Corruption and Agricultural Market Intervention

Sirilaksana KhomanChair, Economic Sector Corruption PreventionNational Anti-Corruption Commission (NACC)

Presented at the course: MORS D68 Ethics and Executive Leadership, Sasin Graduate Institute of Business Administration, Chulalongkorn University, Wednesday 30 October 2013

Types of governance issues Straight-forward, petty corruption Complex and sophisticated networks,

plundering the nation’s resources• Example: Rice pledging scheme

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

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

Loss for 2005/06 crop; 5.2 million tons paddy

44.832.6

-19.1

-20-1001020304050

รายจ่าย รายรับ ขาดทุน

พนัล้านบาท

Agencies involved and quantities of paddy in the process

90 per cent of pledges not redeemed.

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‘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 differentialRent 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 profitsFree rice to siphonRice mill

• Rice mills in the program no longer know how to compete

Consequence

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‘Rent-seeking activities and corruption

₋ lobbying/kick-backs₋ collusion

Bid price lowerthan 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 riceInflated rentWarehouse ₋ excess

warehouse capacity

consequence

“Surveyors”Govt official

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’

(5) Amendment of contract No. คชก.ขข.02/47 ลว. 18 May 2004 removing export requirement

(6) Policy change that favoured one export company that became the largest exporter

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

Evidence of probable insider information

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2005-2006 loss of 19 billion Baht: Distribution of economic rent:

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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)

1414

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

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Top 2 largest exporters received economic rent of 2.641 billion Baht

(for one crop) • Collusion becomes easy

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Remaining13%

20% # 3 and # 4

59% Largest two exporters

Rice production, export and estimated domestic consumption in 2009

Possible profit of 25 billion Baht (conservative estimate)

Flows of Network Relationships in Thailand

B

B1 B2

B1.1 B1.2 B1.3 P1.1 P1.2 C3

C or P

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

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

In a nutshell: the 6 C’s

Constitution Concentration of political power Crisis of 1997 deCentralisation Civil Service reform Corruption

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

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

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?

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

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

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

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NACC Preventive investigation at the policy formulation stage

Mega projects• ‘NGV’ buses• 3G telecommunication• 350 billion Baht flood prevention

project• Suvarnabhumi airport, second phase• Transport infrastructure 2 trillion Baht

Agricultural intervention policy• Rice, longan, cassava, natural rubber,

sugar cane and sugar, milk

More aggressive measures “unusually rich” Asset disclosure

• MPs removed from office

Greater reliance on technology

Asset disclosure – database linkage Encouraging use of technology in

government agencies – business registration, licensing and permits, etc. (greater convenience for business and reduces opportunities for corruption)

Monitoring of monopoly elements Role of regulator and operator Initiatives regarding procurement

Civil Society:• Freedom of information• Public hearings of draft laws • Monitoring by media/NGO’s• School Curriculum

Good and CleanGovernment

Competition & EconomicFreedom:• 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

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