SOEs and Kickbacks
SOEs and Kickbacks
Dear list,
I was just glancing at the report on the abuse of the "oil for food"
program in Iraq and discovered that a Thai trading company and two
Vietnamese ones were implicated. Vinafood and Vinamilk were both
involved in an illegal payement/ kickback scheme through which they paid
somewhere around $50 million to keep their contracts going with Iraq. Of
course, this is peanuts compared to the estimated 2.2 billion that a
wide arrangement of companies paid for the same privilege. . .
Vietnamese state companies engaging in malfeasance abroad? I'm shocked,
I'm shocked. . . (yawn)
For a story on the report by Volcker et al, see:
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/27/AR2005102700954.html
Shawn McHale
Interesting. SOEs regularly sell assets at under value in order for
managers and sales employees to get kickbacks -- since profitability
maximization is not sufficiently rewarded. But why would an SOE pay
a kickback in order to sell its product? Perhaps this would be done
to clear out inventory or unload products of unacceptably low
quality? Presumably the Vietnamese firms would actually go ahead and
record the illegal payments in their books, since they could easily
justify it as a necessary payment for securing the contract and
wouldn't want to get in trouble for a missing $50 million. For a
change, in this particular case, the Vietnamese firms would seem to
be the relatively more clean, transparent party in the transaction.
How 'bout them apples?!
Markus
Markus,
Why would an SOE pay a kickback in order to sell its product? I can
think of myriad reasons. The most important one would probably be that
you want to sign ANOTHER contract and therefore, to improve your chances
of getting the future contract, you pay the kickback.
What seems interesting about this case is that one assumes that people
higher up than Vinamilk and Vinafood had to agree to this.
I hardly see this as an example of Vinamilk's or Vinafood's clean
record. But I suppose there is a "bright* spot -- now those two
companies can join august firms like Lockheed or ELF-Aquitaine as ones
that have been charged with international bribery. . .
Shawn
Hi Shawn,
Just to break the issue down into its parts, the first question, as I
see it, would be why the SOE managers want this specific contract and
future contracts from this specific customer. Often, SOE managers
are interested in specific contracts that return off-the-balance
sheets individual returns (as opposed to on-the-balance-sheets
profits). But the Iraqi party in this particular transaction appears
to be the one that is being accused of this particular infraction,
not the Vietnamese party. So, as you say, the SOE manager is paying
the kickback in order to secure the contract (and future contracts)
FOR THE COMPANY. This is RELATIVELY constructive behavior, because
-- at least on the face of it -- the SOE manager is acting within the
rules of his own country's law and is behaving transparently vis a
vis his own shareholders and in their interest -- who in theory are
the people of Vietnam.
Still, for me, this leaves the question of why would the SOE manager
be going this extra mile -- into the clearly ethically murky area of
kickbacks and behavior that is illegal in the trading partner
country, i.e. Iraq -- for the company? Brainstorming on this,
possibly it's actually not a decision being made by the SOE managers,
but instead by higher level politicians who are doing some sort of
horse trading involving a range of commodities. Looking for where
the selfish motivations of the SOE manager lie, perhaps we could say
that it represents laziness, in that it relieves pressure to improve
the company: i.e., by paying the kickback, the SOE will need to work
less hard to satisfy market demands and find customers in the
future. But I still would say this doesn't fit the normal equation
for SOE corruption, because the individual incentives are not so
clear and the individuals appear to possibly be acting on behalf of
the firm as opposed to on behalf of themselves.
I'd definitely be interested in a continued dialogue on whether I'm
flawed in my above logic or any other suggestions on what's going on
here! Definitely interesting stuff.
Markus