Today the World Economic Forum (WEF) published a report exploring blockchain as a tool to aid transparency in government procurement and combat corruption. The project involved a proof of concept (PoC) using the public Ethereum blockchain as well as providing policy proposals and civic engagement.
The work was done in collaboration with the Inter-American Development Bank (IDB) and the Office of the Inspector General of Colombia (Procuraduría General de Colombia).
The procurement corruption problem
Governments spend roughly $9.5 trillion (15% of global GDP) a year on procurement contracts. The OECD estimates that 10-30% of the value of those contracts is lost through corruption and mismanagement. By eliminating bid rigging, procurement prices could be reduced by 20%.
In its report, the World Economic Forum gives the example of Latin American construction firm Odebrecht, which went bankrupt after it was found to have paid $800 million in government bribes. And Brazilian state-owned banks owned a majority of the firm’s $25.3 billion debt at the time of the bankruptcy.
There are many ways in which corruption can manifest itself. The bidding process can be sidestepped. If there’s a competitive procurement process, it could be deliberately poorly advertised. Contract requirements could be specified to favor particular bidders. That’s without considering manipulating bids after the fact and the many other ways in which the process can be rigged.
So a big part of the problem is a lack of transparency. And that’s where blockchain comes in.
The blockchain solution
The WEF project had five aims, which included enabling permanent and tamper-evident record keeping, as well as transparency and auditability in real-time. Plus, some functions could be automated using smart contracts.
Additionally, no matter the procurement process, the outcome should be published, which encourages public accountability. That publication would help with engaging citizens. In fact, the WEF intended that public comments be logged on the blockchain.
A major challenge was the vendor registration process, which is usually centralized and is a corruption risk area.
For the PoC, the WEF chose a permissionless blockchain, Ethereum. The decision was on the basis that it is more decentralized and less prone to corruption, compared to a private or permissioned blockchain. Many readers will note that just two Ethereum mining pools control more than 51% of Ethereum’s hash rate. But while Ethereum may be less decentralized than desired, at least those miners are scattered around the world rather than government cronies.
A fingerprint or hash of the bidding documents with a timestamp was stored on the blockchain. Public comments, the tender offer and the scoring and evaluation decisions were also logged.
However, while the aim of the project is transparency, it’s important that vendor bids remain anonymous, which was a challenge. The project had a workaround to maintain anonymity, but paying Ethereum’s transaction fees (gas) also needs to be anonymous, which requires other workarounds.
Other weaknesses from using public blockchains were the oft-quoted low scalability and governance.
The suggestion was to use a hybrid approach. For example, to record hashes of bids and tender offers on a public blockchain with other functionality on a permissioned blockchain. This would remove the need for transaction fees. But it introduces the risk of collusion between node operators.
The report concluded: “the challenges and limitations associated with the
public procurement use case highlight the most fundamental trade-offs and limitations associated with permissioned versus permissionless blockchain networks – a critical question for most institutions and enterprises considering blockchain deployment.”
Numerous governments around the world are exploring blockchain for procurement. Two years ago, the Asian Development Bank proposed a standalone global public blockchain. Part of the motivation was to have a single place where suppliers could be authenticated, and their work experience certified.
World Economic Forum trials blockchain to fight government procurement corruptionA year ago, a Seoul district in South Korea implemented a blockchain-based proposal evaluation scheme as part of a competition to tackle corruption. Korea’s state arms procurement organization is also using blockchain form transparency.