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

Governance and Coordination
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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.
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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 (The Freedom of Government Information Law - Article Content - Laws & Regulations Database of The Republic of China (Taiwan)), 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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This discussion is really getting right to the mission and value of SCRF!

Perhaps the problem @Jerry_Ho, @Larry_Bates and @Astrid_CH are identifying is something we can start doing something about:

  1. What are the research questions that need answering that industry and government need answers to before implementation of a blockchain solution? This would be context specific here.
  2. What scenarios/experiements would yield answers to these particular questions?
  3. How can these scenarios be incentivized?

I think that we can potentially help define 1 and 2 above. And maybe that is a project that those involved on this thread might be interested in jumping into? That might eventually get us to step 3. But I think focusing on 1 and 2 is a place to start.

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@Twan: To the truism “Whatever can be made digital will be,” I’ll propose a corollary: “Whatever can be hidden, obscured, obfuscated or made invisible will be.”

This is especially true of corporations and governments where secrecy and redacted information have become a fine art.

For this reason I have my doubts about the idea that “blockchain would be overkill.” Anything that enforces more transparency in human interactions that should be public is a good thing.

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@Astrid_CH @Larry_Bates: I replied to @Twan before I read @Astrid_CH’s comment, and obviously I agree that “the features of blockchain can resolve problems.” But society at large needs to support trials and experiments.

I don’t design such systems, nor do I even know on which chains sandboxed trials would be most practical and welcome… But running targeted experiments could clearly produce real-world proof of the applicability of “academic” research to the “marketplace.”

So some kind of incentive structure — even a “contest” — that encourages students and early-stage professionals to do such limited and very targeted trials seems like a worthwhile thing to explore.

@tebogonong If blockchain experiments could improve delivery of services to the public, including things like digitizing film archives, do you agree that interested foundations, corporations, or not-for-profits could step in to fund or otherwise incentivize public projects like this?

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Thanks for taking a look at my comment. I noticed that you disagree that blockchain is always an overkill, which I don’t think so too! I am merely saying that some information is fine without protection from the best cyber security technology on earth.

If you are suggesting that we should do our best to digitalize conversations and interactions, and migrate every database onto blockchain, I must diverge with what you stand for.

This paper is suggesting that smart contracts could be a great replacement for government contracts.

It is not suggesting that the government publicize everything, because that take on so much more burden of evidence to prove its feasibility.

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I actually read and replied to rlombreglia before reading your comment too :sweat_smile:

My main point is better stated in this order:

The paper is suggesting that by ensuring that contracts are executed, we can combat corruption.

Smart contracts are great at tracking things in the digital world. We all agree. Therefore the author suggested we used the technology.

I suggest that there are also many types of corruption. For example, the majority of corruption in Taiwan did not happen because contracts were not executed as they should be, but because something went wrong under the table, and might not be something the government is authorized to track at all.

Yet blockchain is not the best tool for tracking and verifying things in the physical world. It’s probably not the worst, but would be hard to justify.

Therefore, the author should talk about what are the main types of corruption that happen in South Africa, to better illustrate the size of the impact they would like to see.

The author should go beyond stating 50% is lost to corruption by making it clear on “which type?”

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@Twan @zube.paul @rlombreglia Thanks for your comments.
About @Twan 's concern, according to my experience and knowledge about administrative law, some corruption may be one sort of infringement of contracts. Especially, the requirement of integrity is a basic principle of government action, which includes entering into contracts, implementing contracts. And it should be done under a disclosure circumstance (While the reality condition confined people’s ability to supervise everything done by civil servants). Of course, not all contracts, those parts involved classified information in a contract should not be unveiled, but most country action should still apply to public supervision, this is also why a country could be deemed as a democratic country. When people have the supervise right, to track, verify and allow people to know that information should be an obligation of the government. The disclosure scope should not be confined in contracts as well, everything the laws require to be unveiled is applicable.

Following the thinking above, I agree with the idea that utilizing blockchain to supervise government on some action, including the conclusion and implementation of contracts in most areas. I want to point out my standpoint that I don’t think smart contracts can replace contracts as they don’t play the same role and have different functions in a transaction. The relevant notion can be found in a paper summarized by @Larry_Bates.

As @rlombreglia said, “running targeted experiments could clearly produce real-world proof of the applicability of “academic” research to the “marketplace.” Before that, I much agree with @zube.paul 's idea. I would love to join this valuable project, I believe it could be a small but crucial step to help the world better. If we can commence that project and if there is anything I can help with, please let me know!

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I agree that foundations, corporations and non-profits can partner up to provide or improve access to funds and even promote innovative solutions.

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I’ve found that many countries are still trialling or aim to find ways to promote innovative use of data and blockchain technology. A recent report by the World Economic Forum states that “public-sector corruption is the single largest challenge, stifling social, economic and environmental development. Often, corruption centers around a lack of transparency, inadequate record-keeping and low public accountability”
(http://www3.weforum.org/docs/WEF_Blockchain_Government_Transparency_Report.pdf)
When it comes to the human factor it is quite difficult to predict but it does provide solutions that are still overlooked.

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@Twan I completely agree with your statement here. Thanks!

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@Twan — Once again, I agree with you. When you wrote about blockchain as “overkill,” I was thinking something like “shooting a flea with a rocket.” I.e., that you were talking about blockchains’s native capabilities, etc.

And when you talk about the human dimensions of corruption, often untrackable in the “real world,” you’re obviously correct. And so I also agree that the author should use the word “corruption” with caveats.

However, modern-day bandits (the ones with political power as well as the freelancers) steal a gruesomely large percentage of human wealth and productivity. This is partly why we have such an unequal world. If we agree that those corporate and government transactions need to occur in public (i.e., requiring that they occur on camera), then those data certainly could be maintained on blockchain.

One obvious advantage of doing so would be to slow down another major network crime: identity theft via break-ins to commercial databases.

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TBH, my knowledge on this specific topic is limited. I’m not able to answer the above questions, as one should’ve be observing the incidents in the front line for a significant amount of time, in order to see that which link in the process is the weakest, and how can blockchain help/unable to do so.

However, I can provide another imaginary scenario that Blockchain could be useful.

In Taiwan, we have exactly the opposite problem to corruption - mundane contractors, and thus bad quality constructions cause government people can’t choose the best contractors cause they’re afraid of violating the (overly strict) procurement law.

Our prosecutor system is very diligent:

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ref: UNCAC(United Nations Convention against Corruption) report from Taiwanese government.
The unit is per 100,000 people. That is, 2.3 ppl prosecuted for corruption / 100,000 people, ~1000 ppl every year.

However, such strict laws have their own issues.
Generally, there are three kinds of procurement: Open Tendering, Selective Tendering, and Limited Tendering. REF

For open tendering: open announcement of the tendering, everyone can participate, lowest bid wins.
And this results in constructions with the cheapest quality. that a contractor with normal quality won’t want to bid it. Contractors often declare bankruptcy in the midst of a half-finished construction.

For Selective Tendering: open announcement of the tendering, specs are developed for contractors to apply for the case. Contractors must clear the “expert review process” in order to gain the rights to bid the case.
However, government employees often don’t have idea on how to derive a correct spec - often this resulting in a tendering that no one’s going to bid, for multiple times. And you can’t ask some companies/friends to derive the specs for you, without risking the danger that you’ll be in jail the next year.

For Linited Tendering: without announcement, invite contractor(s) directly. Due to numerous reasons such as: there’s only one company who can do this, this case should be done in secrecy, you’re the pro in this field and you know that by doing it in open tendering or selective tendering, only shitty contractors would win the bid and not the best fitting company.

Yeah, in Taiwan the most concerning issue is not corruption or money funneling, it’s that due to those “I don’t wanna be in jail” mindset, public infrastures are often in a mundane or even shitty quality.

Personally I have a very very very rough idea that could’ve solve the issue. Please don’t be harsh on me…

In selective tendering, contractors must went through the process of “expert review” - and there are often 3~10 ppl who are in charge of the process. They apparently can be bribed. And experts with ethics can and will be forced to bow to the corrupted majority.

Recall the voting mechanism of Academy Awards(Academy of Motion Picture Arts and Sciences, oscar award…) - we can separate the process of experts meeting and experts voting in the government procurement process.

  1. categorize the types of tendering (construction, military, maintenance, human labour, events…), and preselect a bunch of experts to each field. Derive them the private keys on blockchain for them to vote in the future.
  2. gov still airs the discussion process of (a few selected) experts to the public, but they do not vote in the end of such meeting.
  3. gov mass-sending reminders to all ppl who has the right to vote for this certain tendering, urging them to vote. The voting process on the blockchain should be anonymous (powered by zk maybe?), in combination with some MACI(anti-colluding) tecnhiques to protect the integrity of the vote, and the identity to the voters.

I can give few reasons that it’s not useful, and few reasons that it’s useful…
pros:
Mass-bribing ppl are hard, costly.
Compared to the current situation, one won’t be forced to change his/her decision due to the atmosphere of the meeting. (or threatened by gansters…)
By onair the whole discussion process, experts can take time and discuss with others to decide their vote, hope to better achieve a result that’s good for the public
This shit is fancy, and it will attract media to report it. The more exposure, the more likely that it’ll benefit the public.

cons:
This could yield worst results that a few selected experts - public opinions - even from the same expertise domain - are not necessary the best opinions.
There’s no incentive mechanism to reward experts in the field to vote - it will be another DAO where no one’s participating the proposals voting.
Bribing is not solved entirely.
This does not solve the actual implementation issue - it’s just a small part of corruption. Are we overkilling this?

I’d like to emphasis that I’m far form expert on this issue. Discussions or corrections are welcomed.

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“Courtroom Evidence” might be another case close to this topic. We can utilize the immutability of blockchain to prevent the evidence from being manipulated. It could be one kind of corruption, which refers to someone pay the judicial officer to hide or change the evidence. Blockchain Technology and Courtroom Evidence (Su, 2021) This is an abstract of a research paper in Taiwan. It focuses on how to apply and explain some of the principles of Criminal Procedure Law such as Hearsay Rule on the use cases of blockchain, and talks about the US law discussion on the topic.

From this instance, I think there will be a lot of discussion on how to face and adjust conventional law and business principles when we use blockchain to replace or improve it. It seems that some important issues need to be addressed in advance when we are looking for more use cases on these corruption problems, which can become complicated research papers.

Reference
Su, Kai-Ping. (2021). Blockchain Technology and Courtroom Evidence. NTU Law Journal, 50(3). Retrieved from https://www.airitilibrary.com/Publication/alDetailedMesh?DocID=a0000446-202109-202109300006-202109300006-993-1071

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