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Critical factors contributing to corruption in construction industry

Conference Paper · September 2011

DOI: 10.1109/ISBEIA.2011.6088831

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 2011 IEEE Symposium on Business, Engineering and Industrial Applications (ISBEIA), Langkawi, Malaysia

Critical Factors Contributing to Corruption in

Construction Industry
Rumaizah Mohd Nordin1, Roshana Takim2, Abdul Hadi Nawawi3
PhD Candidate1, Associate Professor Dr.2, Professor Dr.3
Graduate Centre Department,
Faculty of Architecture, Planning and Surveying,
University Technology MARA (UiTM)
Shah Alam, Malaysia
[email protected] , [email protected], [email protected]
1

Abstract— Corruption in construction is a fiduciary crime that is Corruption is the violation of established rules for personal
believed to slowly penetrate the construction sectors in countries profit and gain [7], [10]. Myint [16] defined corruption as the
around the world. It that can reduce the efficiency, effectiveness misused of official position, rank or status by an office bearer
and equity of infrastructure services that resulted in construction for his own personal benefit. Following these definitions,
projects that is unnecessary, unsuitable, and defective. In order examples of corruption in construction could be in the form of
to control effectively the level of corruption in construction, the bribery, extortion, fraud, embezzlement, kickbacks, nepotism,
critical factors of corruption in construction need to be correctly cronyism, appropriation of public assets and properties for
diagnosed. Hence, the objective of this paper is to review the private use [10], [13], [16].
critical factors of corruption in construction by various
researchers across the globe. The initial findings based on purely According to Quah [8], the extent of corruption in
literature reviews suggest that critical factors could be divided construction in Asian and other countries in the world depends
into direct and indirect factors that affect the supply and demand on two factors: The first deals with the nature of the causes
for corrupt activities. Meanwhile, environment, individual and (factors) of corruption, while the second factor - the degree of
international firm factors are also seen to be critical. Individual effectiveness of various measures initiated by political leaders
attitude, laws and regulations and administrative control are also to combat corruption in construction. Hence, in order to
imperative factors critical to corruption in construction. control effectively the level of corruption in construction, the
causes of corruption must first be correctly diagnosed. The
Keywords- Construction industry, factors, corruption,
objective of this paper is to investigate critical factors
Malaysia.
contributing to corruption in construction industry. The study
I. INTRODUCTION presents an early research purely based on literature review. It
reviews various researches on factors contributing to
The construction industry plays an important role in any corruption in construction across the globe.
country’s economic development. It establishes the
infrastructure required for socioeconomic development, while II. PROBLEM STATEMENT
being a major contributor to the overall economic growth.
This is vital for the fact that the economic growth of any It is estimated that the total size of the global construction
nation can be measured by the development of physical market are around US 3,200 billion per year. Its share of the
infrastructures [5], [15]. Construction is a sector that includes economy varies from 5 to 7 percent of Gross Domestic
projects initiated by both governments (often termed ‘public Product (GDP) in the developed and advanced developing
works’) and the private sectors [12]. Construction project countries, while around 2-3 percent of GDP in lower-income
development involves numerous parties, various processes, countries [2], [3], [12]. In Malaysia, although construction
different phases of work, and a great deal of inputs from both industry accounts for less than 5 per cent of GDP, the industry
the public and private sectors [15]. is a strong growth push due to its extensive linkages with other
industries [5].
Since construction project is unique in nature, the concept
of accountability to prevent corruption in construction is Corruption in construction projects can reduce the
inevitable [5]. Corruption is a fiduciary crime that is believed efficiency, effectiveness and equity of infrastructure services
to slowly penetrate the construction sectors in countries [10]. Corruption is blamed to represent a threat to construction
around the world [10]. Corrupt practices can be found at every and engineering companies, as well as those institutions
phases of construction projects i.e., in the planning stage, the companies that finance, guarantee or insured construction
awarding of construction contracts as well as the operation and projects. Corruption in construction could result in wasted
maintenance of projects [4], [9], [10], [14]. tender expenses, tendering uncertainty, increased project costs,
economic damage, blackmail, criminal prosecutions, fines,
Corruption in construction involves many types of crimes blacklisting, and reputational risk [12].
that imply some form of illicit and criminal behaviour.

978-1-4577-1549-5/11/$26.00 ©2011 IEEE 330

 As cited in Sohail and Cavill [10], Strombom (2001), acts or they condone such acts, it cannot be expected that the
argues that corruption in construction generates immense employees will behave differently.
opportunities for payoffs with comparatively low risk of
Table1.0: Factors contributing to corruption
detection and punishment. This is a key problem in the
construction industry, which is typically and adversely
affected by delays, disruption and changes leading to Tanzi (1998) Neelankavil (2002) Rahim (2010)
increased construction costs. Corruption Around International Rasuah dan
The World: Causes, Business Implikasinya dalam
III. CRITICAL FACTORS CONTRIBUTING TO Consequences, Corruption: A Sektor Pembinaan
CORRUPTION IN CONSTRUCTION Scope and Cures Framework of Negara
Causes, Effects and
Increasingly public interest and concern over corruption in Prescriptions
construction have resulted in a large amount of scholarly
USA (IMF) USA Malaysia
research on the subject [16]. Table 1.0 presents the critical
factors that contributed to corrupt activities gathered from • Direct Factors • Environmental • Complexity
Affect the demands Variables • Ineffective
various researchers. (by the public)for - Power control system
Tanzi [17] divided critical factors of corruption in corrupt acts concentration of construction
- Regulations and - Lack of management
construction into two: namely, direct and indirect factors. authorization transparency • Financial
Direct factors are those affect the demands for corrupt acts, - Certain - Inappropriate pressure
while the indirect factors are those affect the supply of acts of characteristic of regulations • Tight work
corruption by public officials. It consists of regulation and tax system - Economic process
- Certain condition • Greed
authorization, characteristic of tax system, spending decision spending - Lack of
and provision of goods and services at below market price. For • Low morale
decision competition
example, regulations and authorizations could give a kind of - Provision of - Income
monopoly power to the officials who must inspect the goods and inequalities/
activities of obtaining licenses and permits. The officials can services at poverty
below market
use their public power to extract bribes from those who need price • Individual
the permits. Variables
• Indirect Factors - Greed
In addition, corruption can also affect spending decision of Affect the supply - Integrity /
public expenditure. This is due to public projects sometimes (by public officials) honesty
having been carried out specifically to provide opportunities to of acts of corruption - Living wages
some individuals to get commissions from those who are - Bureaucratic - Maintain power
tradition
chosen to execute the projects.
- Level of public • International
The indirect factors on the other hand, are associated to the wages Firm Variables
- Penalty system - Market
bureaucratic tradition, level of public wages, penalty system in - Institutional expansion
the form of liquidated and ascertained damages (LAD), control - Competitive
institutional control, transparency of rules, laws and processes, - Transparency advantage
and leader’s behaviour. of rules, laws - Profit motive
and processes
Bureaucratic tradition is vulnerable to corruption in - Example set by
construction due to unclear rules of promotion, and nepotism. leadership
Over the years, many observers have speculated that the Source : Tanzi (1998); Neelankavil (2002); Rahim (2010)
wages paid to civil servants are important in determining the
degree of corruption in construction. For example, high wages Meanwhile, Neelankavil [7] classified critical factors of
may reduce the number of corrupt acts, while they may lead to corruption in construction into three main variables. These are
demands for higher bribes on the part of those who continue to environmental, individual and international firm variables.
be corrupted. Environmental variables are those that exist within the country
Penalty system in the form of LAD imposed by a country and are outside of the control of a single individual. It started
is also an important factor in reducing corruption in with the lack of a clear distinction between ‘public’ and
construction. Honest and effective site supervisors, good ‘private’ which create opportunity to some form of public
auditing officers and clear rules on ethical behaviour should be resources for private gain. Environmental variables include
able to discourage corrupt activities. Moreover, lack of power concentration (excessive administrative and
transparency in rules, laws and processes creates a fertile discretionary power), lack of transparency, inappropriate
ground for corruption in construction. Rules are often regulations, economic conditions, lack of competition, income
confusing, the documents specifying them are not publicly inequalities, and poverty. For instance, over regulations and
available, and sometimes, the rules are changed without unclear regulations breeds inefficiency that can be
properly publicized announcements. Leaders’ behaviour is circumvented through bribing officials. This is due to the
another indirect factor contributing to corruption in excessively requirements for approvals and misinterpreted in
construction. When the top leaders either engaged with corrupt the laws. Lack of competition in getting contract for projects

331
could also possibly create informal barrier for companies that Further explanation by the Executive Director stated that “A
could results for firm to win contracts through illegal means. construction project could have one IP throughout the
processes. It is a contract between the bidder and the
The next is individual variables. It is related to the personal contractor. The important thing about IP is that it is a form of
behaviour and attitudes in the form of greedy, integrity, check and balance tool. One of the key components of IP is the
honesty, living wages, and maintaining power. Individual greed appointment of independent external monitor (IEM). The
leads to action that may be corrupt. Low wages and salaries of purpose of IEM is to monitor the potential corruption factors
government employees for some countries can also contribute across project phases. Hence, it could be applied in
to corruption in construction due to desperation. Nevertheless, construction.”
integrity and honesty are important qualities to prevent
individuals to perform corrupt acts in construction In addition, IP sets out rights and obligations to the effect
that neither side will pay, offer, demand or accept bribes, or
The third is the international firm variables. It consists of collude with competitors to obtain the contract, or while
market expansion, competitive advantage, low cost labours, carrying it out. Bidders are required to disclose all
and profit maximization. International construction companies commissions and similar expenses paid by them to anybody in
participate in corruption to assist themselves in their market connection with the contract. If violations occur then sanctions
expansion strategies. This could be seen through bribing will apply. The Executive Director further emphasized that
officials in order to get necessary permits to set up their “we propose high amount of penalty for corruption in order to
businesses. Furthermore, through corrupt practices, avoid people to get involve with it.”
international construction companies are able to secure
continuous source of resources such as materials and Another tool worth to consider is a Whistle-blowing Policy.
components. As an initiative to fight corruption in Malaysia, the
Whistleblower Protection Act 2010 (Act 711) has been duly
In spite of the two researchers, Rahim [11] studied approved in Parliament on 6th May 2010 and came into force
corruption in construction based on the Malaysian perspective. on 15th December 2010. This Act is to be implemented by all
He emphasized that in Malaysia, corruption in construction is a
enforcement agencies e.g., Police Force, Customs,
result of the complexity of construction projects. Construction
Immigration, and Malaysian Anti-Corruption Commission
process with a series of heavy tasks and activities throughout
(including ministries and departments under federal and state
the entire project life cycle, contributed to the occurrence of
governments). The Act is formulated to encourage informers to
corrupt activities at every project phases. Financial pressure to
expose corrupt practices and other misconduct [1]. This policy
construction companies and officers in charged could also act
would provide immunity to informers from civil or criminal
as contributing factors to corruption in construction.
charges that can help to address the issue of integrity and
IV. PRELIMINARY DATA COLLECTION honesty under the individual variables factors. The Executive
Director also highlighted that “a whistle-blowing policy is also
The initial method of data collection is by means of semi- important and must be implemented within all these
structured interview with the Executive Director of companies. Each company must have its own whistle-blowing
Transparency International (TI) Malaysia; the Malaysian policy and a trusted element for them to report so that their
society for transparency and integrity. The face-to-face identity is not known”.
interview was designed to gather preliminary data on
corruption including critical factors and corruption prevention CONCLUSION
in Malaysia, particularly in construction industry. The
This paper attempts to review critical factors contributing to
interview were recorded and transcribed verbatim for content
corruption in construction industry based on the experience
analysis.
learned from various researchers.
Based on the interview, it was found that TI has developed
Tanzi [17] has divided the critical factors contributing to
Integrity Pact (IP) as one of the anti-corruption tool. It is
corruption in construction industry into direct and indirect
currently implemented by many government departments
factors. These factors related to both demand (by the public)
worldwide, including Malaysia. As stated by the Executive
and supply (by public officials). Most of other studies on
Director “IP is popular at this moment and has been used for
corruption dwelt purely on officials misusing of their power for
more than ten years, worldwide. In many countries IP has been
private benefits. This gives an impression that those who give
used for government public procurement. IP is a tool
bribes are innocent victims, who are forced by corrupt officials
developed by Transparency International that can be used for
to pay bribes [16], [10]. But, Tanzi [17] emphasized that both
any procurement process and can be applied to any industry
direct and indirect factors are equally accountable factors
wherever there is a bidding process. IP basically is to
contributing to corruption in construction industry.
safeguards the bidding process against factors of corruption,
especially in the construction sector.” On the contrary, Neelankavil [7] considers factors
contributing to corruption in construction in the contextual
From the interview, it could be deduced that IP is a tool
behaviour of parties involved. It includes country related,
developed to protect the bidding process of any industry, in
individual attitude related and firm related. Unfortunately, he
particular, construction industry. Unfortunately, IP has not
failed to address these factors in term of supply and demand.
been implemented in Malaysia.
Meanwhile, Rahim [11] sees process related, administration

332
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