Every year South Africa loses billions of rand due to corruption in public procurement. And since current safeguards aren’t really effective, we should perhaps start to look at blockchain technology as a possible solution.
This is the view of Professor Sope Williams-Elegbe from the Department of Mercantile Law in the Faculty of Law at Stellenbosch University. She recently delivered her inaugural lecture on the topic Public procurement, corruption and blockchain technology: A preliminary (legal) inquiry.
Professor Williams-Elegbe says public procurement the process by which government buys the goods, services and works needed to fulfil its functions and maximise public welfare has been plagued by corruption and current safeguards have done little to curb it.
“Public procurement is the main conduit for government expenditure, apart from grants and social programmes.
“In South Africa, the annual procurement spend is R800 billion, and it is estimated that about 50% of this figure might be lost to corruption.
“In South Africa, 50% of the complaints submitted to the Office of the Public Protector refer to problems with the public procurement process, and recent Auditor-General’s reports have highlighted immense increases in fraudulent expenditure linked to procurement spending.”
Professor Williams-Elegbe says blockchain technology could help to address these problems.
“What makes blockchain technology fascinating, is that it is both a digitised and a decentralised public ledger of transactions.
“Every copy of the record that is kept by the computers on the network is identical.
“This means that the record of information or transactions cannot be altered by any of the participating parties, unless it is altered by all.
“A procurement blockchain platform can improve the process for identifying and verifying potential bidders, simplify contractor registration, provide a shared information repository on contractors’ past performance, and enable real-time reporting.”
Professor Williams-Elegbe adds that “conducting public procurement via a blockchain platform ought not to change the nature of procurement regulation, but may serve to make procurement more efficient, transparent and less likely to result in disputes.”
She points out that blockchain technology was developed to support the virtual or digital cryptocurrency Bitcoin.
She says that it is currently being used to register land titles in India, Honduras, Georgia, Sweden, Brazil, Rwanda and Ghana; and Dubai intends to move all government services to a blockchain platform by 2020.
Companies like Walmart, Nestlé and Unilever have already used a blockchain system to track food in their supply chains, says Professor Williams-Elegbe.
She also draws attention to the possibility of using so-called smart contracts in public procurement and said it permits parties to transfer digital assets of value directly, without any institution acting as an exchange intermediary.
“A smart contract is a contract that is formed and performed (often using cryptocurrency) via the blockchain. Contractual terms are converted into a computer code, and this code is uploaded to the blockchain and the system acts in accordance with the code to execute the contract.
“The use of smart contracts presents many distinct features such as trust, irreversibility, autonomy, and decentralisation not inherent in traditional contracts.”
Professor Williams-Elegbe adds that smart contracts could help to alleviate the problems of too many intermediaries and the asymmetry of information in public procurement.
“A blockchain-based procurement contract is attractive for several reasons: The auditability and verifiability of transactions is unparalleled compared with paper and e-procurement systems, which are prone to fraud and manipulation.
“The transaction record may also provide the data that could be used to uncover anti-competitive practices, which often go unnoticed in the procurement process, and the transparency inherent in the blockchain meets the highest standards for public-sector accountability.”
She says although it may take some time, blockchain platforms will increasingly being used by the public sector.
“Like most new ideas, the adoption of blockchain will have to overcome obstacles, which might include an aversion to new technologies, integration with legacy systems, the cost of adoption, and gaining stakeholder support,” says Professor Williams-Elegbe.