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Caroline Anstey, Senior Adviser, InterAmerican Development Bank; Senior Fellow, Results for Development Institute

Charles Kenny, Director of Technology and Development for Senior Fellow, Center for Global Development

Every year, governments worldwide buy and sell property, goods and services worth trillions of dollars – from office supplies to mining concessions; from teacher contracts to power plant construction. But the terms of sale and purchase—the contracts—are usually kept secret.  That’s a problem.  Too many contracts are unpublished (or redacted) and unavailable to the public due to confidentiality concerns.  

Authors Caroline Anstey and Charles Kenny describe a new set of principles1 of commercial transparency created by the Center for Global Development (CGD).2 These principles, described below, stipulate that government contract information is to remain confidential if – and only if – confidentiality is in the public interest.   Balancing legitimate concerns for confidentiality with the benefits of openness can be complex and the main objective of these principles is to clarify this landscape.

Why we need the principles

Although some information in government contracts remains confidential for good reason, taxpayers have a right to know how their money is being spent, and if they are getting what they are paying for.  Transparency can be a powerful tool to keep governments and firms accountable.  

Government procurement of goods and services are worth around 15 percent of the gross domestic product (GDP) for the world’s richer countries that are members of the Organisation for Economic Co-operation and Development (OECD)3. And contracts with oil, gas, mining, and agricultural firms that exploit state-owned natural resources frequently involve billions of dollars in a sector that produces output equal to 5 percent of global GDP.  

Significant costs can result when keeping these contracts confidential.  It means that governments and firms can’t learn from past experience what has worked and what has not in procurement and delivery of public services.  This can reduce competition, which carries a price.  In the EU, single-bidder contracts are on average 7 percent more expensive than contracts with multiple bidders.  This is a common problem: in many European countries in 2015, around 40 percent of all high-value procurement tenders attracted only one or two bids.  

Contract confidentiality also prevents parliaments and citizens from providing oversight -- a significant issue when fifty-seven percent of the bribery cases prosecuted under the OECD Anti-Bribery Convention4 involve efforts to obtain public contracts.  

A new trend towards greater contract transparency has emerged worldwide.  Open contracting regimes have been launched by governments including the Ukraine, the UK, Mexico City, Nepal, and Nigeria.  And mounting evidence suggests transparent contracting leads to better outcomes.  In Slovakia, procurement transparency reforms that included publication of contracts were associated with an increase in competition on the average government tender, from 2.3 bids in 2009 to 3.6 bids in 2013.  

Contract transparency has been linked with lower costs for hospital supplies in Latin America; lower costs for social housing in France; and greater exposure of significant funding by sole-source contract winners in Georgia.  There are many other examples of the impact of  transparency.5/6

Most government contracts can be published without redaction (editing or censoring for the purposes of security or confidentiality). An analysis7 of 74,859 Australian federal contracts in 2012 found that only 1,676 contracts were flagged with confidentiality clauses.  That’s only about 2.2 percent of the total. 

Nonetheless, there are legitimate reasons to keep some information in some government contracts out of the public domain such as privacy and national security.  The most common reason that government contracts are redacted before publication is commercial confidentiality issues.   In the Australian analysis, considerably over half of confidentiality clauses involved commercial secrets.

Commercial sensitivity pertains to information which, if disclosed to the public, would likely harm the commercial interests of any person or entity, including the contractor, subcontractors or suppliers, or the public agency itself. The types of information most often included in this category include information on line-item pricing, profit margins, and input costs.  Knowing such information would be published might deter firms from bidding in the first place or offering innovative delivery solutions to governments.  

But little guidance is available and considerable diversity prevails among nations worldwide when it comes to redacting information from public contracts because of commercial sensitivity.  Some countries and sectors are moving toward a full disclosure model with no exceptions for commercial secrets, including the oil, gas and mining industries located in countries that are members of the Extractive Industries Transparency Initiative (EITI).8  

In the Ukraine, Article 27 of the 2015 Public Procurement Law draws a bright line rule9 regarding commercial sensitivity.  It states that certain conditions should never remain confidential, such as price and other evaluation criteria; technical conditions; technical specifications; and documents confirming compliance with the qualification criteria.

Other countries follow a case-by-case approach.  Although in general the commercial sensitivity exemptions in most countries’ Freedom of Information laws have broadly similar wording -- actual practice varies widely among and within countries.10 

Some jurisdictions allow an absolute exemption on publishing commercially sensitive information, whereas others apply a further public interest test to determine whether this information should be published or withheld: the UK, Australia, Canada, India, Ireland, and New Zealand all include an explicit public interest test in their freedom of information laws, for example.  

And even within jurisdictions, analysis of cases in the US and the UK suggest that the level of redaction or disclosure based on commercial confidentiality grounds can vary considerably for similar contracts relating to factors including the emergence of a scandal or the unexamined requests of contracting firms to redact information.

Solution – ten principles

The Center for Global Development Working Group on Commercial Transparency created ten principles1/11on commercial transparency in contracts around three ideas.  

First, contracting systems should incorporate transparency by supporting proactive unredacted publications wherever possible and minimizing potential redaction where this is not possible.   

Model contracts should aim to reduce uncertainty around and the need for redaction.  And the potential to use commercial exemptions can be overridden by prior agreement. For example, South Africa’s Promotion of Access to Information Act states that information can be released if the individual is informed of an exemption before the agreement is signed, providing that the information be made available to the public.  Governments should use an open data, machine-readable format with a clear data schema12 to facilitate sharing and using the resulting information.

Second, exceptions to publication should only occur if they are in the public interest.   At the core of the principles is the public interest test: information should remain confidential on the grounds of commercial sensitivity only if the public interest in withholding information is greater than the public interest in publishing that information.  

Exemptions to a requirement for disclosing information on the basis of the public interest test requires demonstrating:

  • that significant potential financial harm to the contractor or the public agency is likely;
  • that the harm to the contractor or the public agency will harm the public interest;
  • that it is reasonable to believe that this harm could be avoided through the redaction of contract text (including the unlikely event of information being accessed through other channels); and
  • that this negative impact clearly outweighs the benefits of access to the information for the government, market, and citizens through enhanced competition, market information, and scrutiny.

The public interest test departs from the standard in many jurisdictions that inappropriately pits the private interest of the contractor in maintaining confidentiality against the public interest in maintaining transparency. And the burden of proof of harm to the public interest resulting from publication should be on those seeking to withhold information from the public.

The choice of applying exceptions to publication on a case-by-case or bright line basis can depend on factors including contract types and levels of trust in public institutions.

For example, for the extractive sectors (those involving extraction of raw materials from the earth), all of the following suggest that a general policy of full disclosure is likely to be in the public interest:

  • the ownership of natural resources by citizens;
  • the irreversible sale of nonrenewable public goods;
  • the often significant revenue-generation potential;
  • the associated corruption risks; and
  • the information asymmetries between government and companies combined.    

In other sectors or jurisdictions, case-by-case approaches may be more appropriate.

Bright line transparency requirements can be aligned to the public interest principle in determining what classes of information should generally be released or may generally be redacted, such as information concerning technology and/or inventions, intellectual property, or trade secrets.

In bright line cases, the public interest test involves the harm that might occur from the potential of releasing information that is economically damaging in accordance with the rules compared to the public interest in greater transparency, or reduced discretion and uncertainty, or simplicity of the process.

The third central idea in the principles on transparency is that redactions on the grounds of commercial sensitivity should follow a clear and robust process.  In the UK, transparency clauses are included in model contracts, and procuring organizations are advised to explain transparency requirements to potential suppliers early by clearly describing the types of information to be disclosed in tender documentation (invitation to make an offer).  Procuring organizations should also reveal categories of information that might be exempted.

Governments should issue detailed guidance to ensure that redaction is minimized and time-limited.  Redactions should also include an indication of how long the information will be withheld and what appeals process is available.

There should be a system for ensuring that contracts and contract information are in fact disclosed in practice. As examples:

  • publication might be required for contracts to be legally valid (and thus enforceable);  
  • e-procurement systems might automatically publish contracts or deny payment if contracts are not available; or,
  • procurement committees might be instructed to deny final approval until publication.

Finally, exemption to disclosure of information granted for commercial sensitivity should be grounds for increased scrutiny through other oversight mechanisms.  These can include a supreme auditing institution or ombudsman, or additional judicial or legislative oversight that can access the redacted information while ensuring its ongoing confidentiality.  

To summarize, protecting contract documents is critically important but equally so is the public right to know.   Balancing legitimate concerns for confidentiality with the benefits of openness should be the main objective in managing contract publication.  We hope to see the principles more widely adopted as a fair, reasonable and effective standard by businesses, civil society and governments.  Negotiating and executing government contracts cannot be done in secrecy.  Greater transparency can benefit firms and governments alike.

 

END NOTES

  1. Principles on Commercial Transparency in Public Contracts(.pdf research paper by CGD (See End Note 11.)
  2. Center for Global Development (CGD)
  3. Organisation for Economic Development and Co-Operation
  4. OECD Anti-bribery Convention
  5. Publishing Government contracts by CGD
  6. Open Contracting Partnership newsletter Impact Stories
  7. Contracting Down Under CGD article
  8. Extractive Industries Transparency Initiative (EITI) blog titled EITI countries lead the way in making contract transparency a global norm
  9. Bright line rule
  10. Freedom of Information Laws – by country
  11. The Principles on Commercial Transparency in Public Contracts [The Working Group]March 7, 2019, CDG website
  12. Data schema is a schematic for organizing and defining datain a database that graphically illustrates data and inter relationships.

 

ABOUT THE AUTHORS

Caroline Anstey is Chair of the Commercial Transparency Working Group and a former Managing Director of the World Bank.

Charles Kenny was on the Secretariat of the Working Group and is a Senior Fellow at the Center for Global Development.

Topics: contracting excellence, communication, IACCM

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