In countries around the world the potential for corruption is often exploited where there can be a conflict of interest in decision making. This can lead to distortion of resource allocation in public procurement. A foreign bribery report from the Organisation for Economic Co-operation and Development (OECD) stated that 57% of foreign bribery cases occurred to obtain a public procurement contract. When it comes to the allocation of national procurement budgets, it is reported by OECD that an estimated 20-25% is lost to corruption globally at the government level.
Public procurement systems are an important component of a country’s expenditure levels. In Colombia, the proportion of GDP attributed to public procurement is 12.5%, which accounts for 35.7% of the country’s government expenditures. It is estimated that the annual cost of corruption in Colombia is US$17 billion, which is equivalent to 5.3% of the nation’s GDP. Of this amount, US$7.2 billion, or 10% of the government’s yearly budget, is lost to corruption in the public sector, which includes public procurement.
School meal procurement is a microcosm of the many problems that arise in public procurement in Colombia. It is reported that the government pays extortionary prices for standard goods. The local Colombian newspaper El Tiempo found that chicken breasts were sold to schools at US$12 (COL$40,000), or about four times the price of local supermarkets. Even more concerning, it has been reported that goods that are purchased are not always delivered. The mayor of Cartagena illegally contracted a deal of over COL$23 million (US$8,000), in which 2.6 million loaves of bread were bought, one million of which were never delivered to schools. For many poorer children, school meals constitute their main daily meal. Where do these meals end up, then, if they're not being delivered? El Tiempo says the majority of these wasted funds are pocketed by public figures and officials, with a smaller amount going to the food contractors involved.
Blockchain provides three core economic benefits: commitment, coordination, and control. Commitment expresses the idea that blockchain makes information publicly available and increases the credibility of that information. This can greatly help to improve these government procurement issues in which key information may not be credible. We focus on two aspects of public procurement processes where this benefit may be realized: enabling contractor selection and monitoring performance.
In the contractor selection phase, blockchain can help to improve the transparency, fairness, and competitiveness of the bidding process. By publicly committing to contract terms and selection criteria before any bids are elicited, the risk of RFPs or selection criteria being tailored in order to select specific contractors is reduced. In addition, this transparency can bring more bidders to the procurement process by increasing the perception of fairness and the possibility that an outsider could win using clearly-defined selection criteria.
In the performance monitoring phase, blockchain can help ensure information regarding actual deliveries is available to key stakeholders including parents, enforcement officials, and the press. Standardizing observation in the delivery process and ensuring that the relevant information is made public will improve both formal and informal accountability of contractors.
The critical challenge for blockchain to create these benefits is ensuring that the information inputted into the blockchain ledger is accurate and timely. This interface of technology and the real world will almost surely require careful design as well as human intervention. It is important that these processes leverage economic design in order to ensure incentives are designed correctly and the possibility of gaming is minimized. So, while the development of the underlying blockchain technology is important, successful application to reduce corruption requires that blockchain technology be combined with effective economic and incentive design. We discuss the levers of economic design in our framework for the new economics of blockchain.
In our school lunch example, blockchain could significantly reduce the corruption problem in Colombia, helping to justly deliver several million additional meals to children every year.
According to a World Trade Organization report, introduction of more efficient and transparent government processes can have a great impact in a country’s economy, and savings of as much as 10% can turn the budget deficit from procurement processes into a budget surplus for some European countries. Similarly, Dubai, which is currently conducting workshops to identify services and sectors in which blockchain can be useful, estimates cost savings of over $1.5 billion per year if the government decides to adopt such technology.
This project provides an exciting use case to show how blockchain and its related technologies, when applied by public servants in collaboration with social scientists and technologists, can be used to improve the efficiency and equity of public services.