South African government supply chain and procurement processes are often marred by irregularities and allegations of corruption which are reported annually by the Auditor-General South Africa (AGSA) and other bodies, as well as the media. Of even greater concern is the lack of (quality) service delivery that often results from these irregularities and corruption, and which has tarnished the reputation of the government and eroded a lot of trust in the state’s ability to deliver services.
The challenges around procurement arise as a result of a lack of transparency, inadequate record-keeping, and low accountability. In the context of the Fourth Industrial Revolution (4IR), blockchain technology is considered beneficial in procurement process improvements and reforms and could be a possible solution to the procurement challenges the country faces. The use of blockchain in public procurement was recently explored by the World Economic Forum (WEF) in the Colombian context, where despite the multiple benefits, challenges and unintended vulnerabilities were identified.
BLOCKCHAIN IN PROCUREMENT
Also known as distributed ledger technology (DLT), blockchain technology is a technology that creates a decentralised record of all transactions in a network and can be managed by more than one member at a time. It is write-only, programmable with all entries time-stamped and cryptographically secured. In turn, the technology enhances transparency and could do the same for the government procurement process − as different parties could be aware of what’s going on at any given time. Blockchain can transform procurement transactions in the digital sphere through a combination of permanent and tamper-evident record-keeping, transaction transparency and auditability, automated functions with ‘smart contracts’, and the reduction of centralised authority and information ownership within processes. Blockchain and associated applications could enable a new era of government supply chain (supplier−pay−delivery) process efficiencies.
Using blockchain technology, participants in the network can confirm transactions, which when applied thoughtfully to certain government procurement processes, can increase transparency and accountability in the systems, reducing the risk or prevalence of corrupt activity, and keeping a record of every single transaction or activity that occurs. Various benefits can be derived from the use of blockchain technology. The University of Johannesburg (UJ), a public university, recently announced that it would from 2022 use blockchain technology to issue degrees and certificates that are safe and secure. This will ensure that the university’s certificates and degrees are protected from fraud, protecting the good reputation and integrity of the university. Government and public institutions should escalate considerations of possible uses of such technologies to achieve efficiencies and ensure effectiveness in the delivery of services to the citizens of the country. The use of such technologies also presents a new world opportunity and can play an important role in unlocking new business opportunities and helping curb the unemployment rate in the country.
Despite blockchain’s potential, experiments and studies suggest it still has a way to go before it can achieve significant government transformation. According to the WEF report, a hybrid blockchain which uses public, permissionless and permissioned base-layer protocols is the most attractive option. This mixed system strikes an ideal balance, given present technological limitations, between transparency, procedural integrity, scalability and security. The report also highlights the importance of tracking innovations in cryptography and protocol scalability that may address present technological challenges.
Most important to note, however, is that blockchain technology is not a panacea. Instead, the various parts of the procurement processes of government still require serious attention and improvement, where necessary, in order for blockchain technology to make a meaningful impact in reducing corruption and irregularities.
BENEFITS OF BLOCKCHAIN IN PROCUREMENT
Blockchains can offer end-to-end visibility for categories of government spending, and with data that is not vulnerable to manipulation, mitigate possibilities of fraud and enable accountability. Implementing blockchain in the government supply chain can help with the following:
- Supplier management – Transparency in sourcing and the bidding process, also creating an opportunity for supplier development.
- Fraud and corruption prevention – Any fraudulent entries can easily be detected and followed up due to the use of hashing in blockchains.
- Smart contracts – The automated execution of contract terms, monitoring of predetermined conditions and outcomes.
- Traceability – Tracking the delivery of goods and services to the government and citizens at various stages.
- Ledger trust – Multiple verifications can be performed by supplier(s), government and other stakeholders (such as assurance providers and civil society) to ensure enhanced reliability.
SOME LIMITATIONS AND CHALLENGES
While blockchain can provide several benefits and capabilities for combating procurement corruption, legislators and National Treasury would still need to identify priorities and requirements given their specific social, political, and economic conditions and the trade-offs associated with various blockchain technologies. It should also be noted that blockchain technology may not be able to reduce corruption risk in certain human activities (outside of the e-procurement system) such as bribery and collusion.
Blockchains may be permissionless (public − accessible to all) or permissioned (private − restricted to specified participants). A key challenge that arises is supplier anonymity (privacy) and the protection of information, which could for example be solved by a hybrid or pseudonymous approach. Scalability also presents a possible challenge, with procurement occurring in the three spheres of government, including entities – only so many transactions can take place at a given time in a blockchain, which may of course be resolved through advancing cryptography. Other possible challenges include the possible need to use cryptocurrencies (the South African Reserve Bank recently announced it is exploring a possible digital rand based on DLTs). There could also be various other possible disruptions, spamming and attacks. Lastly, blockchain is an enabler and to be effective in procurement, all parts of the processes still need to be improved (for example consequent management and accountability).
GOOD AND CONTEMPORARY GOVERNANCE PRACTICES
Contemporary and good governance needs to accompany the implementation of blockchain technology to maximise its potential to improve transparency and accountability within public procurement processes. To strengthen the integrity of e-procurement, there should be a clear legal framework based on international best practice that considers all objectives and policy positions of the government (such as supporting small business). The framework regulates the creation of a comprehensive e-procurement hub that, for example, monitors monopoly suppliers and top government suppliers, helps avoid possible collusion, enables real-time audits, security, real-time emergency procurement monitoring, provides information on a single platform and of course ensures proper accountability. The framework should ideally −
- Use competitive auctioning as a basis (with effective monitoring enabled by smart contracts)
- Standardise notices, tenders, bids and contracts (to achieve uniformity, fairness, transparency, efficiency and accountability)
- Facilitate citizen audits, develop easy-to-use monitor tools and act on citizen findings
- Mandate transparent price benchmarking (market-based price benchmarks to reduce possible price inflation for public procurement, for example using blockchain oracles), and
- Provide safe and efficient avenues for challenging bids (encourage and manage complaints, protect whistle-blowers)
A DEFINITE MAYBE?
National Treasury has managed to implement the e-procurement project which seeks to support fair, equitable, transparent, competitive and cost-effective procurement in an easy to access, single point of entry, technology-driven facility − a step in the right direction. To enhance transparency and accountability it may be worthwhile to explore some of the advantages that are offered by blockchain technology. Given, however, the benefits challenges and limitations, the case for a blockchain-based e-procurement system is ambiguous and would largely be dependent on the willingness of government leaders and National Treasury, as well as government goals, a deep understanding of the South African context, and the technology’s design, configuration and implementation. Blockchain would only serve to enable accountability and so there would still be a need for adequate consequence management where any issues are identified in the process.
1 See https://www.weforum.org/agenda/2020/06/governments-leverage-blockchain-public-procurement-corruption/; https://www.weforum.org/reports/exploring-blockchain-technology-for-government-transparency-to-reduce-corruption
Msizi Gwala, Project Director: Enabling Competencies at SAICA