid vice president for operations, at the 4th Philippine Construction Industry Congress.

Reid interviewed various stakeholders in the construction industry from October 2018 to March last year to make sure the figures were as precise as possible. Balbieran deferred from disclosing who they interviewed or how many companies they talked to.

Construction companies have to maintain a net income margin of 8 to 15 percent, no matter the costs. Since the budget for a project was already fixed, other parts of the project sometimes suffered for those “other costs,”he said.

In this way, a company could do both—extort government workers and still maintain its profit margin.

Balbieran said a company then covered the expenses by making up all sorts of excuses, such as saying it had more workers than they actually had or using cheaper materials instead. “That’s why I said ‘take your pick.’ Something has to give. There is only a fixed cost of the project. You can’t just easily increase the budget for the project,” he said in an interview on the sideline of the event. “Delays always create opportunities for extortion,” he said, noting how these dealings were hard to trace back because these were made off the books. The interviews came before the appointment of the country’s first-ever director general of the Anti-Red Tape Authority (Arta) in July last year. Arta is supposed to implement the new ease of doing business law, which was delayed for more than a year because Malacañang did not right away appoint a director general. The law, among other provisions, will impose a zero-contact policy, including in local governments, once an online business registration system has been made. The policy bars government workers from having any contact with applicants and this hopefully will lessen the risk for corruption.

“This is why you need to modernize. You cannot say the policy is don’t do corruption. That policy doesn’t work because there are always these kinds of opportunities. It’s not modernized. It’s not digital. It’s not done online,” Balbieran said.

The Department of Trade and Industry tapped Reid to do the 2020-2030 road map for the construction industry. The think tank included the interviews as inputs for the road map, which was first announced last year.

If the construction sector—including the way the government handles business permits—were modernized and made digital, the value of the industry could reach up to P130 trillion from P2.3 trillion in 2018.

Without the road map, the industry’s value could go up to only P43 trillion in 2030, making a strong argument for modernization, which would increase the number of jobs in the industry from a current estimate of 3.9 million to 7.91 million.

When asked if the agency would pursue Reid’s leads, Trade and Industry Secretary Ramon Lopez said he was leaving it to the companies and the government agencies concerned to solve this issue.

“I guess that’s somehow the reality that we want to remove,” Lopez told reporters. He said the introduction of new technologies could hopefully minimize those kinds of costs.

It was not clear where Reid’s findings would lead the think tank to. While Balbieran said companies could always go to court to address the issue, individual litigation could only do so much to solve a problem that required a system-wide approach.