Thursday 22 March 2012

Using Contracts to Bind Future Governments

And there was you thinking that no government could bind its successors. Now, in a widely-trailed move, Osborne has announced reliefs on oil- and gas-field decommissioning costs that will be delivered contractually.

"We will end the uncertainty over decommissioning tax relief that has hung over the industry for years by entering into a contractual approach"

This is because while future governments may change their minds, contracts are pretty inviolable. It was an approach that I first noticed when it was being advocated in respect of the various bungs the renewables industry wants from Huhne's "electricity market reforms": they don't want subsidies any more, they want contracts. (Anyone know of any other precedents ?) Ironic, of course, that it's Big Oil that now wants in on the same largesse.

Perhaps I'm wrong, but I find this highly suspect on philosophical grounds. It's not obscure why a company that has temporarily conned its way into a government's affections (but fears the government or its successors might one day wise up), should be keen to lock in the scam. But why would a government wish to pander to them thus ? I know how the argument runs: 'because if you don't, no-one will invest in what you want us to'. Well perhaps no-one should invest in something that depends on an obviously daft, faddish subsidy.

There will be no end to this. It's a trap for governments in common law jurisdictions, where the sanctity of contracts really means something - and that 'something' is precious, not to be abused by governments and their subsidy-lackeys. Of course, in civil code regimes they all chant pacta sunt servanda with the best of them; but they also know that in the fullness of time a court may re-interpret (or indeed re-write) a contract based on changes in circumstances. That just doesn't happen under common law, which ordinarily I would say is incredibly important.

I really don't like this turn of events. Anyone think I'm barking up the wrong tree ? (Or just barking, yeah yeah ...)



Barnacle Bill said...

Could this be the Coalition's equivilent of the Fifeshire financial fool and his love of PFIs?

alan said...

I agree its stupid.

Have you read about the recent executive order Obama has just signed which gives the US government complete control over all US resources.

Oil companies getting a lock in before something nasty happens? Or before we inact something similar. Can we break the contracts for national security reasons (without using the Navy)?

alan said...

Opps, forgot link

Budgie said...

Well, "pacta sunt servanda" did not work recently as we saw when the ECB exchanged its haircut liable Greek bonds for new to avoid the default hit. Greek bonds written under English law may avoid the hit precisely because of the strength of contracts under Common law.

"Anyone know of any other precedents [in the UK]?" The new QE2 aircraft carriers, as tied up by Labour, is near. But it does not tie up the government's fiscal policy of course, just its spending policy in this area.

The Empty Suit said...

There's a specific issue here for UK oil decommissioning costs - apologies for this as it's fairly technical but the numbers involved are pretty large. In essence, the oil industry has invested a lot building platforms on various parts of the UK Continental Shelf and each of these developments is a separate ring-fence for petrolem revenue taxation (PRT). The rates of taxation on the industry (including corporation tax, PRT, royalty, special CT etc) have consistently been dicked around with all the way through the life of the industry; almost every budget since the early 70s has introduced some change or other (including Tony Benn famously putting the marginal rate up to more than 100% by accident). This is a problem when you're dealing with discoveries that might take ten years to prove up and develop and then operate for thirty years or more. One of the PRT provisions has always been that the big lump of cost at the end of field life associated with taking the platforms away is allowable against tax - as the fields are ring fenced, this means tax that has already been paid and the company therefore (as things stand) gets a cheque back from the tax man after decommissioning is completed. There is a *huge* political issue for any government here, because at some point quite soon as the industry winds down and the big old fields cease to produce HMG starts going cash negative on what has always been a big revenue stream and starts writing big, visible cheques to an industry not known for being skint. The industry, used to being a political football, wants some certainty on what's going to happen to the tax allowances on these costs - the sums involved are large and marginal tax rates on some fields at the moment are 81%, so the tax allowances are significant. Hence, I think, the move to a contractual approach; ministers register that it'll be better to reach a contractaul settlement rather than face the firestorm that will come with what could easily be painted as subsidising the oil companies

CityUnslicker said...

Empty - thanks for that, I found its most enlightening.

That makes it a hard balance to strike with the principle of not binding future govs.

Nick Drew said...

Bill - I reckon the floodgates may indeed open

Alan - yes, seen that: another in a chilling series - this will be quite an election year

Budgie - thanks; also tx to Mr Suit (I am an old oilman meself and know the issues) CU is right, there are some difficulties