Transparency of Contracts

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The drawing up of contracts is necessary in the extractive industries in order to give precise detail and legal specificity to the obligations of a state and company or consortium of companies involved in a project. Many contracts establish important tax, environment and investment provisions with major implications for a producing country.[1]

The 2009 "Contracts Confidential" report from Revenue Watch Institute notes that in recent years there has been a growing movement calling for greater contract transparency, within and beyond the extractive sector. International jurisprudence on the right to information, which increasingly supports the disclosure of agreements, as well as domestic freedom of information (FOI) laws across the world, are trends which offer important tools of argument and procedure in breaking the barrier to disclosure while balancing other legitimate interests.[2]

Benefits

According to Ingilab Ahmadov of the Public Finance Monitoring Center in Azerbaijan, it is widely known that a transparent "company-state" relationship is a key factor for resource-rich countries seeking efficient management of their natural resources to benefit current and future generations. He argues that contract transparency is necessary because an outside observer who wishes to compare similar contracts across or within countries needs a way to determine the extent to which it takes society's interests into account. To judge the fairness of these contracts, one must first have access to them.[3]

Proponents of contract transparency argue that the publishing and scrutiny of contracts allows the government to be held accountable for all contracts they enter. In their report on the issue, Revenue Watch argue that "contract transparency is critical to addressing better resource management and bringing contract stability to an industry that sees its contracts renegotiated more than any other."[4]

Opposition and counter-arguments

One of the most commonly aired arguments against transparency of contracts is that this openness impairs a company's commercial interests and weakens its competitive position. Confidentiality clauses are a common and legitimate feature in contracts between private parties and are used to prevent information from coming into the hands of public groups.[5]

This assertion is contradicted by proponents of transparency such as Ingilab Ahmadov, who argues that industry specialists in any case are aware of all or almost all contracts. Given the high level of information technology and close cooperation on joint projects in today's oil industry, it is unrealistic to maintain "trade secrets" as they existed in the 1980s and 1990s. According to Ahmadov, practice has shown that the commercial interests of parties involved in oil and gas contracts do not suffer negatively from the exposure, but on the contrary are able to benefit from a badly needed enhancement of their public image.[6]

Susan Maples, in her report for Revenue Watch Institute, suggests that one reason why companies are not eager to embrace contract transparency is that the information asymmetry between different parties resulting from secrecy arrangements allows certain companies an advantage, enabling them to negotiate more favourable commercial deals. Maples admits that the arguments in support of contract secrecy are not negligible arguments, but they overlook the special obligations of governments and the democratic right to information.[7]

The EITI and Contract Transparency

As of 2011, the Extractive Industries Transparency Initiative (EITI) did not make demands on participating countries regarding contract transparency. There have been calls from transparency activists for the initiative to widen its remit to include contract transparency.[8] However EITI representatives argue that it is important that the EITI retains precisely this tight focus in order to foster wider change and provoke debate on broader governance issues.[9]

External Links

Revenue Watch Report: Contracts Confidential: Ending Secret Deals in the Extractive Industries

References

  1. Contracts Confidential: Ending Secret Deals in the Extractives IndustriesRevenue Watch, 2009.
  2. Contracts Confidential: Ending Secret Deals in the Extractives IndustriesRevenue Watch Institute, 2009.
  3. Why is oil contract transparency necessary?Public Finance Monitoring Centre, retrieved 15 March 2012.
  4. Contracts Confidential: Ending Secret Deals in the Extractives IndustriesRevenue Watch, 2009.
  5. Contracts Confidential: Ending Secret Deals in the Extractives IndustriesRevenue Watch Institute, 2009.
  6. Why is oil contract transparency necessary?Public Finance Monitoring Centre, retrieved 15 March 2012.
  7. Contracts Confidential: Ending Secret Deals in the Extractives IndustriesRevenue Watch Institute, 2009.
  8. What needs to change for the EITI remains relevant? Publish What You Pay Africa, October 2011.
  9. What needs to change for the EITI remains relevant? EITI, 2 October 2009.