Asked in another section of the media about the trenchant criticisms the oil contract renegotiated with ExxonMobil by Natural Resources Minister Raphael Trotman has attracted, Marxist academic and present head of the State Assets Recovery Agency (SARA), Dr Clive Thomas made two claims. Firstly, he said there needs to be “empirical evidence” to demonstrate the contract was not in Guyana’s interest before criticising and secondly, a “Principal-Agent Problem” (PAP) existed, where Guyana (the principal) and ExxonMobil (the agent) have different “motivations”.
The first claim is rather alarming since it suggests that contracts by the Government can only be critiqued ex post facto; after the evidence of any weakness of the contract would have become manifest. He therefore rejects analyses that considered contractual terms in other similar situations and compared those experiences with what our contract may imply. For instance, where analysts have looked at other countries at a similar stage of development of their oil industry as ours negotiated with oil producers and extracted larger signing bonuses, royalties, and tax revenues.
Stating the obvious that every contract, including Guyana’s – in this case on oil – is unique, he would therefore silence all comments based on premises derived from empirical observations of other similar phenomena. In other words, he would reject the inductive method of reasoning, which has been used for millennia, to offer probabilities of new occurrences. For instance, Trotman, if he had done his homework, would have demanded an eight per cent royalty rate by pointing out that this was the low end of the average for new African oil producers rather than the two per cent he accepted. What is ironic is that Thomas’ second claim on the PAP (here on contracts) is an instance of deriving principles from empirical observations of how principals and agents have actually behaved in situations through the ages.
The principles of the PAP were proposed in the 1970s and applied in several fields other than contracts. It arises when one party (agent) agrees to work in favour of another party (principal) in return for some incentives. As Thomas pointed out, when a “principal” hires an “agent” to perform a task, they each have different motivations: in Thomas rather inelegant phraseology, the Agent (ExxonMobil) ‘will try to rob us as much as they can” while the Principal (here the Government) has “to figure out how best we can defeat them”.
Actually, in accepting the different orientation of the Agent, the Principal is supposed to create conditions – spelled out in a contract – that will make that orientation match his as best as possible. This is generally achieved by offering the “incentives” – known as “agency costs” – typically monies in relationships that are covered by contracts. There were four “Principles of Contract Design” proposed draft better contracts: the informativeness principle, the incentive intensity principle, the monitoring intensity principle, and the equal compensation principle.
Rather than wait until the contract that Trotman renegotiated is executed before passing judgement, the critics are implicitly questioning whether he as the Principal for Guyana, had the requisite experts in contract negotiation – specifically in oil – to help him when he sat across the table from the negotiators of ExxonMobil who had a century of institutional memory. The basic conflict in PAP relationships arises out of what is called “information asymmetry”; that is, each party not privy to the same information and each using the information available to them for their own benefit.
Take for instance, when in 1999 the People’s Progressive Party Government signed the original oil exploration contract with ExxonMobil, the latter probably had information available from the US geological survey taken from satellite imaging – and announced the following year – but the Government of Guyana did not and proposed attractive incentives such as a one per cent royalty. However, when Trotman renegotiated the contract oil had already been stuck and the information now available should have convinced him that incentives much more in favour of Guyana could be redesigned, without Exxon walking away.
