Bribery laws speed up the demise of companies and industries that are able to postpone their eventual collapse through what economists call 'Rent-Seeking', the winning of economic privileges granted by the state to private interests.


Rent-Seekers hard at it: Roman, Beneš and Schmalz


The UK Bribery Act 2010 is the most ambitious piece of anti-bribery legislation Europe has ever seen. It introduces several new offenses of which two are especially onerous: bribery of foreign public officials and corporate failure to prevent bribery.

The new law complicates the lives of those British-based companies, many of which operate across the globe and might be French, German, Czech or Russian, wishing to do business with corrupt governments and to buy firms dependent on work from such governments or from companies these governments control.

Opponents of the Act say that it will disadvantage law-abiding firms. For example, they argue that firms with dubious links to public officials will be too risky for those that fall under the jurisdiction of the new law, and will end up being sold to the less scrupulous buyers unafraid of prosecution.

In December 2009, before the Bribery Act existed, a UK-based subsidiary of Doosan Babcock Energy, since renamed Doosan Power Systems, acquired Škoda Power, the Czech-based steam turbine maker. In thinking about how the Bribery Act affects the decision of a British-based company to acquire a business dependent upon contracts awarded by conflicted managers reporting to corrupt politicians, we may consider how Doosan would have behaved if the law had been in force before it bought Škoda Power.

It is hard to believe that Doosan’s due diligence of Škoda Power at the time failed to turn up evidence, anecdotal or otherwise, of the links between Martin Roman, the then CEO of state-controlled ČEZ, the firm’s single biggest customer, and Škoda Power. It is just as hard to accept that the Doosan team on the ground in Prague in 2009 was not made aware of the rumours, malicious or not, circulating around the city in the late summer of that year which suggested that Roman was actually leading the negotiations to sell Škoda Power. More likely, the risk was known and either dismissed as unreal or considered manageable.

But what if the deal had occurred two years later, that is, in December 2011, after the enactment of the law and after the media revelations that Roman participated in and may even have benefited from the various ownership structures of Škoda Power? Would Doosan have gone ahead and acquired the Czech turbine maker under these circumstances?

Perhaps not. From an economic point of view, Doosan’s acquisition of Škoda Power was a lucky break for the Czech firm. With a global and competitive owner, the Plzen-based firm and its 1000 employees will become less dependent upon the goodwill of the Czech state as majority shareholder of ČEZ. Škoda Power under Doosan may miss the low-hanging fruit that its key client might have offered it in the past, for whatever reason, and it may grow less fast with lower margins. But it is likely to become a more competitive and innovative business in the long run.

Josef Schumpeter famously described capitalism as “the perennial gale of creative destruction,” explaining how modern economies evolve, in spite of the best efforts of politicians to preserve the status quo and protect companies from real competition and economic realities. Over time, the effect of bribery legislation such as the UK Bribery Act 2010 is to accelerate the demise of companies and industries, such as the nuclear power industry, that are able to postpone their eventual collapse through what economists call 'Rent-Seeking', (and the rest of us would call 'Daylight Robbery'), the winning of economic privileges granted by the state to private interests.

Public monopolies like ČEZ may be turned into private monopolies with the blessing of the state. But this scale of rent-seeking, which increases prices, hampers innovation, and in the case of ČEZ, enfeebles the democratic foundations of the state itself, is self-defeating.

None, not even national energy champions enjoying the full and determined protection of the state, can escape Schumpeter's gale for long.