Thursday, 3 December 2009

Costly corruption

The cost of Russian roads is set by a combination of factors. While corruption and weak controls over budget spending cannot be fully ruled out, I believe that the largest contributor to high costs in this area is linked to a fundamental problem of the Russian economy, namely its extremely high levels of monopolisation and, consequently, low levels of competition. Monopolisation comes as part of the Soviet heritage that Russia received (Soviet planning meant the creation of aggregated producers rather than multiple small operators). However, while low competition is partially the result of high monopolisation levels, it is also a direct result of the weak levels of state support for private initiatives and the difficult investment climate that exists in the country.
The reason is corruption. Because based on our estimates, 10 per cent of the cost goes towards the actual construction. Everything else is kickbacks and additional payments. Apart from that, our market of construction materials is highly monopolised and prices for all construction materials are much higher than they could be. We do not conform to construction technology, so it's lucrative to start repairing the road just after it's finished. This is normal practice. Funds are not released immediately, so construction begins in the winter, when it's more expensive. The main point behind this corruption is not to construct a road that will be functional. The main point is the building process itself, because while it is going on there is money and the possibility to allocate funds from the budget.
Road construction is one of the areas most vulnerable to corruption, and this is not just in Russia but all over the world. There are simply too many opportunities to apply so-called grey schemes, inflate construction costs and so on. Given the very high level of corruption in Russia, indicated by a variety of indices, the implied costs of corruption in road construction must be very high. Of course I do not think that this is the only reason. Russia's climate also contributes to costs, as well as obsolete construction techniques which are not modernised.

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