By: The World Economic Forum
The World Economic Forum wrote Around the world, the potential for corruption is often exploited where there is a conflict of interest in decision making, leading to the misallocation of public funds.
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, the OECD reports that an estimated 20-25% is lost to corruption globally at the government level.
With the scale of many public contracts, which can be worth several million dollars, public procurement systems are an important component of a country’s spending. In Colombia, where the World Economic Forum and key partners are developing an innovative new project to address gaps in government transparency, the proportion of GDP attributed to public procurement is 12.5%, which accounts for 35.7% of the government’s total spending.
It is estimated that the annual cost of corruption in Colombia is $17 billion, which is equivalent to 5.3% of the nation’s GDP. Of this amount, $7.2 billion, or 10% of the government’s yearly budget, is estimated to be lost to corruption in the public sector, which includes public procurement.
Odebrecht S.A. is a Brazilian construction firm who, between 2001 and 2016, conducted both illegal campaign financing and large-scale bribery of about $800 million to secure more than 100 contracts across 12 countries including Colombia.
In Colombia, school meal procurement is a smaller-scale yet salient microcosm of the problems that arise in public procurement. It is reported that the public sector has historically paid egregious prices for standard goods. The local Colombian newspaper El Tiempo, for example, found that chicken breasts were sold to schools at $12 or about four times the price of local supermarkets.
Even more concerning are the reports that goods that are purchased are not always delivered. The former mayor of Cartagena has been charged for illegally contracting a deal of over COL$23 million (about $7,000), in which 2.6 million loaves of bread were bought, one million of which were never delivered to schools.
The World Economic Forum has partnered with the Inter-American Development Bank and the Colombian Inspector General’s Office to explore how distributed ledger technology can improve public transparency and integrity in school meal procurement.
What is the World Economic Forum doing about blockchain?
Blockchain technology provides three core economic benefits to many processes: commitment, coordination, and control. Due to blockchain’s tamper-resistant record-logging features, the first benefit – commitment – can reduce risk in government procurement through an increase in data record integrity and credibility of publicly available information. This will be particularly beneficial in enabling contractor selection and monitoring performance.
In the contractor selection phase, which is the focus of the Forum’s initial project, blockchain can help improve the transparency, fairness, and competitiveness of the bidding process.
For competing vendors, a blockchain-based solution creates permanent and tamper-proof bid records to preclude a firm’s ability to alter submitted bids after learning new information about competing bids.
Actions and decisions during the auction and vendor evaluation are automatically recorded in a manner that is permanent and publicly viewable, meaning the process is easy to audit.
In terms of monitoring the chosen contractor’s performance, blockchain could help ensure that information regarding actual deliveries is available to key stakeholders including parents, teachers, enforcement officials, and the press.
According to a World Trade Organization report, the introduction of more efficient and transparent government processes can have a great impact on 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.