Foreign direct corruption

As corruption at home is tackled, attention has turned to the role of Chinese businesses in corruption scandals around the world. In February 2008, the Philippines media and legislators were desperately trying to find one relatively unknown forestry official named Rodolfo Lozada. He was supposed to give a tell-all testimony in a senate investigation about a botched telecommunications deal between a Chinese supplier and the Philippines government, but evaded his summons by going abroad and was then whisked away by authorities when he returned. He appeared two days later, at 2:30 am, on live television, to recount who abducted him, how he was persuaded and bribed by government officials to keep silent about his involvement in the controversial deal, and how his conscience made him come clean.17

Certainly, Lozada could not claim to be an angel. During his senate testimonies, he admitted profiting from kickbacks on government deals through his friendship with the economic planning secretary who approved the telecommunications project. He said this project would have been pushed through with little or no attention if the kickback had been limited to the agreed $65 million. But various individuals—apparently emboldened by the alleged willingness of the Chinese suppliers to pay extra—wanted to bloat the project’s worth to $330 million so they could pocket up to $200 million. He said the economic planning secretary asked him to ‘moderate their greed’.18

Philippines President Gloria Arroyo: tainted by ZTE scandal

Philippines President Gloria Arroyo: tainted by ZTE scandal

The project involved a nationwide broadband network that would link government offices and allow the education ministry to beam instructional materials to far-flung public schools isolated by mountain ranges or located in islands. Whistleblowers, including Lozada, named an election official and the husband of Philippines president Gloria Arroyo as project ‘facilitators’ (political backers). President Arroyo signed it days before the May 2007 national election when her allies, who would ensure she would not be impeached, won majority seats in congress.

The failed project’s main beneficiary would have been Zhong Xing Telecommunication Equipment Company Limited (ZTE), one of China’s biggest telecommunication makers. ZTE, a partly state-owned company, is growing its emerging-markets portfolio and the supply contract with the Philippines government would have been a coup. But vocal Filipino critics from civil society, academia and the media have criticised the ZTE contract with their government, arguing that it violates several Philippines laws, including rules that call for competitive bidding for government procurement contracts. Whistleblowers recounted during the senate investigations how the ZTE officials wined, dined, provided women entertainers to, gave free trips to, and paid an advanced ‘facilitation’ payment of about $41 million to their Filipino political backers who helped them clinch the deal. Eventually, President Arroyo not only nullified the deal but also suspended other Chinese-funded projects in the country worth some $2 billion.

Had the Philippines’ active and free press and dynamic civil society not exposed ZTE officials’ actions to clinch the broadband project, bribery and corruption may just have been hidden away as a business-as-usual inevitability. So, is this an indication of how Chinese state-owned companies are bringing their economic ambitions to the developing world?

It is not often that cheap, long-term loans from China encounter public wariness in a beneficiary country. China has also been generous in dispensing loans, some interest-free or as outright grants, to poor debtor African states that embraced no-strings-attached financing for electrification, highways, railways, hospitals and schools. Such financing is in stark contrast to the austerity demands and long list of social, environmental, human rights, fiscal policy, publicly declared political affiliation, and ethical requirements of multilateral agencies, such as IMF and the World Bank. China announced that, through its Export and Import Bank, it will ramp up infrastructure and trade financing to Africa to $20 billion over the next three years and that it would also write off unpaid debts. In return, not only did China outflank the United States, Japan and the European countries in clinching supply deals on oil and other minerals from these natural-resource-rich but development-poor nations, it also means serious business for some 800 Chinese state-owned enterprises (SOEs) now active in the continent.19

ZTE is considered as one of China’s ‘National Champions’, backed by China’s fat foreign exchange reserves that are funnelled through state-owned lending channels, which then lend de facto subsidised, low-cost funds to ZTE’s customers.20

In China’s telecommunications industry, two giant equipment companies have emerged: Huawei and ZTE. They seem to be a study in contrast on Chinese companies’ outbound investments.

Both have been feverishly expanding overseas and edging out their Western counterparts not only by being price cutters but because they understand that some developing markets have a ‘just give me the phone’ attitude, a far cry from, say, Nokia, whose customers are locked into the Finnish company’s standardised products and systems. But as CFO Asia described, there are key differences between the two. For example, Huawei is privately owned, while ZTE has a share structure that is an amalgam of public and state ownership (about half of the shares belong to state-owned agencies and senior management; the balance are listed in Shanghai and Hong Kong bourses). They also differ in style, and perhaps even in general approach. While both are headquartered in Shenzhen, CFO Asia described Huawei’s as a palatial Silicon Valley-like campus, while ZTE’s has the official feel of a government office. ZTE’s showcase lobby reportedly has LCD screens flashing pictures of government ministers and political leaders from Sudan, Eritrea, Niger, Algeria, Libya and Zambia where ZTE has already clinched equipment deals.

But perhaps the most telling difference is the overseas markets they have secured. Huawei has made inroads in the more lucrative developed markets of North America and Europe. It has won contracts with operators in France, Germany, Spain, the UK and Australia.21 On the other hand, ZTE’s sales executives have become wizards at selling products in the developing markets of Africa, Latin America and Asia.22

No wonder, then, that Huawei seems more attuned to the global standards of sustainability. In 2004, Huawei joined the UN Global Compact.23 On the other hand, ZTE reported on its website limited corporate social responsibility (CSR) goals, which focused more on product, supplier and philanthropic concerns.24 There was no mention of any ethical or legal standards that it vowed to uphold in its overseas transactions. In fact, consultancy firm CSR-Asia censured ZTE for vying to invest in a proposed cyber-city in Burma, which has a notorious human rights record.25

However, the mere fact that ZTE has begun to document its CSR goals is a step in the right direction. This could have been a response either to its need to project a caring image to outsiders, or conformity to government-led initiatives, such as those from the State Council’s State-owned Assets Supervision and Administration Commission (SASAC), which oversees and regulates SOEs, such as ZTE. In January 2008, SASAC issued an instructing document that aims to guide SOEs in fulfilling and reporting about their social responsibilities, and in turn improving their competitiveness and sustainability. This guideline was based on CSR issues revealed from SASAC’s in-depth study, which was initiated as a result of the ongoing and increasing debate on CSR in both the international and national arenas. It listed eight major CSR content points that SOEs should follow. While labour issues, product safety and environmental concerns are prominent in the document, at the top of the list is this: ‘Comply with laws and regulations, moral standards, business ethics, and industrial regulations and conduct their business honestly. They should . . . eliminate corrupted behaviours in all business activities’ [our italics].26

The failed ZTE contract in the Philippines, however, is a glaring contradiction between what is preached and what is happening in practice. How these CSR reports will contrast with actual progress and achievements on CSR issues such as corruption remains to be seen.

If corruption in China is exported elsewhere through loans and contract agreements, a twin threat occurs. If the return from a project is insufficient to pay off the loans, this could lead to bad debt, which in time might create a new debt crisis in emerging nations, with similar negative developmental impacts to the previous debt crisis fuelled by Western lenders. The costs of such a situation would also mount for China. It is in China’s best interest, therefore, that it safeguards the long-term viability of its overseas investments’ beneficiaries and promotes enlightened self-interest among the outbound Chinese investors. If it does not, then there are also risks to be faced, as future governments in foreign countries seek to penalise companies that bribed previous administrations.

Back in China, the head of the CCDI, He Guoqiang, said in January 2008 that ‘the key to winning our war against official corruption is to put punishment and prevention on equal footing’. He said, ‘We will place equal efforts in punishing crooked officials for their misconduct, as well as in establishing an anti-corruption system to get rid of corruption at its root.’27 Some consider one of those roots to be the shifting cultural norms in China, as Maoist Communism has been fundamentally transformed. Consequently, more Chinese leaders are speaking either overtly or implicitly about traditional Confucian and Taoist values. Some socially responsible entrepreneurs are even described as Confucian entrepreneurs.28 Confucianism, like all spiritual and religious traditions, has a mixed history in how it shaped, or was used to justify, forms of governance and trade. Its role in the future of China is unclear, and even more unclear is whether it will influence the way China does business with the rest of the world. The concept of Ren in Confucianism emphasises interconnectedness. A more conscious approach to the broader relations it has with all the peoples of the nations it is investing in may prove a wiser approach, in the long term.

» Targetting change

(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)

This section can be referenced as:

Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines.
(Page numbers for this section are available in the pdf download and hardcopy.)


One Response to “Foreign direct corruption”
  1. Debbiep says:

    Confucianism is an Eastern religion/philosophy. Although it is more accurately referred to as a philosophy, books on world religions inevitably include it with other religions from Buddhism to Zoroastrianism.

    It originated in China but has spread to Korea, Taiwan and Vietnam. Most people who adhere to the teachings of Confucius follow Chinese traditional religion, which is a blending of Confucianism, Buddhism, Taoism, and traditional local practices and beliefs.

Share your views or news on this subject