State Owned Enterprises and Corruption: An International Perspective
Dr. Y.R.K. Reddy
Petróleo Brasileiro S.A. of Brazil, popularly known as Petrobras, has been caught in a storm of corruption charges dragging with it the internationally popular President Dilma Rouseff, who was suspended on 12 May 2016 by the Senate and impeached by the same body at the end of August. Along with her, several Ministers and the former iconic President Lula da Silva have also been indicted. Over 117 senior executives face charges. The Government of Brazil together with its financial entities own 64% of Petrobras. According to many indicators that now seem facile, the company is an unlikely candidate to be caught in corruption charges. It was lately ranked 28 among the Fortune Global 500. It is the largest company by market capitalization north of the equator; a true state-controlled multi-national with assets in several countries in South America, North America, Africa, Europe and Asia; a signatory to the UN Global Compact and a recipient of prestigious awards for sustainability initiatives.
Petrobras also embraced outstanding corporate governance standards such as international listings, separation of CEO and Chairman, non-executive directors, board committees, regular financial and non-financial reporting, impressive disclosures, engagement of big four auditor and a dedicated Corporate Governance Officer. But years of cronyism and cleverly packaged kick-back schemes ensured about 16 companies received inflated contracts, eventually passing the benefits to some individuals, the political party in power and its associates/nominees. While the kick-backs are estimated by the company sources at about US$3-4 billion, the Audit Court put the figure at US$7.6 billion. Ironically, the Workers Party, the chief beneficiary in this scandal nicknamed “car wash”, came to power on the back of socialism and fight against corruption.
In another part of the world, there has been a globally cited strong drive against corruption in State-owned Enterprises with President Xi Jinping reportedly promising to clean up not only the “tigers” (the giants among them) but also the low flying “flies” in China. Since the beginning of 2014 over 115 C-Suite officials were reportedly named publicly for investigation, from giants including Petrochina, China Southern Airlines and Sinopec. As per one report even two years ago, 10,300 officials have been investigated for graft involving mostly engineering projects, purchasing and sales, real estate and international dealings. According to an official of the Supreme Peoples` Procuratorate, the fundamental issue is the relationship between political power and proper allocation of resources. Not surprisingly, surveys in other countries also show public procurement as being at the center of such corruption. Other studies such as those of the Organisation for Economic Co-operation and Development (OECD) indicate low standards of disclosures, conflicts of interest, weak internal control environments as exacerbating corruption at State-owned Enterprises in some regions.
The issue of corruption in State-owned enterprises (SOE or public enterprises or Government Linked Companies or Parastatals as they are called in some countries) is not limited to the countries in the current limelight. Corruption is widespread, admittedly more noticeable in the BRICs (Brazil, Russian, India, China), where massive scandals have been reported in the energy, technology, banking and defence segments.
Given the size and economic significance of SOEs in the global economy, there are intuitively appealing estimates as to how much can be saved by arresting corruption; how that can help mitigate fiscal pressures on stressed economies and how savings can contribute to eradication of poverty and improvements in nutrition, health, and education for children, women and the extremely vulnerable and ultimately to meeting the Sustainable Development Goals (SDG).
According to the Paris based, The SOE Forum (www.thesoeforum.org) SOEs represent over 25% of GDP in many important emerging economies. More than 10% of the world’s 2000 largest companies and 25% of the top 100 multinationals are SOEs. The market capitalizations of listed SOEs could be over 20% of the total. These numbers may be understated as they often exclude much of the financial sector, sub-national entities, as well as those in which the State may have significant shareholding and indirect control. Further, not all state-owned commercial enterprises are corporatized and are hence, excluded from these estimates.
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* Dr. YRK Reddy is Founder and President, The SOE Forum (www.thesoeforum.org.) He is an advisor, particularly on corporate governance, whose work spans across 40 countries and for several international agencies. Dr. Reddy is based in India (yrk@yagaconsulting.com)
