Concession Contract Guide



1. Introduction

The aim of a Concession Agreement is to create the best value for money in the provision of railway services. The Agreement seeks to balance the contributions of the public and private sectors so that public service obligations are met as economically as possible while maintaining acceptable service levels; these tasks are sometimes best undertaken by the private sector, with some government support. Drafting the contractual arrangement known as the Concession Agreement should be preceded by conducting a comprehensive feasibility study that includes legal due diligence and risk review, which can differ from country to country.

In contractual arrangements, a key difference between civil law and common law jurisdictions is judicial interpretation of agreements. Generally, in common law countries, the law assumes that parties have set out the specifics of their agreement in the contract. Therefore, under law, the contract means what it says. By contrast, civil code countries rely more on the provisions in the civil code, hence, contracts tend to be shorter because they do not need to repeat what is in the code. In addition they are interpreted on a purposive basis, namely, “What was the intent of each party?”

To a degree, if project finance is used, international lenders tend to demand comprehensive documentation rather than rely on judicial interpretation, or failing that, the results of arbitration. However, if lenders can rely on being fully paid out by the state in the event that an agreement is terminated, they may be less concerned but the state is considerably more exposed to residuary risk.

The public sector would be well advised to consider the following: (i) Should it recapture some benefit from refinancing arrangements that improve the equity return? (ii) Should it rely on a financial model to make adjustments under the Concession Agreement? (iii) How should it calculate compensation upon termination if a corporate finance structure is adopted instead of a project finance structure? Concession Agreements would then reflect the outcome of these decisions.

1.1 Purpose of Concession Agreement

The three main objectives of a Concession Agreement are the following:
  • Promote an understanding of the main responsibilities and risks that are to be undertaken by the parties to the agreement;
  • Specify service levels to be delivered by the private sector and the flow of payments between the parties without extended negotiations; and
  • Establish a consistent approach and pricing among bidders during any competitive tendering procedure that follows the introduction of reforms.

    
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