Leveraging Blockchain to Combat Procurement Corruption

Procurement corruption–including things like bid rigging, shadow vendors, and the steering of public contracts to politically connected firms—is an enormous worldwide problem, costing taxpayers up to $2 trillion annually. New technologies, though certainly no panacea, may offer new techniques for combating this sort of corruption. One such technology is blockchain.

Blockchain, most famous as the foundational technology for cryptocurrencies such as Bitcoin, is a “distributed ledger technology” (DLT)—a tamper-proof record of activities that are time-stamped and verified by a distributed network of computers. DLT creates a trail of information which allows for the full traceability of every transaction and stores a chronological list of transactions in an encrypted ledger. Transactions are bundled into a secure and identifiable block and then added to a corresponding chain. The blockchain is maintained and verified by the distributed crowd, eliminating the need for hierarchy and any centralized authority or middleman. And while blockchain is best known for its role in making cryptocurrencies feasible, it also has a range of other applications, including anticorruption applications. For example, Tanzania has utilized the technology to weed out “ghost workers” from the public sector, ending the monthly outflow of 430 billion Tanzanian shillings (approximately US$195.4 million) in salaries to fake employees who exist only on paper. Nigeria’s customs service has also used blockchain technology to store information on financial transactions and share these transactions across multiple computer networks.

Blockchain technology could also be used to combat common forms of procurement corruption, particularly those that involve after-the-fact tampering with submitted bids and supporting documentation. Such a system would work as follows:

  • The government issuing a public tender would issue that tender in the form of a “smart contract,” a self-executing computer code that sets the rules under which the parties to the contract agree to interact with each other. The tender would be placed online on the blockchain along with a bid evaluation code and a deadline for prospective bidders to enter the bidding process.
  • Prospective bidders could upload bids (along with necessary supporting documents) in response to the tender, and those bids and documents would be encrypted and added to the smart contract blockchain. Because the bid and associated materials would be uploaded and time-stamped, they would be impossible to alter after the fact. So, for example, any attempt by vendors to raise or lower their bids after the initial submission would be automatically registered on the blockchain, making it easier to spot attempted collusion and other fishy behavior.
  • When the deadline for bid submission expires, the smart contract on the blockchain would stop accepting new bids. The government would then download all the submitted bids, run evaluation codes, and then select the best bid with the provided data. Because the information is already stored on the blockchain, any fraudulent changes by government officials intended to favor a certain bidder would be recorded and could be later detected. Furthermore, the program can prevent the government procurement officers from changing the tender or seeing the bids until after the deadline has expired, making it much harder for corrupt procurement officers to manipulate the process to steer bids toward favored firms—for example, by looking at what’s supposed to be a confidential bid from a competitor and then either tampering with that bid or tipping off a favored firm.
  • Additionally, the blockchain stores a full record of the bidding and selection process. Thus, every transaction would be fully traceable, making it easier to conduct subsequent audits if the need arises (see here and here).
  • Finally, in addition to preserving the integrity of the bidding process itself, blockchain technology can also help prevent corruption in the execution of a public contract. For example, contractors sometimes invoice certain materials but actually use cheaper, lower-quality materials to complete the job. When the contractor’s transactions with other firms (such as materials suppliers) are also stored on the blockchain, and the ledger is open to inspection by government auditors, it’s easier for the government to ensure that the right materials or services were purchased, in the right place at the right time.

In general, the great advantage of blockchain—relative not only to paper systems but also to traditional e-procurement systems—is that blockchain systems are more transparent and less vulnerable to after-the-fact manipulation. Admittedly, this technology is still at an experimental stage and may have performance challenges. Yet blockchain technology seems to hold distinctive promise as a technological tool for cracking down on some of the most egregious forms of corruption in public procurement.

1 thought on “Leveraging Blockchain to Combat Procurement Corruption

  1. I really enjoyed reading your article and though the area of public procurement reform is quite prickly I think you mention some really innovative ways to attempt to tackle the problem. I was particularly interested in your example where the government in Tanzania weeded out ghost workers from public administration using blockchain. Are you saying that the technology was able to distinguish real from fake employees? It seems like for this to function access to a list of names needed to be provided by the government in order to perform an audit. Is this correct? I’m asking because I worked in Bosnia and Herzegovina where there is a huge fake veterans issue with the number of members growing drastically since the end of the war in the 1990s, which doesn’t make sense. Veterans are powerful constituent groups and political parties use lucrative veterans benefits to ensure votes but do not publish lists in fear of discovery of political patronage and thousands of fake veterans. Meanwhile real veterans don’t have access to meaningful benefits and the payout for thousands of fraudulent members is a burden on the budget of entities, particularly the Federation. If the government needs to provide the initial information (names) and is unwilling, how do you think citizens or others can put pressure for them to do so and can technological solutions like blockchain aid in any way in this regard?

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