Written By Cindy Kroon, 19 Sep 2016

Since we launched our Confidentiality Project a couple of weeks ago, the most complex argument used against disclosure, we found, is that of commercial confidentiality.

The reasoning goes that if commercially sensitive information of a company is disclosed, it will damage the company’s commercial interests and undermine competitiveness. This is based on the thinking that in competitive markets, innovation will only occur with some protection of information: if a company spends time and money developing something new, the details of which are then made public, then its competitors can easily copy it without having to invest the same resources. The result is that no-one would innovate in the first place.

The first layer of complexity regarding commercially sensitive information is related to its technical definition: there isn’t any. In general, it’s understood to be “company-specific information which, if exchanged, could influence competitor’s future conduct” and “information that has economic value or could cause economic harm if known”. Trade secrets are a form of commercially sensitive information that does have a legal definition: “a trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives [the holder] an opportunity to obtain an advantage over competitors who do not know or use it.” This is different from patents, trademarks and copyrighted material, the use of which is protected, but the details of which are (eventually) made public.

This means that, in theory, anything could be categorized as commercially sensitive information. In public contracting, most disputes are about whether or not the following information should be considered commercially sensitive: line item pricing, financial models, detailed costing, profit margins, product designs, pricing structures, technical specifications, overhead rates, rates of return, details about insurance and liability regimes, manufacturing processes, lists of customers, lists of suppliers, lists of clients, sales methods, distribution methods, subcontracting information, detailed explanations as to how the company will meet the tender requirements, unsuccessful proposal information, and details about warranties and financial guarantees, to name a few.

But for every dispute indicating that a certain piece of information is commercially sensitive, there is another court case concluding it isn’t. For every general rule determining that certain data is not commercially sensitive, there are numerous exceptions that show it is.

It’s safe to say there’s no definitive list of information that is or isn’t commercially sensitive. Better (or worse) still: the same piece of information can be considered commercially sensitive in one situation, but not in another.

How is that possible?

In most countries, sufficient evidence of potential damage (called ‘harm’ or ‘prejudice’ in legal language) is required to prevent disclosure of commercial information. In other words, in order to determine whether commercial information is also commercially sensitive information, one would have to successfully argue that the release of the information is likely to harm the company’s interests or competitiveness.

In some countries, it’s enough to establish that information is indeed commercially sensitive (i.e. is likely to cause harm) in order to prevent disclosure. In other countries, however, such as the United Kingdom, Ireland, Australia, Canada, and New Zealand, disclosure depends on the results of a subsequent Public Interest Test.

A Public Interest Test assesses whether the benefits of disclosing information (such as, for example, increased accountability and ability to evaluate value for money with regards to how tax money is spent) outweigh the benefits of not disclosing the information (i.e. the prevention of causing harm). If the public interest in favor of disclosure outweighs the potential harm caused, then the information will be disclosed, even though it is commercially sensitive information and is thus likely to cause harm.

The way in which harm and public interest are assessed and weighed is not an exact science or a mathematical equation. Rather, it is a best guess as to what could potentially happen, using a good old pros and cons list as a decision-making tool.

Just for a second, put yourself in the shoes of a civil servant in a government procurement agency. A concerned citizen has put in a freedom of information request related to a project you are responsible for: a tender for building and managing a hospital in your district. You must decide how to respond to the request. The bidders of the tender demand that under no circumstances should any of the financial information in proposals and contracts be disclosed. You ask them to provide a plausible, causal link between disclosing financial information and potential harm: what would the harm look like? You try to get a sense of the severity of the potential prejudice: will its effects be limited or detrimental? You try to understand the specifics of the financial information: isn’t it already in the public domain anyway, and is it really that unique? You try to assess whether hospitals in general, and this hospital in particular, is a matter of great public concern: how has this been dealt with in other cases?

That’s no easy task. Plus, you don’t want to risk your job by putting controversial information out there. Perhaps that’s one of the reasons why some government agencies lean towards non-disclosure, and not openness by default.

Unless, of course, you’ve been told by your supervisor that all information is to be made public. Everything. All of it. Unredacted, and proactively.

That is exactly what happened in Georgia, where the motto in public procurement is ‘everyone sees everything’. From annual procurement plans, to proposals, contract implementation information, payments, amendments, receipts, and invoices – it’s all published online, unredacted and proactively. Bidders are told in advance that all information will be disclosed, unless Georgian legislation provides a case for non-disclosure. From interviews conducted we know that with over 100,000 completed tenders, not a single request for nondisclosure with regards to commercial confidentiality reasons was made. Similar examples can be found in other Eastern European and South American countries.

How can these extreme differences be explained?

To answer that question, more research is needed. Are there any patterns with regards to the size of contracts? Are there differences between industries, sectors, or markets? What is the role of confidentiality clauses? Is the timing of disclosure important? Is the content of proposals and contracts different between jurisdictions? Has ‘harm’ been caused by disclosure?

We’ll be conducting more interviews with policymakers, practitioners, and companies to get to the bottom of this issue. We’ll analyze disclosed contracts and proposals across sectors and jurisdictions, and establish partnerships to help us advance our research.

As always, your input is greatly appreciated. If you know of an interesting example, a good case study, questions you’d like clarified, or someone we should speak to, do not hesitate to get in touch.

Photo credit: David Bleasdale (CC BY 2.0)

  • Cordelia Lonsdale

    Hi Cindy, really great post and useful food for thought. Thanks for sharing.

    Here’s a question, since you asked! In the international development sector, we’re seeing a rise of what’s called ‘blended finance’. In this context, the term means using public inputs to de-risk private investments in development. EG: providing first-loss capital in a mezzanine loan structure or providing technical assistance at sub-market rates to prepare a project.

    There’s a challenge here because while the public resources (which may or may not be reported as official development assistance- ODA) should be published transparently according to the existing global norms/agreements, the deal terms when the concessional finance is ‘blended’ with the private finance are usually not published for ‘commercial confidentiality’ reasons. So the level of subsidy provided by a public actor like a DFI in order to ‘leverage’ additional capital is not available at deal level. There are two issues here, one is around basic transparency and knowing whether governments are using these subsidies well, the other is about market distortion/unfair competition etc.

    I’ve been doing some reading around what ‘commercial confidentiality’ means for bilateral and multilateral DFIs, and had come to a similar conclusion to you, that it depends on the jurisdiction of the investment and the investing institution. But I still feel like we could achieve more transparency on how private investments are being subsidised with public money and I wondered how Open Contracting might see this issue. What are your thoughts?

    • Cindy Coroa

      Hi Cordelia,

      Many thanks for your feedback. It’s a complicated issue, isn’t it!

      From reading your example, I can’t think of a reason why government subsidies at the deal level should be considered commercially sensitive – what would be the potential ‘harm’ caused by disclosure and to whom? I’d be very interested in knowing more about it.

      We are working hard to finalise our Mythbusting report, which includes more information on the commercially sensitive information topic, including a list of information that typically is/isn’t considered to be commercially sensitive, which may be of use to you.

      One of the topics mentioned in the Mythbusting report that may be relevant to your example is that while details of financial models (in the context of PPPs) such as formulas and inputs, are typically considered commercially sensitive (as they typically include sophisticated pricing breakdowns, giving insight into the way in which revenue is generated and how the project is financed), the outcomes of the models should be disclosed, including information that shows how much the government is paying and how much it will receive in relation to a project.

      Curious to hear your thoughts!

      Best wishes,

      Cindy

      • Cordelia Lonsdale

        Hi Cindy, thanks for response, I actually linked to your piece in a blog on the issue which gets into this a bit more. Subsequently, I’ve been speaking to IFI representatives who say they feel that the confidentiality issue may be less challenging if the data was released a year down the line. Progress! I think there is also general reluctance to put extra barriers in the way of investments since these are already challenging deals to identify and set up… To me that’s not enough of a reason for lack of transparency. Feel free to email me to continue the dialogue cordelia . lonsdale @ devinit . org

        http://devinit.org/post/transparency-accountability-principle-good-blended-finance/

      • Cordelia Lonsdale

        oh and please put me on the mail list for the report!