You are currently viewing Part II: Essential Elements of a PPP Concession Agreement: The Concession & Conditions Precedent

Part II: Essential Elements of a PPP Concession Agreement: The Concession & Conditions Precedent

By Chongo Sombo Mulenga (MCIArb)

PPP agreements take various forms such as Service Contracts, Affermage (Lease) Contracts, Management Contracts and Concessions. Concession Agreements specifically govern partnerships where the private sector takes up responsibility for financing the construction or rehabilitation of project infrastructure as well as operation, maintenance and management of the facility, including the collection of user fees.

The term “concession”, stemming from “concede”, refers to the act of yielding. In the context of PPPs, a concession grants a Concessionaire (the Special Purpose Vehicle incorporated by the private party) the long term right to use and operate the project assets; and recoup its investment therefrom. It must be understood, however, that the public sector retains ownership of the asset and possession thereof reverts to the government at the end of the concession period, including assets procured by the Concessionaire.

With the leading clauses out of the way, what follows are clauses pertaining to the:

  • award of the concession;
  • duration of the concession;
  • concession fee;
  • rights yielded to the Concessionaire;
  • collection of user fees; and
  • conditions precedent.

The Concession

The concession agreement must reflect the public sector’s willingness to grant the concession to the private party for a defined term. In the same breath, the agreement must precisely stipulate the rights conceded by the Contracting Authority to the Concessionaire. For instance, in a “Build, Operate and Transfer” PPP arrangement, the public sector yields to the Concessionaire the right to construct and run the project infrastructure for a specific duration, after which the Concessionaire transfers possession to the public sector. Other rights may include the right to maintain the infrastructure and collect fees from users of the infrastructure depending on the PPP model.

 

Concession Fee

One of the elements of a valid contract in common law jurisdictions is consideration which, in the words of Lush J as per Currie v Misa (1875) LR 10 Ex 153, refers to “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. In fewer words, consideration is defined as an exchange between the parties which results in a benefit to one party, and a detriment to the other. Therefore, in consideration of the award of the concession, the Concessionaire pays a concession fee which is usually ring – fenced and channeled towards asset replacement and expansion or even the development and procurement of similar projects.

Collection of User Fees

For greenfield projects, once the project infrastructure becomes operational, the Concessionaire is entitled to collect fees from the users of the project infrastructure in accordance with the agreement. It is important to note that collection of user fees during the operation phase is not necessarily a hard-and-fast rule as concession agreements, although guided by international best practices, respect the parties’ freedom to contract and formulate unique solutions for infrastructure development and social service delivery. Brownfield PPPs are especially dynamic and the modalities thereof vary to suit the particulars of the project. However, irrespective of whether the project is for the development of new infrastructure or for the rehabilitation of existing infrastructure, project revenues are usually pooled into an account that both parties have access to in order to ensure accountability and transparency in the collection and appropriation of funds.

Conditions Precedent

It is not uncommon for the performance of substantive provisions of an agreement to be triggered by the occurrence of certain events such as the attainment of financial close in PPPs. These events are known as conditions precedent and the rights and obligations of either party may be subject to the satisfaction of predetermined conditions. Where a condition precedent is not satisfied and its fulfilment has not been excused by the party to whom it is owed, the agreement cannot come into effect.

In PPPs, conditions precedent accrue to both parties. For instance, the Concessionaire is usually required to attain financial close, provide a performance security and obtain environmental clearances in order to bring the rights and obligations under the agreement to life. Likewise, the public entity is expected to have procured, for the benefit of the Concessionaire, permission to enter upon the project site for the fulfilment of the objects of the agreement, among other things.

 

Conclusion

To sum it up, it is imperative that the concession agreement captures the public sector’s commitment to yield specified rights and defines the duration of the concession. In addition, the agreement ought to encompass provisions for revenue collection and outline the requisite conditions to be met in order to activate the fundamental rights and obligations essential to achieving the objectives of the partnership.

Resources

DISCLAIMER: Any views or opinions expressed in this article belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in a professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company or individual.

All content provided in this article is for informational purposes only and is not intended as a substitute for professional advice. Therefore, while the author strives to ensure that the information in this article is complete and accurate, the author assumes no responsibility for any errors or inaccuracies. All liability with respect to actions taken or not taken on the premise of this article are hereby expressly disclaimed.