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oon after political leader Lutfhi Hasan Ishaaq and his crony Ahmad Fatanah were arrested by the Corruption Eradication Commission (KPK), the mainstream media, on behalf of the Indonesian public, cried out at the extent of corruption at the Agriculture Ministry.

On the other hand, the business community seemed to accept the Rp 40 billion (US$4 million) fee that would be collected from the president of beef importer PT Indoguna as an inevitable practice of dealing with government institutions. The business community seemed to understand that the ministry imposed the legal requirements for beef import as the means to extract bribes from beef importers.

This was a perfect example of a rent-seeking business transaction.

The corruption scandals relating to Hambalang sports complex and Koran procurement were also  popular examples of rent-seeking practices committed by politicians, supposedly to raise funds for themselves and their respective political parties.  

Gordon Tullock, a leading expert of rent-seeking economics, defines rent-seeking as '€œusing resources to earn income or rent for people through the exploitation of political power where the rent itself comes from something with a negative social value'€. Thus, the income does not come from ordinary economic transactions in fair, open market competition.

Rent-seeking individuals spend their resources in order to own the gains of others. For example, a political party spends money on a campaign to sway public policy to be favorable to a particular group of people. All projects pertaining to that public policy are awarded to rent-seeking contractors related to high-ranking members of that political party. At the end, the public policy generates financial rewards for the political party at the expense of other political parties.

In contrast to profit-seeking, rent-seeking does not create value added. Instead, rent-seeking distorts market competition that provides the best product for the best price. Rent-seeking may include the mark-up of government projects, piracy, or government persuasion to give subsidies. Rent-seeking usually acts as a barrier to competition through political power.

Rent-seeking creates problems and uncertainties for both consumers and producers. At the end of the day, the rent-seeking economy imposes higher interest rates and high prices of goods and services. Imagine how many beef importers in Indonesia must close down their businesses because they no longer possess the import licenses that they used to have while at the same time beef prices are rising steeply due to a lack of supplies.

From an economic point-of-view, rent-seeking is equal to redistributing surplus from one party to another with the '€œhelp'€ of the government. Obviously, the receiving party is happy; however the society at large suffers the consequences of inefficiencies in the economy. Hence, less government involvement and less bureaucratic and regulatory procedures in economic activities should be the best way to prevent rent-seeking economics.

In times of economic boom, producers pay less attention to rent-seeking activities because all productions are absorbed in the market. However, in an economic downturn, it is hard to make profit in a business, and therefore it seems easier to rent-seek others'€™ surplus.

In a social sense, rent-seeking is a good incentive for political allies to take advantage over the powerless producers and consumers. That said, it sets a tone of '€œpermissive'€ behavior to grind down rules of law, equal opportunities and property rights. Therefore, it is imperative for the KPK to get to the bottom of every case of rent-seeking and corruption in order to deter government officials and politicians from engaging in rent-seeking business.

Since rent-seeking activities are negative both economically and socially. In addition to the KPK'€™s effort, a holistic approach may be needed to prevent and combat rent-seeking activities, such as handing out severe punishments to rent-seekers, transparency, and closing rent-seeking loopholes on government projects.

There are two sides to transparency: public information and special interest groups. First, the public deserves to be fully informed about government projects and how to participate in the projects. Second, transparency should also mean closing loopholes for special interest groups, and let the demand and supply in the economy generate the best prices of goods and services.  

Special interest groups always favor new projects that implicitly provide loopholes for rent-seeking activities. Incognito market visitation (blusukan) may be good for government officials to get fresh data from the market in making decisions on what loopholes need to be closed. Note: Jakarta Governor Joko Widodo and State-Owned Enterprises Minister Dahlan Iskan received good performance reviews during their recent blusukan.

In general there are two stages in monitoring the administration of government projects: a bidding stage and an implementation stage. Classical rent-seeking occurs when the bidding process lacks transparency. Without transparency, the lowest bidder would be faked or would not be listed, and the bidder'€™s qualifications would not be scrutinized. At the end of the day, the project will be awarded to a rent-seeking contractor, and the government official in charge enjoys being bribed.

In the implementation stage, the objective of transparency is to create a barrier for rent-seeking contractors by encapsulating a fair and accountable disbursement process. An example of the accountable disbursement process may be modeled on the process used by the US Department of Defense.

Since the 1960s that department has been using an accounting system for disbursements known as the Earned Value Management System (EVMS). Consequently EVMS later was adopted by all principal aerospace companies in the US and Europe.

EVMS is a project management system in which the project fund is disbursed based on the project scope, schedule and cost. The contractor that is awarded the government project will be guided to submit a detailed project plan and during the implementation of the project, the contractor will be paid according to the earning rules over project schedule and project performance.

Most projects with a big contract value require EVMS and will be on a cost plus basis. This means that the contractor will be reimbursed for all costs plus a reasonable profit margin. Under EVMS-cost plus, the contractor is assured to earn a fair profit of around 10-15 percent. That said, the focal point in the bidding process emphasizes the historical capability and reputation of the contractor. In short, EVMS leaves no room for rent-seeking or collusion activities.

During the implementation phase, government officials responsible for the project must have the discipline to follow quantitative and qualitative assessment methodologies of contractor performance and the contractor is guaranteed to receive the payment in time upon completion of the work schedule and earned valued performance.

On top of transparency in the bidding and implementation stages, the US Department of Defense has multiple oversight institutions in the democratic system, which makes it very difficult for rent-seeking and corruption activities to grow.

The writer, who is pursuing a PhD in business administration at the University of Southern California, is an analyst for an aerospace company in Los Angeles.