Contracts and performance agreements

As we’ve written previously, negotiated economic development incentives should be covered by written, enforceable contracts or performance agreements. Good performance agreements limit risk, show the economic development organization is a responsible steward of public funds, and make expectations for outcomes clear up front.

Other groups have also considered how to make contracts work effectively for governments and communities that are engaging private companies to help them accomplish their economic development objectives. This blog post summarizes and adapts key points developed by the Natural Resource Governance Institute on establishing a legal framework consistent with government priorities for such contracts.

Contracts should, of course, be in compliance with existing statutes and regulations.

The bulk of the legal framework should be established within legislation or regulation, with few variables changing from contract to contract. Benefits of this approach include:

  • Helping maintain a coherent procedure for implementing strategy across multiple projects
  • Reducing challenges associated with negotiating each project
  • Making enforcement easier

Problems that can accompany highly variable and detailed individual project contracts are:

  • Greater potential to contradict the legal framework
  • Bad deals that can result when the government lacks either a strong negotiating position or negotiating skills
  • Challenges for the oversight body as it tries to manage complex rules across multiple projects, which in turn hinders enforcement
  • Transparency and reporting become more difficult
  • May limit options for future policy changes given the terms of existing contracts

Economic development organizations can limit the risks associated with contracts by:

  1. Standardizing terms
  2. Creating model contracts
  3. Enabling a competitive process for applicants
  4. Publicizing contracts

You can follow these links to learn more about NRGI’s approach to legal & regulatory frameworks and contract transparency & monitoring. I learned about this work via an online lecture provided by Patrick Heller, Director of Legal and Economic Programs at NRGI, as part of Natural Resources for Sustainable Development: The Fundamentals of Oil, Gas and Mining Governance, a course offered by NRGI, the Columbia Center on Sustainable Investment and the World Bank.  I encourage you to check it out.

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