Contract transparency: A win-win situation
| October 04, 2013
Contract transparency is increasingly advocated as a tool to achieve good governance in the extractive industries around the globe. Those opposing contract transparency argue that if the practice is not implemented consistently, nontransparent companies will have an advantage to transparent ones, and nontransparent countries will attract more investment compared to transparent ones.
But, first of all, what does contract transparency mean and how is it supposed to bring about good governance? And, more importantly, are there reasons for companies to support contract transparency?
As one might guess, contract transparency means that contracts within the extractive industries should be made public. Usually when talking about contract transparency, it concerns the primary contract between a state and a company (or consortium of companies) and not a contract between an international companies and its subcontractors. (Actually, if it would mean that all contracts were concerned, the endeavor might be too ambitious. Some estimates suggest that on average 100 contracts are involved in a typical oil project.)
What are the arguments for contract transparency?
So far there have been only a few countries that have published their contracts, including Ghana, Liberia and Timor-Leste. In most other countries, model contracts are available that can give the public a rough idea about the contractual framework in their country. But the model contracts do not include crucial sections like the fiscal terms of an agreement — and one can never be sure whether a particular clause or article has been retained in the same form in a signed contract.
There are many rights-based reasons for which contracts should be made public. In most countries, subsoil resources are property of the nation, and citizens therefore have the right to know under which conditions their state provides access to these resources.
But contract transparency can be a crucial cure to “principle-agent” problem governing the sector. When it comes to dealing with the income of natural resources, governments might not act in the interest of the citizens of their country, but in their own interest as they have an informational advantage if contracts are secret. Public access to contracts and greater contract literacy will provide governments with the incentive to act in the interests of as many constituencies as possible.
What are the arguments against contract transparency?
One of the biggest worries of countries is that if they open up their contracts to the public, they would lose their bargaining power and deter investors. The truth, however, is that so far countries like Ghana and Liberia have received at least as much investment as countries that keep their contracts secret.
For companies, the counterargument to contract transparency is that items such as tax and royalty rates would be disclosed. This information could reveal the costs structure and pricing strategy of the companies concerned — giving competitors crucial information that they could use against a company.
Another argument is that countries that are not interested in transparency could choose nontransparent competitors over transparent ones.
Yet, it it is questionable whether this would take hold. In another post of mine I was talking about the decision of the U.S. Securities and Exchange Commission on Section 1504 of the Dodd-Frank reform. If the SEC pushes through the reform, the amount companies pay to governments for their natural resources will be published anyway.
In most cases, the terms of contracts are already available on a paid basis and common industry insider knowledge. But, more importantly, if contracts are made transparent and are accepted by the wider public, property rights — particularly in the developing world — will be more secure. As Susan Maples and Peter Rosenblum put it, this will "lead to more durable contracts and lessen the need for renegotiation over time.” In short, a win-win situation for both governments and companies.
How can companies contribute to contract transparency?
So far, even if a country has committed to the Extractive Industries Transparency Initiative (EITI), contracts do not have to be published. (Check what responsibilities you have as a company under EITI here).
Still, a company can pressure for the publication of contracts and — what many misunderstand — confidentiality clauses do not mean that a contract has to remain secret. Governments and companies can always agree to publish contracts, and they can agree to modify the confidentiality clauses to allow contract transparency.
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