Economy

Procurement fraud, bribery are the biggest risks facing infrastructure firms, says new Deloitte survey

Mamuni Das New Delhi | Updated on October 09, 2014 Published on October 09, 2014

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Companies opening up on problems; dispute resolution another key cost





Procurement fraud, bribery and corruption are the biggest fraud risks that infrastructure companies face, according to a survey conducted by Deloitte on managing fraud and dispute challenges in the infrastructure sector.

“Today, more and more players are willing to discuss the fraud issues they face, which is quite a shift from the scenario five years ago when firms were unwilling to even discuss such issues,” said Amit Bansal, Senior Director, Forensic Services, Deloitte Touche Tohmatsu India.

The participants in the survey were 29 top executives – C-level professionals – from as many infrastructure firms. The survey started in August 2014.

Procurement fraud happens because large infrastructure projects rely on large-scale procurement of goods and services, and despite centralising procurement processes, companies depend on local third parties for sourcing material, equipment and labour, points out the report.

The survey reiterated the perception about bribery being a part of regulatory clearances of infrastructure projects with 50 per cent of respondents saying they were compelled to resort to back channels, bribery and facilitation payments to ensure that delays do not trouble them.

“Further, 60 per cent of survey respondents indicated that at least 15 per cent of their total investments in projects were delayed due to paying bribes and those who did not pay were denied clearances,” the survey report said.

How fraud happens

Interestingly, the respondents rated revenue leakage and misappropriation of cash as the least important fraud risk impacting the sector. Deloitte attributes this to the fact more projects are in construction phase than in the operational phase, which shifts the focus of respondents.

In the construction phase, fraudulent activities happen through inflated invoices for hiring equipment and labour, pilferage of inventory and scrap material, inflated costs for earthwork and collusion between vendors and employees to inflate quotations.

In the operational phase of infrastructure projects, “fraud schemes” involve revenue leakage at toll plazas, under-reporting of revenues by lessees at airports, malls or duty free outlets and leakage in container demurrage charges. Moreover, there could leakages in metering and billing at power distribution companies where there could be collusion between employees and consumers to pocket the differential amount. Also, there could be cash theft at counters of courier companies when the amount on receipt is recorded lower than actual and balance is pocketed.

Having identified such fraud risks, 70 per cent of respondents preferred to have whistle-blower hotline for vendors, customers and employees as a preferred mechanism to prevent frauds.

Also, dispute resolution for infrastructure companies is getting costlier with 20 per cent of respondents spending 5-10 per cent of their revenues in dispute resolution. Interestingly, 65 per cent of respondents stated that they spend 5 per cent of their annual revenues on dispute resolution.

Published on October 09, 2014
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