Corruption Case Study

I heard this story recently. Not sure if it is true. Read and draw your own conclusions.

The Supreme Court has banned iron ore mining in Karnataka’s Bellary region. A government-owned organisation is allowed to do the mining. The result: steel company barons are rushing to the appropriate Central minister with generous dollops of cash to get their quotas of iron ore allocated for their plants. With elections due in states next year, all money is welcome.

And to top it off, iron ore mine owners in other states are readying cash to lobby to ensure that the Court does not lift the ban so that they can get above normal profits!

Lokpal ,anyone? Think about what’s happening. The problem, like I wrote last week, is Monopoly+Discretion-Accountability=Corruption. And no additional institutions are going to solve either this corruption or the corruption that happens when you jump a red light and are offered a choice – pay Rs 50 and get going now, or spend a few hours in court and pay more if a challan is made.

Unless we understand the cause of the problem, we are not going to get to the right solution, and could in fact make the problem worse.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.

3 thoughts on “Corruption Case Study”

  1. who created the Bellary mess…who looted it.. BJP…its top leadership… please mention that too along with the alleged central ministers.

    it was bjp and its leardership that looted the Bellary mines since 1998 election when its tallest leader contested loksabha election from there.she lost the elections but won over the Reddy brothers..

    following which bjp won the southern state. and the Reddy brothers were awarded the ministries and clean chits from none other than the party president of bjp… with whom more than
    often you share the stage…

    please mention full facts in your “I heard this story recently. Not sure if it is true. Read and draw your own conclusions.”

  2. Reading through your case study, I feel anyone of several actors:
    • Competitor companies motivated out of jealousy
    • Ordinary citizen motivated out of loss to exchequer and hence to them
    • Political competitor motivated out of one-upmanship
    • Social activist motivated by trying to bring justice or showcase their marrow
    could file a complaint with lokpal office.

    Lokpal since it is independent of judicial, executive or legislative can perform investigation into the complaint.

    Conducting simple CAG audits can expose scams while lokpal will have the ability to perform criminal investigations if required.

    Within a year they have to conclude the investigation and within additional year they have to announce punishment to guilty.

    The guilty are responsible for 5 times of the total loss to exchequer (I agree that loss valuation can be difficult here). These have to be collected from seizing all the assets including the personal assets of those found guilty. And all found guilty will be in for life sentence.

    Few such cases in a year and fear of not being able to get away sets into the heart of politicians as well as the companies’ barons.

    The pendulum is right now on one extreme where graft is considered birth right by those in control. With lokpal in place it may go to other side where graft will become nuisance. And with time pendulum will come back to center.

    I am assuming that lokpal should be able to execute on its vision. There we need to lend support to Anna’s movement.

    Beyond that I agree that system itself is promoting corruption. If there was less government and all they did was set a regulatory body to sell the reserves within legal framework it would serve better. But that needs changing the system. To change the system we need several smart educated people inside the parliament. And at this moment such people are not interested in dirting their complete life. Lokpal can help clean it and enable such people to participate.

    What am I missing?


  3. Well said, Sid.

    I did say some time back on these pages that corruption is a irrepressibly creative monster.

    Moving in on corruption is akin to pressing into a water filled ball, you press one end and another end pops out, and it is usually the unseen end. Rajesh has just given us an example.

    Even in the most simplest of financial interactions there is money to be made, and where money is to be made, people will make it.

    Consider this…

    If you have ever traveled in public transport, the problem of small change is a big problem. The conductor almost everyday doesn’t have change.

    Ideally speaking though he must be the person with the most change. So where is the change going?

    To the sundry shops and hotels which invariably have no shortfall of change. There are some establishment I know who have made a fetish of giving your change only in new coins. So what is happening?

    The conductor collects all the change and hands it over to these people for a small margin. For every hundred rupees he hands over the premium he charges can be as high as twenty rupees.

    Is he doing wrong? The man has just taken advantage of the system, to his own benefit, and the state or private bus agency is none the wiser.

    Would he agree if you called him corrupt?

    Imagine the same man, it could be you and me too, in charge of a fifty thousand crore contract, and will you resist the urge to make some easy money?

    For 90 percent of the population the desire to take a cut will over come the desire to be fair.

    Is the system faulty?

    Well you could say so, but then if you formalize the system, there is going to be more trouble than before.

    The conductor who pops off into the bus eager for earnings from the transfer of change will now sulk. He will sit in the station and refuse to move unless his superior arranges for change, then he will use the new rule to create so much nuisance that we would wonder that the system even if bad was better.

    In any system, the system has to be flexible to allow things to work, and flexibility invariably puts loop holes in, and then these loopholes get exploited.

    These loopholes are the fountainhead of corruption, however it is impossible to design systems without loop holes without sacrificing flexibility and the possibility of system idiocy.

    Good intentions are good, but they may not be good enough. Consider this case.

    Of excessive mining from river beds.

    Leave the sand mining to private parties and they will exhaust the river bed. In this phase the bribes are usually paid to the local officials who close their eyes to it.

    Right minded environmentalists step in, the government is receptive to their complaints, takes over the business, holds auctions.

    Let us consider some imaginary figures.

    The official price for a sandbed, even during an auction, let us put it at 1000 crore a year. Actual income from the river bed was 8000 crores. Add 2000 crores of kickbacks to local officials which reverse flows gently back to the very top.

    Now that the government has taker over. The auction figure remains the same or grows marginally. Kickback is now consolidated and migrates from the level of the petty official to that of the highest echelons of government.

    Where local officials demanded 2000 crore, the current figure becomes 4000 crores and paid upfront and in larger tranches. Income from the sand bed rises that year.

    The government is happy, the lease owner is happy, the only people unhappy are the common people.

    What has changed?

    Now that government takes over, the supply and transport lines become inefficient. Government deems that one cannot overload vehicles, but does not make alternate arrangements for new vehicles. It cannot, it does not have so much money, and who will maintain it once bought.

    If you are the one who is building a house, then you are in a hurry. You suddenly become willing to pay more.

    Fine, the lease owner is happy, he needs to earn his kickbacks and a constrained supply line is almost a godsend, it will kick demand up, and thus the unofficial price. Also unsuspecting customers get lower weight loads, creative ways are found to deliver less.

    Soon there develops a government fixed price and a real market price. Sooner or later a new black market economy replaces the earlier one.

    This time the people suffer even more, not only is the thing pricey, it is also scarce.

    Now who is to be blamed?The simpleton environmentalist, the original miner, the government, or the particular party? Difficult question to answer!

    How do you solve this problem? Difficult!

    Let go the government control and environmental headaches will loom large. Take it into government control and efficient processes suddenly become slack.

    What I want to point out is that designing a corrective process is not a simple task. It is easy to find problems,however solutions are not that easy to come.

    We should recognize that
    1. there are limitations to transparency, and formalism. 2. whatever be the system, people will find a way out.

    Merely crying fowl over a situation merely replaces one crime with another, one criminal with another. In crying fowl there is the chance that we will worsen the situation with our goodness.

    A common solution suggested is that educated people take over. However it is well known that the more educated the administrator is, the more venal he can become, blue collar crime becomes white collar.

    What is needed is not just action or even vigilance, we can see how action merely worsens the situation, too much vigilance creates its own set of problems. The challenge is to find creative solutions, and that is the problem of governance.

    Merely cribbing about things gets one no further than becoming a nuisance. If you have valid solutions, come forth and declaim. Otherwise silence may be better, at least let existing systems work, inefficient as they may be.

    So this is the challenge, to take an area, look at the problems, the available solutions and how they can be bettered. We need think tanks to do jobs like these.

    Isn’t it a sorry sight that Rajesh and Co have become crib tanks rather than the think tanks they can be?

    Add to this mix American educator cowboys, and the stink gets nauseous!

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