LEGAL & MACROECONOMICS, TRADE AND INVESTMENT LEGAL & MACROECONOMICS, TRADE AND INVESTMENT EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Enhancing Debt Transparency by Strengthening Public Debt Transaction Disclosure Practices Susan Maslen, Senior Counsel, Legal Vice Presidency Cigdem Aslan, Lead Debt Specialist, Macroeconomics, Trade and Investment EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This paper is part of the Debt Management Facility (DMF) knowledge-products series and was funded by the DMF. Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 2 >>> Recommendations at a glance Borrowers and lenders should not use confidentiality clauses: (i) that amount to secrecy clauses in specific public debt transactions; or (ii) to prescribe that disclosure only be made upon full repayment, termination, or at final maturity of the loan (paragraph 26.a.). Borrowers and lenders should require the ability of borrowers to share complete information about individual public finance transactions with the World Bank and the IMF, given their roles in the international financial architecture, as elaborated in paragraph 26.b. National legal frameworks should mandate the timely public disclosure of transaction-level public debt information including the method and location for such disclosure (paragraph 26.c.). Borrowers should aim at a level of public disclosure of public debt transaction information that is meaningful and sufficiently granular to facilitate stakeholder awareness, scrutiny of government actions and public accountability (paragraphs 26.d., 27 and 28). orrowers should use standardized approaches, where feasible, to B confidentiality and disclosure in individual public debt transactions, that facilitate information sharing and public disclosure (paragraph 26.e.). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 >>> CONTENTS Abbreviations and Acronyms 5 Executive Summary 6 PART I. INTRODUCTION: Why transaction-level debt transparency? 9 PART II. Addressing confidentiality & disclosure practices in public debt transactions 11 II.A. Disclosure of Details about Individual Finance Transactions Supports Debt Transparency 12 II.B. Incentives and Factors that Influence Confidentiality and Disclosure Practices 15 II.C. Approaches to Confidentiality and Disclosure in Public Debt Transactions 17 II.D. The Use of Confidentiality Clauses to Maintain Secrecy or to Prescribe Delayed Disclosure 20 II.E. How About the Public Disclosure of Entire Public Debt Contracts or Entire Parts thereof? 21 PART III. Recommended approaches for the disclosure of transaction-level public debt information 22 ANNEX 1: Elements of Public Debt Management Legal Frameworks that Enhance Debt Transparency 29 >>> TABLE OF BOXES Box 1: Implementation of the IIF’s Voluntary Principles for Debt Transparency 16 Box 2: Elements of Public Debt Management Legal Frameworks that Enhance Debt Transparency 21 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 >>> Abbreviations and Acronyms IFI International Financial Institution IIF Institute of International Finance IMF International Monetary Fund LMA Loan Market Association LSTA Loan Syndications and Trading Association MDB Multilateral Development Bank OECD Organization for Economic Co-operation and Development PDMLF Public Debt Management Legal Framework PRGT Poverty Reduction and Growth Trust SOE State-Owned Enterprise EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 >>> EXECUTIVE SUMMARY 1. Improving debt transparency is critical for promoting debt sustainability and creditworthiness assessments, increasing the accuracy of public debt information, and protecting the interests of a diverse range of stakeholders. The importance of debt transparency, the costs associated with the lack of it, and its benefits, are extensively discussed in recent World Bank literature.1 2. One of the key factors that limits debt transparency as it relates to public disclosure and the sharing of public debt-related information, is transaction-level confidentiality and disclosure practices. Challenges to disclosure have become more evident during recent debt distress among borrowing countries, and the COVID-19 pandemic. The discussion in this paper reveals issues that arise from confidentiality and disclosure practices among lenders and borrowers; and highlights how these issues cause information asymmetries and undermine the interests of stakeholders. The paper concludes by proposing concrete and actionable recommendations for the World Bank, IMF and sovereigns. 1. In particular the report Debt Transparency in Developing Economies, published in November 2021. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 Confidentiality & Transaction-Level 4. Confidentiality and disclosure practices are influenced by a wide range of incentives and factors, including: Disclosure Practices as a Challenge nformation that may reasonably be considered i to Debt Transparency: confidential – e.g., proprietary or technical 3. C onfidentiality and transaction-level disclosure information, such as financial calculations or practices present an important challenge to debt formulae, and price-sensitive or commercially transparency. Greater public disclosure and sharing sensitive information; of transaction-level information related to public debt omestic d political considerations (e.g., enhance debt transparency by: upcoming elections) and pressure from the public aking public debt statistics and data more m on economic matters (e.g., the prospect of civil accurate; unrest) may also skew a government’s willingness to disclose specific finance transaction-related informing debt sustainability assessments with information; granular information that helps avoid “hidden” and “surprise” debt; eluctance to reveal the true state of strained public r finances; facilitating lender finance decisions and creditworthiness analysis; corruption; minimizing information asymmetries between as bond issuers, sovereign governments will creditors and debtors. For example, without typically be mindful of information being disclosed transaction-level information disclosure, the use that could impact their position in bond markets; of collateral and quasi-collateral can easily remain hidden. Similarly, a debtor’s vulnerability applicable law and regulation; and to economic shocks, as well as the availability argaining power, technical capacity, and lender b of assets for liquidity and paying its unsecured pressure for confidentiality or secrecy. creditors, are difficult to accurately assess. This is especially the case for natural resource-rich 5. Approaches to confidentiality and the disclosure of countries; loan-level information vary by lender, borrower, and market. For example, in commercial loan markets iving the public, taxpayers, and other civil society g that use English or New York law, relevant model form stakeholders the opportunity to scrutinize public confidentiality clauses require lenders (rather than debt; borrowers) to maintain confidentiality. Meanwhile, e nhancing the borrower’s reputation and credibility multilateral development banks usually operate among lenders, and fostering lender/investor under policies requiring access to information and confidence, which might positively impact pricing therefore publicly disclose the terms and conditions and the cost of borrowing, since embedded risk of loans made by them. Other lender and borrower premia may be reduced or removed; practices range along a spectrum. Restrictive confidentiality approaches may require secrecy, nhancing information timeliness. Indeed, the e or disclosure only upon final maturity or repayment disclosure of transaction-level information can of the loan. At the other end of the spectrum are more feasibly take place in a “closer-to-real-time” arguments in favor of the public disclosure of entire timeframe, and avoid the time lags that tend to debt contracts, although the practical attainability of occur between the incurrence of public debt and this is challenged by factors such as: (i) confidentiality the availability of aggregated public debt data and clauses; (ii) rules under national information disclosure statistics; and frameworks; (iii) considerations related to sovereign and lender interests; and (iv) the capacity/resources f acilitating efficient and effective debt of the public and other stakeholders to analyze entire restructurings and helping to build trust among transaction documents. creditors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 Recommendations imely public disclosure of transaction-level t public debt information be mandated through 6. In order to improve confidentiality and disclosure national legal frameworks, including specification practices, this paper recommends approaches that of the method (digital and/or physical) and location differentiate the information needs across stakeholders. for such disclosure; It is recommended that: ransaction-level information be publicly t borrowers and lenders should not use disclosed by borrowers by aiming at a degree of confidentiality clauses to: (i) maintain secrecy public disclosure that is meaningful and sufficiently about public debt transactions; or (ii) only permit granular to facilitate stakeholder awareness, scrutiny disclosure of transaction information upon full of government actions, and public accountability. repayment, termination, or final maturity of the loan; This could be implemented via a schedule of b orrowers and lenders should expressly transaction information that forms part of the (main) acknowledge the ability of borrowers to share debt contract and is agreed/acknowledged by complete information about individual public transaction parties at the time of signing the deal. finance transactions with the World Bank and The borrower would be responsible for timely public the IMF, given their roles in the international disclosure of the information at an easy-to-find financial architecture. Such support entails: (i) location(s) (e.g., website of the government’s debt routinely including language in finance contracts to management office); and expressly permit the borrower, or to acknowledge he benefits of borrower-specific standardization t the borrower’s right (as appropriate), to provide be explored. (without any need to seek further consent) entire public debt transaction documentation 7. T his paper recognizes that there can be sound reasons and information to the World Bank and the IMF; for confidentiality; and seeks to balance factors that and (ii) engaging with the LMA (Loan Market inherently influence current practice against the Association) and LSTA (Loan Syndications and interests of diverse stakeholders and the need to Trading Association) to include a similar provision improve debt transparency. in relevant model form documents used in English and New York law markets, respectively; EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 I. >>> PART I: Why Transaction-Level Debt Transparency?2 1. A ccess to accurate, timely, and sufficiently granular public debt information is important for facilitating sound borrowing decisions, sovereign debt sustainability, creditworthiness assessments, and good governance. Debt transparency3 through the availability of reliable information enables borrowers and creditors to take informed decisions. Debt transparency is also critical for effective debt restructuring. The public availability of sovereign debt information facilitates government accountability and taxpayer scrutiny of the use of borrowed funds. It also benefits borrowers by enhancing their credibility with investors, lenders and rating agencies, thus possibly contributing to reductions in borrowing costs. Transparency may also function as a disincentive for corruption. Record-high public debt levels, which became worse during the COVID-19 pandemic, have placed debt transparency in the spotlight. The importance of debt transparency, the costs associated with the lack of it, and its benefits are extensively discussed in recent literature.4 2. This paper was prompted by disclosure-related challenges and friction points that became evident during recent periods of widespread debt distress in developing countries. As a result of instances such as: (i) the non-sharing of transaction-related information with IFIs that perform debt sustainability assessments and generate global debt information for stakeholders; (ii) revelations of “surprise” and “hidden” debt; (iii) undisclosed granting of collateral and quasi-collateral that, if disclosed, may impact creditor assessments of borrower liquidity or creditworthiness; and (iv) inter-creditor mistrust and tensions during debt restructurings; it is obvious that confidentiality clauses and/or the inadequate sharing or disclosure of transaction-level public debt information can significantly impede debt transparency. These impediments cause information asymmetries and undermine stakeholder interests. At the same time, insufficient granularity of transaction-level public disclosure leaves civil society stakeholders largely in the dark. 2. The authors of this World Bank paper are Susan Maslen (LEGFI – Corporate Finance), Legal Vice Presidency; and Cigdem Aslan (EMFMD), Macroeconomics Trade & Investment Global Practice. This paper was prepared under the leadership of Marcello Estevao (EMFDR), Cliff Frazier (LEGFI), Doerte Doemeland (EMFMD) and Ivailo Izvorski (EMFMD). The authors would like to thank the following colleagues for their peer review: Isaias Losada Revol, Rita Ramalho, Diego Rivetti and Ximena Talero. We would also like to thank Lee Buchheit, Adam Lerrick, and Brian Pinto for their review and inputs, as well as the following colleagues from the IMF: Wolfgang Bergthaler, Sebastian Grund, Alessandro Gullo, Hoang The Pham, and Karla Vasquez Suarez. All review, inputs and comments are greatly appreciated. 3. The term “debt transparency” is used broadly in this paper to refer not only to the availability of comprehensive, detailed, timely, and consistent public sector debt data (WB 2021; and WB & IMF 2020b), but also covers the attributes of public debt operations and public debt management legal frameworks that promote public disclosure, overall systemic transparency, and clarity. 4. Examples include the World Bank’s report Debt Transparency in Developing Economies, published in November 2021. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 3. The purpose of this paper is to discuss common 4. This paper complements the debt transparency transaction-level information disclosure practices work of the G20 and the G7. It also complements the and shortcomings, to explore the variety of World Bank’s ongoing initiative towards strengthening incentives and factors that influence them, and its Debtor Reporting System to obtain more granular to propose solutions. The discussion considers the debt information from borrowers. The topics discussed different nature of stakeholders and their information in this paper are integral to public debt management needs and capacities. It aims at demonstrating that and debt transparency-related technical assistance practices by borrowers and lenders in the realm of by the World Bank to its member countries, as well as confidentiality, disclosure and public disclosure need to debt transparency-related policy actions and reforms be improved. This paper concludes by making concrete promoted through certain World Bank operations. This recommendations aimed at influencing borrower and paper also elaborates on our discussion of confidentiality lender behaviors. The recommendations include a and transaction-level disclosure in recent publications.5 framework of loan information proposed for routine 5. This paper is structured as follows. Part II analyzes disclosure to the public by sovereign and state-owned the nature and shortcomings in current disclosure enterprise (SOE) borrowers. Other recommendations practices related to transaction-level loan information6 relate to the ability of borrowers to provide information and highlights the need for improvements which: (i) to certain IFIs. The paper also underscores the links are readily “actionable”; (ii) broadly balance public between transaction-level confidentiality, disclosure and private sector interests; and (iii) complement practices, and public debt management legal existing private sector debt transparency initiatives. frameworks (PDMLFs), by recommending the use Part III concludes with recommendations to meet the of public disclosure mandates to boost public debt challenges discussed in Part II by applying legal and contract-related transparency. policy concepts to support better disclosure practices and enhance public debt transparency. 5. In particular, the World Bank’s Debt Transparency in Developing Countries, published in November 2021. It also builds upon issues targeted in the OECD’s implementation of the IIF’s Voluntary Principles for Debt Transparency. 6. Disclosure challenges in connection with sovereign/SOE bond issuances are beyond the scope of this paper. It is a topic that we hope to approach separately in due course. Bond issuances are subject to listing rules, selling rules, and relevant securities laws (some of which address disclosure matters) in the jurisdiction of issuance and are generally more transparent than the bilateral/syndicated loans markets. The securities laws of the jurisdiction of issuance also help underpin fairly rigorous due diligence procedures that are undertaken by underwriters vis-à-vis issuers. Additional scrutiny in connection with bond issuances is undertaken by credit rating agencies for the purposes of rating bonds. Common challenges to debt transparency in bonds include: (i) the non-availability of the legal documentation (e.g. trust deeds/ indentures, agency agreements) that underlies a bond issuance; (ii) the limited availability of sovereign bond prospectuses/ offering circulars except via subscription to proprietary, commercial databases such as Perfect Information and Dealogic; and (iii) the availability in some jurisdictions of exemptions to sovereign issuers in connection with certain securities laws related to disclosures. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 II. >>> PART II: Addressing Confidentiality & Disclosure Practices in Public Debt Transactions his part of the paper considers debt transparency as it relates to individual 6. T finance7 transactions. It focuses on issues related to confidentiality and disclosure practices. It highlights the importance of improving transparency with respect to transaction-level information and discusses some of the challenges. 7. The discussion of “debt” in this paper is aimed at public debt/borrowing transactions, (express) sovereign guarantees/contingent liabilities, as well as finance transactions undertaken by sovereigns and state-owned enterprises (SOEs) that may not be classified as “debt” in a technical sense but that have a similar economic effect as a borrowing, and that are considered “debt-like” or “debt-equivalent” instruments. Accordingly, the words “finance”, “loan”, and “debt” are used interchangeably in this paper. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 II.A. Disclosure of Details about Individual Finance Transactions Supports Debt Transparency 7. There are numerous ways in which the availability of aggregated and non-aggregated, portfolio-level adequate, accurate, and timely information related to public debt data and statistics on developing country individual debt transactions supports the objectives of borrowers. To the extent that information pertaining debt transparency: to a specific debt transaction is held under an obligation of confidentiality, it may negatively a. The availability of transaction-level information impact whether and how the relevant country improves the accuracy of public debt statistics. feeds the deal-specific information into its debt A wide range of lenders – including international reporting. The potential impact of unreported and financial institutions (IFIs) such as the World undisclosed borrowings that become subsequently Bank, the IMF, and regional development banks, revealed was demonstrated recently in the case of as well as sovereign lenders, export-credit Mozambique and the Republic of Congo, where agencies and commercial/private lenders – and the debt numbers for each country needed to be credit rating agencies, rely on the availability of revised upward and each country was re-classified meaningful sovereign and SOE debt information in as being in debt distress (WB&IMF 2018a.). order to inform their assessments and decisions. Accordingly, the role of IFIs such as the World b. Details of individual debt transactions Bank and the IMF in compiling debt reporting and enhance analysis of debt sustainability, publishing global public debt statistics is critical. creditworthiness, and compliance. Individual Information from individual finance transactions loan-related information is an ingredient used by is an important input in generating accurate, lenders to assess borrower creditworthiness and EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 debt sustainability. It helps lenders and donors roughly 40% of Zambia’s bondholders (including consider additional borrowing needs, appropriate sophisticated players like hedge funds) did not levels of concessional lending or grant elements, accept a request from Zambia for a suspension of pricing, and repayment capacity. Transaction-level interest payments on bonds. The non-acceptance debt information is also critical for assessing debt was because there was inadequate sharing of restructuring prospects and determining comparable information about how the borrower proposed to treatment among creditors in the context of debt handle other debts owed to different (large) lenders, suspension and restructuring initiatives. Moreover, namely Chinese lenders estimated to hold roughly the availability of individual transaction-level US$ 3 billion of debt (Stubbington and Fletcher, information offers clearer insights to lenders about 2020). Bondholders were essentially concerned borrower performance and compliance with certain that if they agreed to a standstill/suspension of loan covenants (e.g., negative pledge, permitted payments, then the saved monies would be diverted lien clauses, and financial ratios) under existing to pay the other creditors on-time and without any debt. If sufficiently granular information is provided, discount (i.e., essentially a “free-riding” concern). such information also indicates if there are novel Given their concerns about comparable treatment transaction features. across creditors, bondholders continued to hold out, and, in November 2020, Zambia defaulted on nformation from individual finance transactions c. I a bond interest payment due to the failure to agree can help to fill gaps owing to the time lags on terms. In this overall context, the importance inherent in generating public debt statistics. of disclosure of transaction-level debt information Considerable time lags tend to occur between is clear, whether that be around the time that debt the incurrence of public debt and the availability is incurred, or at the time of debt restructurings/ of public debt data and statistics (WB&IMF 2020b suspensions. and 2018a). In addition, since public debt statistics tend to be aggregated in presentation, it can be he disclosure of collateral and collateral-like e. T challenging to ascertain the inclusion of a specific features in individual finance transactions debt and to cross-compare information from is critical for debt transparency. The giving different data sources. The disclosure of information of collateral8 or quasi-collateral in a sovereign about individual finance transactions can more borrowing may allow access to finance that the feasibly take place in “real-time” than aggregated borrower would otherwise not have; or offer pricing/ debt statistics, and thereby offer stakeholders maturity terms more favorable than otherwise solid information on a borrower’s most recent debt available. The availability of information about finance activities. Information about a borrower’s the existence of collateral or quasi-collateral in a most recent individual finance transactions is public finance transaction is particularly important. also an important ingredient towards lender due A lack of disclosure, or lack of timely disclosure, diligence. causes information asymmetries in assessing the debtor’s vulnerability to economic shocks; he availability of transaction-level debt d. T and the nature and scope of assets available to information facilitates efficient and effective a borrower as a source for repaying unsecured debt restructurings by building trust among creditors. This is especially relevant for sovereign creditors and ensuring that agreed debt borrowers that have economies heavily reliant on restructurings are sustainable. The recent one sector for national revenues – e.g., commodity/ example of Zambia illustrates the tensions and natural resource exports, or the export of a single mistrust that can arise among creditors in a debt commodity such as oil (WB, 2021). restructuring context where information pertaining to certain debts is not disclosed. A group representing 8. As used in this paper, a debt instrument is “collateralized” when the creditor has rights over an asset or revenue stream that would allow repayment of the debt if the borrower defaults on its payment obligations. In a legal sense, collateralization typically entails a borrower granting liens/security interests over a specific asset(s) or future receivables to a lender as security against repayment of the loan (although interpretations may vary by jurisdiction). The concept of “collateral-like features” as used in this paper refers to arrangements that do not entail the formal granting of a security interest, but that have a similar economic effect. Collateral-like features often give lenders that know about them a “first mover advantage”, for instance in being able to withdraw funds from a debtor’s deposit/collection account ahead of other legally unsecured lenders. Collateral-like features or structures in a transaction are sometimes also referred to as “quasi-collateral”, “quasi-security”, and “commercial security”. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 n recent years, the use of escrow accounts, f. I defray debt; or by foregoing government services debt service reserve accounts, and deposit or subsidies that shrink in times of budget deficits accounts in public debt transactions have and fiscal austerity. An absence of public disclosure gained increased attention. An example entails denies the public the opportunity to scrutinize debt. the use of a deposit account, which is established As noted above, scrutiny is especially important separately from the loan repayment account(s). when national assets of any kind (whether cash, gold The deposit account may be opened in the name reserves, revenue streams from resource sales, or of the borrower or in the name of an associated physical infrastructure, such as power stations and entity (such as an oil-producing SOE), and is held ports) are used as collateral or quasi-collateral; at, and managed by, the lender. The purpose of the or where lenders have step-in/control rights over deposit account is to hold the proceeds of certain assets or revenue streams that become activated (reliable, separately contracted) commodity sales in a default. Similarly, to the extent that a sovereign as a kind of commercial or quasi-collateral. Under lends to other sovereigns, then taxpayers and civil such a transaction structure, the lender will have society stakeholders in the sovereign lender country a broad contractual right to dip into the monies in also have a stake in accessing information about the deposit account to pay itself if the borrower loans made by their governments, as well as any is late, looks like it will be late, or otherwise accommodations made due to borrower repayment defaults on making relevant loan repayments. In difficulties (Gelpern, 2018). this example, the funds delivered into the deposit isclosing transaction-level debt information h. D account stem from commodity sales transactions may improve the experience of borrowers. that are completely unrelated9 to the loan made by Transparent transaction-level information may the lender. The benefit of this kind of structure to enhance the borrower’s reputation and credibility a lender is reinforced where there is no disclosure among lenders, foster lender/investor confidence, about the existence of the deposit account. Even and may positively impact pricing and the cost of if other lenders/IFIs are aware of the commodity borrowing, since embedded risk premia may be sales, if they have no way of knowing about the reduced or removed (Mustapha & Olivares-Caminal existence and function of the deposit account (due 2020). In addition, where a sovereign borrower is to confidentiality, a practice of not disclosing, or able to share transaction-specific information over due to insufficiently granular disclosure), then this the life of that transaction, then the borrower may opaqueness reinforces the practical dedication of more readily seek advice or technical assistance the deposit account proceeds solely for the benefit about how best to navigate payment difficulties and of the specific lender(s). As noted above, a lack of budgetary troubles that arise. disclosure of transaction-specific information like this complicates assessments of debt sustainability, on-disclosure undermines debt transparency 8. N creditworthiness and seniority; and may cause and the interests and roles of the full range of mispricing in other loans (Gelpern et. al., 2021). stakeholders. There is relative interdependence among the interests and roles of stakeholders when g. From a public interest perspective, publicly it comes to debt transparency. As outlined above, key available debt transaction information offers an stakeholders include: (i) the public; (ii) borrowers; (iii) opportunity for greater scrutiny of government lenders, creditors, donors, and credit rating agencies; actions and easier verification of the proper use and (iv) IFIs (which may also be lenders) that are of proceeds. This in turn promotes government tasked with generating global debt data, conducting accountability and helps disincentivize or “weed out” debt sustainability assessments, and providing corruption. Taxpayers and other stakeholders have emergency funds in times of crisis. While the specific a vested interest in being able to access information nature of their interests as well as their capacity to related to the various debts generated by sovereign analyze transaction-level information differ, the ability borrowers. This is because the citizens of the of each of these stakeholders to protect their interests country are indirectly burdened with the repayment and perform their roles is impacted where there is an of public debt, whether through their taxes; the absence of meaningful disclosure. need for increased production towards exports that 9. Collateral per se is not a bad thing. See WB&IMF, 2020a., for an explanation of how “related” and “unrelated” collateral are viewed differently. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 II.B. Incentives and Factors that Influence Confidentiality and Disclosure Practices 9. Confidentiality per se is not unreasonable. at the time of incurring the debt but also over the life of Reasonable drivers for keeping certain information the loan. Other drivers of non-disclosure may include confidential (or, in some instances, confidential for just a fear of revealing the true state of strained public a limited period of time) include where the information finances; lender pressure for confidentiality or secrecy; is proprietary or technical (e.g., financial calculations and corruption (Group of Thirty, 2020). or formulae), price-sensitive or commercially sensitive Hesitations to publicly disclose may also stem 11. (e.g., interest rates, fee information). These drivers may from a sovereign borrower’s bond market position. be present on either the lender or the borrower side. Additional disclosure considerations may arise Arguably, the reasonableness of these drivers varies (justifiably or otherwise) where the sovereign borrower depending on the context, parties, circumstances, and is also an issuer in the bond markets. As bond issuers, jurisdiction. sovereign governments will typically be mindful of Other drivers of confidentiality are inherently 10. information being disclosed that could impact: (i) the more subjective and not necessarily reasonable pricing of their bonds, especially if they plan to soon go to from a purely disclosure-oriented perspective. the markets to raise funds; (ii) the trading of their bonds From a sovereign’s perspective, domestic political in the secondary markets; (iii) investor perceptions; and considerations (e.g., upcoming elections) and pressure (iv) their credit rating. However, the more concerning from the public on economic matters (e.g., the the relevant information is, the more likely it is that prospect of civil unrest) may also skew a government’s such information ought to be disclosed. The reality of willingness to disclose detailed finance transaction- these factors indicates that while confidentiality clauses related information. This may be particularly the case in in individual debt transactions have a practical impact a restructuring context, or when the needs for funds are on public disclosure and other information sharing, pressing and finance is negotiated fast, or government they are just one aspect of the overall equation in debt procedural corners are cut. In such situations, borrowers transparency outcomes. may be reticent to disclose transaction details, not just EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 Factors under national legal frameworks may also 12. Similarly, national security laws may preclude influence a sovereign’s approach to disclosure. disclosure of public debt contractual information National legal frameworks from either the sovereign for the purchase of things like military equipment. borrower or that apply to the lender may be relevant to iii. Laws such as Ecuador’s Organic Law on public disclosure considerations. Examples include the Transparency and Access to Public Information following: support debt transparency by requiring public ublic disclosure may be informed by rules a. P disclosure of a certain amount of information emanating from domestic legislation outside related to external and local public debt the borrower country’s public debt management transactions.10 legal framework. While the instances of public debt contracts being impacted by national laws may be b. The laws and regulations of other jurisdictions limited in nature and scope, examples of relevant may also influence public disclosure by laws include those about access to information, borrowers. Sovereign borrowers (and lenders, privacy and data protection, freedom of information, whether sovereign or otherwise) may be bound national security, and public procurement. Rules by laws or regulations of the jurisdiction in which under these kinds of laws may impact disclosure by they operate or that is chosen as governing the specifying the timing of disclosure (e.g., disclosure relevant debt contracts. One such example is within or after a specific period), requiring a certain privacy laws (such as Europe’s General Data level of disclosure, or by limiting or precluding Protection Regulations) that seeks to apply trans- disclosure. They may also stipulate the modalities nationally and may prescribe rules of redaction and for disclosure, such as requiring the redaction information handling protocols. of information, or the provision of summary Bargaining power and negotiating capacity may 13. information. Examples include the following: also impact the borrower’s ability to reject strict i. U nder privacy laws, signatory names and or non-market-standard confidentiality clauses. personal details, banking details, addresses, In most loan settings, the bargaining power and signature panels, and other information may negotiating capacity of a developing country borrower not be disclosable. (or its SOE) is weaker than that of the lender. It is also ii. Under freedom of information laws, while the typical for a lender to control the drafting process for transactions and activities of many central finance documents.11 Borrowers may compensate for government departments may be subject to any deficit in technical and negotiating capacity by disclosure requests from the public, there engaging appropriate legal counsel or other advisors. will inevitably be cases where individual Even with sound advice, other dynamics may exist transactions (or parts thereof) are exempted to tilt the bargaining power away from the borrower. and not disclosable under the relevant For example, if an oil-rich sovereign borrower is legal frameworks. With respect to sensitive experiencing large budget deficits at a time when oil subject matters, freedom of information legal prices are very low, and the cost of servicing external frameworks (in countries where they exist) debt rises due to steep foreign exchange movements, often entail public policy balancing acts, where these factors may impact bargaining dynamics and the the interests of public disclosure are weighed terms that the borrower is willing to accept. In such a against strategic or other national interests. scenario, the borrower may be more inclined to focus Obviously, these public policy balancing acts its negotiating energies on the speed with which the are open to conveniently broad interpretation by deal can be closed, and core terms such as loan pricing sovereigns that wish to preclude disclosure. An and tenor, while being more accommodating to any example of a public finance contract excluded lender requests for bespoke or non-market-standard from disclosure in this context may include confidentiality arrangements (or, for that matter, other finance to purchase intelligence equipment. mechanics, such as the provision of collateral). 10. See Article 7 of Ley Organica De Transparencia Y Acceso a La Informacion Publica. 11. This plays out firstly because it is usual practice for lender’s legal counsel to “hold the pen” when it comes to drafting and negotiating loan/finance documentation. Secondly, in drafting the documentation, it is customary for the lender’s usual documentation related to the specific financial product to be used. In the case of a commercial lender, such documentation is usually based on market-standard model forms (see paragraph 16) which are then tailored to reflect the lender’s preferences, protect the lender’s key interests particular to the transaction, and be consistent with the lender’s deal-management systems. This tailored documentation is typically the starting point for a negotiation with the borrower. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 II.C. Approaches to Confidentiality and Disclosure in Public Debt Transactions Confidentiality/disclosure clauses12 are widely used 14. c. A list is used to identify upfront frequently occurring in financial transactions. Contractual approaches situations when disclosure is permitted. Examples to confidentiality vary depending on the nature of include: (i) where required by a court, relevant the lender, the borrower and market practice. They tribunal or due to litigation; (ii) where required by are commonly used in loan agreements entered into applicable law or regulation; (iii) for the purpose of by commercial/private lenders, export-import banks, consulting professional advisors such as lawyers export credit agencies, and some international financial and accountants; (iv) sharing with subsidiary or institutions. Confidentiality clauses are also used associated entities for specified purposes, usually in loans to sovereigns made by state-owned banks with the caveat that any such party is also required (Gelpern et al, 2021). Although not absolutely clear, it to maintain the information as confidential; (v) with is likely that confidentiality clauses are also deployed in the consent of the other party or parties. some sovereign-to-sovereign loans (WB & IMF, 2019a). d. C lauses also often state that where any confidential In this way, confidentiality clauses (of some sort or information enters the public domain through no fault other) are more-or-less a norm in finance documents. of a party bound to maintain confidentiality, then As a practical matter, since one cannot necessarily such information is no longer considered confidential know if the non-disclosure of a borrowing is due to the information. The clause may include a stipulation existence of a confidentiality clause, disclosure practice limiting the time for which the relevant information is also significant. is considered confidential. Confidentiality/disclosure 15. While the exact wording of confidentiality/ clauses used by government agencies and IFIs disclosure clauses depends on the context and may refer to their ability to disclose information the parties, they have some common components, in accordance with the applicable policies and including the following: procedures of their organizations. a. T he parties identify what sort of information Among commercial lenders, the starting point 16. constitutes confidential information. for drafting a loan facility is usually the relevant b. T he clause indicates whether the confidentiality prevailing market-standard model form. Frequently obligations are mutual or only apply to one or some used jurisdictions/governing laws include England and of the parties and in what circumstances. Sometimes New York, and the main model forms for commercial the obligation applies to all parties except about lenders in these markets are generated by the Loan how they handle their own information. Market Association (LMA),13 and the Loan Syndications 12. In this paper the term “confidentiality clause” is used interchangeably with “disclosure clause”. Finance agreements used by commercial and private lenders typically use the term “confidentiality”. In the case of IFIs, a confidentiality provision may be referred to as either a “confidentiality” or a “disclosure” clause. The use of the term “disclosure” in finance agreements is more common in the case of IFIs that have a focus on the public sector. See paragraph 18 for elaboration about the approach of IFIs to disclosure. Accordingly, the terms “confidentiality” and “disclosure” represent alternate ways of addressing the same or similar substantive points, as applicable to the context of the parties. 13. The Loan Market Association (the LMA) is based in the UK with a membership of over 750 organizations, such as banks and law firms, and over 65 countries. It aims at improving liquidity, efficiency, and transparency in the primary and secondary syndicated loan markets. Among other things, the LMA aims for its model form loan agreements to be widely used in commercial loan markets across Europe, the Middle East and Africa. LMA model forms are available to members. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 and Trading Association (LSTA), respectively. categories, with corresponding protocols for the Provisions are usually adapted by the parties for their handling of information. In general, whilst the World contexts as needed, such as altering the model form Bank maintains confidentiality (among other instances) to cater to a sovereign borrower or SOE context, etc. when requested by third parties, and for a time-bound Such adjustments may include making changes to the period in connection with internal deliberative materials, form of confidentiality clause, whether at the suggestion the overall orientation of the policy framework aims of the lender or the borrower. at greater public disclosure in connection with Bank operations. This orientation also syncs with the public 17. The LMA’s model form confidentiality provision14 sector nature of most of the World Bank’s activities. is drafted to protect the borrower’s interests by IBRD’s and IDA’s lending terms and conditions, which requiring the lender(s)/arranger(s) to maintain are standardized across borrower categories, are confidentiality. This reflects a private banker’s publicly available.18 Instead of a confidentiality clause, broad obligation of confidentiality to its customer. IBRD/IDA lending documentation (through the relevant Among the carve-outs that permit lenders to disclose set of General Conditions) refers to the Bank’s right confidential information are: (i) where the disclosure to disclose in accordance with its Policy on Access to would be required under applicable law and regulation; Information. In addition, World Bank operations are (ii) disclosure to relevant parties for the purpose of subject to public disclosure requirements at various consulting with professional advisors (e.g., lawyers) stages throughout their life cycle. Other multilateral and auditors on the condition that any such party also be development banks such as the Asian Development required to maintain confidentiality; and (iii) disclosure Bank,19 the African Development Bank20 and the Inter- with the consent of the borrower. On the other hand, American Development Bank21 also publish the terms the borrower’s obligation to maintain confidentiality and conditions for their loans. is limited to price-sensitive information about funding rates. This narrow obligation emanates from the LIBOR 19. The approaches to confidentiality adopted by the Code of Conduct which requires lenders to obtain range of other lenders vary. The nature of model form confidentiality undertakings from relevant parties to finance documents used by sovereign lenders, export- whom funding rate information is divulged – i.e., in this credit agencies (ECAs), and state-owned banks varies case, the borrower. The confidentiality clause used in by lender. To the extent that an ECA or state-owned the LSTA model form credit agreement15 is drafted along bank lends in a particular commercial context, much of similar lines in that the obligation of confidentiality is the model form (including confidentiality and disclosure largely placed on the lenders, banks, and agents rather provisions) adopted may be similar to models used by than the borrower. A confidentiality clause along these commercial and private sector lenders in the relevant lines would not limit the ability of a sovereign borrower markets. In most cases, adjustments to contractual to share information with the IMF, the World Bank and language are made to account for the institutional other IFIs. Such a confidentiality clause also does not context of the lender, and perhaps also depending on expressly preclude public disclosure by the borrower of whether the loan is non-concessional or concessional key transaction information.16 in nature. G20 sovereign lenders commit to a range of good transparency-related lending practices (WB&IMF Many multilateral development banks (MDBs) 18. 2019a.). ECAs commit to lending practices that observe operate under a policy framework oriented towards debt sustainability (OECD 2018) in financing activities public disclosure in their lending operations. with low-income countries, although notably the relevant For example, IBRD and IDA are subject to the World guidelines do not provide specific guidance on public Bank Policy on Access to Information.17 The policy disclosure with respect to individual transactions. entails numerous documentation classifications and 14. The LMA has a range of model forms. The model referred to here is the Single Currency Term Facility Agreement for use in Developing Market Jurisdictions. 15. The LSTA model referred to is the Form of Credit Agreement dated October 19, 2017 and re-posted on January 10, 2018 and the relevant clause is section 9.12 Treatment of Certain Information; Confidentiality. 16. Having said that, from a practical and relationships perspective, a borrower may be well-advised to check any proposed public disclosure (including the extent of same) with the lender/agent in advance. See the discussion in section E below about disclosure of entire contracts and entire parts of contractual text. 17. https://www.worldbank.org/en/access-to-information 18. https://www.worldbank.org/en/topic/lawjusticeanddevelopment/publication/general-conditions 19. https://www.adb.org/documents/series/loan-regulations 20. https://afdb.org/en/documents/document/general-conditions-applicable-to-loan-guarantee-and-grant-agreements-of-the-afdb-and-the-adf-23881 21. https://www.iadb.org/en/legal-resource-center/general-conditions-sovereign-guaranteed-loan-contracts EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 >>> Box 1 - Implementation of the IIF’s Voluntary Principles for Debt Transparency 1. In 2019 the Institute of International Finance (IIF), a global association representing the financial industry, published Voluntary Principles for Debt Transparency (the “IIF Voluntary Principles”) aimed at the public disclosure of certain transaction-specific information in connection with foreign currency borrowings by sovereigns and sub-sovereigns (e.g. SOEs), and sovereign guarantees.1 The following points are noteworthy in respect of this initiative: (i) the IIF Voluntary Principles pertain to disclosure to be put into action by private sector lenders (not specifically by borrowers); (ii) as the name suggests, adherence to the IIF Voluntary Principles by private sector lenders is voluntary; (iii) the IIF Voluntary Principles are not yet operational and so there is no clear indication of the degree of likely uptake among private sector lenders; and (iv) under the IIF Voluntary Principles, private sector lenders will provide the relevant information (roughly within 60-120 days of funds flowing in the relevant transaction) to a repository/reporting entity to be hosted by an international financial institution. The G20 supported the IIF Voluntary Principles in 2019 (G20, 2019 at paragraph 6). 2. OECD as repository/ reporting entity. In March 2021, it was announced that the Organization for Economic Co-operation and Development (OECD) will act as the repository/reporting entity for implementation of the IIF Voluntary Principles. The OECD will publish information on its website. The initiative under which the OECD will collect, analyze, and report the transaction data to operationalize the IIF Voluntary Principles is called the Debt Transparency Initiative and it is presently in the first phase of a multiphase pilot program. 3. Transaction information matrix template. The OECD and relevant stakeholders generated a form matrix2 document that functions as the template, containing information fields, onto which private sector lenders and their borrowers will enter the financial transaction information to be publicly disclosed. It is envisaged that the matrix will be an annex or schedule to the relevant loan/finance document and the completion of the schedule itself will be a condition precedent to the financial closing of relevant public debt transactions. The public disclosure of the transaction-level information set out in the matrix template would help to reveal the type of granular information necessary to tackle the challenges outlined in this paper. To this end, the loan-level data offer additive value that aggregated data cannot. Nevertheless, it is proposed that initially only aggregated datasets will be publicly disclosed. In contrast, the IIF Voluntary Principles envisaged public disclosure of un-aggregated, transaction-level information from the matrix/schedule, not aggregated datasets. The OECD’s rationale for such an initial approach is to help persuade hesitant private sector lenders about participating in the initiative. 4. Focus on low-income borrower countries. The Debt Transparency Initiative will initially focus on public debt arrangements with PRGT-eligible countries (OECD, 2021). This proposal is consistent with the IIF Voluntary Principles themselves which note that in adverse economic circumstances, PRGT-eligible countries (i.e., low-income countries eligible for certain concessional finance from the IMF) are more likely to encounter repayment difficulties with market-rate debt, and debt sustainability challenges. At some point, application to a broader subset of borrower focus would better enhance debt transparency. NOTES: 1. The IIF Voluntary Principles exclude numerous types of transactions such as bond transactions; trade finance and overdraft transactions with a maturity of 12 months or less; transactions where an official export-credit agency is a party, unless such agency requests public disclosure; transactions where an international development institution or multilateral development organization is also a party (on the basis that such organizations usually already have public disclosure rules and practices in place); transactions involving central banks related to liquidity or regulatory requirements. 2. A preliminary form of the matrix is available at: https://www.oecd.org/finance/OECD-Debt-Data-Transparency-Initiative.htm EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 II.D. The Use of Confidentiality Clauses to Maintain Secrecy or to Prescribe Delayed Disclosure 20. Confidentiality clauses which specifically require confidentiality clauses requiring secrecy are also out secrecy actively undermine debt transparency. of step with prevailing commercial market practice. Lenders and borrowers should restrict22 confidentiality To the extent that secrecy clauses are deployed by requirements that seek to keep a borrowing secret by sovereign lenders or their agencies, such practice invoking secrecy only for information that cannot be would demonstrate “room for improvement” according disclosed by law.23 This also applies when disclosure to recent sovereign lender self-rating diagnostic tools (whether public disclosure, or disclosure to relevant (WB&IMF 2019b.).24 third parties including the World Bank and the IMF) of If a borrower agrees to keep loan information 21. any information at all is prohibited up until final maturity secret, then the borrower will likely also find or full repayment of the loan. The reason is that such itself in breach of undertakings previously made disclosure is not timely and, since repayment periods in in favor of other lenders (including IFIs). As noted loans can be long, delayed disclosure is generally not above, this includes breaches of obligations related to overly meaningful. When these types of confidentiality negative pledge and permitted lien clauses, but also requirements are deployed by lenders it indicates an extends to periodic reporting and information-sharing intention to hide loan data from other lenders and market undertakings, as well as impeding the compilation of participants; and it creates information asymmetries accurate debt sustainability assessments. In addition, that: (i) increase the risk of crises; and (ii) undermine previously undisclosed or hidden debt may hamper international efforts towards debt transparency and the ability of the borrower to obtain fresh finance or to sustainability. This is especially the case where the successfully undertake debt restructuring activities if relevant loan includes collateral or quasi-collateral, such the country enters financial distress. as the deposit/escrow account structures referred to above in paragraph 7.f. As highlighted in paragraph 17, 22. The context envisaged for this statement is mainly loans made for an investment, development/ infrastructure or commercial purpose, irrespective of lender type. As discussed in paragraph 12, it is recognized that there may be certain instances under sovereign borrower or lender legislation, such as national security laws, where disclosure is exempted/secrecy is required. 23. Such secrecy clauses might include carve-outs permitting the borrower to disclose certain information where the borrower is required to do so by law, or for the purpose of obtaining advice (e.g., legal and accounting advice), or where the borrower otherwise obtains the prior consent of the lender(s). Given the overall language of such clauses as stipulating a default position of secrecy, these carve-outs still do not achieve much, from a transparency perspective, in improving the nature of the clause. A better outcome could be achieved, however, where a sovereign borrower falls within the “required by law” carve-out because public disclosure of transaction-level information is mandated under its public debt management legal framework (PDMLF), as recommended in paragraph 26.c. 24. A “strong practice” in the same sovereign lender diagnostic tool is to refrain from using confidentiality clauses (WB&IMF 2019b.). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 II.E. How About the Public Disclosure of Entire Public Debt Contracts or Entire Parts thereof? 22. The public disclosure of whole/entire public debt country may have legislation that operates b. A contracts by borrowers is sometimes put forward as to limit or preclude the public disclosure of a solution for improving gaps in debt transparency public debt contracts or parts of contracts. An and for avoiding the information asymmetries and example is Ecuador. As noted above (paragraph other problems that flow from non-disclosure. To 12.a. iii.), Ecuador’s Organic Law on Transparency the extent that the public disclosure of entire contracts, and Access to Public Information supports debt or entire parts thereof, is a practice in some countries transparency by requiring26 the public disclosure of or is legally required as part of their transparency and certain information related to individual public debt accountability mechanisms, such public disclosure is transactions. Information disclosed on Ecuador’s encouraged. At the same time, we recognize that, in the websites is extensive and includes monthly lists context of finance transactions, it is less straightforward of public loan transactions with details such as than it sounds. Some relevant considerations include the purpose of indebtedness, debtor of record, the following: executing agency, lender name, maturity, amount borrowed, amount disbursed, and amount to a. The debt contract(s) may contain a be disbursed.27 Nonetheless, when it comes to confidentiality clause that limits or precludes providing a link to download the relevant contract(s), the borrower from publicly disclosing contract the provision of such link is excluded in most text. As a result, the borrower will need to seek the instances and marked as “not applicable” due to (written) consent of the other party or parties before the application of a different law, the Organic Code publicly disclosing the entire contract, or parts of Planning and Public Finances (the “Organic of the contractual text. To the extent that a loan Code”).28 Article 137 of the Organic Code enables is already effective, sovereign borrowers/SOEs discretion for the Ministry of Economy and Finance may determine that seeking consent after the fact not to disclose public debt contracts if, among other (i.e., after a contract is signed and effective) is things, disclosure would be contrary to the interests not feasible since they prefer, strategically, to limit of the country. Even in countries like Ecuador that consents and other requests to matters that are demonstrate a commitment towards transparency critically important to the borrower over the life of of loan-level information, the public disclosure the loan (e.g., repayment or performance issues). of entire contracts (or entire parts thereof) raises The Extractives Industry Transparency Initiative additional legislation-based considerations. (EITI) is an example of an initiative that, among other things, aims at full contract disclosure (EITI, c. S upporting an approach that requires the disclosure 2019). While things continue to develop and evolve, of entire public debt contracts could place with respect to encouraging disclosure of the full borrowers in sticky negotiating situations. text of relevant contracts, EITI noted in a 2020 Examples of relevant scenarios and considerations report that confidentiality clauses, among other include the following: factors, continue to impact the ability of countries to disclose contracts (EITI 2020; EITI 2017).25 25. The types of documents presently publicly disclosed in EITI implementing countries that we reviewed (e.g., Philippines, Liberia, Malawi) include profit-sharing agree- ments, mineral production sharing agreements, joint venture agreements, concession agreements, service contracts, mineral development agreements and mineral exploration licenses. While these are contracts related to oil, gas and mining exploration and exploitation, they are not finance and loan documents related to such activities. The publication of finance documents likely poses different disclosure dynamics than exploration-related licenses and award documents, with the latter falling more squarely within the sovereign’s discretion on terms. 26. See Article 7 l) of the Ley Organica De Transparencia Y Acceso a La Informacion Publica. 27. See the lists of public debt contract-related information available at the following website of Ecuador’s Ministry of Economy and Finance: https://www.finanzas.gob.ec/transparencia/ 28. See Article 137 of the Codigo Organico De Planificacion Y Finanzas Publicas. For example, see references in the following transaction list: https://www.finanzas.gob.ec/wp-content/uploads/downloads/2022/02/octubre-2021-1.pdf EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 i. It may be that a lender simply will not agree to finance contracts, offering a high degree of finance a loan arrangement that permits the transparency. The majority of debt contracts public disclosure of the entire debt contract disclosed, however, are loans and grants from or entire parts of it. In addition, borrowers multilateral development banks and other IFIs, need to prioritize their issues for negotiation which, as noted above, tend to be specifically and even though a lender may readily support a oriented towards public disclosure. While sovereign or SOE borrower’s public disclosure this public disclosure may completely reflect of the existence or nature of a transaction the borrowing portfolios of these countries and key details, the same lender (particularly (i.e., no loans from private and sovereign private lenders) may baulk at the idea of public bilateral lenders), the more general absence disclosure of entire contracts or entire parts of of full contractual disclosure by other countries contract text. Even among lenders that accept the arguably indicates the challenges associated importance of improving public disclosure for debt with publishing entire contracts entered transactions, the precise drafting of clauses such into with non-MDB lenders. as covenants, representations and warranties, s publicly disclosing the entire document a d. I and events of default remains sensitive. fit-for-purpose approach? There is a tendency ii. I n addition, even where a debt contract (such to refer to “the” debt contract when discussing as one that follows the LMA model forms) does sovereign debt matters, which suggests that finance not expressly restrict a sovereign borrower’s is routinely provided through a single document. ability to publicly disclose most transaction- While a loan operation may entail a single level information, the borrower would be well- document, the reality is that loans (particularly advised—as a relationship matter, rather commercial loans or loans that are highly structured than a legal matter—to consult its lender(s) or collateralized) often entail a suite of lengthy legal and obtain written acknowledgement or consent documents which operate together to lay out the prior to publicly disclosing entire contracts or transaction. For example, depending on the deal, entire parts of contractual text. a loan agreement may be accompanied by a fiscal agency agreement, syndication-related documents, iii. It may prove challenging for borrowers sale and purchase agreement(s), payment direction to successfully negotiate the insertion of documents, account management agreement, language into debt contracts expressly security documents, fee letters, etc. Where there permitting the borrower to publicly disclose is a suite of transaction documents, the public entire contractual text. In addition, since some disclosure of an entire loan agreement (or part of the contractual clauses belie the lender’s risk thereof) would not necessarily convey a complete assessment of the borrower, public disclosure picture of the deal without some form of disclosure of entire contracts or entire parts of contractual of the remaining suite of documents. At the same text may come at the cost of obtaining time, if a suite of transaction documents is optimal loan pricing. From the perspective publicly disclosed in its entirety, making sense of maintaining strong ongoing business and of the complexities of a deal is a considerable lending relationships, haggling over the public task requiring technical capacity. To some extent, disclosure of entire contracts may not be a the same is true for a singular loan agreement. borrower’s best use of its bargaining chips. The question arises as to whether a “data dump” iv. The sensitivities surrounding the public approach – i.e., the disclosure of entire contracts disclosure of entire finance contracts, or actually serves the interests of the public and civil entire parts thereof, is perhaps signaled by society (Gelpern 2018), and whether they have the the limited degree to which finance contracts capacity and resources to analyze the information. are currently disclosed by sovereign/SOE Their capacity and resource levels are in contrast borrowers. For example, the Philippines29 and to private lenders/ market players, which have the Sierra Leone30 currently disclose some entire ability to analyze large quantities of documents. 29. See https://www.dof.gov.ph/data/fin-agreements/ 30. See https://www.parliament.gov.sl/loans.html EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 e. Redacting contracts requires resources and is not obvious. Accordingly, a more feasible approach capacity. As noted above (paragraph 12), from to public disclosure, which also meets the information an administrative perspective, prior to any public needs of the public while avoiding other challenges disclosure of an entire contract, a sovereign elaborated above, is the completion of a template for borrower may need to redact details (e.g., account transaction-level information which could be included numbers, signature panels etc.) or perform other as a schedule to the loan/transaction agreement and actions based on requirements under applicable agreed by transaction parties, at the time of signing, for laws and regulations. Any such redaction process public disclosure. Public disclosure of the information requires staffing, time and technical capacity. schedule could be made by the borrower on an easy- to-find website within a reasonable period thereafter. 23. An Alternative Approach? From this perspective, the See the recommendations in Part III at paragraphs publication of entire debt contracts or entire portions of 26.d, 27 and 28 for more details. contractual text lies at one end of a continuum of debt disclosure-related approaches. It raises questions of Public debt management legal frameworks 24. sensitivity, willingness, and practical attainability due (PDMLFs) may be used to mandate transaction- not only to being more complicated than it sounds, but level public disclosure. The contribution of PDMLFs to also because it is distant from most current practices in debt transparency objectives is achieved when certain public debt transaction disclosure. As noted above, for key features are present (WB, 2021). Box 2 provides some lenders (e.g., MDBs), public disclosure of entire a list of key elements in public debt management contracts may be acceptable, yet in other contexts it legal frameworks that enhance debt transparency. raises sensitive issues and challenges for borrowers These points are further elaborated in Annex 1. To to obtain the concurrence of lenders. At first sight, the the extent that a PDMLF mandates the timely public idea of disclosing entire debt contracts sounds useful. disclosure of transaction-level public debt information, However, finance transactions tend to be complex the PDMLF underscores the sovereign’s commitment and, although lenders and IFIs have the capacity to debt transparency and can operate, in conjunction to wade through lengthy debt contracts or suites of with other measures (discussed in Part III below), to transaction documents, the capacity and resources ensure a level of public disclosure that is meaningful in of the public and civil society stakeholders to do so the context of each transaction. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 >>> Box 2 - Elements of Public Debt Management Legal Frameworks that Enhance Debt Transparency A borrower’s public debt management legal framework (PDMLF) is the main instrument defining the decision- making and operational mechanisms for incurring and managing public debt. Elements of a PDMLF that contribute to debt transparency include the following: Clear delegation of authority to create debt from the legislature to the executive. nformation stating the functions, responsibilities, and roles of the relevant minister(s) (or other authorities) I and different government agencies, such as the debt management office, in creating and managing public debt. ules and procedures related to the debt authorization cycle to facilitate the legitimate creation of compliant R debt. lear definition of what constitutes public debt, the nature of permitted instruments (including debt-like C instruments) and permitted uses of debt proceeds. Explanation of requirements related to the publication of debt management strategies and debt reporting. equirements related to enhanced scrutiny and/or approval for public debt that entails collateral, quasi- R collateral, lender step-in rights, novel features or unusual risk levels. Rules related to the public disclosure of the public debt management legal framework itself. These elements are discussed in more detail in Annex 1. In addition, in Part III of this paper a recommendation is made that PDMLFs mandate the timely public disclosure of transaction-level information in respect of public debt. The recommendation also discusses modalities and approaches to such public disclosure. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 III. >>> PART III: Recommended Approaches for the Disclosure of Transaction- Level Public Debt Information 25. This part of the paper identifies concrete approaches and recommendations for borrowers and other actors to take towards enhancing debt transparency in individual public debt transactions to overcome the challenges discussed in Part II. The approaches recommended below differentiate the information needs across 26. stakeholders and aim at a baseline of adequate and meaningful disclosure to the public. By distilling the various points discussed above, we recommend an approach to confidentiality and disclosure of transaction-level public debt information, which takes into account the different information needs, and functions, of key stakeholders. At the same time, the approach is ambitious. It recognizes that there can be sound reasons for confidentiality; and seeks to balance factors that inherently influence current practice EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 against the interests of diverse stakeholders and the consent,31 and irrespective of the type of need to improve debt transparency. Accordingly, we lender or debt/debt-like instrument; and recommend the following approaches be adopted in 2. engagement with the LMA and LSTA to respect of new borrowings (i.e., on a prospective basis): include a similar provision in relevant a. Refrain from using confidentiality clauses: i. model form documents used in English that amount to secrecy clauses requiring the and New York law markets, respectively.32 existence of, and information related to, public debt transactions to be kept secret; and ii. to As noted above, express acknowledgement/ prescribe that disclosure only be made at final consent is useful for practical purposes maturity, termination, or upon full repayment. and relationship management even if As outlined above (see paragraphs 7.f., 20 and the relevant contract does not otherwise 21) secrecy causes major information asymmetries expressly limit disclosure. The ability to and gaps, and can skew pricing, debt restructuring provide complete documentation and progress, and assessments of debt sustainability detailed transaction-level information to and creditworthiness. Similarly, provisions that the World Bank and the IMF is necessary permit public disclosure only at final maturity or in light of their roles in performing debt full repayment are harmful because such delayed sustainability assessments and global debt disclosure is neither timely nor meaningful. We statistic compilation functions, as well as recommend that lenders and borrowers alike their lender-of-last resort function and roles refrain from the use of secrecy provisions in public in debt restructurings. These IFIs typically debt transactions. maintain strong relationships with their member countries and formidable global b. Recognize the borrower’s right to provide convening powers. Their functions and complete information about individual public roles are more important than pure lending debt transactions to the World Bank and volumes and extend to the provision of the IMF as the IFIs that, among other things, services to the international community that generate global public debt statistics, conduct uniquely demand debt transparency. debt sustainability assessments and provide emergency financing in times of crisis. ii. As a practical matter, such information-sharing- i. In recognition of the roles that the World related language would facilitate timely access Bank and the IMF play within the international by the relevant IFIs to public debt contracts, financial architecture, this recommendation and timely availability of information related supports affording them the broadest and to salient events that arise over the life of most detailed level of access and information individual debts (e.g., about disputes, payment sharing by sovereign and SOE borrowers. This standstills, moratoria, suspensions, re-profiling, recommendation proposes: and restructurings). 1. routine inclusion in finance documents c. Mandate, through national legal frameworks, involving sovereign and SOE borrowers the public disclosure of transaction-level public of language expressly permitting the debt information.33 borrower, or expressly acknowledging the i. Legislative requirements specifying the borrower’s right (whichever is appropriate), degree of public disclosure of transaction- to share complete information (including level information will limit the discretion of transaction documents) with the IMF the borrowing authority/debt management and the World Bank without any need to office to decide whether or not to disclose seek additional/subsequent lender or party 31. Any requirement for the borrower to seek further or later consents could lead to delay or impediment to the relevant disclosures/ information-sharing. Invariably, there are multiple reasons why borrowers might hesitate to seek consents after the fact (i.e., after legal agreements have already been executed and/or have become effective) and, as a result, the possibility of delay is best minimized by language that is upfront and expressly permissive of such information-sharing. 32. As far as engagement with the LMA/LSTA for these model form amendments goes, perhaps it could be explored to make use of any similar engagement with the LMA/ LSTA currently underway or contemplated by the official sector. 33. It is recommended that such legislative provisions operate on a prospective basis so as not to disrupt existing contractual arrangements, which may otherwise fall short of such requirements if they contain confidentiality or non-disclosure undertakings. For existing contracts, sovereign borrowers would need to analyze confidentiality and disclosure-related provisions in each contract and seek appropriate consents from lenders and other relevant parties prior to making public disclosure. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 loan-level information. It is envisaged that iii. Confidentiality should be an exception such requirements would be in addition to, rather than a norm. One of the challenges and separate from, any existing legislative in this respect is attaining the right balance requirements for public debt reporting of between legislative requirements and executive aggregated debt data by the sovereign. flexibility or discretion. While the primary Additionally, in the case of SOEs, it is legislation can broadly mention the requirement recognized that their operations and reporting for disclosure and reporting, leaving the functions do not typically fall within the authority details to the executive, it is recommended of the government debt management office or that the legislature specify the rules regarding ministry of finance. While it would not likely be the level of detail, frequency, and timeliness feasible to require (and supervise) transaction- of the transaction-level debt information to level disclosure by many of a country’s SOEs, be disclosed. Clear transparency principles if an SOE is critical to the national economy determined at the legislative level are harder to -- for example, a commodity-exporting SOE modify if contained in primary legislation. The that generates significant national revenues PDMLF may reasonably include or contemplate or dominates the main export revenue-earning limitations to public disclosure on grounds sector(s) of the sovereign’s economy; or an that certain information is subject to national SOE that could be regarded as being “too big or strategic interests, or other considerations. to fail” – then such SOE should be required In some cases, those interests could also to make transaction-level disclosure of its be addressed by making public disclosure debts and any granting of collateral/quasi- on a delayed basis (i.e., once the sensitive collateral over its assets. Public disclosure information is no longer sensitive) or only in of transaction-level debt information by the summary form. Comprehensive legislative sovereign and economy-critical SOEs would rules minimize scope for ambiguity; and may be also help reveal scenarios where a central beneficial where they leave little to no discretion government borrows for its own purposes but to a council of ministers, finance minister or the uses the assets of its SOEs as collateral or head of the debt management office in terms of quasi-collateral (e.g., oil sales). If a borrower’s what needs to be made publicly available. public debt management legal framework or im at a level of public disclosure of public debt d. A other legislation requires the timely public transaction information that is meaningful in disclosure of transaction-level information, then the context of the transaction, and sufficiently public finance contracts would need to comply. granular to facilitate stakeholder awareness, This would influence and improve contract- scrutiny of government actions and public related confidentiality and disclosure practices. accountability. It may also positively impact investor and other perceptions of the credibility and reliability of i. Types of information to be publicly information, and ultimately translate into cost disclosed. We recommend that the types of savings or improved pricing for the borrower. It transaction-level public debt information listed also helps sovereign and SOE borrowers push in paragraphs 27 and 28 be publicly disclosed back against requests for secrecy or unjustified by sovereign borrowers (irrespective of whether confidentiality when negotiating, with the ability such borrower is a low-income, middle-income to cite legislation and public policy in support. or high-income country) and SOE borrowers.34 The list of elements proposed for public ii. It is recommended that the legal framework disclosure is fairly ambitious relative to current clearly identify the authority or government practices. It is envisaged that such public office responsible for timely public disclosure disclosure becomes routine. of transaction-level debt information, as well as any penalty to be imposed for failure or non- ii. Timing of public disclosure. The public compliance. disclosure of relevant transaction-level 34. To the extent that public disclosure is contemplated for a public debt contract that is already in place and to which confidentiality is attached, the borrower would need to obtain appropriate prior written consent from relevant parties before publicly disclosing contract information. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 information should be made by borrowers in via the sovereign borrower’s website or, as a timely fashion. Different factors (e.g., law or relevant, the SOE’s website. Having said that, in regulation; borrower resources and capacity the case of sovereigns, the location(s) for public constraints) may influence the timing of public disclosure (digital and physical), or the means disclosure. Absent other salient factors, it of facilitating access to public information, may is proposed that a reasonable period for vary based on the borrower’s legislation and public disclosure to take place is as soon local circumstances. It is recommended that as practicable following effectiveness of applicable rules address the following: the financing; or otherwise between two to 1. Location specifically dedicated to debt four months after the date on which funds disclosure. To the extent that contract- move or are disbursed in connection with the related information is already required, as borrowing.35 part of the approval, ratification or signing process, to be published in the national iii. Modality of public disclosure. In general, gazette (or similar bulletin authorized to and specifically for cases where there are publish official public or legal notices), concerns or limitations among the relevant a separate/different publication location parties, or prescribed under applicable law and should be mandated and dedicated for the regulation with respect to public disclosure, it public disclosure of transaction-level debt is recommended that borrowers and lenders information. add an annex or schedule to the (main) debt contract (and to any subsequent material 2. The importance of an easy-to-find amendments/ supplementary agreements). location for public disclosure. A logical Such annex/schedule would set out the place for digital public disclosure might information relating to the whole transaction be the website of the national debt office, that will be publicly disclosed. The complete borrowing authority or the ministry of annex/schedule is envisaged as a condition finance, with links to this website being precedent to the effectiveness of the debt placed on relevant sub-pages and related transaction. The use of an annex/schedule government websites. Bearing in mind that is beneficial because it facilitates a clear lenders or members of the public may not understanding among the parties, at the time have specialized knowledge of how the of contracting the financing, about the specific relevant borrower government is organized nature of the proposed public disclosure and its or the full gamut of its websites, the relevant compliance with applicable law and regulation. website or subpage should not be obscure In cases where the borrower’s right to publicly or difficult to find, since that would defeat disclose is not limited under the relevant the purpose of public disclosure. contract(s) or by law, the schedule concept may still be helpful as a practical template that 3. Searching and finding information. As could be used by borrowers to scale up and digital disclosure of transactions builds, systematize the presentation and publication of information should be readily searchable. transaction-level information. It may also help 4. Retention of information over time. manage expectations and relationships with Information should be retained on relevant transaction counterparts. The schedule itself websites over time and not removed. (or just the information from it) could then Transaction-level debt information should be made publicly available by the borrower. remain publicly available at least until the iv. Location for public disclosure. In terms of final maturity, repayment, termination/ location, it is envisaged that public disclosure cancellation or restructuring (as applicable) of the transaction-level information be made of the finance. 35. This latter timeframe is the same timeframe suggested in connection with the IIF Voluntary Principles (see Box 1 above). Under the IIF Voluntary Principles, it is envis- aged that private sector lenders will, within 60-120 days (i.e., two to four months) of funds first moving under a transaction, furnish the matrix template to the OECD (which is the reporting host/ repository for the initiative). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 5. Financial costs and other resources. disclosure under domestic legislation. An important Without a doubt, building borrower capacity, caveat with respect to standardization is to ensure scaling up staffing and other resources to that there is adequate flexibility to deviate, and to make timely public disclosure of transaction take into account approaches across different debt level debt information, as well as managing instruments, markets, and jurisdictions. the information over time, all require 27. Public debt transaction details recommended formidable commitment and financial for public disclosure. In elaboration of the investment. recommendation in paragraph 26.d.i above, the e. Borrowers should explore the benefits following public debt transaction-level information of standardizing how they approach should be publicly disclosed by borrowers,36 irrespective disclosure-related contractual matters, and of the type of lender: pair standardization with staff guidance. a. core financial and legal terms and conditions along Sovereign and SOE borrowers may apply this to the lines detailed in paragraph 28 below; confidentiality and disclosure in individual public debt transactions. Market-specific model forms b. names of the legal documents (including such as those discussed in paragraphs 16 and finance documents, security documents, project 17 may offer a useful starting point for amending documents, credit insurance or similar credit and inserting provisions that cater directly to enhancement and support documents, side letters specific public, or other, disclosure needs of the etc.) that make up the transaction. This information borrower. Useful alternatives to having standard offers a useful overview of a transaction, given that confidentiality and disclosure language may simply they often entail multiple documents or even suites be a list of relevant considerations with practical of documents; guidance for the borrower’s staff and negotiators c. plain English (or plain other language, as about the borrower’s legislative, public policy, applicable) summary, or if instructive, a diagram of contractual or corporate (as applicable) imperatives the transaction structure/design. These are useful on the topic. Accordingly, while the borrower may for providing a snapshot of money flows, parties/ not manage to negotiate the exact same language entities involved, and the mechanics of a deal; and in disclosure-related clauses across all of its debt contracts, it could use a standard approach that d. over the life of a transaction: a summary of the ensures it still achieves its main objectives in nature of material amendments or supplemental connection with disclosure. Standardization in its agreements or side letters, including transfers and best form allows for gradation and prioritization assignments of interests among lenders (where of issues. Standardization coupled with internal known to the borrower), entered into in connection guidance can help borrowers to: (i) resist upfront, with the transaction. or negotiate downwards, any lender requests for 28. Core financial and legal terms and conditions to be unreasonable confidentiality provisions; and (ii) publicly disclosed. The following transaction elements recognize and examine the operational, legal, and should be publicly disclosed as “core” financial and other consequences of excessive confidentiality legal terms and conditions: provisions. Standardization and guidance may also help to resist novel and overly complex a. identify the parties involved in the transaction(s) confidentiality clauses because they help borrowers and specify the role(s)/capacity or capacities in recognize the practical implementation challenges which they act (e.g., lender, borrower, guarantor, that such clauses pose, especially if they run counter lead arranger, cash account agent, fiscal agent, to disclosure obligations that the borrower owes to bond trustee, security trustee, etc.); other lenders, or counter to mandates for public 36. Sovereign debt restructurings are complex and highly sensitive. Trust and transparency between a borrower and its various creditors is crucial for the success of a debt restructuring. Such disclosure and communications may be robust from a borrower to its creditors; yet public disclosure in connection with sovereign debt restructurings is entirely separate. We recognize that lenders, perhaps more so than borrowers, may be the appropriate entities to make public disclosure in the sovereign debt restruc- turing context. In addition, complex considerations related to the timing of public disclosure and tactical considerations related to the negotiation of debt restructurings would also come into play. Accordingly, disclosure (between a borrower and its creditors) and public disclosure in connection with debt restructurings is beyond the scope of this paper. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 b. identify the type of loan/finance (e.g., committed/ templates. The recommendations above are intended uncommitted, term loan, revolving, master facility, to create synergies by proposing a similar public forward sale agreement, guarantee); disclosure modality – i.e., a schedule/annex to the main financing contract setting out publicly disclosable c. currency denomination, loan/finance amount, the information (that also factors in, and complies with, any conditions of any possible increase in the amount or applicable law and regulation). The recommendations renewal, applicable interest rate/cost of financing;37 above build on these ideas by proposing the extension d. tenor or maturity of the loan/finance (excluding of the use of such schedule/ annex concept to all public transactions with maturities of 12 months or less) debt (including debt-like) transactions (not just external and, as applicable, amortization or repayment debt – i.e., irrespective of currency or lender residency profile; etc.), with all lender types (i.e., beyond private sector lenders) and propose that the public disclosure actions e. the existence of any grace period(s) and its length; be taken by borrowers (whether such borrower is a developed or developing country, or an economy- f. the intended use of proceeds and duration of the critical SOE). availability/drawdown period; 30. A robust borrower-led and administered system of g. the nature of any collateral or quasi-collateral public disclosure of transaction-level information provided (e.g., the nature of any escrow, deposit could be established in phases, but nonetheless entails and collection account arrangements); formidable capacity, as well as set-up and maintenance h. priority among parties – i.e., subordination, or any costs. At the same time, it is ultimately more seniority, among lenders; and sustainable, incentivized and accountability-driven, and possibly more accurate, than relying fully on i. governing law, dispute resolution mechanism, aggregated debt data or on debt information generated lender step-in rights, and details of the extent of any by third parties. The case for borrower-led public sovereign immunity waiver. disclosure of transaction-level debt information is 29. Improving upon current public disclosure practices. strengthened where borrowers experience clear The approach to public disclosure by borrowers upsides from their disclosure activities in the form recommended above in paragraphs 26.d, 27 and 28 is of market perception, ratings improvements, enhanced broadly consistent with the approach originally proposed public/lender trust in the borrower, and possible cost under the IIF Voluntary Principles. In the case of the savings and pricing improvements. Apart from the IIF/OECD initiative (see Box 1 above), the disclosure need for greater debt transparency, borrower-led public process is proposed to be initiated by private sector disclosure of transaction-level information would also lenders that will submit the agreed, completed matrix offer a valuable source of information for debt data template of transaction-level information to the OECD. reconciliation across different sources. Finally, the However, for the time being, the OECD proposes to recommendations above are also broadly consistent publicly disclose only aggregated information and with the diagnostic tool of the G20 Operational not the transaction-level granularity from the matrix Guidelines for Sustainable Financing. 37. Consistent with the approach to be taken in connection with the IIF Voluntary Principles, it is anticipated that the interest rate/cost of financing could be specified as falling within one of a number of specific ranges. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 A. >>> ANNEX 1: Elements of Public Debt Management Legal Frameworks that Enhance Debt Transparency 1. A borrower’s public debt management legal framework (PDMLF) is the main instrument defining the decision-making and operational mechanism for incurring and managing new debt. In its PDMLF a country determines the rules and procedures for the creation of debt (including debt-like) contracts and debt management operations. Such rules enhance debt transparency, ensure that the debt is put towards its intended purposes, and help mitigate the prospect of corruption. Sound national PDMLFs consist of debt management-related primary and secondary legislation, as well as lower-level guidance documents. 2. The PDMLF facilitates the objectives of multiple stakeholders. At the borrower level, the legal framework sets out a list of rules and procedures to ensure that debt management operations are legally compliant and decision-making processes are predictable. From the lender’s perspective, the legal framework facilitates the collection of data and information to assess the creditworthiness of the country and to verify ex ante and ex post compliance with applicable laws (Buchheit & Gulati, 2010). For the public and civil society, the legal framework enables oversight of the governance of public debt and enhances accountability. 3. The PDMLF includes delegation of authority from the legislature to the executive and regulates the execution of debt operations. The legislature, which is vested with the authority to engage the credit of the country on behalf of taxpayers (Buchheit & Gulati, 2010), regulates, through the national legislation, the delegation of its authority to the executive branch. The PDMLF sets out the procedures and processes to be followed at the executive level when undertaking borrowing and debt management operations. Examples of such procedures include: (i) the required approvals (e.g., ministerial or parliamentary approval or pre-authorization, ratification, etc.); (ii) the designation of officials with actual authority to sign a contract; (iii) the steps for contract approval/ratification and effectiveness; (iv) the delegation of responsibility for generating the country’s legal opinions; and (v) the unit or team responsible for undertaking the EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 technical debt negotiations. It is vital to define the rules, procedures, and processes for incurring debt so that debt is legitimately created and complies with the legislation. Clarity in the rules also helps minimize the likelihood of creating contestable debt, including court interpretations that go against the country or that result in unintended enforcement or rejection of debt claims. 4. Institutional set-up, roles, and responsibilities. The PDMLF outlines the debt management institutional set-up so that lenders and other stakeholders are aware of the roles and responsibilities of different branches of government and their agencies. The most important of these institutions is the government office, usually the debt management office located in the finance ministry, tasked with carrying out debt operations. 5. Authority to create debt and the authorization cycle. A sound PDMLF includes clear rules, procedures, and processes for the debt management office to follow to contract debt or issue guarantees on behalf of the government. An example is the seeking of required approvals prior to the signature of the contract by the persons vested with the actual authority to sign. 6. Definition of “debt” and the limits of debt management. To ensure transparency, the PDMLF clearly and comprehensively establishes the national debt policies that facilitate the creation of lawful debt, and the tracking by all interested parties of the compliance of public debt with legislation. These policies consist of the debt management objectives, the debt management strategy (i.e., requiring the publication of a debt management strategy that describes a plan to manage the costs and risks of a country’s debt portfolio in line with its policies), and the permitted characteristics of sovereign guarantees and debt. Such characteristics include: (i) the definition of debt; (ii) permitted purposes of borrowings; (iii) types of instruments, including debt-like instruments; (iv) sources of funding; or (v) permitted use of proceeds. 7. Level of scrutiny. The legislature in borrowing countries determines the degree of scrutiny it desires when deciding on the type of transactions or conditions for which the authority to borrow will be delegated to the executive. It is common in many developing countries for the legislature to require the approval or ratification of sovereign guarantees or foreign law loans from bilateral, official and private sector lenders. On the other hand, the issuance of market-based domestic debt (treasury bills and bonds) is usually delegated to the executive branch, sometimes up to a certain limit once the legislature determines the standards for the terms and conditions. The riskier the debt operation for the sovereign (e.g., the secured/collateralized nature of a transaction, or the existence of collateral-like features), the higher (e.g., council of ministers or parliament) the required level of the approving body must be. In addition, new or unusual financing structures should have extra scrutiny and require authorization from a higher level. Such enhanced scrutiny inherently leads to more transparency. 8. Mandating public disclosure of transaction-level information and debt reporting. Countries are encouraged to mandate in their PDMLF the public disclosure of timely and comprehensive transaction-level borrowing information (on a prospective basis); and to include the requirement to publish regular public debt reports containing aggregated and non-aggregated data and statistics. These actions enable stakeholders to understand a country’s level and composition of debt, its lenders, details on individual transactions, and the use of proceeds. Such scrutiny promotes government accountability and makes it harder to mask corrupt behavior. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 9. Where and how to publish transaction-level debt information and other debt data. The PDMLF defines the mode (digital or physical) and place of disclosure of relevant debt data and information. In determining an appropriate place, it is important to consider whether information disclosed will be catalogued and maintained in that place over the long term. For example, a National Gazette or Council of Ministers’ legal documents are usually places where officially published information is catalogued and identified for long-term record-keeping and cross-reference purposes. To the extent that a borrower website is operated such that information is removed after a period of time, then such a location may prove counter-productive for the purposes of facilitating adequate public disclosure of debt information. This is particularly the case because loans may have long tenors and being able to find out information about them will remain an imperative over time. Accordingly, it is important that information, whether disclosed on a debt management office website or elsewhere, be properly maintained and available over many years, ideally with a search function to help find information over the passage of time. 10. Public Disclosure of the PDMLF (itself). A PDMLF that is accessible to different stakeholders and readily “find-able” is key for understanding the debt-management operations of a country. It also facilitates lender financial and legal due diligence with greater certainty that the lender can discover all relevant rules (instead of just some rules). Although it may depend on how a country’s legislation is arranged, it is user- friendly if stakeholders can find all relevant public debt management legislation in one place. Where relevant legislation appears across multiple locations or websites, the use of cross-referencing links is useful. 11. Compliance with national legislation. It is important that countries clearly define the consequences of not complying with their PDMLF. Some countries1 include in their national legislation articles to declare a contract void if the rules under the PDMLF are not followed. 12. Compliance as a tool to enforce disclosure? It is sometimes proposed that sovereign borrowers explore the feasibility of using compliance as a tool to enforce disclosure and reporting requirements to the extent that the PDMLF states that non-disclosure of information according to debt transparency requirements makes a debt contract invalid. Any such proposed approach would, however, need to be carefully applied, and only on a prospective basis -- not retroactively applied to existing debt contracts. Moreover, the viability of such an approach would likely be challenging in practice if lenders view such requirements as a disincentive to provide finance to the borrower in the first place; or where the requirements in the PDMLF for transaction-related transparency are not sufficiently clear or not readily available to lenders. In addition, lenders may view such an approach as generating increased risk, since lenders are not in control of a borrower’s domestic public disclosure processes and there may be a perception of moral hazard involved with the risk of government failure to properly and timely undertake the required disclosures in accordance with relevant law/regulation. Any time that risks or uncertainty are created, this may interrupt lending flows or negatively impact pricing. Other complications, which may impact the enforceability of such an approach in practice, is where a debt contract is governed by the laws of a foreign jurisdiction. 1. Brazil (Brazil’s Fiscal Responsibility Act, Article 33), Côte d’Ivoire (Organic Law 2014-337, Article 76), Kosovo (Public Financial Management and Accountability Law, Article 49.4), South Africa (Public Finance Management Act 1999, section 68) (WB 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 R. >>> References 1. Buchheit, Lee C., and G. Mitu Gulati. 2010. “Responsible Sovereign Lending and Borrowing.” UNCTAD Discussion Papers 198. UNCTAD/OSG/DP/2010/2. 2. Cotterill, J., November 19, 2020, “The ‘blood, sweat and tears’ behind Zambia’s default”, Financial Times. 3. EITI/Extractives Industry Transparency Initiative, September 4, 2020, Contract transparency in EITI countries: progress, priorities and challenges”, Oslo. 4. ———, October 15, 2019, “EITI Standard 2019: The global standard for the good governance of oil, gas and mineral resources”, Oslo. 5. ———, September 2017, “Guidance Note 7 Contract Transparency”, Oslo. 6. Gelpern, A., 2018, “About government debt … who knows?”, Capital Markets Law Journal, vol.13 no.3, p.321. 7. Gelpern, A., Horn S., Morris, S., Parks, B., and Trebesch, C. 2021. “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments.” Peterson Institute for International Economics, Kiel Institute for the World Economy, Center for Global Development, and AidData at William & Mary, at: https://www.cgdev.org/sites/default/ files/how-china-lends-rare-look-100-debtcontracts-foreign-governments.pdf 8. G20, June 8-9, 2019, “Communique - G20 Finance Ministers and Central Bank Governors Meeting”, Fukuoka, Japan. 9. G30/ The Group of Thirty, October 2020, “Sovereign Debt and Financing for Recovery After the COVID-19 Shock – Preliminary Report and Conclusions of the Working Group” Washington, DC. 10. G30/ The Group of Thirty, May 2021, “Sovereign Debt and Financing for Recovery After the COVID-19 Shock – Next Steps to Build a Better Architecture”, Washington, DC. 11. IIF/ Institute of International Finance, June 10 2019, “Voluntary Principles for Debt Transparency”, Washington, DC. 12. Mustapha, Shakira and Olivares-Caminal, Rodrigo, 2020, “Improving transparency of lending to sovereign goverments”, ODI Working Paper 583. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 34 13. OECD/ Organisation for Economic Co-operation and Development, April 15, 2021, “OECD Debt Transparency Initiative: data repository, analysis and reporting aligned with the IIF Voluntary Principles on Debt Transparency”, Paris. [Official Use Only] 14. OECD, June 8, 2018, “Recommendation of the Council on Sustainable Lending Practices and Officially Supported Export Credits”, Brussels. 15. Stubbington, T. And Fletcher, L., September 30, 2020, “Bondholders balk at Zambia’s plan to delay debt payments: Private creditors seeks clarity on Chinese loans in test case for pandemic-hit countires.” Financial Times. 16. World Bank and International Monetary Fund, 2020a. “Collateralized Transactions: Key Considerations For Public Lenders And Borrowers”. Washington, DC. 17. ———, 2020b. “G20 Note on Public Sector Debt Definitions and Reporting in Low- Income 18. Developing Countries” Washington, DC. 19. ———, 2019a. (May 31). “G20 Operational Guidelines for Sustainable Financing – Survey Results and Policy Recommendations” Washington, DC. 20. ———, 2019b. (Nov. 15). “G20 Operational Guidelines for Sustainable Financing – Diagnostic Tool” Washington, DC. 21. ———, 2018a. “G-20 Note: Strengthening Public Debt Transparency –The Role of the IMF and the World Bank” Washington, DC. 22. ———, 2018b. “G-20 Note: Improving Public Debt Recording, Monitoring, and Reporting Capacity in Low and Lower-Middle Income Countries” Washington, DC. 23. World Bank (2021) “Debt Transparency in Developing Countries”, Washington, D.C. 24. World Bank Group (April 2018) “Sustainable Financing for Sustainable Development: World Bank Group Capital Package Proposal”, Report to Governors at 2018 Spring Meetings. 25. World Bank (2000) “Poverty Reduction and Global Public Goods: Issues for the World Bank in Supporting Global Collective Action” Issues note to the September 25, 2000 Development Committee Meeting (DC/2000-16), Washington, DC. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 35 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 36