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