All over the world, public-sector corruption seems to act like a lead weight that significantly slows down social, economic and environmental development. As a rule, the public sector is composed of all levels of government and enterprises that are directly subordinated to a country’s government. The problem of corruption seems to accentuate especially when governmental actors interact behind closed doors with companies that are outside the system. The public procurement sector perfectly illustrates that the lack of transparency and improper data management are the main factors that facilitate and fuel the widespread corruption phenomenon.
As corruption becomes rampant in this area, governments are looking towards innovative technologies for an answer. Blockchain seems to have garnered much attention over the years for its ability to act as a highly transparent and auditable record-keeping ecosystem capable of closing traditional corruption channels. Immutability, transparency, traceability and integrity of data are some of the features inherent to blockchain that have made this technology an attractive foundation for many PoCs that aim to circumvent fraud and malicious human interference.
Modex, an early player in the blockchain field, has focused on the data related benefits of blockchain, developing its own in house technology, the Blockchain Database solution, that masks the complexities of blockchain behind the familiarity and ease of use of a database system. With this approach, Modex makes this innovative technology accessible and easy to use in scenarios and use cases where trust in data, transparency and information traceability are essential. Removing the barriers to adoption, Modex makes blockchain implementation straightforward and affordable for a wide range of businesses and industries, including governmental processes.
From a high-level overview, public procurement is the process of acquiring often through an organized bidding process everything ranging from infrastructure needs such as highways and railways to essential services buildings like hospitals, and energy grids. According to the World Bank, “public procurement represents on average 13% to 20% of GDP. Global expenditure in procurement is estimated at nearly 9.5 trillion US dollars”. Although the exact costs of corruption are difficult to quantify exactly, its effects are undeniably detrimental, as it undermines competition in the market and it thwarts economic growth by artificially inflating prices in order to line the pockets of a select few. The United Nations Office on Drugs and Crime points out that every year corruption significantly increases government spending for public contracts “studies suggest that an average of 10-25 percent of a public contract’s value may be lost to corruption. Applying this percentage to the total government spending for public contracts, it is clear that hundreds of billions of dollars are lost to corruption in public procurement every year.”
Public procurement under scrutiny
The World Economic Forum acknowledges in the “Exploring Blockchain Technology for Government Transparency: Blockchain-Based Public Procurement to Reduce Corruption” that “public-sector corruption is the single largest challenge, stifling social, economic and environmental development. Often, corruption centres around a lack of transparency, inadequate record-keeping and low public accountability”. Fraud in the public procurement sector seems to be a widespread phenomenon present in various degrees around the world. Literature on the subject highlights the fact that corruption in public procurement and in the public sector, in general, is exacerbated in poorer and in developing countries “the impacts of corruption severely and disproportionally affect the poorest and most vulnerable in any society, and when it is widespread, corruption deters investment, weakens economic growth and undermines the basis for law and order”.
The Organization for Economic Co-Operation and Development (OECD) outlined a series of recommendations concerning public procurement spending. In the report, the OECD offers a broader definition of public procurement, stating that it “refers to the process of identifying what is needed; determining who the best person or organization is to supply this need; and ensuring what is needed is delivered to the right place, at the right time, for the best price and that all this is done in a fair and open manner”. Each country has outlined its own public procurement model, meaning that there is no one fit all solution, because there are differences in how countries manage this process. Even so, countries need to adhere to a common set of principles such as transparency, integrity, access, balance, participation, efficiency, risk management, accountability, integrity, overriding public interest and competitiveness. International standards and guidelines that guarantee a fair and transparent public procurement process in different jurisdictions are the OECD Recommendations on Public Procurement and the World Bank procurement Framework.
Public procurement bottlenecks
From a technological standpoint, public procurement systems around the world create the necessary loopholes and blind spots that allow corrupt actors to influence and manipulate the process. This is mainly because the effects of digitalization have yet to take hold in a vast majority of public procurement systems. As a result, many public procurement frameworks still operate under a manual pen and paper model, or a very basic online system that is vulnerable to multiple security and administrative threats.
According to the World Economic Forum, the public procurement landscape is a hotbed of corruption because:
- sizable amounts of money are in play. Governments spend yearly between 10% and 30% of national GDP on procurement
- it involves close and repeated interactions between government representatives and private sector actors. Usually, when the public and private sectors converge, the promise of newfound profit is enough to motivate the parties involved to manipulate the process
- it’s a complex and opaque process backed by a large bureaucratic web. As the number of actors involved increases, the opportunities and incentives to bribe government officials also spike
- low transparency levels in the needs assessment, contract specification, and vendor selection process. The lack of transparency means that the decision power is concentrated in the hands of procurement officials who can distribute large sums of money at their discretion
- people are often alienated from the public procurement process. Even if they are aware of the corruption in this area and the financial loss, the absence of reporting and accountability mechanisms ultimately leads to a sense of indifference
Blockchain, a new framework for trust
Blockchain was designed to act as an ecosystem capable of ensuring trust and cooperation between actors that do not know each other. The distributed character of blockchain alongside its other core features like immutability, integrity, disintermediation, traceability and transparency makes this technology a natural choice for an anti-corruption use case. Paired together with the programmable and self-executing code known as smart contracts, blockchain can add a layer of automation that increases trust and efficiency by limiting human errors and discretion in decision making.
In a report focused on the applicability of blockchain technology in the public procurement sector, WEF argues that blockchain’s unique combination of features can help promote a new type of tamper-resistant data ecosystem “[u]sing cryptography and distributed consensus mechanisms, blockchain provides the unique combination of permanent and tamper-evident record-keeping, transaction transparency and auditability, automated functions with “smart contracts” and the reduction of centralized authority and information ownership within processes”.
As of 2017, blockchain has garnered much attention from several governments who turned to this technology to streamline their public procurement system:
- Japan seeks to use blockchain to enhance the security of its data systems with a blockchain layer
- The United States is looking into blockchain to reduce spending by automating pricing analysis and contract review
- Mexico is among the first countries to promote the use of blockchain platforms in public procurement. The solution proposed by Mexico is a blockchain-based governance model with the public institutions, universities and civil society organizations as the stakeholders
- The Seoul district in South Korea is implementing a blockchain-based proposal evaluation system to enhance the transparency and trustworthiness of assessing responses to public tenders
- Colombia is working on a blockchain-based public procurement procedure. Dubbed the Transparency Project , the initiative is a public school meal program that aims to provide meals to the country’s most vulnerable children.
One of blockchain’s strongest points is its ability to ensure the integrity of public procurement systems by making them tamper-proof and financially costly to try to maliciously modify. Blockchain is also tamper-evident, meaning that if a modification occurs, the system can easily track who made the changes. These design features bring a much-needed layer of accountability to procurement systems, making each actor involved responsible for their actions. The above-mentioned features are possible due to blockchain’s design choices:
- blockchain is an interlinked chain of hashed data structures called blocks that store transaction data. New blocks of data are constantly added to the chain of information. Because every block is connected to the previous block and the next block that will follow it down the chain, it becomes almost impossible to modify blocks of information as it will invalidate the rest of the data chain
- blockchain is designed to be a distributed, synchronized peer to peer network. Data is distributed across a wide network of computer nodes that compose the network. This means that the system mitigates the single point of failure vulnerabilities, as there is no single clearly defined target for attackers. To change the blockchain, a malicious user would need to get control of a majority of the network, which is too difficult and costly
- cryptography, hashing and digital signatures play an essential role in ensuring security and confidentiality inside a blockchain framework. When new data is added to the network, it also contains information that simplifies audit processes such as provenance and timestamp.
As it can be observed, the sum of the beneficial features of blockchain allows the creation of a new type of infrastructure that moves away from the established monolithic structure in which power is concentrated in the hands of a single authority, to a transparent system governed by checks and balances that cannot be tampered. A study paper that explores the role of blockchain in the fourth industrial revolution, confirms that “the emergence of blockchain and the use of technology will weaken the concentration of centralized power due to decentralization and liberalization”. The same paper acknowledges the technology’s potential to consolidate trust in multiple sectors and governmental institutions “before the introduction of blockchain, the centralized system was based on strong public trust and the resulting concentration of power. However, owing to the appearance of blockchains and the use of technology, the field of blockchain use, excluding some sectors, predicts a weaker concentration of central power in the future due to decentralization and liberalization. Distributed information can prevent the monopolization of information”
Different blockchains, different benefits
Blockchains are usually split into two main categories: public / permissionless and private / permissioned.
The public/permissionless version is fully open to anyone who wants to join the network and has the necessary computing resources to validate transactions. The selling point of this type of blockchain is that it offers the strongest security and degree of data immutability, being more suitable for organizations outside government control. But the high levels of distribution, decentralization and security come at a high cost in terms of scalability, speed, efficiency and computational cost.
On the opposite spectrum, we have permissioned/private chains where only authenticated users that received an invitation can join the network. This blockchain model focuses more on ensuring confidentiality and a higher degree of control which makes it more suitable in a business or enterprise scenario. The public procurement sector and public sector use cases, in general, are no exception because they require an efficient, fast and scalable infrastructure.
Smart contracts are a core feature that will help remove the concentration of power in the hands of a single individual during the procurement process. As self-executing, immutable pieces of code, smart contracts operate on a predetermined set of rules, without the possibility of deviating from those rules. As such, transparency, immutability, traceability and automation prevents all major fraud opportunities that may occur across the various stages of the procurement process.
Blockchain enhances record keeping
Due to its unique set of functionalities and features, blockchain can act as an enhanced record-keeping mechanism that can secure not only documents but virtually any type of information. The International Council on Archives (ICA) defines a record as a document that is “created, received and maintained as evidence and information by an organization or person, in pursuance of legal obligations or the transaction of business” and a record keeping system is defined as “a framework to capture, maintain and provide access to evidence of transactions over time, as required by the jurisdiction in which it is implemented and in accordance with common business practices”
The ARMA Generally Accepted Recordkeeping Principles states that accountability, transparency, integrity, protection, compliance, availability, retention and disposition, are mandatory in an information governance program. By design, blockchain is capable of ensuring most of these features
- Accountability – each member of the system needs to be responsible for their actions. Blockchain tracks the activity of its users, enabling high levels of transparency and efficient audit
- Transparency – processes should be transparent and easily verifiable by every party involved. Transparency is built-in blockchain systems by design
- Integrity – the record-keeping system needs to offer guarantees that the information is authentic and reliable. By storing data in interdependent blocks of information, blockchain offers in-depth data integrity assurance
- Protection – the system needs to guarantee optimal protection levels as well as confidentiality and continuity. The distributed nature of blockchain and the complex cryptography it employs make it a highly secure data environment
- Compliance – record-keeping systems need to be compliant with the provisions of the law and international regulations. As with any technology, compliance is ensured during the design stage of the system
- Availability – information needs to be organized to ensure timely, efficient and accurate retrieval. Depending on the type of blockchain used, information can be available to everyone, or available upon request
- Retention – information needs to be stored and preserved for an appropriate amount of time especially considering the legal and regulatory compliance. Blockchain not only stores data records securely, but it also stores every version of that record which ensure streamlined audit
- Disposition – to be compliant with data laws and regulations, record-keeping systems need to be able to delete information when it no longer needs to be maintained. The Blockchain Database solution developed by Modex bypasses this issue by storing only a reference of sensitive records inside the blockchain and the data record on a traditional database. If the record is deleted from the database, the reference will no longer point at anything, becoming redundant data. Generally, it is advisable to store sensitive data outside the blockchain.
Modex Blockchain Database makes blockchain compatible with the public sector
To bypass all of the challenges associated with blockchain implementation and to help companies and governmental institutions tap into the benefits of this technology, Modex has created its trademark Blockchain Database solution, a technological layer that fuses the advantages of blockchain with a database system, a technology that is already deeply ingrained in every business and industry sector, to create a hybrid software product that makes blockchain easy to use in existing systems, to streamline operations and data security, or to build an entirely new infrastructure from the ground up that has a blockchain engine running in the background.
Modex BCDB is a middleware software solution that combines the functionality and familiarity of traditional database systems with blockchain, a technology designed to deliver a slew of disruptive features such as data integrity, immutability, traceability, distribution and decentralization that can reshape the public procurement sector. Bundled as an Infrastructure as a Service offering, Modex BCDB is devised to act as a building block that companies can use to build an infrastructure tailored to their specific business requirements. What makes the Modex technological layer stand out is the fact that it incorporates a blockchain component that unlocks a series of powerful features and functionalities without requiring any prior knowledge of blockchain development.
Available on the Microsoft Azure Marketplace, Modex BCDB can be easily deployed in cloud environments as well as on on-prem infrastructures. With a modular and agnostic approach to its two core components, the database engine and blockchain framework, companies can utilize what blockchain and what database is best suited to answer their data-related needs. Organizations can use the Blockchain Database solution to build a new infrastructure for their business or complement their existing IT framework to unlock a slew of data-related benefits.
Blockchain is only a means to an end / Blockchain is not a silver bullet
Even with all its disruptive features and benefits, blockchain isn’t a panacea for every issue. When applied in public procurement, blockchain can preserve record integrity, transparency and trust in the data introduced in the system, but it does little to nothing for off-chain interactions. What happens to data before it is introduced in a blockchain system is a big red flag that needs to be addressed with other mechanisms and procedures. As a validation and verification layer, blockchain enhances trust in public procurement, making low-level corruption detectable. Unless it is used alongside other technologies, blockchain can do little to prevent sophisticated forms of corruption like:
- officials disclosing sensitive information to certain parties to give them an unfair advantage
- the circulation of false documentation
- bribing and collusion with public officials
- bidders colluding with each other to rig the bidding process
Blockchain can help improve some areas in public procurement, especially when used as a record-keeping mechanism. Inside its own perimeter, blockchain provides valuable features and benefits like distribution, enhanced audit and verification, data integrity assurance and transparency. Question marks remain when we look outside the system at how corrupt actors can work together to use the system to their advantage. Governments need to weigh carefully if blockchain can supplement existing anti-corruption mechanisms and procedures to bring real benefit to the public procurement sector.