Crypto-enthusiasts are eager to boast of the many possible applications of blockchain technology to the world’s economy. While more traditional areas, such as banking and finance, have already jumped onto this decentralized technology, other areas that are just as ripe for innovation have remained aloof to the potential blockchain holds in transformation the way business is done.
Now while this is especially true for private market solutions, the public sector is perhaps even more starved for innovation. Governments across the world collectively invest trillions in public projects in a bid to revitalize infrastructure and stimulate economic growth, with over $78 trillion worth in public projects estimated to be funded over the next 10 years.
Unfortunately, these large-scale public projects tend to be bogged down by inefficiencies, red-tape, and even corruption. This unfortunate truth is even a reality for first-world countries, with The American Society of Civil Engineers estimating that corruption costs within the United States adds an extra 10 to 30 percent to the overall project cost. With similar figures in order developed countries, keeping this issue unaddressed could cost trillions in future development expenses that are otherwise avoidable.
In light of this issue, it’s not surprising that blockchain proponents have advocated for the use of this technology to help illuminate the current process of public works and ensure these tax dollars are not wasted.
The Current Situation
According to the 2017 Corruption Perceptions Index issued by Transparency International, the public works sector which includes infrastructure projects remains the worst sector for corruption and bribery. Numerable studies have correlated high levels of corruption with more investment, lower revenue, and reduced quality of public infrastructure.
In addition, most projects go woefully over budget. Nine out of ten public projects exceed their financial allotments, with some areas (such as rail projects) exceeding their budget close to 50 percent on average. Most public projects also have needlessly bureaucratic organizational layers, with seemingly endless chains of contractors, subcontractors, and sub-subcontractors that make it almost impossible for project managers to get accurate information in a timely manner.
With these redundancies in mind, both private investors and government organizations become more hesitant to fund these massive projects. Although feasibility studies are supposed to evaluate the viability and return for these kinds of projects, often these studies are awarded to whoever bids the lowest. Sometimes investors are hesitant to even fund these studies in the first place, since not all projects get approved for development. What this means is that much-needed projects can stall in the earlier approval stages due to external, unrelated factors.
Blockchain in the Public Arena
In light of these concerns, applying blockchain technology into the public domain could be a key factor in changing these problems. Perhaps the most important difference is that all payment events and key project performance metrics can be recorded onto a blockchain, fully broadcasting and recording these details for everyone to have access to. For instance, applying blockchain technology into the financial transactions of a major project would ensure that every penny spent is recorded and broadcast in a way that’s unfudgeable. Once a commitment has been made, it cannot be undone no matter how large a potential bribe or threat may be. This way, civilians and stakeholders can monitor, verify, and control public service providers unlike ever before.
At the same time, this means that all details pertaining to financial transactions can be audited and scrutinized at a later date. By employing blockchain technology into the payment system, corrupt projects won’t be able to as easily hide traces of corruption.
Many governments have begun experimenting with these kinds of transparency systems to ensure their bidders remain honest and trustworthy. Speaking at a conference earlier this year, the Mexican governments national digital strategy coordinator Yolanda Martinez announced a blockchain project called HACKMX which would help make public service bidders more transparent.
“With blockchain applied to public contracts we’ll be able to know whether a company that provides services to the government is trustworthy,” said the coordinator. She added that this technology will hopefully remove the more easily corruptible aspects of the public tender process, keeping records of the bidding process and allowing for future audits.
On the other side of the North American continent, the Canadian government made a similar announcement in January 2018. The National Research Council Industrial Research Assistance Program (NRC IRAP) announced in a blog post that it was launching a pilot project backed by the Ethereum platform.
“These are early days yet, but the experiment is expected to provide constructive insight into the potential for blockchain technology and how it may be used for more open and transparent function of public programs,” said the organization.
Every time a grant is awarded, a permanent record of the data is stored on the blockchain and NRC IRAP posts these details online. Canadian citizens can also search past projects and look through the monetary value, region, date, and recipient of said grants online. The largest grant listed on the experimental database was an $11.8 million contribution to an R&D project at Ryerson University.
How it all Works Together
This transparency makes corruption much more unlikely to take place. In addition to these features, aspiring public-service blockchain projects or tokens would require some other details to fight fraud effectively. Firstly, the blocks that constitute the blockchain should contain additional information for the purposes of fraud and corruption enforcement. For example, a block can include details/reasoning behind the expense, who signed off on the expenditure, as well as any supplemental activity linked to the funds.
Additionally, like many blockchain projects, the use of smart contracts is crucial to making this application of blockchain work. Smart contracts have logical clauses preprogrammed into their code that activates certain events under specific conditions of said contract. This could be anything from specifying the conditions to release funding, which funds they can be made available, etc. Having a strict set of criteria established beforehand that can’t be altered after the contract is in effect ensures there is an incorruptible element to the entire process.
For these reasons, the Ethereum platform and technology is the most optimal. Ethereum allows not only for the creation of new cryptocurrency tokens but also allows developers to include other features, chiefly smart contracts, into their coins. If governments wish to go this route, they can peg the value of their tokens to a physical currency in order to reduce volatility. From there, governments can issue tokens to bidding companies according to the project’s budget (access to which would not require a bank account, only a software wallet). Once these tokens are awarded to their final bidders/contractors/subcontractors, they can be converted into fiat currency. The idea is that this transition point from government-backed cryptocurrencies to fiat should be moved as close as possible to the end beneficiary of the project (staff salaries, equipment purchases, etc.). That way, stakeholders have the most awareness over the way these tokens are spent as well as a greater ability to audit these transactions in the future.
As governments recognize the need for increased transparency and accuracy within their own public infrastructure projects, blockchain technology is poised to revolutionize how they handle this process. Through many features such as smart contracts, government-backed tokens can add an unrivalled level of transparency in an otherwise corrupt and wasteful industry.
Also published on Medium.