Key Features
 

• A concession gives a private concessionaire responsibility not only for operation and maintenance of the assets but also for financing and managing all required investment.

• The concessionaire takes risk for the condition of the assets and for investment.

• A concession may be granted in relation to existing assets, an existing utility, or for extensive rehabilitation and extension of an existing asset (although often new build projects are called concessions).

• A concession is typically for a period of 25 to 30 years (i.e., long enough at least to fully amortize major initial investments).

• Asset ownership typically rests with the awarding authority and all rights in respect to those assets revert to the awarding authority at the end of the concession.

• General public is usually the customer and main source of revenue for the concessionaire.

• Often the concessionaire will be operating the existing assets from the outset of the concession - and so there will be immediate cashflow available to pay concessionaire, set aside for investment, service debt, etc.

• Unlike many management contracts, concessions are focused on outputs - i.e., the delivery of a service in accordance with performance standards. There is less focus on inputs - i.e., the concessionaire is left to determine how to achieve agreed performance standards, although there may be some requirements regarding frequency of asset renewal and consultation with the awarding authority or regulator on such key features as maintenance and renewal of assets, increase in capacity and asset replacement towards the end of the concession term.

• Some infrastructure services are deemed to be essential, and some are monopolies. Limits will probably be placed on the concessionaire – by law, through the contract or through regulation – on tariff levels. The concessionaire will need assurances that it will be able to finance its obligations and still maintain a profitable rate of return and so appropriate safeguards will need to be included in the project or in legislation. It will also need to know that the tariffs will be affordable and so will need to do due diligence on customers.

• In many countries there are sectors where the total collection of tariffs does not cover the cost of operation of the assets let alone further investment. In these cases, a clear basis of alternative cost recovery will need be set out in the concession, whether from general subsidies, from taxation or from loans from government or other sources.

• The concept of a "concession" was first developed in France. As with affermages, the framework for the concession is set out in the law and the contract contains provisions specific to the project. Emphasis is placed in the law on the public nature of the arrangement (because the concessionaire has a direct relationship with the consumer) and safeguards are enshrined in the law to protect the consumer. Similar legal frameworks have been incorporated into civil law systems elsewhere.

• Under French law the concessionaire has the obligation to provide continuity of services (“la continuité du service public”), to treat all consumers equally (“l’égalité des usagers”) and to adapt the service according to changing needs ("l’adaptation du service"). In return, the concessionaire is protected against new concessions which would adversely affect the rights of the concessionaire. It is therefore important when considering concessions in civil law systems to understand what rights are already embodied in the law.

• Within the context of common law systems, the closest comparable legal structure is the BOT, which is typically for the purpose of constructing a facility or system.

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• In a BOT project, the public sector grantor grants to a private company the right to develop and operate a facility or system for a certain period (the "Project Period"), in what would otherwise be a public sector project.

• Usually a discrete, greenfield new build project.

• Operator finances, owns and constructs the facility or system and operates it commercially for the project period, after which the facility is transferred to the authority.

• BOT is the typical structure for project finance. As it relates to new build, there is no revenue stream from the outset. Lenders are therefore anxious to ensure that project assets are ring-fenced within the operating project company and that all risks associated with the project are assumed and passed on to the appropriate actor. The operator is also prohibited from carrying out other activities. The operator is therefore usually a special purpose vehicle.

• The revenues are often obtained from a single "offtake purchaser" such as a utility or government, who purchases project output from the project company (this is different from a pure concession where output is sold directly to consumers and end users). In the power sector, this will take the form of a Power Purchase Agreement. For more, see Power Purchase Agreements. There is likely to be a minimum payment that is required to be paid by the offtaker, provided that the operator can demonstrate that the facility can deliver the service (availability payment) as well as a volumetric payment for quantities delivered above that level.

• Project company obtains financing for the project, and procures the design and construction of the works and operates the facility during the concession period.

• Project company is a special purpose vehicle, its shareholders will often include companies with construction and/or operation experience, and with input supply and offtake purchase capabilities. It is also essential to include shareholders with experience in the management of the appropriate type of projects, such as working with diverse and multicultural partners, given the particular risks specific to these aspects of a BOT project. The offtake purchaser/ utility will be anxious to ensure that the key shareholders remain in the project company for a period of time as the project is likely to have been awarded to it on the basis of their expertise and financial stability.

• Project company will co‑ordinate the construction and operation of the project in accordance with the requirements of the concession agreement. The off-taker will want to know the identity of the construction sub-contractor and the operator.