Outsourcing, Insourcing and Corruption


In the PNC years many government functions were done within the various ministries. Government divisions employed many more engineers, welders, carpenters and technicians because work needed to be done by the government itself instead of a contractor. Therefore, the previous PNC government insourced many more of its responsibilities and services. This does not mean that a government, let alone the old PNC, could do everything internally. The old Burnham government contracted out the building of the outstanding Linden-Soesdyke highway to external contractors B. B. McCormick & Sons.

When the PPP came to power in 1992 a new business model was applied to government operations and services. The PPP outsourced almost all the services of the government. External contractors collect garbage, maintain roads, maintain security, provide drugs for the public hospital system, etc. Outsourcing means the business or government has contracted out parts of its operations to vendors. Insourcing is the opposite where the business or government does its operations internally instead of contracting them out. In the business world, it is a fact that outsourcing can be superior in terms of cost savings. Today global trade is organized mainly around outsourcing instead of agglomeration as was done in the old days.

Spotting Corruption

It would be naïve to believe that insourcing cannot result in government corruption. I argue in this column, however, that outsourcing has a greater likelihood of resulting in off-the-books corruption, kickbacks and quid pro quo. Insourcing requires that work and price be recorded and documented internally. With a capable and politically independent audit office, they would be better able to police corruption when government work is done in house and recorded under strict accounting standards. Therefore, it is no surprise that the opposition representatives could not document corruption on the recently held TV show on NCN – the state-owned television network paid for by all taxpayers but which serves only the PPP government. This is because outsourcing allows corruption to go unrecorded. For instance, it is never documented on the books when a contractor sends his unidentified trucks to a politician’s home to unload building materials.

Therefore, what is a good rule of thumb for spotting corruption? I would argue that the summation of incomes minus expenditures over the years must equal total assets. In other words, the flows of net income must sum up to the stock of assets displayed + secretly held by the politician. This is a mathematical and accounting fact that must be satisfied. In economics we call it stock-flow consistency – the flow of incomes must add to the stock of assets over some period of time. It is an insult to our intelligence for the head of NICIL or the Minister of Finance to tell us otherwise. Let us look at a scenario. Never mind global warming, its concomitant increase in seal level and the LCDS, let’s say a powerful politician builds a mansion close to the ocean for US$1.75 million, it is perfectly reasonable for the public to ask how can a senior public servant’s salary minus expenditures sum up to approximately US$1.75 million in one decade?

The political leader may argue that he/she was rich before assuming office. In this case, the public and opposition – so as not to be taken for idiots – are still in order to ask questions because the onus is on the Ramotar government, and not the opposition, to provide income and wealth disclosure laws.  The political leader may argue that the seaside mansion is bank financed. In that case we have to assume that commercial banks don’t know what they are doing to extend such a massive loan backed by a minister or senior public servant’s salary. For decades we know that Guyanese commercial banks are highly risk averse and will not make loans that are not backed by sufficient incomes. This is one of the reasons why they prefer to hold excess liquid assets instead of extending loans to borrowers without an established credit history.

Perverse Outcomes

While very useful in the world of business for minimizing cost, outsourcing may have resulted in perverse outcomes and may not have resulted in the kind of savings the government envisaged. The vendors or contractors the government uses are doing poor work; they are friends of the government and contribute heavily to the election campaign of the ruling party. For example, a contractor’s trucks could be seen transporting party supporters to political rallies. Major infrastructure works are poorly done yet the same vendor/contractor gets another project. Some of the contracts awarded – example Fip Motilall’s infamous Amaila access road – boggles the mind. Contract prices may be inflated since some of the subcontractors are closely connected to the PPP. With the lax audit schedules (example NICIL has not provided audits for seven years in spite of the large volume of people’s money it handles) and the conflicts of interest at the audit office, the system is structured to permit contract overbilling. Overall, the practice may have weakened the capacity of the state and public service.

At the village level, party members are rewarded with maintenance and construction work. For example, in some villages party operatives dig drains and throw the mud on the sidewalk. A few heavy showers and the mud is washed right back into the drains. The village politicians get another contract to repeat the exact idiocy. Some of the party members have no experience in waste management or drainage systems yet they are rewarded with repeated contracts. This problem is made worse in light of the fact that the people have been denied local government elections for eighteen years.

The Right Balance

There should be a reconsideration of what government services can be done externally versus internally. There has to be a repositioning in light of the problematic outcomes of outsourcing of government services in Guyana. It might be necessary to ask what aspects of the government can perform engineering and maintenance tasks. For instance, what is the status of the Army’s corps of engineers? Perhaps the National Service has to be reintroduced. There is no reason why the army could not have built the road that Fip was contracted to do. The road was not intended to be of bitumen variety but a compressed clay road, thus army engineers ought to have been able to complete this task. Has the PPP underfunded the army for obvious political fears? The country’s treasury would have been US$10 million richer had this access road been done by an arm of the government – in this case the army. The US army, for example, was responsible for sea defence works after the hurricane devastated Louisiana.

One of the benefits of having some building and engineering activities done by the army, National Service or the public service is it will lead to much needed spillover to the private sector. Engineers, pilots, builders, electricians, operators/drivers, etc., will eventually take their skills and discipline to the civilian population. With the requisite know-how some will even start new businesses. There could be more self-control and a reduction of crimes. Perhaps the drivers would have been more willing to observe laws had they spent some time in National Service or the army.

These difficult tasks cannot be done in piecemeal fashion but will have to be accomplished as part of wider political and structural reforms. The historical fears associated with the army will have to be addressed by the political stakeholders. I personally believe that some of these fears were planted by the various political propaganda machines. It seems as though we threw out the good with the bad. Today economic incentives are perverse. It will require comprehensive reforms to roll back the tide of corruption in CARICOM’s most corrupt government.

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