Select Committee on International Development Minutes of Evidence


Examination of Witnesses (Questions 420 - 439)

TUESDAY 9 JANUARY 2001

MR DAVID PHILLIPS, MR IAN WHITE, DR REG HINKLEY, MR MIKE WELTON, MR STEPHEN WILLIAMS AND MR JOHN BRAY

  420. And you have done in the past?
  (Dr Hinkley) Yes, we have done that in the past.

Chairman

  421. Can you tell me would it be helpful and are you pursuing international agreements on these corrupt practices which would help you and other companies? We are talking about a whole range of companies. Would it help you to develop some kind of international anti-corruption standard which all companies applied and all governments are supposed to apply as well to which you could make reference when dealing with subcontractors and insist that they apply it?
  (Dr Hinkley) You asked a number of questions there. First of all, are we actively pursuing, I think the answer to that currently is no. Do we think it would be helpful to have common standards, the answer is yes, I think there are advantages in having common standards. We work very much within the Foreign Corrupt Practices Act. A large part of our business—

  422. In the States you mean?
  (Dr Hinkley) In the States, yes. A large part of our business is in the States and we have a heritage through our mergers and so on where many of our staff, and indeed our activities, have been derived, if you like, from US led organisations. We have generally found that Act to be a helpful point of reference. Looking more broadly, the things that stand out, I think, are that it is helpful to industry to have as much commonality as we can rather than different forms of requirement running across different jurisdictions. The more we can standardise, the more helpful. The other issue is really around enforcement and compliance issues.

  423. Yes, enforcement is very difficult.
  (Dr Hinkley) Clearly we do not want compliance and enforcement issues to be unduly onerous in relation to the problems they are addressing. That is another issue for us. I think those are practical questions that can be considered in the context of specific discussions about the issues. The matter of principle, I think, is generally helpful.

  Chairman: We must hurry on. Can we look at Unilever.

Mr Colman

  424. The question is mainly to Mr Williams. In your written evidence to us in section six, "Ceasing to do business", you mentioned our interest in your actions in Bulgaria in March 1997 when you closed your representative office and ceased to do business there and you stated that you would be happy to explain why you did this in more detail. Could you take this opportunity to do that.
  (Mr Williams) Yes. Just a few words first of all about the representative office system that was in operation there. We have been operating in Bulgaria through a rep office for some time, about a dozen or so salesmen and merchandisers. The principle of the rep office runs as follows: the goods are ordered from one of our operations outside of Bulgaria, in this case it was Hungary, and the whole transaction, which is transport, customs clearance, payment of duties, VAT, storage, distribution, etc., is carried out by the distributor who is ordering it in the country. The role of the rep office is to be at the other end, at the consumer end, which is to spend money on advertising, to stimulate demand. So, if you like, we are at two ends of the see-saw and the fulcrum in the middle is the distributor. So we are manufacturing in country X, in this case Hungary, we are stimulating demand, advertising it in the marketplace stimulated at the receiving end, the distributor is the middle man all the way through. What happened here was we became aware that the prices being charged for our merchandise by the distributor, and ultimately on the shelves in the shops, was such, and we knew from the price we were charging the distributor that the import duties could not have been properly paid on these products. That is, the middle part of the transaction was by whatever means not being honoured by the distributor, he was breaking the law, he was obviously engaged in illegal activities. We felt, and this was the subject of considerable alarm, the business group president felt, supported by the board, that he did not want to be party to a business system that was, if you like, corrupted in that fashion. He felt, and we felt, that being at the front end and the back end of this transaction did not exonerate us from ownership of it, albeit that the middle part was being undertaken by a third party where the problem was. There were some discussions, believe it or not, with one or two senior ministers in the country about this who at the time showed a rather world weary approach to the matter.

Chairman

  425. An interesting term, "world weary".
  (Mr Williams) In the absence of any support from central government we decided we could not tolerate this any longer and we pulled out of the operation in Bulgaria in totality. A similar action was taken in the Ukraine shortly thereafter. We are now back in Bulgaria. Three years have passed and the regime has changed. In fact, there was a little ceremony when we went back in there with an on-site operation and Prince Charles was there and the Deputy Prime Minister and one thing and another. We are now operating in Bulgaria because a number of things have happened. The regime is different, we have a regime that we can deal with, and is an uncorrupted regime. The duty situation is different, it is now part of the Eastern European Economic Co-operation area, therefore the duty differences that gave this step that people were not willing to pay, or were seeking to avoid, has gone, so if you like the opportunity for dodging for an advantage has gone. We are now back there. Interestingly enough, and maybe this is a bit of a case study, I do not want to strike any note of sanctimony about this because there is no reason to be complacent in this area anywhere, there are a number of initiatives in Bulgaria in terms of overseas companies in conjunction with the Bulgarian Government now in terms of cleaning up the terms of trade in Bulgaria. I cannot help thinking that perhaps in some modest way our withdrawal helped stimulate the interest of a new regime, of a new government, in actually having a transparent and a clean business environment. It is a story with a happy ending.

  426. When you withdrew in March 1997 did you seek to persuade other multinationals, who I assume were operating under a similar situation, to join you and thereby bring pressure to bear, as it were, on the Bulgarian Government?
  (Mr Williams) I cannot say that we did. I would hope that maybe we did locally but I do not know that we did. I do know that some of our competitors stayed on and made their own accommodation, who knows.

  427. Can I ask whether BP or Balfour Beatty have had the same experience or Crown Agents in Bulgaria?
  (Dr Hinkley) We have not had that experience.
  (Mr Welton) We have not.
  (Mr Phillips) Our exposure would be only on donor-funded contracts.
  (Mr Bray) We have very limited operations in Bulgaria but we would say it is a particularly difficult environment in which to operate. As a company we have never had an office in Bulgaria.

  428. Did you work with local organisations within Bulgaria? You mentioned you spoke to the ministers and they were world weary in your words. Did you work through a local chapter of Transparency International in Bulgaria?
  (Mr Williams) No, we did not. From what I have learned of Transparency International, from reading the submissions to this Committee, I must say that at another time in another place one certainly would. At the time, in so far as I was involved in that situation, I was not aware of Transparency International although I do understand that we know them around the world.

  429. How do Unilever use the experience of this corporate governance in working with companies in developing countries? BP has been pressed by Mr Robathan in terms of what they do, working with joint ventures and other organisations where they operate. Do Unilever have similar arrangements that they enter into in terms of ensuring that their standards, Unilever standards, of corporate governance are maintained?
  (Mr Williams) Yes, we do. One of the areas where we can be undone in terms of one's way of doing business is when you are venturing with other parties. Our own Code is rigorous, and can be something of a nuisance sometimes, in ensuring and requiring that Unilever's principles are honoured by its joint venture partners and we will not enter into arrangements with companies or organisations if we have suspicions that their practice is not the same as ours. We would leave if, through our management involvement, we became aware of any practices that would infringe our own Code, otherwise the thing is a hollow vessel.

  430. It is a zero tolerance approach, is it?
  (Mr Williams) Yes, just as it would be for our own employees, there is no difference.

  431. You do not keep a sort of scorecard which says if it does not get up to this level we will continue working in this country and working with companies in this country but if it goes above that then we will withdraw?
  (Mr Williams) It is a zero tolerance level in terms of joint venture partners, that is absolutely right. One thing I would say about our withdrawal from Bulgaria is, as I made clear, we had an operation there but it was not a hugely extensive operation, we were not responsible for a thousand employees. I was trying to rationalise this in my own mind. One of our chairmen in a speech a couple of years ago put it rather well, that we have a way of doing business and only if we find that we are in a situation whereby we cannot survive by applying our way of doing business would we withdraw, as was the case in the Bulgarian example because the whole business system was utterly undermined. Absent the business system being undermined there is a nice balance to draw. We would not withdraw, we would apply our own principles and stagger on but it means you are missing opportunities and it costs you money and you are at a disadvantage sometimes in corrupt environments. We would not withdraw lightly. I think Transparency International in their submission said that it was an in extremis remedy. I think you do have obligations to your own staff that you do not reach for the withdrawal lever too readily, but equally by the same token you do not cease to apply your own rules, you simply have to do business your way no matter how disadvantageous it might be in a particular situation. You go on doing business your way.

  432. Do you have key criteria indicators that you use to determine the level of corruption in a country? You read out a list of countries where people have been dismissed. There were some very interesting countries, obviously. Are you keeping a scorecard?
  (Mr Williams) We are acutely aware of the difficulties and the risks that our business faces in many environments. There is not a thermometer in the sense of what countries are unacceptable and what countries are acceptable. The test for us is can we do business in accordance with our own principles in that environment. If we cannot, we will leave it. If we can, no matter that we do it less efficiently, we are there for the long term. We believe that in due course this problem will be eradicated. Companies have a role to play in that, we discussed it earlier on. We are there for the long haul. It would be naive to say that we do not know that in many countries we have to have our guard much more firmly up than others.

  433. You mentioned you went back into Bulgaria because of the change of government. Did the same thing happen in the Ukraine? You were talking about withdrawing, I think, from the Ukraine.
  (Mr Williams) At the moment I do not think we have any operation in the Ukraine. I am sure we do not.

  434. Because of the high level of corruption.
  (Mr Williams) Yes.

  435. What would you wish to see, if you saw yourself going back into the Ukraine, what are the determinants you believe you would need to see in order to decide to go back?
  (Mr Williams) Directionally, from my particular position in the organisation, one of the things which matters most to me is some form of the rule of commercial law, that if you strike a bargain, you have some reasonable prospect of a forum where it can be enforced. In some of these countries in the last 10 or 15 years there really was no forum, no matter how even handed that forum might prove to be.

Chairman

  436. You are talking about the rule of law being the administer of justice not just theoretically in place?
  (Mr Williams) Indeed. If the practice of commercial activity is the making and performing of contracts, if the contracts are resting on nothing then you really are in a remarkable environment. It makes life very difficult for businesses and it makes life difficult to operate in accordance with our own precepts. That is a bright light for me in my personal role in the company.

  Chairman: Now we are going to move quickly to ask the Control Risks Group some questions and Andrew Robathan is going to ask those.

Mr Robathan

  437. Mr Bray, if you are doing a risk analysis of a country

  where corruption is endemic how do you assess the comparative level of risk in that country? At the same time presumably if you were doing it for a company do you assess the ability of the company to withstand the pitfalls surrounding corruption, whether it has the right controls and checks and balances in place?
  (Mr Bray) First of all, on the country, the kinds of issues we would look at are the ones we have mentioned, the possibilities of commercial law, putting it rather more broadly, the institutions and especially the checks and balances. So among the checks and balances we would look at the judiciary, but we would also look at civil society, the role of the press, whether there is a legitimately recognised opposition. Those things are all important indicators. If we were doing a project for a particular company we would want to look at the vulnerability first of the industry. As we have indicated already some industries are more at risk than others. Yes, we could and indeed do—and this is another department rather than mine in another area of expertise—look at companies and take a view on whether the controls are effective or not. A colleague of mine has a phrase which I have been repeating which is "control delusion", the idea being the companies have controls and they may put more faith in them than they deserve. He would look at them with a cynical "poacher" type eye to see whether they would really stand up.

  438. Turning to foreign direct investment, apparently UK-based companies rank corruption as the greatest barrier to foreign direct investment above such things as lack of infrastructure and political instability. Indeed bribery and extortion were ranked as the factors with the greatest negative impact on investment by multinational companies. Given that, are there examples that you know of where a country has successfully tackled corruption and seen an increase in foreign direct investment?
  (Mr Bray) Unfortunately these things are always an ongoing battle but within South America, for example, I understand that Chile has a better reputation than most as a destination for foreign direct investment and relative transparency and strength of institutions is quoted as a reason for that. In Africa, Uganda. I am afraid its reputation has gone up and down again but Uganda is still regarded as better than many of its competitors and its efforts to address corruption were seen as one of the reasons for that. Yes, we do believe it makes a difference in what actually happens in terms of investment flows. Perhaps I can add, there is some more technical analysis which is being done in America by a man based in Harvard, now on secondment to the World Bank, which seeks to demonstrate this empirically. What he argues is that levels of corruption have a similar effect as levels of tax, so where the levels of corruption increase, the levels of investment go down, rather as they would if levels of tax were increasing.

Chairman

  439. Can I ask others on the panel whether levels of corruption in a country are a deterrent as to whether or not you will invest and do business in that country? Is that an important factor in your decisions?
  (Dr Hinkley) Yes. We, like a lot of other companies, do undertake a comprehensive risk analysis of entering a country or, indeed, making major new investments. In fact, our policies are one of the yardsticks which we use in that risk assessment.



 
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