According to the United Nations, fraudulent activity siphons an estimated US$3.6 trillion annually from legitimate business and international development activities. That figure represents a staggering 5% of annual global GDP. Could blockchain in public procurement make a dent in this problem?
Public procurement, where government agencies and public sector institutions buy goods and services from the private sector, accounts for a significant part of government spending. Political leadership also uses these funds to stimulate economic growth and incentivize development in specific sectors.
Conversely, the public procurement process can struggle with corruption, from bid-rigging and kickbacks to nepotism and contract manipulation.
Corrupt practices inflate costs, degrade project quality, and erode public trust. Examples include disappearing funds for military action and the procurement scandals surfacing during the COVID-19 pandemic. Governments worldwide faced accusations of favoritism and financial misconduct in the rush to secure medical supplies and services, highlighting the vulnerabilities in the public procurement process.
Enter blockchain technology. Conceptually, blockchain decentralization and smart contract automation seal critical weak points in the procurement process that are vulnerable to corrupt interventions. Blockchain’s distributed, transparent ledger shines a light on details that previously were difficult to track or see clearly.
While blockchain technology is in its early days, the impact of blockchain on public procurement could streamline processes, reduce corruption, and transform a significant aspect of the public sector.
How Blockchain Works for Public Procurement
Before diving into more detail, let’s review how blockchain can work in public procurement.
- Digital Ledger: Think of blockchain as a digital ledger or record book. Unlike a traditional ledger, this one is distributed across a network of computers (nodes). Every stakeholder in the procurement chain can view the ledger at any time.
- Blocks of Data: Each entry in the ledger is a data block. This block can contain various types of information – for instance, in the context of public procurement, it might include details of a contract or a transaction.
- Decentralized and Transparent: Every computer in the blockchain network has an identical copy of the ledger, meaning the ledger is decentralized. When someone adds a new block of data, the information is visible to everyone on the network.
- Transparency: This transparency ensures that all participants can see the entire history of transactions.
- Immutable Records: Once someone adds the block to the chain, it is virtually impossible to change or delete. This process is called “immutability.” It is secured through complex cryptographic techniques, making the blockchain secure and tamper-proof.
- Consensus for Validation: Before a new block is added to the chain, the network of computers must agree (or reach a consensus) that the information is valid. This consensus mechanism prevents fraudulent entries from a single party or other sources.
Simplifying Procurement with Blockchain Technology
At the heart of blockchain’s appeal is its ability to make procurement processes more transparent and less cumbersome. Traditionally, procurement involves multiple steps — from tendering to the final awarding of contracts — each with its complexities, paperwork, and dozens, if not hundreds, of opportunities for fraud or corruption.
This graphic from the World Economic Forum gives an overview of the challenges of corruption in public procurement.
Smart Contract Automation Saves Money in the Procurement Cycle
Another significant advantage of blockchain in procurement is its ability to reduce operational costs. By streamlining workflows and eliminating redundant steps, blockchain can cut down on administrative overheads. This efficiency is not just about minimizing paper-based processes; it’s also about optimizing the supply chain, making data management more efficient, and saving time.
Smart contracts on the chain introduce a new level of automation, reducing administrative expenses by minimizing the need for intermediaries and excess paperwork, directly decreasing operational costs.
For instance, smart contracts on a blockchain can automatically execute agreements when parties meet predefined conditions without human verification. This process significantly reduces manual intervention, the likelihood of errors, and opportunities for corrupt manipulation of funds. Smart contract automation streamlines the procurement process and reduces opportunities for corrupt practices.
Blockchain Procurement Slashes Fulfillment Timelines
Another significant advantage of blockchain in procurement is saving time. Streamlining verification processes and contract executions can significantly reduce the time between tender and delivery. This efficiency is crucial in sectors where lives are at stake, such as emergency services, disaster response, or public health.
For example, Forbes reports that U.S. climate disasters have cost an average of $18 B annually over the last five years. In 2023, the Algorand Foundation teamed up with the Disaster Services Corporation Society in Tennessee and Florida to launch the KARE survivor wallet to facilitate the distribution of goods to families displaced or suffering from natural disasters.
Using a mobile app, the families verify their identities, receive a distribution of credits, and redeem them for critical supplies directly from Amazon in as few as 24 hours, compared to a traditional end-to-end process that could take up to several months. The wallet results showed a 50% direct cost savings.
Enhancing Transparency: Blockchain as a Procurement Anti-Corruption Tool
The transformative power of blockchain extends far beyond efficiency; it is a potent weapon in the fight against corruption in public procurement. By its very design, blockchain enhances transparency and fosters accountability, two crucial elements in deterring corrupt practices.
Blockchain’s decentralized ledger technology records every transaction and contract in the procurement process transparently and immutably. This transparency means that once a record is made, it cannot be altered or deleted without leaving a trace.
Such a feature significantly diminishes the chances of fraudulent activities, as every change is visible and traceable by all stakeholders. This level of transparency is a deterrent to corruption, making it easier to track and audit transactions, thereby increasing the integrity of the procurement process.
When procurement systems operate on a blockchain, they benefit from a single, immutable ledger of transactions. All parties can access the same information 24 hours a day, reducing and eliminating reconciliation disputes.
Blockchain also enhances traceability in procurement. Maintaining an immutable record of all transactions allows easy tracking of goods and services from origin to delivery. This level of traceability is not only efficient but also disincentivizes bad actors by boosting accountability.
Blockchain empowers all involved parties with real-time visibility into the procurement process. This continuous oversight ensures accountability at each step. Blockchain’s transparency can prevent the typical backdoor dealings and under-the-table agreements often synonymous with procurement corruption.
Incorporating blockchain into public procurement is about more than just making processes quicker and more cost-effective. Blockchain can help transform the procurement ecosystem into one inherently transparent, accountable, and resistant to corruption.
Global Reach: Blockchain in Public Procurement
Blockchain is gaining traction beyond the experimental phase. The US General Services Administration (GSA), a massive government agency not known for cutting-edge innovation, is adopting blockchain to modernize and streamline some procurement processes.
IBM reports that Dubai has embarked on an ambitious plan to become the world’s first blockchain-powered government, including using blockchain for public procurement fulfillment.
Various UN agencies are early adopters of blockchain. The United Nations Regional Commissions (UNRCs) and the United Nations Conference on Trade and Development (UNCTAD) launched a blockchain initiative to facilitate trade and enhance competitiveness. The three-year project will focus on implementing blockchain to transform customs and trade operations in five selected developing countries (Lebanon, Kenya, Mexico, Mongolia, and Uzbekistan).
While the impact of blockchain on public procurement could be transformative, it is not a silver bullet. Politics and unethical people are still in the driver’s seat at the start of many flawed projects. Blockchain cannot address deeply ingrained systemic issues such as cronyism or poor public policy. Effective public procurement relies on technological solutions like blockchain, robust policy frameworks, and ethical governance practices.
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This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.