PPP’s and Blockchain : “Even money cannot buy trust; thank god someone created blockchain”

Bockchain is a new technology, or I can say a new methodology to keep an account of transfer of assets within a business environment. Undoubtedly, blockchain’s open distributed ledger has significant advantages over the traditional ledger accounting system being used by humans for years. It is estimated that inhabitants of Yap Island were the pioneers to use blockchain technology in early 1900’s. They used a distributed ledger system; open to all the inhabitants, to keep track of large stone coins. As it was cumbersome to transfer such massive stone coins, every Yapese made a note in its ledger when a change in coin ownership occurred, thereby saving time and efforts to physically move coins. As it was used efficiently in the 1900’s, in present business scenarios too blockchain can be used effectively and legitimately to save time, remove or reduce cost, reduce risk and most importantly increase trust.

I write this article not as a proponent of blockchain but to illustrate an eminent use case for blockchain technology, which can enhance the efficiency of a business ecosystem, especially for a project envisaged to be implemented on Public Private Partnership (“PPP”). In one of my earlier paper, I emphasized that amongst others the most critical factor for success of a PPP project is trust between the concessioning authority and the concessionaire. In spite of a long history of execution of PPP’s, there are several examples of failed PPP projects. One of the key reasons for such failures is lack of transparency and trust, leading to disputes between parties. The lack of trust is inevitable as the government backed concessioning authority focuses on Economic IRR, while the concessionaire objective is to increase Financial IRR. Further, concessionaire is over cautious in reporting its work progress and methodology of finance, construction and operation to the employer, on the other hand concessioning authority often tries to micro manage concessionaire’s activities. Moreover the parties interpret the contract as per their own convenience and god forbids, if the contract is badly drafted it leads to numerable conflicts between parties. These are just a few issues which make it essential to transfer entire PPP framework into a new paradigm of blockchain and smart contracts.

While you are reading this article, number of PPP contracts are being designed and executed around the globe. However, experts do not foresee PPP’s exceeding 15% of total public investment in any country as they believe that the process of creating PPP is very cumbersome (OECD). Data suggests that close to USD 2 trillion of PPP deals have been planned and finance till date and the number is rapidly increasing due to increasing demand of better infrastructure and this demand cannot be solely delivered by public exchequer money. However, not all such PPP projects conclude with a desired outcome. They face cost overrun, delays, and sometimes are abandoned due to failure in planning and implementation. Adoption of blockchain can help such projects to be implemented in an effective and cost efficient manner.

Recently, blockchain received a setback, as to a novice block chain is equivalent to bitcoin which is a shadow unregulated currency. Hence, due to lack of knowledge, one assumes that there will be significant regulatory issues in implementing blockchain, such as being faced by bitcoin today. There is no denial of fact that bitcoin was the first large scale implementation of blockchain technology, but in reality blockchain is far wider, sophisticated, efficient and legitimate compared to bitcoin. Blockchain is a technology; while bitcoin is just one product designed using this technology. My endeavor here is not to propagate blockchain or undermine bitcoins, but to simply put forward an idea of how to use of blockchain so as to enhance overall effectiveness of PPP project implementation.

A simplified PPP project ecosystem is shown below which depicts the roles of various project participants.

It looks complex, but believe me, this is the simplest version I can create to represent a PPP organization. In actual PPP frameworks can be much more complex than the one shown above.

In this PPP ecosystem, there is a continuous transfer of assets and information from one party to another throughout the project lifecycle. The subcontractors complete their scope and transfer the asset to the employer. Often there is a transfer of asset among the subcontractors themselves. The lenders verify the work through lender’s engineers and release disbursement. The consultants plan and monitor the work progress for their employer.  This largely completes the bottom layer which is managed by the concessionaire.

On the next layer, there is the employer who hires independent engineer to oversee their scope of work and concessionaire activities. Further there are sponsors/lenders of the employer, often state, municipal or federal government, who always have a keen interest to review the progress of the work.

One critical aspect is the regulation; a regulator has authority to regulate the activities of the mployer as well as of concessionaire and hence is in need of updated information about the transactions taking place with the project.

Everyone in the system maintains their independent ledger and reporting which leads to origination of multiple and sometimes contradictory reports. While the contract describes who will have final say to certify completion, often there is a lack of consensus on the completion of the scope of work  as a result the parties tend to go for disputes.

Another issue which such large scale projects face is corruption. There is an opportunity for both employer and concessionaire to skim out money from the system for individual use in the form of kickbacks or undue favors. This not only increases project cost but, also increases financial, operational and regulatory risks for the project.

In light of the above, can a blockchain technology be an answer to make such a complex framework more efficient? I believe it can. An EIR i.e. Educate, Implement and Review, framework can be used for adoption of blockchain in PPP ecosystem. The first step is education, wherein the decision makers need to be educated about the numerous advantages which blockchain brings to a business.  The education would remove the myth that blockchain is much more than creating any legitimate or illegitimate crypto currency. It’s about sharing information in a more efficient and cost effective way.

Second and simultaneous step would be to implement blockchain technology for few such projects. Once a block chain business case is developed for such PPP projects, it would help in reducing the lengthy contracts and lawyer fees as everything can be transferred to event base programming in smart contracts. The parties can mutually decide the validators thereby reducing disputes. Payment terms can be embedded within smart contracts, eliminating the need for bank guarantees and LC’s thereby reducing financing costs. As block chain provide provenance, the parties can also track the history of the installed asset and verify genuineness, thereby reducing maintenance cost and risk of failures. While information will be readily available to everyone concerned, still privacy can be maintained for crucial transaction in the design of the blockchain environment. For e.g. if the terms of a bid should not be known to the regulator, the blockchain system can be designed accordingly. It will also reduce reporting requirements substantially, as entire information will be available on a single ledger. A single ledger would reduce disputes, eliminate delays, and provide immediate payments to parties after completion of work, thereby making them more efficient.

Finally, a review mechanism of the technology is required. Once, implemented, the cost and benefits of such implementation need to be quantified and documented as learning for future projects.

Implementation of any new system is a complex task, so will be the implementation of blockchain for such large and complex projects. However, given the advantages, I believe it’s a right time to start testing blockchain on few PPP projects at least to start with. All it requires is will of parties to attain transparency, efficiency, provenance and trust in the project eco-system.

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