Blockchain and Procurement

Introduction

Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

Business runs on information. The faster it is received and the more accurate it is, the better. Blockchain is ideal for delivering that information because it provides immediate, shared and completely transparent information stored on an immutable ledger that can be accessed only by permissioned network members. A blockchain network can track orders, payments, accounts, production and much more. And because members share a single view of the truth, you can see all details of a transaction end-to-end, giving you greater confidence, as well as new efficiencies and opportunities.[1]

The advantages of blockchain are:

AUTONOMY: The blockchain works according to the rules set by its members. There is no need for a central decision-making body.
SECURITY: Operating data input on the blockchain is deemed secure owing to the stacking of the information blocks.
TRANSPARENCY: The blockchain offers an audit trail that can be consulted at any time by all blockchain members.
AUTOMATION: The rules set upstream by blockchain members via ‘smart contracts’ allow for automatic settlement.
ACCOUNTABILITY: Each blockchain participant has rights and obligations with regard to the blockchain community.

Reducing Procurement Corruption

While the extent of procurement corruption varies from country to country, the causes are common: inadequate record keeping, low public accountability, repeat and close interactions between the private sector and government officials, and centrally controlled processes. These combined factors create an opaque, complex and high-value process which is vulnerable to corruption.

Blockchain-based procurement offers governments the potential to de-corrupt their procurement processes through ‘technologically induced sunlight’. Blockchain enables permanent and tamper-evident record keeping, real-time transparency and auditability, and automated smart contracts. This increases uniformity, objectivity and transparency. For instance, blockchain makes it more difficult to remove records of bids and public comments, or to alter bid or tender offers once submitted. This decentralises decision-making, oversight and record-keeping, enhances transparency and devolves power away from authorities who might be prone to corruption.

A summary of corruption problems in public procurement and how blockchain can mitigate them is shown below.[2]

The World Economic Forum has led a proof-of-concept project which enables vendors and tenderers to conduct vendor-bidding and evaluation processes using blockchain, while also allowing third parties such as journalists and citizens to monitor and flag risky activity in real time. The software includes several automated features such as minimum bidding and public comment periods and automatic ‘red flags’ on potentially corrupt activity.

Improving E-Procurement Systems

During the COVID-19 pandemic, many governments resorted to emergency direct contracting to procure necessary health services and supplies. These contracts are particularly high-risk as they are awarded very quickly in the absence of competitive auction. Next-generation electronic procurement systems, based on blockchain technology, can record direct-contract activity in a permanent, secure and automated manner to potentially reduce corruption risk.

Blockchain technology can also be used to create integrated supplier profiles across fragmented systems, which will reduce asymmetry of information in purchasing or pre-tender assessment. E-procurement systems can combine blockchain-layer data with artificial intelligence (AI) analytics: the former guarantees data integrity and traceability, while the latter extracts patterns to help shape better procurement assessment. Linking supplier and contract data across the whole organisation, and using blockchain and AI analytics, leads to a number of benefits, summarised in the table below.[3]

Tracking And Controlling Pharmaceuticals

Pharmaceutical supply chains are complex. Drugs are not only very delicate products that require special care, but delivery involves multiple stages, stakeholders, and border-crossings in a series of carefully orchestrated and regulated steps with precise timing. Counterfeit and low-quality products are also a major problem. In such a complex endeavour, many things can go wrong and when they do, it is crucial to have a transparent record of events in order to learn from mistakes and continuously improve supply chain processes. This is where blockchain’s unique characteristics of offering an immutable and transparent record of transactions can show its strength.

However, adoption of blockchain for supply chain management has been rather slow and mainly limited to pilot projects. So why does blockchain seem to be always on the verge but never breaking through to adoption? One of the core issues is scalability. Managing a global supply chain potentially involves thousands of interactions between individuals and machines. An even greater concern, however, is the technical complexity of blockchain and the degree to which it is interoperable with existing systems. Enterprises tend to want to combine blockchain with their existing back-end systems rather than starting from scratch, but this can often be an onerous undertaking involving high research and development costs. These issues are particularly prevalent in the pharmaceutical sector, due to the complexity of its supply networks.[4]

Supporting Value Based Healthcare

Blockchain applications must support the transition to value-based healthcare (VBHC). This aims to improve the value of care while providing it at a lower cost. There are three major stakeholder groups that must be supported in achieving VBHC: patients, providers, and researchers. Blockchain offers the potential to support these stakeholder groups while achieving regulatory compliance, added value, and continuous improvement. The diagram below demonstrates how using blockchain for pharmaceutical tracking and control can help achieve VBHC.[5]