U.S. Firms in Mexico Face Bribery Dilemma : Corruption Likely to Limit Benefits of Free Trade

Allegations that Mexican officials solicited a $1-million bribe from a bidder on a government contract have raised questions about how much U.S. companies would really benefit from provisions of the North American Free Trade Agreement, which is designed to give them a crack at more government business here.

Published reports, based on charges brought by an agent representing International Business Machines in the bidding for a computerized air-traffic control system, suggest that foreign companies’ ability to win contracts could be hampered by the corruption that is widely acknowledged to permeate government contracting.

“It is a real barrier” for companies that are forbidden to pay bribes by U.S. law, said an attorney who works with foreign clients and who, like many of the sources contacted, asked not to be identified.

The government has waged a vigorous anti-corruption campaign, but the recent charges raise questions about its effectiveness.

IBM agent Kaveh Moussavi was quoted in London’s Financial Times as saying that three men who appeared to be government officials told him that unless he paid money or made a donation to the government’s Solidarity anti-poverty program, the bidding on the project would be canceled.

Subsequently, officials said none of the bidders met the technical requirements and asked them to resubmit their bids. Two European companies won the contract in the second round.

IBM officials have denied any knowledge of the bribe solicitation, and the government has demanded that Moussavi either supply proof or withdraw his allegations. But whether or not Moussavi’s claim can be proven, it has focused attention on the chronic but sensitive issue of corruption.

“This incident has provided a concrete example that critics of the Mexican government can point to,” Washington-based consultant Christopher Whalen said.

The demonstration of such a weakness is especially embarrassing while the U.S., Mexican and Canadian administrations are trying to get legislative approval of NAFTA, which would create a 360-million-consumer market, said economist Rogelio Ramirez de la O.

Like many Mexican presidents before him, Carlos Salinas de Gortari has carried out a highly publicized anti-corruption campaign. Officials have attacked the most blatant bastions of bribery, such as the ports and the customs service. Yet traffic police still ask for “soft-drink money” in exchange for leaving cars in no-parking zones, and sources said government contracting is rife with kickbacks.

“An effort is being made to clean up corruption,” the attorney said, “but it takes time to fill posts with people you can trust.”

Sources familiar with government contracting say Moussavi’s allegation is unusual mainly because the bribe was relatively small, less than 5% of a $21-million contract. In many agencies, 20% is the norm, they said.

“This is a little tiny thing, just the tip of the iceberg,” Ramirez said. “However, it is now clear that the government procurement system continues to be corrupt.”

The donation alternative also raised eyebrows because it casts a shadow on the Solidarity program. The program provides financing for community projects, including paving streets, building schools and installing utilities. It is generally considered a political master stroke that has made Salinas popular with the poorest Mexicans despite the continuing austerity here.

For U.S. companies, the scandal is a warning that as long as corruption persists, being allowed to bid may not be the same as having a real chance at winning a contract.

“The North American Free Trade Agreement provides only nominal possibilities,” Ramirez said. The agreement would limit the number of contracts that governments may formally set aside for domestic suppliers, but it is ineffective against a corrupt system, he said.

Besides the U.S. legal restrictions on payoffs, American companies often do not even realize when they are being asked for a bribe. Solicitations are often subtle, relying on codes that executives unaccustomed to offering payoffs may not understand.

“There is too much inside stuff,” the attorney said. “IBM had an agent for a reason.”

Besides hiring agents, U.S. firms that want to do business with the Mexican government often have joint ventures with Mexican partners, in effect simply delegating the corruption problem to native partners to handle. Such practices are likely to continue under free trade, sources said.

For Mexico, continuing corruption means that less-qualified bidders win contracts and the quality of service suffers, Ramirez said.

He predicted that, to quell complaints, the government will soon offer IBM a contract for a different part of the air control system. “Then we will have incompatible components and the overall system will not function efficiently,” he said.