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Including...
Interview - Sanjeev Gupta, IMF
Asia Pacific : Japan outspends China militarily but keeps clean
Europe : Corruption case in army is exceptional – Defence Minister Kuehnl
Americas : Venezuelan military officers charged with corruption
Middle East : Halliburton cuts Iraq bill in wake of overcharging claim
Africa : John Githongo releases dossier detailing corruption in Kenya
Transparency International UK's
Defence Anti-Corruption Digest
Edition 2 / Feb 06
Defence Against Corruption
In the News
Below is a selection of news headlines from around the world from the past month. Please see our disclaimer immediately below the news section.
Feature Story
Single-Round Firing (Russia)
Andrei Belianinov, head of Russian defence procurement, comments on the Russian defense industry's problems
Originally published in TRUD; Translated into English by WPS; Reprinted with permission
27 January 2006
Vladimir Gavrilov, Yuri Tretiakov - More and more funding is being allocated for rearmament, but the troops are still driving old tanks and firing old cannons. Andrei Belianinov, head of the Federal Arms Procurement Service (Rosoboronzakaz), gives us his evaluation of the current situation in this area.
The recently-established Federal Arms Procurement Service is intended to oversee the process of re-equipping the security and law enforcement agencies. The main question it has to answer is whether one-tenth of federal budget spending, the amount allocated for arms procurement, is being spent rationally. The sum allocated for these purposes in 2006 has reached an unprecedented high of almost 568 billion rubles. The lion's share goes to the Defense Ministry, ofcourse: it is getting 237 billion rubles in the 2006 budget, 54 billion more than last year.
The figures are impressive - but examples of new hardware actually being used by the troops can still be counted on one's fingers.
For instance, only 15 new tanks were delivered to the Armed Forces between 2000 and 2004. Seventeen tanks were delivered in 2005. That doesn't even add up to one company. This year, the Defense Ministry plans to acquire 31 T-90 tanks - only enough for one battalion. In addition, the Defense Ministry plans to take delivery of six Topol-M ICBMs, six satellites and 12 carrier rockets, 125 armored vehicles, and a few dozen aircraft. These acquisitions can hardly have any substantial impact on the military's modernization level, but at least it's a start.
Then again, even these modest plans could be jeopardized if the Defense Ministry can't resist the temptation to do what it did last year: redirect part of arms procurement funding into paying accumulated debts, including salary backlogs, and personnel maintenance costs. Funding for arms production was relegated to the background. That prospect is a cause of concern for Andrei Belianinov, head of the Federal Arms Procurement Service (Rosoboronzakaz), who gave us his evaluation of the current situation in this area.
In his opinion, the state has indeed started allocating a great deal of money for defense. However, says Belianinov, a comparison with defense spending in the United States shows that we're still lagging behind by an order of magnitude. By 2009, US spending on rearmament will reach $165 billion. Russia, on the contrary, barely approached $8 billion in 2005. But the main problem is that funding is often spent ineffectively, or even simply stolen. Rosoboronzakaz specialists have already carried out over 400 inspections, detecting over 1,300 irregularities and flaws in the process of carrying out instructions. Their analysis showed that the primary need is for changes to the system.
Belianinov notes that there are problems at every stage with work being delayed or not done at all. Domestic clients lack sufficient leverage to influence defense producers; sometimes they don't even have an interest in ensuring that the orders they place are completed on schedule. Why, for example, does it take us three years to build a frigate for India, but seven or eight years to build ships for the Russian Navy? Because any enterprise that delivers an export order late risks a heavy fine - but there is no penalty for being late in delivering products for the Russian Armed Forces. Why hurry? The money is coming in, after all. This issue should probably be addressed at the level of legislation. So should the problem of price formation in state arms procurement. At present, prices are set at maximal levels - this is facilitated by constantly-increasing costs of raw materials and energy resources.
According to Belianinov, Russia was unjustifiably hasty in leaving the standardization market. Common standards are indispensable when it comes to defense capability. This applies to rear services and supplies as well as weaponry. After all, even the fuel used by tanks and aircraft often varies in quality. Somehow, when it's really necessary, we manage to adapt to NATO standards in making arms for export. Within Russia, however, different security and law enforcement agencies often order the same hardware at different prices, with no certainty that the products they receive will be of the quality they expected.
Then again, that uncertainty also stems from the state of the defense sector as a whole. In relation to this problem, Belianinov mentioned an old joke about the elk shot by a hunter, with the bullet-hole going right through its body, wondering why the water it's drinking isn't doing any good. Belianinov maintains that money alone isn't enough to get the defense industry back on its feet. There is an urgent need to modernize machinery at defense enterprises. New military hardware for the Armed Forces can only be produced using modern equipment. There is no money for that at present. There isn't even a single body or agency responsible for the condition of the military-industrial complex. Development priorities for the industry have not been specified. Placing the defense minister in charge of the defense industry is actually paradoxical: it makes him the defense sector's main client and the guardian of its interests as well. Defense enterprises need to be given the opportunity to make money. Stealing is bad, but making honest revenues is essential. It should also be kept in mind that reviving the defense industry will require efforts by the whole state, and the shortest path to that would be to approve some federal targetted programs.
This will be a long-term effort, but this year there is already a chance to spend the funding allocated for arms procurement more effectively, if a number of parameters specified there can be maintained. For example, plans to change the ratio between spending on acquisition of new hardware and repairs to old hardware: planned funding increases are 40% and 14% respectively.
Expanding the use of competitive tenders for production of arms and military hardware could result in cost savings of up to 20%. If all this can be done, there might be a light at the end of the tunnel at last for our defense sector.
Asia & Pacific
Japan outspends China militarily but keeps clean
Copyright Kyodo News
25 February 2006
Synopsis: Analysts are now speculating that while on paper Japan spends more on defence than China on paper, it is possible that China actually outpaces Japan using off-budget defence spending. Much of China’s military expenditure, it is thought, is not open to public scrutiny. The alleged discrepancies are a source of tension between the two nations, as well as other nations trying to deal with the situation diplomatically.
Other Japan stories:
Japan to dissolve scandal-tainted agency Copyright Agence France Presse 1 February 2006
China speeds up anti-corruption efforts in military forces
Copyright People’s Daily Online
10 February 2006
Synopsis: According to a story reported by Xinhua news agency, a new regulation, issued by the People’s Liberation Army, endeavours to fight corruption systematically throughout all military units. The article reports that while punishing officers has met with some success in combating corruption in recent years, the new regulation is the first of its kind, including a set of applicable guidelines and practices. The regulation refers to fighting job-related crimes in the military as a “regular, comprehensive and basic task” for all levels of the military.
US seeks more defence transparency from China
Copyright USINFO
9 February 2006
Synopsis: US officials are emphasising the need for China to be more transparent about its military preparations. Ryan Henry, the Undersecretary of Defence for Policy, has pointed out the fact that China, as an emerging world power, “has the greatest potential to compete militarily with the United States.” The US also fears that China may be preparing a military program which would lead towards taking control of Taiwan.
India to make $2bn artillery decision by 2007
Copyright Defense Industry Daily
19 January 2006
Synopsis: After excluding South Africa’s Denel from the current tendering process because of the company’s alleged bribery involvement, India is continuing to look at tenders for an order of 400 howitzers, worth $2 billion. The two tenders currently in the running are the BAES Bofors system and the Soltam global system. While tests of the guns are ongoing, the Army Chief has suggested that the winner would be chosen by 2007. Yet some suspicions have begun to circulate about corruption in the Bofors tender.
Bofors ghost behind repeated artillery gun trials?
Copyright The Hindu
3 February 2006
Synopsis: For the past five years, the Indian army has been testing howitzers for a very large procurement. Three companies were originally in the running, but South African Denel has been excluded due to internal scandals, while Israeli Soltam had products which broke down under trial conditions. The remaining company, BAE, has expressed concern at the continuance of trials and India’s possible reopening of the tender. It has been suggested that India may feel uncomfortable giving the deal to the sole competitor left without further trials, and the BAES system in question has ties to Bofors, a company that was previously involved in a bribery scandal in India.
Government not to open defence deals to public scrutiny
Copyright Defence India
31 January 2006
Synopsis: The Indian government has rejected a proposal to open ongoing defence procurement deals to public scrutiny. Only after the tendering process has been completed will information regarding defence deals be made available.
‘Transparency hallmark of defence procurement’
Copyright Financial Express
2 February 2006
Synopsis: Indian defence secretary Shekhar Dutt spoke of growing transparency and an increased role for the private sector as the new trends in Indian defence procurement. Procurement standards, he said, continue to grow along with India’s increasing economic power, and India is anxious to leave behind earlier allegations of corruption in its procurement processes.
Europe
Corruption case in army is exceptional – Defence Minister Kuehnl
Copyright Czech News Agency
28 January 2006
Synopsis: Czech defence minister Karel Kuehnl said that the bribery case around Miroslav Beno (see previous story) is Beno’s personal responsibility, and does not reflect on the ministry. A past single-source contract with Fides, the company involved in the current bribery scandal, has raised issues about Czech defence procurement processes.
UK competition watchdog reviews BAES undertakings on Marconi acquisition
Copyright Forbes
9 February 2006
Synopsis: The UK group in charge of promoting competition has decided to review certain undertaking by BAES Systems, put in place to protect competition as BAE was involved in acquisitions. A change in the rules governing the defence industry has brought the relevance of the guidelines into question.
Americas
Contractor pleads guilty to corruption
Copyright Washington Post
25 February 2006
Synopsis: Defence contractor Mitchell J. Wade pleaded guilty to paying bribes to Congresspersons and US Department of Defense officials. The facts behind Wade’s attempts to illegally influence defence procurement contracts began with the uncovering of Randy “Duke” Cunningham’s involvement in the scandal last year. In the wake of Wade’s, other US officials may also be brought to trial.
Venezuelan military officers charged with corruption
Copyright Venezuelanalysis.com
16 February 2006
Synopsis: 17 military officers have been accused of corruption, after allegedly diverting funds into their own pockets from a military-run sugar-processing plant. The scheme in which the military runs corporate initiatives is part of the current government’s civil-military development plan. Venezuela’s anti-corruption committee brought forth the allegations, after discovering incongruities in the planned projects around the processing plant.
Middle East
Halliburton cuts Iraq bill in wake of overcharging claim
Copyright Evening Standard
31 January 2006
Synopsis: KBR, a division of Halliburton, has faced many allegations of overcharging and corruption for its Iraq contracts. The International Advisory and Monitoring Board has announced that KBR will reduce some of its charges in response to these claims.
Africa
Disclaimer
Transparency International UK takes no position on the views presented by reporters, commentators, organisations and companies in the materials listed in this email or linked to in our website. As with any such resource, our purpose is to provide access to a wide selection of materials representing diverse viewpoints on a matter of obvious public interest. We do not exercise any editorial control over the materials and cannot guarantee their accuracy. The Digest is a free publication of Transparency International UK.
Interview
Sanjeev Gupta
Co-author (with L de Mello and R Sharan) "Corruption and Military Spending", IMF Working Paper, WP/00/23, February 2000
In 2000, authors Sanjeev Gupta, Luiz de Mello and Raju Sharan wrote the IMF Working Paper “Corruption and Military Spending” (viewed here). Based on empirical analysis the “paper argues that corruption is associated with higher military spending. The paper also outlines several reasons for this association, such as the secrecy of defence procurement and greater competition among arms dealers. The authors find that countries with higher corruption indicators spend more on defense as a share of the GDP and total government expenditures.” The Digest caught up with one of the authors, Sanjeev Gupta, in January to find out more.
What inspired this piece of work?
When I worked on this piece, I was heading the Expenditure Policy Division of IMF's Fiscal Affairs Department… At that time, we were interested in understanding the possible interaction between corruption and the composition of public spending. For some time now, the IMF has recognized the important role of good governance in influencing economic performance. In conducting these studies… we focused on "big ticket" categories in the budget, such as wages and salaries, and social and military spending. We did not single out defense spending, rather we looked at all major expenditure components. Military spending is interesting from the corruption perspective because governments are sole providers of defense services and defense procurement tends to be less transparent than other types of government procurement.
“Military spending is interesting from the corruption perspective because governments are sole providers of defense services and defense procurement tends to be less transparent than other types of government procurement”
Have you found that your results are as relevant today as when published?
Our results are relevant for countries where defense spending is still shrouded with secrecy and where the public expenditure management systems continue to remain weak. In such an environment, the scope for resource leakages is significantly large.
What do you consider have been the main changes since your paper? Are there any countries which you think have made a commendable effort to reform their defence procurement over the last five years?
In the past five years, numerous initiatives have been launched to enhance transparency of budgets and public sector operations in general. These also include the efforts to enhance transparency of revenues of oil producers. In addition, a significant amount of resources are being devoted to building public expenditure management systems of countries at different levels of development. There is some progress in this area, as illustrated by the benchmarking exercise carried out for 28 highly indebted poor countries by the Bank and Fund. It suggests that public expenditure management systems have on average shown some improvement, but many countries still require a substantial upgrading of their systems.
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