This is the third article in our series on PPP and infrastructure concessions. If you would like to catch up on the previous articles in this series, please use the buttons below.
Features of Infrastructure Concessions
Concession contracts typically have the following key features:
The Government is a party to the Concession
Firstly, the contract governs the relationship between the concession granting authority and the private concessionaire.
As a general rule, the government is the concession-granting authority. However, it may act through an ministerial commission, or, less commonly- a regulatory agency.
For this reason, it is extremely important that the terms of the contract are explicit from the start.
It is Time-Bound
Secondly, the concession is limited to a specific period. During this period, the concessionaire enjoys the exclusive right to use the assets, exploit existing facilities, and develop new ones.
Furthermore, the contract determines conditions under which a concessionaire uses these facilities and the prices at which it provides the service. The facility remains public property.
The Concessionaire is responsible for further Investments during the contract term.
Thirdly, the concessionaire is responsible for all investments and for developing all new facilities. The contract normally limits the amount of investment that can be made. Regulators supervise these limits, in order to ensure that the project is sustainable.
The concessionaire retains the rights to control and use the new assets until they hand over the project. However, this right usually expires along with the contract.
The contract might however, contain a clause specifying compensation for investments not fully amortised by the end of the concession period. It may also contain clauses specifying causes and remedies for early termination of contract and stating penalties and fines for non-compliance with agreed upon terms.
The concessionaire is remunerated based on contractually established tariffs
The contract establishes tariffs. These define how the concessionaire will be remunerated during the term of the concession. These tariffs are usually based on information collected directly from users. However, parties often allow for review and adjustment, where appropriate.
These prices are typically regulated through rate-of-return or price-cap mechanisms, usually driven by the principle of “efficient financial equilibrium” – allowing the firm to earn a fair rate of return on its investments.
In conclusion, we hope the above information will be helpful in your transaction. Please feel free to contact us by clicking on the button below. You can also schedule a free initial consultation to explore your options and how we can support your organization in this respect.