Public Procurement, Corruption and Blockchain Technology in South Africa: A Preliminary Legal Inquiry

TLDR:

  • S. Williams-Elegbe began a preliminary legal inquiry on public procurement, corruption and blockchain technology in South Africa.
  • In the study she asserts that smart contracts are currently incompatible with public procurement governance, specifically in relation to dispute resolution.
  • From her findings, Elegbe establishes transparency and auditability of blockchain technology as potential solutions to corruption in public procurement.

Core research questions:

  • Do the mechanisms of blockchain technology serve to limit the potential for fraud and corruption in government contracts?

  • Under certain circumstances, do tender procedures and contracts prove to be a barrier to the adoption of blockchain platforms in South Africa?

  • Will a legal system that relies on documents and testimony to understand complex technical transactions be flexible enough to interpret contracts written in code?

Citation :

Williams-Elegbe, S. (2019) Public Procurement, Corruption and Blockchain Technology in South Africa: A Preliminary Legal Inquiry.

Link: Public Procurement, Corruption and Blockchain Technology in South Africa: A Preliminary Legal Inquiry by Sope Williams-Elegbe :: SSRN

Background :

  • Elegbe considers whether blockchain technology could be a viable solution to the intractable issue of corruption in public procurement in South Africa (SA).
  • The meaning of and applicability of blockchain-based smart contracts in public procurement is considered as a method of limiting procurement corruption.
  • According to Elegbe, the annual procurement expenditure in A is approximately R800 billion (USD $52.7 billion). It is estimated that about 50% may be lost to corruption.
  • Corruption in public procurement is enabled by reliance on intermediaries (public officials) in the procurement process, often referred to as the agency problem.
  • A typical public procurement process in SA comprises several phases. The pre-procurement phase consists of project identification and design, the procurement and project delivery phase, which involves project execution, and the completion phase, during which project objectives are evaluated.
  • Elegbe explains that procurement in SA is regulated by several pieces of legislation as well as institutional oversight. The laws provide direction on the procurement process, prohibited practices, and accountability and governance.
  • The author presents the transparency and auditability of blockchain technology as a solution to public procurement corruption.

Summary:

  • Smart Contracts are contractual terms that are converted into computer code. This code is uploaded to the blockchain, and the system executes accordingly.
  • Traditionally, contract parties have to trust that the other contracting party will act according to the terms of the contract. Various provisions are included in a contract to mitigate the risk of default or breach of contract and provide penalties when this occurs.
  • Smart contracts work in the same way as traditional contracts; however, smart contracts create other problems for contract law.
  • The author explains that a smart contract is a contract formed and performed via blockchain terms and are converted into a computer code, and this code is uploaded to the blockchain and the system then acts in accordance with the code to execute the contract.
  • All jurisdictions contain specific requirements for the validity of a contract. This includes contractual capacity, legality, certainty, consideration (in common law jurisdictions), and the absence of vitiating circumstances such as duress, undue influence, and unconscionability.
  • Procurement lawyers are often concerned with whether the procurement regulatory framework is fit for its purpose. The shortcomings of extant procurement regulations ensure consistency in public procurement and can fulfill policy objectives if adequately implemented.

Method:

  • The research design uses the mechanics and definitions of Blockchain Technology and smart contracts to consider the applicability of Blockchain-based smart contracts and how they might limit procurement corruption and the challenges that the legal system may face in regulating smart contracts.
  • The author considers challenges the South African legal system may face in regulating smart contracts.
  • The author describes blockchain technology and its non-technical functionality.
  • The researcher describes the procurement phases in South Africa as well as the considerations in common law jurisdictions.

Results:

  • The author suggests that, by definition, smart contracts could be used to generate contractual effects between parties. She states that such contracts reduce fraud and enforcement costs and guarantee the execution of the contract. Though prohibitively expensive.
  • The author highlights the component of trust and finds that contracts are digitally verified and authenticated by a blockchain, with no requirement from the other contracting party to be known or trusted.
  • The researcher argues that the intersection of contract law and code creates new areas of potential dispute.
  • She further states that: With a smart contract, the aggrieved party will essentially be seeking a remedy for a contract that has already been executed by the time the court hears the case.

Discussion and Key Takeaways:

  • The author suggests that while smart contracts reduce the scope of disputes, the intersection between contract law and code creates new areas of potential dispute.
  • The research argues that smart contracts can be terminated or modified for performance based on inaccurate data, discrepancies between computer code and the natural language of the contract.
  • The researcher states a few suggestions on the resolution of smart contract disputes, which may take the form of resolution in a traditional forum (courts or by arbitration) or online dispute resolution, being blockchain itself.
  • Conducting public procurement via a blockchain may make procurement more efficient, transparent and less likely to result in disputes. This is partly because the terms of the contract and the state of facts relating to the performance of the contract cannot be amended or overridden by any individual, whether maliciously or mistakenly.
  • A common way of addressing the agency problem in public procurement is to limit the discretion available to public officials in decision-making, provide multiple approval levels, and develop an enforcement framework to sanitize the procurement process.

Implications & follow-ups:

  • A blockchain-based platform may provide contract surveillance teams or civil society with up-to-date information on contract award and performance information, thus providing the information required to halt and limit poor performance through community participation.

  • Blockchain may provide a less burdensome means for ensuring compliance that also eliminates the risk of fraud. A blockchain-based platform could potentially be used to verify the identity of a contractor and authenticate the accuracy of contractor histories in the submitted procurement documentation.

  • Elegbe concludes that Blockchain technology is still in its infancy. Its embryonic nature has meant that there has been limited government regulation and scant legal academic exposition on the topic.

  • Elegbe concludes that until blockchain technology is trialed in South Africa, according to the researcher, we cannot confirm whether smart contracts may be integrated into the current procurement system models; or whether wholesale reform of procurement approaches may be required to take advantage of the benefits of blockchain technology to public procurement.

  • The researcher states that there is an inability to confirm whether smart contracts may be integrated into current procurement system models.

Applicability:

  • Elegbe suggests that a government-wide procurement platform could thus be used to onboard contractors and ensure transparency on contractor relationships with all public-sector agencies.
  • She further states that a government procurement platform would reduce the risk of doing business with new contractors, opening the door to increased competition and participation in public tenders while reducing the barriers to entry for smaller suppliers who do not currently participate in public tenders due to the high costs involved.
  • Similarly, in other industries such as film, where there are copyright and intellectual property disputes, a film archiving blockchain platform can possibly transform the fragmented nature of film archiving and knowledge management by providing access to film content, information and metadata on copyright contracts.
7 Likes

Congratulations @tebogonong and thank you for a fascinating read. Before I get into asking about the details of public procurement, corruption, and blockchain technology in SA, I’d be really interested in hearing about what life on the ground is like. There’s a citation in here that says as much as 50 percent of procurement expenditure could be lost. Do you see the effects of this in day-to-day life? I know you mentioned your background working in the film industry, is there much of an effect on libraries and government film archives?

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Thank you. In day-to-day life, the effects are visible in core services such as: (infrastructure, electricity, land and housing). Various government sectors such as the department of health and department of arts, sports and culture where there has been mismanagement of expenditures and service delivery that are not accounted for.

The insufficient funding of the National film archives has had an effect on how archives are managed, displayed and catalogued. One of the major issues being most of the collections are not digitised. However, there is a research gap when specifically looking at the National film archives.

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@Jerry_Ho you had some really interesting thoughts about this paper in our Discord channel, I’d love to see them added to this thread.

@tebogonong you mention that there’s a real risk of the court system being unable to cope with the new, complex technology like the blockchain; do you have any insight into how other countries have coped with this issue? And what about the human factor, would blockchains really be robust enough to stand up to entrenched corruption?

I’m also really interested in the way that this piece intersects with some of the conversations we’re having elsewhere on the site about governance. @ntnsndr’s piece discusses the limits of cryptoeconomics for managing a decentralized community, this seems like a mirror image of the problem, how do you remove perverse incentives from an entrenched system and convert bad actors – who presumably are the only ones who can deliver certain goods – to good?

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I’m very excited when I saw this research here.
It’s exactly the kind of pursuit/research that paved the foundation for people to further step onto. Feeling awesome just by reading the digest.

Personally, I (hope to) devote myself into infrastructure building for this exact reason. I want some (applicable) internet/society infrastructure to be ultimately reshaped into a fair form for everyone, just like the scenario of procurement in the article.

Two years have passed since the article was published, and I wish that people who are in the right place discovered this piece, and are currently working on it to further expand it, trying to do some small-scale experiments.
(Although not really related to the procurement example here… I’ve heard that the same situation happened in Afghanistan - people in between were leeching from US aids, and people were not benefiting from it, or maybe just a little.)

Anyway, a great one indeed!
Looking forward to it being realized in some form or another - in the near future, I really wish this one to be my go-to example of how blockchain can really help people, thus people can relate to it wholeheartedly.

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You have hit upon something that is a major problem: research that seems to have useful applications falling through a gap and not being implemented into the system for which it was designed.

This is a perpetual problem that has been plaguing new theoretical approaches and ultimately that problem is the crux of what I am studying for my doctorate. I think there is an iterative process in which research isn’t determined to be relevant until the results have been discovered and analyzed. In this process, the gap between what is currently being applied in contrast to the emerging theoretical frameworks should exist as an experimental ground; but unfortunately this gap does not usually exist as an interconnected point of experimentation.

Identifying what is useful theory coming out of academia becomes a difficult task for organizations that are operating in the market in real-time. It is in this gap that hopefully these summaries and discussions can start to illuminate common problems to which these types of solutions can be proposed as potential answers with empirical data supporting the thesis.

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It concerns me that corruption is more than forged documents. It takes forms in ways such as:

  • Kickbacks and bribes (happens under the table, not recorded)
  • Influenced, unjust decisions (happens in pre-logging phase, thus not traceable again)
  • Abuse of duty, usually for personal gain (Either under the table or not illegal anyway)

What is actually related to maintaining transparency might be something like regulations that demands government make information available to the public (https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?pcode=I0020026), but blockchain would be an overkill.

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Though most countries have some regulations that demand governments to reveal information, there is some important information that would be hidden or counterfeited before they are revealed, especially those involved in detailed and technical execution. The details of transactions are executed by humans in a physical world and this gives them chances and incentives to do those indecent. In the physical world, many things can be hidden and counterfeited, so that no one can find any evidence to accuse them. Many things can be lobbied or bargained for, so that law may not be effective enough to forbid corruption. This is what is happening in many jurisdictions. The features of blockchain may resolve this problem, but it does need more experiments and tries. So the problem @Larry_Bates mentioned also is what I am concerned about. Do we have more opportunities to try this prospective technology?

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