Monday, April 5, 2010

Concession Agreements - Legal Issues

Concession agreements are commonly used to implement public-private partnership projects in the infrastructure sector and are commonly used in Oman. For example, concession agreements are often used for the following types of projects:

  • airports and sea ports;
  • toll roads, highways and bridges;
  • railroads;
  • power and water production projects; and
  • waste water and sewage projects.
Concession agreements provide a mechanism for making public infrastructure projects more competitive and effective without privatizing the projects. In contrast to a management agreement, under which the government pays the operator a fixed fee to operate the project, a concession agreement allows the operator to keep the profits it generates by building and managing the project, in exchange for paying concession fees to the government. This compensation structure incentivizes the concession holder to develop, operate and maintain the project efficiently.

This article provides an overview of some of the key legal issues relating to concession agreements.

Grant of Rights
In the concession agreement, the government transfers to the private concession holder certain rights relating to the project for a defined period of time, for example the right to operate an airport for a period of thirty years. The government, however, will retain ownership of the project. Customarily, governmental authorities will provide administrative support to the concession holder, for example in helping to file applications and secure required licenses. The right to use the land on which the project is located is generally provided to the concession holder via a separate arrangement, such as a lease or a license. In Oman, the concession holder would be given a usufruct for fifty years which is renewable for a like period.

Financing and Duration
Since the typical project developed using a concession agreement requires a high level of investment, financing the project is an important issue. A transaction structure that is clear and takes into account potential lenders’ interests will help promote the availability of the necessary financing for the project. For example, the concession agreement should allow for the assignment of the concession agreement as security under financing arrangements.

The term of the concession is also very important from a financing perspective, as the concession holder must be able to operate the project long enough to recover the funds invested in the project. For this reason, concession agreements for major infrastructure projects usually last for a term of at least fifteen years or more.

Finally, it is important for the concession holder to work with the government to provide financial backing for the project. Governments often will enter into financial support agreements directly with the lenders.

Profits and Development
Under concession agreements, the concession holder is allowed to keep the profits it generates from the use and operation of the concession project. In the case of an airport, for example, such profits include passenger fees, landing fees, security fees and various other fees. In addition to operating the concession project, the concession holder usually also is required to maintain and further develop the project. The concession holder will typically subcontract some or all of its design and construction responsibilities to third parties under separate engineering, procurement and construction agreements.

Concession Fees
As consideration for the right to retain the profits it generates from the operation of the project, the concession holder pays a concession fee to the government. Concession fee arrangements usually take into account the need for the concession holder’s profits to be guaranteed in some form by the government, as the concession holder will require a reliable future income stream in order to undertake the long-term operational and financial risks associated with concession projects. The concession agreement should set forth in detail the concession fees to be paid by the concession holder to the government.

Force Majeure
Concession agreements should always include force majeure provisions, since concession projects are often vulnerable to events such as earthquakes, floods or terrorist attacks. The agreement should provide detail on how to handle force majeure events, including a possible early termination following such an event.

Exclusivity and Competition
The concession holder also should be sure the concession agreement includes appropriate exclusivity or non-competition clauses to protect its investment. For example, a concession holder operating a civil airport typically would be interested in ensuring that neither the government nor any other party operates another civil airport within a clearly defined radius. Otherwise, the concession holder would be in danger of suffering a loss of profit and a reduction of the value of its investment.

Quality Control and Standards
The concession holder and the government will agree on quality standards applicable to the concession project as well as the corresponding monitoring and control mechanisms, and they will jointly develop an appropriate action plan to be followed in case of non-conformities or quality complaints.

Concession agreements often address liabilities for environmental damages (particularly when the concession project is a major infrastructure project) and insurance. Insurance usually is obtained and maintained by the concession holder on his own account. The concession agreement should specify any uninsurable risks separately.

Finally, the concession agreement should include arbitration provisions. The types of major infrastructure projects usually covered in concession agreements are complex matters involving many expert parties and a large amount of interdisciplinary work. Consequently, the disputes that arise under concession agreements are often complex and involve substantial amounts of money.

For these reasons, the parties to the concession agreements usually provide for arbitration so that disputes will be decided by arbitrators experienced in the relevant technical matters, rather than by the courts of a particular country. The concession should specify the jurisdiction and the rules of arbitration to be applied. Oman is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which means that Omani courts would decline jurisdiction over a concession agreement that provides for dispute resolution through arbitration.