Net Impact Talk May 2012

1. Innovation in Corruption
Sirilaksana Khoman
Advisor to Commissioner
National Anti-Corruption Commission
Presented at the the Sasin Centre for Sustainability Management and Net
Impact Bangkok Professional Chapter luncheon meeting on Thursday 17
May 2012 at Sasin Graduate Institute of Business Administration,
Chulalongkorn University
and how to deal with it … maybe ?

2. “When I despair, I remember that all
through history the ways of truth
and love have always won.
There have been tyrants, and
murderers, and for a time they can
seem invincible, but in the end they
always fall.”
Mahatma Gandhi

3. How to understand politics using cows
 SOCIALISM: You have 2 cows; you give one to your
neighbour.
 COMMUNISM: You have 2 cows. The State takes both and
gives you some milk.
 FASCISM: You have 2 cows. The State takes both and sells
you some milk.
 NAZISM: You have 2 cows. The State takes both and shoots
you.
 BUREAUCRACY: You have 2 cows. The State takes both,
shoots one, milks the other, and then throws the milk away...
 TRADITIONAL CAPITALISM: You have two cows. You sell
one and buy a bull. Your herd multiplies, and the economy
grows.

4.  A THAI CORPORATION: You have two cows. You are
lousy at what you do. You make friends with a corrupt
politician and get your circle of friends to vote for him. He
gives you subsidies and privileges using taxpayers'
money. You get rich, multiply your herd of cows, and
make more friends who will also vote for the corrupt
politician. The cycle goes on.
 A THAI CORPORATION: You have two cows. You buy
up one thousand more from poor farmers at 4,000 Baht
each. You convince the government to buy cows from
poor farmers at 20,000 Baht each. The government
agrees. The poor farmers have no more cows to sell.
You sell your thousand and two cows for 20,000 Baht
each.

5. Types of governance issues
 Straight-forward, petty corruption
 Complex and sophisticated networks,
plundering the nation‟s resources
• Example: Rice pledging scheme

6. Paddy Pledging Scheme: Policy evolution
 Original Paddy pledging scheme at warehouse – provided
credit to farms of 80-90% of market price to delay sale by
farmers (like pawning)
 1993-4 started use of pledging „receipt‟
 2000-2001 Thaksin increased pledging price above market
price – increased budget – transforming scheme into price
support scheme
 2001-2002 increased coverage to off-season rice crop
 2006-2007 Surayudh government decreased price to close to
market price
 2008 Samak government increased price to highest level at
14,000 Baht for off-season rice
 In spite of rapid fall in price, Somchai and Abhisit
governments maintain pledging price above market price:
main crop 2008-09 at 12,000 Baht and off-season crop 2009
at 11,800 Baht

7. Comparison of pledging price and market price
of jasmine rice
Pledging price
higher than
market price for
the first time
01/02
Study period
2005/6

8. Loss for 2005/06 crop; 5.2 million tons paddy
44.8
32.6
-19.1
-20
-10
0
10
20
30
40
50
รายจ่าย รายรับ ขาดทุน
Million Baht
Expenses Revenue Loss

9. Agencies involved and
quantities of paddy in the
process
90 per cent of pledges not
redeemed. Farmer’s choices
Farmers barn
1.23 million tonnes
Loan 11,622 MB.
Participating rice mills
4.06 million tonnes
Loan 33,174 MB.
Disposable
pledge
420,648.4
tonnes
Redeem
762,904
tonnes
Milling
order
Disposable
pledge
3,662,741.6
tonnes
Redeem
401,543.5
tonnes
Domestic
distribution
of unmilled
rice
Central
warehouse
1.73 million
tonnes rice
Domestic
distribution
of unmilled
rice
Domestic
distribution
of white rice
Overseas
distribution
of white rice
Department of
Foreign Trade
BAAC
Milled rice Unmilled rice (Paddy)
BAAC
Public Warehouse
Organization (PWO)
Public Warehouse
Organization (PWO)
Public Warehouse
Organization (PWO)
Pledge barn Pledge
Set Rice Policy
Approval of project
cost
Registration of farmers
Registration of customer
BAAC
Bank for Agriculture and
Agricultural Cooperatives (BAAC)
BAAC Branch
Department of Agricultural
Extension
The National Rice
Policy Committee
Committee of Policy and
Measures to Help Farmers
(unmilled rice) (milled rice)

10. 10
„Rent-seeking activities‟ and corruption
- inflation of registered production
₋ increase acreage for rice/reduction of other
crops
₋ substitution of rights of other farmers
₋ increased number of crops to 7-8 crops/2
years
₋ put pressure on governments to continue
program
P differential
Rent Seeking
Farmers
₋higher cost
₋greater
pollution
₋competition
for water
resources
₋ Capacity expansion/Silo to 90 million tons
paddy
Increased investment from 0.8 million
Baht to 1.6 m per mill during 1987-2005
₋ Lobbying to be included/pledging across
district
₋ siphoning of rice for illicit sale
₋ substution of farmers’ rights/ using rice
from Cambodia, Myanmar and Laos
Milling profits
Free rice to siphonRice mill
• Rice mills in
the program
no longer
know how to
compete
Consequence

11. 11
‘Rent-seeking activities and corruption
- lobbying/kick-backs
₋ collusion
Bid price lower
than export price
exporters ₋ unfair advantage
of large exporters
₋ huge investments in warehouse
construction/ return in 2 years
₋ illicit sale of rice
₋ exchanging low quality for high
Siphoning of rice
Inflated rent
Warehouse - excess
warehouse
capacity
consequence
“Surveyors” Govt official

12. Corruption and benefit-sharing
(1) Collusion in bidding among exporters
(2) Contracts favouring those in the scheme:
5-6 months after bidding to pay
(3) Contract amendments between Govt
Warehouse and President Agri Trading, winner
of the export contract on 6 May 2004; standard
clause: 5% deposit changed to 1%
(4) At time of export, govt paid another $20 per ton
to „prepare rice for export‟

13. (5) Amendment of contract No. คชก.ขข.02/47
Date 18 May 2004 removing export requirement
(6) Policy change that favoured one export company
that became the largest exporter

14. Innovation in corruption policy
 In early 2004 President Agri Trading, a newcomer, won
the bid to buy 1.68 million tons of rice from the govt
at prices above market price, thereby possessing the
largest amount of rice of all the exporters: 2.2 million
tons
 A few months later, the govt announced the pledging
price for the new season paddy at 10,000 Baht (higher
than market price)
 Consequently market price shot up – other exporters
could not compete with PAT. Many had to buy rice from
PAT

15. Evidence of probable insider information

16. 16
2005-2006 loss of 19 billion Baht:
Distribution of economic rent:
16
Farmers 37.3%
Rice mills (323
mills)
18.1%
Warehouse +
surveyor
4.2%
17 exporters 23.4%
Government
budget
13.7%
Deadweight loss 2.7%
Recipients
Consumers’
and taxpayers’
loss of 19.13
Billion Baht
Source: Nipon (2010)

17. 1717
 Beneficiaries are mostly well-to-do farmers in
irrigated areas in the Central and lower
Northern regions
 Richest 10% of farmers received 20 % of the
benefits
 Poorest 10% received 1.7 %
 Farmers with pledges above 200,000 Baht
received 59.7% in 2008-9 season
 Farmers with pledges below 40,000 Baht
received 2.7% in 2008-9 season

18. 18
 Top 2 largest exporters received economic
rent of
2.641 billion Baht
(for one crop)
• Collusion becomes easy
59
Remaining
13%
20%
# 3 and # 4
59%
Largest two exporters

19. Rice production, export and estimated
domestic consumption in 2009
Possible profit of 25 billion Baht (conservative estimate)

20. Flows of Network Relationships in Thailand
B
B1 B2
B1.1 B1.2 B1.3
P1.1 P1.2
C3
C
C4
C1 C2 P3
N1.2.1 N1.2.2
P2.1
P2.2 P2.3
N2.2.1 N2.2.2
Bureaucracy Politicians
Notes: B = bureaucracy, C = capitalists, P = politicians, N = non-politicians
Por

21. Rivalry between Clans/ „Puak‟ or Sub-Clans,
Choosing Clan Affiliation
Fighting each
other to control
the resources or
to be promoted
higher in the clan Providing
resources
to the client
in his own
sub-clan
Clan A
A1 A2
Clan B
B1 B2
Providing
services and
political
support to
the patron in
the sub-clan
The poor and the under-privileged
who are not accepted into any clan
are left without resources and
protection
People choose clans according to the
perceived benefits which could depend on
member size and resources of the clan
choose choose
People with
independent
source of power

22. What can be done?
 Membership of the WTO‟s GPA?
 Ratification of the UNCAC; membership in OECD
Anti-Bribery Convention?
 Integrity pacts with private sector, encouraging
integrity pacts among professional and business
associations, eg. medical suppliers, construction,
supply chain, involving civil society.
 Pro-active, pre-emptive anti-corruption action –
intercepting questionable projects

23. OECD Convention – Article 8
Accounting
1. “….. each Party shall take such measures as may be
necessary, within the framework of its laws and
regulations regarding the maintenance of books and
records, financial statement disclosures, and accounting
and auditing standards, to prohibit the establishment of
off-the-books accounts, the making of off-the-books or
inadequately identified transactions, the recording of
non-existent expenditures, the entry of liabilities with
incorrect identification of their object, as well as the use
of false documents, by companies subject to those laws
and regulations, for the purpose of bribing foreign public
officials or of hiding such bribery.”

24. Targeting corruption-friendly policies,
measures, practices
 Intervention schemes in agricultural
markets
 Targeting creation of artificial monopolies
 Licensing requirements, registration
practices, permits,
 encouraging use of technology to reduce
contact, promoting competition
 Evidence-based transparency index

25. Vigilance on conflicts of interests
 Data base
 Disclosure requirements
• More positions included
• Use of technology
• Streamlining forms
• Business associates
 Recommendations regarding
appointments of officials and prosecutors
to state enterprise boards
 Strengthening legislation?

26. Amendment of anti-corruption law
• Clarification and penalties
• Provincial offices
• Whistle-blower protection
• Anti-money-laundering powers
• Plea bargaining
• Statute of limitations
• Public procurement
requirements/procurement legislation

27. NACC ACT 2011:
 Article 103(7),(8): procurement
 Publication of reference prices and
method of calculation
 Disclosure of accounting statements
for contracts designated by the NACC
 Monitoring by the NACC

28.  Design of anti-corruption measures
taking into account the structure of
patron-client networks/creation of
monopoly rent
 Strengthening of conflict of interest
laws?
 Incentives to make whistle-blowing
worthwhile?
Direction
28

29. Civil Society:
• Freedom of information
• Public hearings of draft laws
• Monitoring by media/NGO’s
• School Curriculum
Good and Clean
Government
Competition & Economic
Freedom:
• Competitive restructuring
of monopolies
• Regulatory simplification
Public Administration and Public Finance:
• Meritocratic civil service, codes of conduct
• Transparent, monetized, adequate remuneration
• Accountability in expenditures (Budget, Audit, Procurement)
• Perception index of good service by agency/service
Measures for Good Government and Transparency
Accountability of Political Leadership:
• Disclosure of parliamentary votes
• Transparency in party financing
• Asset Declaration, Conflict of Interest Rules
Checks and Balances:
• Independent and effective judiciary
• Independent and effective specialized
anti-corruption agency/unit
• Decentralization with accountability?
Private Sector
Partnership:
 CSR, codes of conduct
 Anti-corruption pact
29