Disclosure requirements of contractual terms are a crucial tool in the governance of all economic transactions. When public money is involved, governance problems tend to increase because of the many layers of delegation that often protect public agents and the lack of market-based governance mechanisms. Disclosure requirements therefore tend to be more stringent for transactions involving public partners in the hope that higher transparency can increase accountability by facilitating taxpayer control. In the particular case of PPP procurement, accountability is made even more difficult by the complexity and specificity of each procurement.
For Public Procurement in general, where governance, and in particular corruption problems are still widespread even in OECD countries, in large part because market forces cannot discipline politically-protected public buyers that misbehave, stringent disclosure requirements are also seen as a potentially powerful remedy (see e.g. Rose- Ackerman, 1999; Kaufmann, 2005).
It is interesting that Coppier and Piga (2007) find an inverse cross-country relationship between the level of transparency in public procurement and the perceived level of corruption in a country, as measured by Transparency International. According to the authors, this relationship is the result of governments' attempts to fight corruption by increasing disclosure and transparency in countries where this is a major problem. This relationship testifies for the widespread belief that transparency is a force that limits corruption and improves governance, but also that transparency is a relatively weak force..
The direct costs of disclosing information on contract terms and performance evaluation appear to be rather small in general (see e.g. Leuz, 2007), and even more so for repeated procurements and large infrastructure projects like PPP. Disclosure costs in terms of potential competitive harm for the private-sector party (and for potential private partners in the phases that precede the signature of the contract) should be rather small when disclosure regards contractual and output-related performance measures, and much larger when disclosure refers to investment choices and other input-related variables that may convey delicate information about production processes and strategic choices.
When the buyer is a public entity, another potential cost of disclosure adds to the competitive harm for the private partners: information can be deemed sensitive to the public interest, for example on national defence grounds or on the ground of weakening the future bargaining position of the public sector in future procurements.
One cost of disclosure rules that is not often discussed, but that has been identified early in relation to public procurement rules, is that public knowledge on the price and quality conditions offered by the winning private partners may harm the competitive process by facilitating anti-competitive agreements among competitors. Bid ringging tries to illegally keep procurement prices at a level higher than the competitive one, trying to prevent competitors from cutting prices by threatening to punish them with 'price wars'. And, as the Nobel-prize-winner George Stigler wrote regarding public procurement auctions: "The system of sealed bids, publicly opened with full identification of each bidder's price and specification, is the ideal instrument for the detection of price cutting." (1964, p. 48).
In comparison with the public procurement of standardized products or services, PPPs are likely to be even more problematic from a governance point of view, as PPP procurements tend to be infrequent for the particular public buyer, much larger, more complex, and often specific to particular assets. These features make benchmarking and other standard forms of outside control more complex. At the same time, stakes are higher than in standard procurement, so bad governance can be much more costly.
Early reports on PPP best practices recognized well the particular governance problems of PPP procurement, and therefore suggested (IPPR, 2001) or prescribed (NHS, 2003) great levels of transparency and a widespread and proactive disclosure of contractual terms.
Ex post analyses such as Gosling (2004), however, have revealed that even in a country like the UK, with a good general level of accountability and a lively public debate, non-binding 'best practice' recommendations to disclose information were seldom followed by public administrations, even when directly asked for the information. It is clear, therefore, that in countries with weaker general accountability and public debates, non-binding disclosure requirements are likely to have little or no impact.
We mentioned that the standard ground for labeling a piece of information as 'confidential' and not disclosing it is that the piece of information, if disclosed, could damage a private party by undermining its situation relative to competitors. This suggests there is a trade off between accountability and willingness of private parties to disclose delicate information on how certain needs could be faced in a PPP. Such information is crucial, for example, in the early stage of assessing the suitability of PPP for an infrastructure project..
The trade off discussed above should be relevant for information about the production processes and strategic choices of the private-sector party. The disclosure cost in terms of potential competitive harm for the private-sector party should therefore be small or absent when disclosure is limited to contractual terms (payment schemes, quality standards, deductions, prices, etc.) and other output-related measures (revenues).
However, since PPP contracts are based on output specifications and the assessment and selection phases are in the past, from a PPP governance perspective the most important contractual information that needs to be disclosed once the contract is signed is exactly that about output variables.39 Moreover, information should be disclosed within a pre-established, short, and binding time limit from its emergence. The time limit could be established by law, by the national auditor, and/or by the contract, but in any case it must be short and strictly binding. Notice that such information should imply little or no competitive harm for the private-sector party.
The case for confidentiality on contractual and output features that convey no information on inputs after the contract has been signed is, therefore, extremely weak.
The other cost of disclosure mentioned earlier, the direct cost of making information public, appears simply negligible if compared to the very large size typical of PPP procurements. It is not a case, therefore, that most reports and best practice documents suggest maximal disclosure of PPP documentation, limiting confidentiality to a very strict set of information (HM Treasury, 2007).
The competitive cost of disclosing information on the awarding price highlighted by Stigler, however, is likely to be relevant for PPP, as PPPs regard often such large projects that potential competitors can be counted on the fingers of one hand, making distortions of competition highly likely. This could be a reason not to disclose exact price information in the contract.
We have been writing until now about full disclosure requirements, unrestricted in terms of recipients. Disclosure restricted to bodies like Agencies and Accounting offices that would maintain the information relative to competitors under secret does not cause the costs discussed, and therefore such a disclosure must be complete (HM Treasury, 2007).
As discussed in the companion paper (Section 1), a case can be made to withhold information from the public only when that information is 'commercially sensitive' or is sensitive to the public interest (e.g. on national defence grounds). That is, only information whose dissemination is either contrary to the public interest or unique to the private-sector party (in the sense that it could damaged the private partner's competitive position if it were disclosed).
The focus here is only on the disclosure rules that apply once the private-sector party has been selected and the contract has been drafted and signed by the relevant parties.40 At this stage, the type of information that is important to enhance accountability relates to contract design and to output specification and performance variables. This information is not related to input variables (i.e. how to obtain the output) which are precisely the variables most likely to contain commercially sensitive information.
For this reason, and given the serious accountability problems involved in PPP procurement, the baseline of these guidelines is the presumption that all documents and information must be readily and proactively publicly disclosed unless:
(i) they are identified as 'commercially sensitive' by the private-sector party and recognized as such by representatives of the PPP Authority and the benefits of increased accountability achieved through their disclosure have been shown to be substantially smaller than the cost the private partner may incur in case of public disclosure;
(ii) they are identified as sensitive to the public interest (e.g. for national security reasons) and the benefits of increased accountability achieved through their disclosure are shown to be smaller than the cost in terms of public interest in case of public disclosure.
In other words, there should be a strong presumption that contractual and operational information is neither commercially sensitive nor sensitive to the public interest, and a stringent test should be used to verify claims that they are, with written and publicly available arguments in case of information that passes the test and is not disclosed.
In particular, the details of the PPP contract regarding output levels required from the private sector and connections between output levels and payments (i.e. the payment scheme) will generally not contain commercially sensitive information nor information sensitive to the public interest. Therefore, the final contract and all related documentation should be put in the public domain largely intact (with the only exception of documents related to the production plan and process, and other input variable that passed the test above). Also, output specifications, performance targets measured during the contract execution, and the payment deductions for low performance applied, should be all publicly disclosed within a pre-determined time period after they have been measured/applied.
Ways in which best practices on information disclosure have been circumvented in the past included hiding information in hard-to-reach corners of a homepage, or delaying disclosure as long as possible without answering to the requiring parties. For this reason, information should be put in the public domain in a proactive way, possibly in electronic form and in the first page of the project's homepage. Moreover, information should be disclosed within a pre-established, short, and binding time limit from its emergence.
Further, the experience suggests these disclosure requirements should not be left as suggested practices that the contracting parties are then free to follow or not. Therefore, disclosure requirements should be made compulsory; otherwise it is very likely that they will not be followed. Moreover, if general regulation does not cover disclosure rules, then each contract should specify disclosure rules in detail.
Information contained in the final contract that is not about input or production processes, but may have a ground in terms of 'commercial sensitivity', is that about financial provisions (e.g. prices and priced elements of the payment mechanism). In particular, financial provisions internal to the relationship among the contracting partners can be 'commercially sensitive' (for example, terms on which lending is arranged can be 'commercially sensitive' for the lenders). This kind of information, however, is not of the highest relevance for the accountability of the project. Still, it should pass the test before being declared confidential and not disclosed.
Of course, these baseline recommendations regard disclosure of information to the general public. Disclosure rules for Agencies empowered to control and regulate the PPP procurement should be complete, i.e. disclosure rules should include full and swift access to all contractual information, including that regarding inputs (production plans and processes, etc.).
_______________________________________________________
39 Also, a case could be made for disclosing the criteria used in the PPP suitability assessment (e.g. the public sector comparator) and the business outline (i.e. the formal presentation of the project for approval by the public sector).
40 The present best practices are relative to contract design only. They do not consider information disclosure requirements during the consultation period preceding contract drafting (where absent protection firms would not offer suggestions on possible solutions based on private knowledge), nor disclosure rules during the competitive private partner selection process (where information disclosure may affect the functioning of the process).