A Norwegian local government corruption case: What happened, how and why?

1. A Norwegian local government corruption case: What happened, how and why? Liss Schanke, special adviser, KS liss.schanke@ks.no

2. The Norwegian corruption case: Water Companies and African farms

3. Short description of the case • In February 2008, a former director of 3 water and sewerage companies owned by local governments in the Oslo region was sentenced to 8 years of prison and payment of compensation of 10 million USD – along with family members, business partners and a Swedish construction company • The guilt is established, sentences are appealed • The company manager has been tapping the local government water companies for funds through a system of companies, family members and subcontractors – probably since the 1970s. • The money was channelled into purchase of 9 farms in South Africa

4. Whatis corruption?

5. Secret misuse of power - private gain • Transparency International defines corruption as “The misuse of entrusted power for private gain.” • The Norwegian Unit for Economic Criminality, underlines the secret aspect: “Corruption implies a secret agreement between two or more parties, to achieve inappropriate benefits.“ • We find all these three elements in this case: • the misuse of entrusted power • the private gain • the secret agreement between the parties

6. Bribery, nepotism and clientelism • Bribes • Staff members received favourable pension deals, salary increases and could buy company cars cheap • Board members got gifts, free plane tickets and trips abroad with their spouses. • Local governments got kindergartens, the police a helicopter field, and private individuals new bathrooms • Favouritism (nepotism and cronyism) • The manager’s friend and son were given contracts without competitive tendering, his daughter was on the company payroll without working for the company • Patron-Client relationships • There were mutual but unequal exchange of favours between the manager and persons of lower status

7. Direct result: Loss of public money and reduced public service delivery • Economic: high consumer prices, reduced taxes and loss of USD 10 mill in public money • Environmental: water pollution above the permitted limits due to false tests • Institutional: negative company and management culture • Private sector: lost opportunities because of lack of competitive tendering • Social: greater inequality in the community • International: possible illegal actions in S- Africa?

8. Indirect result: Loss of political trust and legitimacy • Short term: Reduced trust in political systems and local governments in the communities involved – and in the Norwegian population in general • Short term: Increased focus on possible corruption cases by control systems and media – and more corruption cases revealed • Long term: Possibility of Reduced political legitimacy - and will to pay taxes/fees? • Long term: Vicious circle with constantly reduced democratic trust as result

9. Many challenges: Technical, financial, legal and political

10. Challenge 1: Financial management and audit • Financial management • The financial management was informal and not according to rules and regulations – without competitive tendering • Financial audits • The companies were given clean audits by the international audit company PWC every year, the board members trusted the PWC audit. • An independent Local Government Audit revealed the corruption in 2007 • The role of PWC and a possible compensation is being assessed

11. Challenge 2:Legal framework • Transformation of former local government units into shareholding companies is a general international trend - especially for technical sectors as water and electricity • Shareholding companies are governed and managed by other laws and rules than local government units and are less transparent • Local Governments are owners, but own companies on behalf of tax payers

12. Challenge 3:Role of company boards • Most board members were active local politicians from the area- challenge re. political independence, possible conflicts of interests, capacity, competence • The boards did not fulfill the legal duties re. internal control, and endorsed activities and budgets beyond the mandate • The board members may be held responsible • There were close bonds between the director and the board - the allowances for board members were set by the manager and doubled six times during the period 1990-2005

13. Control challenge 4: Role of staff, unions, and civil society • Whistle blowers where not taken seriously: A local carpenter 1978, a trade union representative 1994 and complaints from the LG CEO from 1991. • No whistle blowers among the staff, possibly because of the informal Human Resource Management of staff benefits and contracts • The director was very well known and respected locally, trusted by local government politicians and private sector, and was awarded a Royal Gold Medal in 2002

14. How can you overlook a stuffed African animal in a water company?

15. Question 1: Why did nobody tell about the mismanagement? • Why did not staff, board members and local government politicians say anything? • Some of them did not notice the mismanagement • Some of them benefited from the mismanagement • Some of them feared that revealing the mismanagement might be uncomfortable or even dangerous for them • For some there may be overlapping reasons

16. Question 2: Is this an isolated case? • In 2007, Norway dropped 10 points to no. 14 on the Transparency International CPI – behind the 4 Nordic countries, Canada, Netherlands. Australia • The SG of the Norwegians Section of Transparency International has stated that “Norwegian local governments are naïve when it comes to corruption; we have still only seen the top of the iceberg”…. • Probable reasons for increased CPI: • Several recent corruption cases in Norwegian local governments and oil companies • Oil producing countries tend to have high CPI

17. Question 3: Does Norway have any systemic challenges? • Internationally, corruption is seen as a product of bad governance. The water company case shows failures re. key good governance elements: • Transparency: Manager control, little information • Financial control: Weak audit system • Legal compliance: No competitive tendering • Independent representation: LG board members • Systemic challenge : Small country, small communities, close bonds and informal tradition. Last example: Messages between Prime Minister and Bank Director Oct.2008. Inside trading?

18. Question 4: Is the case unique? comparison with Tanzanian case • Similarities with a T • Corruption aspects (bribery, favouritism, clientelism) • Control challenges (legal, financial, political, civic) • Loss of public money, impact on services and prices • Loss of public trust in LG systems and democracy • Differences • Scale: N: 10 mill USD, Tanzania: 58 mill. USD • Poverty impact on users and population • Threats or harassment against users or whistle blowers • Links to elite groups at national level • Media role, coverage and impact • Public audit report • Judicial process - and sentence

19. Question 5: What is KS doing to promote ethical behaviour? • Establishing an independent external advisory committee on ethics and an internal working groups • Establishing a voluntary web register for politicians and staff on private interests and representation • Assisting and encouraging local governments and companies to develop guidelines on ethical challenges and anti- corruption measurements • Assisting in integrating ethics, openness, transparency and accountability in local government management , policies and strategies. • Holding conferences, meetings, training sessions, capacity building for staff and politicians etc.

20. Question 6: Who are responsible? • The company manager and his family? • The private business partners? • The board members? • The local government owners? • The financial auditor, PWC? • The company staff? • The local trade unions? • The judicial system? • The Civil Society and the general public?