VII. Corporate governance in foreign investments, privatization and the significance of insolvency regimes 7.4 Grand corruption involving privatization

Submitted by:
Ma. Jolina M. Boloso
BSA 3-1

Submitted to:
Prof. Carolina Guerrero

May 10, 2014

Table of Contents

I. Corruption and privatization ………………………………………………. 2 What structure help prevent corruption …………………………………. 3 II. Examples of Grand corruption involving privatization MWSS …………………………………………………………………………………. 4 * Problems and rationale for MWSS privatization ……………… 4 * Privatization of MWSS ………………………………………………….. 5 * MWSS issues and controversies …………………………………….. 6 Expo Filipino ………………………………………………………………….……. 8 * Issue ..…………………………………………………………………..…….. 8 * Reopening …………………………………………………………………… 9 III. References ………………………………………………………………………. 10

I. Corruption and privatization Corruption has become a major international concern. The topic of international conferences, policy forums and ministerial speeches, it is also the subject of a recent OECD Convention and the focus of an international non-governmental organization, Transparency International. However, the incidence of large-scale corruption is closely connected with contracting-out, concessions, and privatization, where multinationals based in OECD countries stand to gain a lot of profitable business. The encouragement of privatization by the World Bank, and the economic benefit to OECD multinationals from this business, mean that effective action against corruption has to involve effective sanctions by developing countries against multinationals which engage in corrupt practices; greater political transparency to remove the secrecy under which corruption flourishes; and resistance to the uncritical extension of privatization.
Corruption commonly defined as the abuse of public office for private gain.
Grand corruption takes place when large multinational companies paying millions of dollars to government leaders or politicians to obtain lucrative business contracts. Grand corruption is easier to organize and offers opportunities for fraudulent investors. Grand corruption is sometimes used synonymously with political corruption.
Political corruption involves political decision makers. Political corruption not only leads to the misallocation of resources, but it also affects the manner in which decisions are made. Political corruption is the manipulation of the political institutions and the rules of procedure, and therefore it influences the institutions of government and the political system, and it frequently leads to institutional decay. Political corruption is therefore something more than a deviation from formal and written legal norms, from professional codes of ethics and court rulings.
Common form of corruption is bribery. There are many equivalent terms to bribery, like kickbacks, baksheesh, sweeteners, grease money and pay-offs. By “greasing palms” many corporations and business interests are for example able to buy political favors and escape the full burden of taxation and environmental regulations, others are able to buy protected markets and monopolies, import/export licenses, etc.
For multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favorable terms. They distort decision-making in favor of projects that benefit the few rather than the many.
Privatization may have several meanings. Primarily, it is the process of transferring ownership of a business, enterprise, agency, public service, or public property from the public sector (a government) to the private sector, either to a business that operates for a profit or to a nonprofit organization. It may also mean government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management.
What Structures Help Prevent Corruption?
“Good governance” principles can make it more difficult for corruption to take root. Of many requirements of good governance, some key components are participation, accountability, transparency, and rule of law.
Public participation greatly helps mitigate conflict because there are legitimate public forums and mechanisms for peaceful debate. Public participation in politics (through elections, political parties and civil society organizations) can provide a check on the government and keep political authorities accountable. Such accountability is enhanced by the rule of law, which encompasses the processes, norms, and structures that hold the population and public officials legally responsible for their actions and impose sanctions if they violate the law.

II. Examples of Grand corruption involving privatization * Metropolitan Water and Sewage System
On 19 June 1971, Republic Act 6234 was enacted. It dissolved the National Waterworks and Sewerage System (NAWASA) and created in its place the Metropolitan Waterworks and Sewerage System (MWSS). MWSS was thus given the mandate “to ensure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes at just and equitable rates.” The proper operation and maintenance of sewerage systems was likewise part of its mandate.
PROBLEMS AND RATIONALE FOR MWSS PRIVATIZATION * Poor Coverage
MWSS was able to supply water to only 69% of its service area. * Inefficient Service
Water availability was intermittent – averaging only 16 hours per day – and water pressure was uncomfortably low. * Highest Non-Revenue Water (NRW) in Asia
NRW refers to the unbilled or lost portion of water produced or supplied. This is caused mainly by meter tampering, illegal connections, pipeline leaks, and the illegal use of fire hydrants. NRW of MWSS at the time was nearly twice that of developed countries. * Sewerage
Approximately only 8% of the total service population and less than 7% of households in the service area were covered. Sewerage facilities could be found only in some areas in Manila and Makati, with most establishments having to use either their own or communal septic tanks. * Procurement Procedures
Procurement procedures always tended to be very rigid and involved many sequential processes. This oftentimes resulted in inefficiency and delays, both in terms of acquisition of equipment and in the implementation of projects.
Privatization of MWSS
In 1997, the Legislature passed into law Republic Act 8041, also known as “The Water Crisis Act.” The Act, which paved the way for the privatization of MWSS, had as its primary objectives the following: * Transfer financial burden to the private sector * Improve service standards * Increase operational efficiency * Minimize tariff impact
In August that year, the Philippine government entered into a 25-year Concession Agreement with two private consortia comprised of local and international partners. This effectively transferred the operational responsibilities of MWSS to Manila Water Company, Inc. (for the East Zone) and Maynilad Water Services, Inc. (for the West Zone).
MWSS continued to exercise several of its legally mandated functions including: * Facilitating the exercise by the concessionaires of its agency powers * Carrying out accounting and notification functions * Monitoring, reporting, and administering loans and performing related functions in connection with existing projects * Managing and disposing of retained assets * Managing and operating the Umiray-Angat Transbasin Project
A concession or concession agreement is a grant of rights, land or property by a government, local authority, corporation, individual or other legal entity.
Public services such as water supply may be operated as a concession. In the case of a public service concession, a private company enters into an agreement with the government to have the exclusive right to operate, maintain and carry out investment in a public utility (such as a water privatization) for a given number of years.
In the private sector, the owner of a concession — the concessionaire — typically pays either a fixed sum or a percentage of revenue to the owner of the entity from which it operates * MWSS issues and controversies

* EX-NCIP head charged (Philippine Daily Inquirer) February 10, 2014
MANILA, Philippines—The Ombudsman has filed a malversation case against the former head of the National Commission on Indigenous People (NCIP) and a separate graft case against the deputy head of the Manila Waterworks and Waterways System (MWSS) for alleged misuse of public funds.
Charged in the Sandiganbayan antigraft court was former NCIP head Eugenio A. Insigne for alleged violation of the Revised Penal Code when he unlawfully drew a cash advance of P214,938.62 for a trip to New York on Sept. 11, 2007.
This was despite a prohibition against using public funds for that purpose as stated in his Authority to Travel.
Despite demands made by the Commission on Audit, Insigne failed to refund P115,133.42 to the government.
In the other case, former MWSS Deputy Administrator Virgilio Ocaya was charged with graft, also in the Sandiganbayan, for allegedly receiving additional employment compensation and double compensation amounting to P240,000 from the Presidential Commission on Good Government as its legal counsel.—Cynthia D. Balana * Advance charges payment or investment?
This is questionable billing practices of Manila’s private water concessionaries, collecting fees and payment from public in a manner apparently contrary to law. The Wawa dam project, its start to be charged to consumers from 2003 up to now and that amount would cost around 150 million pesos. But they used some of its fund to other projects. (Fund diversion)
The collection of water rates includes draft projects (projects not yet started). There’s nothing stated in the concessionaries agreement that allowing them to collect payment to consumers for future project. MWSS and its 2 concessionaires we allow them for approved collection of costs of project even before they are implemented or enjoyed by consuming public. So it’s like now investing. * Sewage system: myth or reality?
In the water bill there is a 10% environmental charge. But this environmental charge has to do with sanitation and sewage system. This 10% environmental charge from 1997 up to now is being collected and that would cost in billions already. But MWSS only do minimal work of sanitation and providing sewerage system. * Regulatory office friend or foe? The regulatory office is not dependent. Regulatory office provides recommendation that can be reverse by the board. Under concession agreement, regulatory office evaluates and checks the business plan submitted of 2 concessionaires if it’s right and prudent. But what happened is that “regulatory office is working for concessionaires instead of working for consumers”, says Rodrigo G. Gatmaitan (president of water watch coalition Inc.)

* Expo Pilipino
Expo Pilipino (now Clark Expo) was the Philippine National Centennial Exposition and centerpiece of the commemoration of the 100th anniversary of the declaration of Philippine Independence on June 12, 1898. The 60-hectare heritage and entertainment park in Clark Freeport Zone, Angeles City, Pampanga is a celebration of the Filipino's history, culture, and achievements in the past 100 years, as well as aspirations for the next millennium. This was a project of the National Centennial Commission (NCC) and the Philippine Centennial Exposition Corporation.
Its 35,000-seat capacity amphitheater is a favorite venue for concerts, ecumenical services and political rallies. In addition, the site is also the new home for the 45-acre (180,000 m2) Nayong Pilipino complex, an open air museum featuring miniature attractions of the Philippines and its culture.
The construction of Expo Filipino entailed a total budget of Php 3.5 billion (US$ 63.64 million). Then President Fidel Ramos directed three Government Financial Institutions: the Social Security System (SSS), the Government Service Insurance System, and the Land Bank of the Philippines to lend a total of Php 1.4 billion (US$ 25.45 million) to the joint venture. * Issue
The project was criticized for the excessive amounts of money that went to its construction. Particular targets of criticism were: a Freedom Ring (more than Php 1.2 billion); a parking lot (Php 111 million); an entry zone (Php 118 million); display villages (Php million); an artificial river (Php 76 million); and bridges on this river (Php 32 million). However, charges of alleged massive corruption or misuse of funds blemished the resulting programs and various projects, one of which was the Centennial Expo and Amphitheater at the former Clark Air Base in Angeles City, Pampanga, supposedly Ramos' pet project.
Expo Filipino closed down in 1999, during the administration of former President Joseph Estrada, after sustaining heavy losses. * Reopening
On December 8, 2005, Expo Pilipino which has been mothballed for more than five years reopened as Clark Expo to host trade exhibits and cultural presentations headed by the Clark Development Corporation (CDC). The park's reopening featured concerts, world-class furniture exhibits, carnival rides and major concerts.
CDC president Antonio Ng said the opening of the Expo Pilipino was realized due to the directive and full support of President Gloria Macapagal-Arroyo in boosting tourism and investment activities inside the Clark Special Economic Zone, with her Administrative Order (AO) No. 63 issued on February 17, 2003, directing the transfer of certain assets and liabilities of the National Development Company (NDC) in First Clark Centennial Corporation (FCCC) to CDC.
In connection with the reopening of the park was the Clark National Duathlon Championships on December 19, and the holding of the annual district assembly of some 10,000 members of Jehovah’s Witnesses in Pampanga and Tarlac on December 23, 24 and 25. CDC spent some Php 2.5 million for the rehabilitation of the Barasoain Church replica, amphitheater, trade halls and convention centers in the Expo Pilipino.
In early 2010, the site was relaunched as Clark Education City by the Australian International Training and Management group (AITMG). Initial construction of the campus cost $6mAUD and the site has capacity for 15,000 students. The institution delivers a range of Australian Government accredited vocational courses, English language and customized training. The facility now operates as Site Skills Training.

III. References http://www.twnside.org.sg/title/corruption.htm http://www.usip.org/sites/default/files/ETC-D/NPEC/480021.PDF http://www.slideshare.net/ankityadavuk/corruption-in-international-business1 http://en.wikipedia.org/wiki/Political_corruption#Governmental_corruption http://www.cmi.no/publications/file/1040-political-corruption.pdf http://www.investopedia.com/terms/p/privatization.asp http://en.wikipedia.org/wiki/Privatization http://sambodopurnomo.wordpress.com/2009/06/04/mncs-bribery-to-foreign-public-official/ http://50.57.171.177/r3d3s1gn/about/our-history/ http://www.youtube.com/watch?v=9WCxJkjxxd8 http://www.youtube.com/watch?v=rCahwR46qsQ http://www.youtube.com/watch?v=mq928hW5Pc4 http://www.assetrecovery.org/kc/node/4a99e842-baa6-11dc-9fad-1980671b0841.0;jsessionid=D0CDEDB61380DAD2FBBE43C69BB1351E http://en.wikipedia.org/wiki/Expo_Pilipino
http://en.wikipedia.org/wiki/Fidel_V._Ramos#Controversies