November 23, 2014 12:20 am JST
Corruption in China

Smart cities seen as hotbeds for dirty deals

JOHAN NYLANDER, Contributing writer

HONG KONG -- Xie Xuening was a Chinese official who embraced the idea of "smart cities" fervently. In 2011, the head of Guangzhou Municipality's Bureau of Science and Information Technology boasted that the city's residents were about to change the way they lived. At a Communist Party conference, he shared a vision of breakfasts being prepared by "fully automatic refrigerators and cooking equipment" according to settings registered the night before. By 2015, he said, home security systems would be able to recognize familiar visitors and open the door for them.

     He never got to realize his dream. Last year, he was placed under investigation for taking bribes.

     China plans to invest hundreds of billions of dollars developing smart cities across the country, but experts warn that this digital-powered urbanization plan is threatened by rampant corruption.

     The country desperately needs to invest in city infrastructure that can help cope with rapid urbanization and worsening pollution. It is easy to see the appeal of optimizing everyday functions with the help of information technology, environmentally friendly facilities and social initiatives. For starters, a smart municipality would have efficient public transport, green power and citywide fiber-optic Internet.

     China's urban planning authorities have identified 193 cities that will be developed into smart ones; 10 pilot projects are underway.

     The scale of investment is massive. The total is expected to exceed 2 trillion yuan ($325 billion) by 2025, leading to the creation of some 4 million jobs, according to a report by IBM and research firm IDC in March.

     All that money is likely to create problems, cautioned Liao Ran, senior program coordinator at Berlin-based Transparency International, an anti-corruption watchdog. "China is investing massive amounts into smart cities, but there's no way of telling how much money goes into the projects, and how much goes into the pockets of the corrupt officials," he said. "This is definitely a hotbed for corruption." 

     He explained that smart-city contracts have not been going through transparent bidding processes.

     It is no secret that China is battling with endemic corruption. Some 13% of the nation's gross domestic product was lost to shady dealings in 2003, according to research from Tsinghua University. Today, that percentage is lower, Liao said, but the actual amount of bribes paid is still rising as the economy grows.

"Officials expect to benefit"

The problem is particularly serious within the construction industry. This is partly due to the nature of the business, which involves large capital investments, frequent involvement of public money and unexpected project changes.

     Technology companies, naturally, will also be heavily involved in smart cities. International giants such as IBM, Siemens, Ericsson and ABB are facing stiff competition from domestic players such as Huawei Technologies and Alibaba Group Holding.

     In September, Huawei, the country's largest telecom equipment maker, uncovered widespread corruption in an internal inspection, with as many as 116 employees implicated. Foreign companies have also been known to bribe their way to lucrative Chinese contracts, said Liao, who pointed to examples involving GlaxoSmithKline, Siemens and Rio Tinto. "How can you otherwise be certain that you are going to win the bidding?" he said.

     Joseph Cheng Yu-shek, a professor of political science at City University of Hong Kong, also expects smart-city contracts to spur graft activity.

     "Corruption is a very serious problem and in major construction projects, officials expect to benefit considerably," he said. "Hopefully, Chinese authorities under the leadership of Xi Jinping will do a better job [of controlling] corruption, but one cannot be optimistic at all. It is a deep-rooted problem." 

     Efforts are being made to fight the plague. As a result of President Xi's crackdown, heads are rolling in the construction sector. 

     State media recently reported that 50 officials involved in technology and science projects in Guangdong Province are under investigation for corruption, although details were not revealed. In the town of Foshan, IT companies are said to have bribed a city science official to gain competitive advantages. 

     Several officials in the southern provinces of Guizhou and southeastern Jiangxi have engaged in "trading power for money" in construction engineering deals, the party's top discipline watchdog said.

     In Guangyuan, Sichuan Province, deputy mayor Wu Lianqi was expelled from the party on suspicion of taking bribes related to construction and procurement contracts. Last spring, the chairman and general manager of China Three Gorges, which runs the world's largest hydropower plant, were replaced after officials at the power company were found guilty of corrupt bidding practices and nepotism.

     Still, there are two major hurdles that make ending corruption easier said than done.

Smart solutions

First, the country's construction laws are poorly developed, said Daniel Cook, a procurement attorney with experience working in the Chinese construction industry.

     "My gut tells me that the amount of money involved in these projects, coupled with the persistent problems with China's construction procurement laws, means that corruption and influence peddling will still likely take place," he said. He urged wide-ranging reforms, including improved oversight of the tendering process, consistency across relevant legislation and better enforcement mechanisms.

     Second, as a result of the government's anti-corruption campaign, bribes have become harder to track. In the past, a bribe could be as simple as handing over a bag full of cash during a meal, or a wire transfer to the official's bank account. Today, the process tends to be more about cultivating relationships over the long term, Liao said. Instead of just cash handouts, enticements may include overseas trips or luxury apartments registered in other names.

     Ding Baogui, senior research manager at IDC China, acknowledges the risk of bribery in the smart-city projects but thinks the central planners are trying to solve the problem. He explained that there are plans to involve more private financing from venture capital firms and other companies, and that this would improve transparency.

     When done properly, smart cities can improve lives and boost economies. A Swedish study last year showed that billions of dollars had been added to Stockholm's economy because its superfast fiber-optic network had made it easy for people to use cloud services, health care, distance learning and smart transport services.

     But as long as money keeps ending up in the wrong hands, it may be too early to put faith in smart-city development in China.

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