
How real-world corruption works - ssp
http://www.reddit.com/r/Economics/comments/c84bp/how_realworld_corruption_works/
======
jlangenauer
All quite true - especially the bit about the contractual white-anting.

A few years back, I was taking a course for my then-job, and the lecturer told
us about a group of people in one of the major Australian constuction firms
(though he didn't say which one).

The job of these people was to go through all tender documentation looking for
things which hadn't been specified properly, or which might conflict with
other things in the tender documents. When the construction company bid, it
would include a laundry list of conditions of their tender, usually saying
abstruse things like "In s.311(a) of the Scope of Works, we have bid assuming
that existing conditions on site are foo..." and the like. On those tenders
they won as the conditions turned out to be different to what they'd assumed
(bearing in mind that these conditions were now part of their contract),
they'd be able to ask for a variation (and more money) for most things -
pushing up the price of the contract while allowing a competitive bid price.
This is all legal, and frankly, not that uncommon.

The interest thing is that this company had actually worked out how much
revenue these guys - the contract analysts - brought in, and they found that
the revenue per employee for these guys was _more than for any other employee
in the entire organisation_.

~~~
jacquesm
Insurance companies have similar people working for them called 'claims
adjusters'.

It's really sad how parasitic behaviour is rewarded so well and real
productivity is not.

There's a fundamental flaw embedded in there somewhere but I really can't
verbalize it.

~~~
puredemo
The term "gotcha capitalism" pretty much sums it up for me.

~~~
notauser
It's not quite that straightforward.

Think about it from the other side of the fence. My experience was with weapon
systems but to a certain extent it does apply to roads.

Because of THE RULES only fixed priced bids are acceptable.

As a contractor you are being asked to quote on the complete price for a new
product build, even though you haven't designed, tested or built anything like
it before. The price you quote needs to include the cost of upgrading a bunch
of existing equipment to support your new product. You have no idea what the
current state of the existing equipment is.

You have three choices:

\- Quote a huge price that fairly covers every possible risk, and get told
it's too expensive.

\- Quote a small price and caveat the hell out of everything and get blamed
when the initial conditions or complexity turns out to have been misunderstood
or misrepresented.

\- Go bankrupt.

You actually even see the same decision being made by normal employees at
work. "Sure boss, I can do it in three weeks, as long as Dell delivers on
time" would be an example of option (2) in action.

~~~
jacquesm
So, when forced to choose between three honest options with (potentially!)
unfavorable outcomes and a dishonest one it's ok to be dishonest?

~~~
crc32
The contractor has an incentive to identify caveats, the purchaser has an
incentive to pin down those caveats before agreeing to the purchase. Where is
the dishonesty in that? It is the purpose of the contract.

~~~
jacquesm
The dishonesty is in undercutting another party that is willing to work
without trickery by using a bunch of paper manipulation to effectively obtain
a much higher price than the original bid.

That both parties collude in this makes it no less wrong.

~~~
crc32
By "a bunch of paper manipulation" you must mean a legally binding contract?

If something is specified in the contract, I find it difficult to see how this
can be called "trickery", it is a magician telling you in advance that he may
hide the coin up his sleeve.

~~~
cia_plant
By 'a bunch of paper manipulation' he probably means some of the practices
mentioned elsewhere in this discussion - such as hiring someone whose full-
time job is to find loopholes and contradictions within complex contracts, so
they can charge more money; or grossly misrepresenting the likely cost of a
project, with full intention of raising the price regardless of ultimate
conditions. The misrepresentation in the latter case is making it out that a
clause applies to exceptional circumstances, when its actual purpose is to pad
the contract under any circumstances.

You seem to think that each party should simply expect the other party to try
to get as much from them as possible, through whatever misrepresentations and
legal strategems they can get away with. Maybe this is normal in the areas
where you work - I guess Jacques and I both come from backgrounds where this
would be abnormal, and in fact disgusting behavior.

~~~
notauser
The government also has people who audit contracts looking for places where
the contractor has committed a technical breach.

In my experience breaches on either side tend to get netted off fairly
amicably. I might swap you a change request that you want for signing off a
performance deviation I can't avoid, that kind of thing.

However the contract still serves a purpose - it provides the ground rules for
that kind of trade. It does sometimes happen in bad faith (usually when the
contract has a long and sticky history already) but most of the time it's just
a more formalized version of goodwill. And that formality is necessary when
you are talking about millions of dollars per change.

------
ErrantX
Because of the arena we work in we have to fight tooth and nail for contracts.
Here's why:

One of our big contracts is for a couple of public service bodies; as with all
contracts at this level there is a bid process.

We are the smallest firm in the bid process, previously (under the same sort
of contract) we have done twice as much work for these bodies for half the
cost (compared to the other 3 current contractors - being small and agile
means we are able to work really efficiently). From a technical standpoint we
are by far the best option for them.

But the CEO's of our 2 main rivals "play golf" with all the managers of these
bodies at weekends... they offer them a much lower hourly rate than us and
promise certain limits on hours/job that takes it just under our quoted
overall cost. Then they schmooze the management into putting a good word to
the legal department (who make the decision) for them.

Everything is, of course, legal - but who is going to ignore what their boss
is "suggesting".

Trouble is; 6 months down the line the hours per job starts to creep up
dramatically ("as you see in subsection e; we are now having to account for
ISO1003490 compliance which adds drastically to administration cost...").

For us, though, fortune favours the honest. In one contract that we lost it
took 3 months for the contractor they chose to become unable to cope with the
workload - cue panicked phone call to us ("someone who can handle it") and the
contract is re-awarded...

But it's a pain to go through this all the time, and we are luckier than most
companies in the same position :(

 _sucks_

The last time round the process was much like the one the same Redditor
discusses here:
[http://www.reddit.com/r/Economics/comments/c84bp/how_realwor...](http://www.reddit.com/r/Economics/comments/c84bp/how_realworld_corruption_works/c0qrt6i)
(note: we don't work for the DOD, it's just the same method)

But it is still bitch to try and out manoeuvre the "big guys".

~~~
revorad
I used to work in an organisation which sounds very much like yours. Our
rivals also played the same undercutting tricks to get contracts and then
often couldn't deliver. The sad part was that then they would subcontract us
to do the work, instead of us doing it in the first place.

~~~
Retric
FYI: That's when you increase your rate above your initial bid.

Just call it "administrative overhead" because you now need to keep the client
and the person contracting the work to you happy.

~~~
revorad
Our company usually did well financially out of those situations, but
considering our rivals wasted a lot of time figuring out that they don't know
how to do the job, our workload and timescales were just crazy.

------
brc
For a simple, but topical example, you can see the process at work with the
Australian Governments' current 'stimulus' program, 'Building the Education
Revolution (BER)'. This is a $16.2 billion dollar program to build new
buildings on school grounds, nationwide in both public and private schools.

With that sort of money shovelled quickly out the door, it didn't take long
for reporting of corruption and rorts to show up: In some documented cases,
the construction costs of simple school buildings mushroomed from $78,000 for
a pre-BER quote to an actual built cost of $954,000. All this for a simple
school structure. Most of the fat is in 'consulting fees' and 'variations'
specified by the builders.

There are many documented cases of school buildings costing in excess of $5400
per square metre - about what it costs to build a top grade office block, and
about 3 times what the cost would be normally.

The main problem, it would seem, is that all the contracts go to large
building companies, who then subcontract to smaller builders, who then
subcontract out to local people. Each person clips the ticket and adds some
fat on the way through, and you end up with a building costing 3 times as
much. All of this could have been avoided if you just gave the money to the
school and got them to hire local tradesmen to do the job, and would have more
of an effect on employment and economic activity. As it is, a large percentage
of the money will go to shareholders in large construction firms. This is very
similar to what the reddit post describes.

The worst thing about the whole thing is, while everyone knows it is
happening, and it is in the news, nobody is actually getting into trouble.

~~~
jacquesm
Another big problem with this kind of bid is that the requirements to bring
out a bid are insane, and insanely complicated, so typically only the larger
companies can bid. They have full timers working on bringing out the bids,
whereas a local contractor would be employing just as much people to prepare
the bids as they have out building stuff.

~~~
arethuza
Well, you wouldn't want the wrong people getting awarded these contracts,
would you?

~~~
ori_b
Yes, that's a part of the reason that the system is so complicated - to guard
against corruption - or at least, to convince observers that you're trying to.
(To be fair, some of this does work. But it still makes the barrier to entry
far higher.)

------
revorad
I'm seeing my dad and his friends run businesses in India. Basically, you
cannot do ANYTHING without bribing someone at every step. If you don't want to
be "corrupt" you can simply close shop and go home. I'm grateful to the West
for creating a society which gives me a chance to live an honest life. I think
most people in developed countries hugely undervalue what they've got.

~~~
anonymousDan
Fair enough, but as this discussion shows, it is still far from perfect. No
harm in trying to improve it.

~~~
revorad
Yes I agree. I just wanted to point out the stark difference in realities,
especially given the title of the article.

"Real-world corruption" has different meanings in different parts of the
world. In India, it is also called life.

------
DanielBMarkham
I would add that for the sake of simplicity the author only pointed out the
glaringly obvious examples. Lots of government workers leave office and move
into cushy consulting jobs. Lots of legislators have friends or family that
lobby for laws that nobody understands (and that require extensive follow-on
consulting to make sure people are in compliance) This game can be played on
many levels, at the same time, and in ways that are completely impossible to
see.

I remember my first job consulting with a contractor on a large government
job. It was a disheartening experience that opened my eyes to how things
really work. A lot of people on that job were really sad or angry. I
determined to make it a learning experience about how people interact.

I'd like to add that there is a big of well-meaning whack-a-mole going on
here. Some folks will read these stories and think "Well gee, we just need a
better checklist" or a better contract, or a better process, or a better set
of definitions.

These are the same people who have created huge Software Development
Lifecycles for big companies. The idea is that every time something goes wrong
in a human interaction that another layer of process, checklists, or formal
hand-offs is needed to fix it.

The killer part is that the more complicated the plumbing, the more you need
an inside track on how to work on it. So systems quickly reach a point where
more and more safeguards are added on, but all it really does is make it
easier to hand-pick the winners from the losers. If you had the right
contacts, you could easily pick up a $1 million+ contract. This is called
being "walked into" a contract, and it's done all the time.

------
boredguy8
The Village Voice (previously linked on HN) has a great exploration of what
corruption looks like in the NYPD. When you have to meet a certain number of
stop-and-frisks, you're going to take action where normally you wouldn't. And
the outright altering of crime statistics is terrible.

[http://www.villagevoice.com/2010-05-04/news/the-nypd-
tapes-i...](http://www.villagevoice.com/2010-05-04/news/the-nypd-tapes-inside-
bed-stuy-s-81st-precinct/)

Or take a look at what's being revealed in the Mineral Management Service: oil
company employees would fill out inspection reports and MMS employees would
simply approve them.

[http://www.allvoices.com/contributed-news/5917196-ig-
report-...](http://www.allvoices.com/contributed-news/5917196-ig-report-mms-
ethics-violations-included-bribes-and-cheating)

------
stretchwithme
I think we see corruption when those making decisions have control over the
resources of others. Those that watch their assets like a hawk and read all of
their contracts thoroughly fare far better than those who leave it all in
someone's hands.

When there are many layers separating the investor or taxpayer from those who
make day to day decisions, the more likely corruption is. That's exactly why
democracy scales so poorly and government works best when decisions are made
as locally as possible.

And maybe its also part of the reason startups are so innovative and creative.
When you know exactly what everybody is contributing, you don't suffer any
unnecessary drain on resources.

------
btilly
That's the nice kind of corruption. For the nasty kind read
<http://www.rollingstone.com/politics/news/;kw=[3351,53763]> to find out what
Jefferson County has been going through...

~~~
puredemo
County officials were corrupt in this case, it's not like it all happened
accidentally. They _chose_ to purchase a $2B sewage system (when initial
quotes were only $250M from local contractors) and proceeded to fiscally
destroy their city and county budgets in the process.

Still a fascinating read though. Why doesn't the country just default on the
debt? These seem like extenuating circumstances.

~~~
arethuza
Sounds like those debts were created through criminal activity - I would have
thought the city should have the right to take them to court and have them
declared null and void and walk away.

Shouldn't there be a law that if a bank uses corrupt means to obtain business
then the people who end up with the debt should have the right to walk away
from it (after due process, of course).

------
DrSprout
Calling that real-world corruption seems fairly self-important. Real-world
corruption is when you have to bribe the DMV to get a driver's license on top
of the normal fee. Or when you can bribe your way out of most criminal
offenses.

Getting taken in by a flashy corporation's sales division is just bad
management.

------
ANH
On several occasions, I have seen and heard of RFPs written so specifically as
to rule out all but one bidder. The receiver of one of the contracts admitted
as much to me; the request was written for him, because the civil servant in
control of the dollars knew who he wanted before any proposals were in.

On the other hand, I have seen (and worked on) contracts taken away from
companies with high overhead and shifted to a more nimble, but significantly
smaller, competitor. In such cases it appears the contracting officers are
taking steps toward less waste, but it is not always possible to know all of
the factors that result in shifting a contract from one company to another.

And there is the hidden cost of doubling the size of the smaller company over
night. How do they handle that growth? They say, of course, in the proposal
that they can handle it, "Piece o' cake!" However, reality tends to intervene.
But I digress...

~~~
jseliger
_On several occasions, I have seen and heard of RFPs written so specifically
as to rule out all but one bidder._

My family's business does grant writing for nonprofit and public agencies, and
we don't respond to RFQs and the like:
[http://blog.seliger.com/2009/12/27/why-seliger-associates-
ne...](http://blog.seliger.com/2009/12/27/why-seliger-associates-never-
responds-to-rfpsrfqs-for-grant-writing-services/) for this reason, among
others. The other problem we have, as described at the link, is that contracts
to write grants are often wired for local grant writers, which makes it futile
for us to apply.

------
Kilimanjaro
As long as we let people manage resources that aren't theirs, they will misuse
them.

From governments, to localities to corporations.

------
mavelikara
Wouldn't a variant of this works internationally also? First, you lobby your
government to hand out huge loans to a poor country with the stipulation that
the money should be used for something good, say providing drinking water.
Then you go around and win the contract for providing the pipes. After a while
you escalate costs as mentioned in the OP. The net result is that, officials
in both countries can make great speeches, but the citizens of the poorer
country are now saddled with a huge debt.

~~~
handyman5
Confessions of an Economic Hit Man (<http://amzn.to/2ZdEWA>) is the story of
companies that do exactly this thing, on purpose, to use the oppressive debts
of the poor countries to control their behavior.

------
akkartik
Related: [http://blog.programmableweb.com/2010/05/25/hey-big-
spender-t...](http://blog.programmableweb.com/2010/05/25/hey-big-spender-the-
million-dollar-api)

~~~
sriram_sun
Post it under an independent title. Interesting...

------
Maven911
This post shows that reddit isn't just junk, there truly are gems beneath the
torrent of rubble...you just have to dig to find them...

~~~
gahahaha
or subscribe to r/tldr

------
Kilimanjaro
Do we have the brains and balls to fix it?

Do we just want a piece of that cake?

Brightest minds wanted.

------
thefool
So whats the solution?

------
kahawe
An interesting read, especially the follow-up on DoD purchasing policies
but... This is not really about corruption but rather about brutal business
practices? It focuses on "wining and dining" your customers and then robbing
them blind through details and fine print in contracts and abusing politics as
a means of pressuring the victims.

Corruption as I understand it would be bribing the officials with money to get
the contract. "Wining and dining" and invitations to nice places is very close
and there is a fine line between that and down right bribery.

Or did I miss a notion of corruption here? Not a native speaker.

------
known
It is called High Frequency Trading in Wall Street

