This article is written by Amit Kumar, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
What is a Concession Agreement?
A concession agreement is an agreement between a Government Authority and a Private entity, through which the Government grants certain rights to the Private entity for a limited period of time. These agreements are common in the development of infrastructural projects under the Public-Private Partnership (PPP) model. In this context, Concession Agreement is an agreement through which the Government grants rights to a private sector entity to implement an infrastructure project.
These agreements can be made either for the purpose of executing an infrastructure project or for providing services related to an infrastructure project.
What is meant by “concession”?
In essence, a concession is a license awarded by the government authorities to a private entity for execution and implementation of public service and for this purpose grant some rights for a limited period which are exclusively held by the government under law. In turn of granting such rights, the government transfers certain operating risks to the private entity.
What is a Public-Private Partnership Model?
Public-Private Partnership refers to an arrangement between the Government or Government owned entity and a private sector entity for providing assets or services for public benefit. For this purpose, investments are made by the private entity and sometimes the management is also undertaken by them for a limited period. Government shares the operating risk with the private entity. The Private entity gets payments based on specified, predetermined and measurable performance standard.”
Who has the ownership?
The ownership of the project asset, under a concession arrangement, is retained by the authority, while concessionaire gets only a constructive possession. Once the agreement is terminated all the project assets are returned to the authority.
Difference b/w Concession and Lease
One must not confuse between the concession under a Concession Agreement and a Lease. A “lease” is an interest in a property whereas a “concession” is a grant of a license to operate on the property but doesn’t carry any inherent property rights.
A lease is a grant of possession over a definite description of the land or other property in return of a definite price and payment arrangement. On the contrary, concession under a Concession Agreement is a license to use the property for some specific purpose, after the purpose is achieved all such rights are to be transferred back to the concession giver. In this process, the right to manage and control the property is retained by the owner.
How is a concession agreement different from other commercial agreements?
Concession Agreements are very different from other more common commercial agreements for the provision of goods and services. Contrary to other commercial contacts which are generally undertaken for transactions of assets and properties owned by private parties, concession agreements are for public goods and services and are aimed at making available essential facilities and services. Other than that, concession agreements are long term contracts and involve typically high-value transactions.
Who pays whom?
The question, which party will make payment to the other is determined by the commercial viability of the project to be undertaken. Depending on the commercial viability and the risk factor, payment can be made by the private party to the Government (revenue share/ concession payment) or vice versa (grant or annuity payment).
Development of Model Concession Agreements.
In the early stages of the PPP model in India, various state governments and government authorities developed their own concession agreements. This created difficulties in implementation. In 2000 the Planning Commission came up with the first Model Concession agreement (MCA) for the highways sector. MCAs for other sectors were subsequently developed for other sectors following the model of Planning Commission. Development of MCAs resulted in standardisation of concession agreements and brought more consistency and efficiency in transactions.
Advantages of MCA/ Disadvantages of MCA
Model Concession Agreements (MCA) have played an important role in disentangling the complexities involved such transactions. Using one standardised form for concession agreements reduces unnecessary delays and higher costs involved with transactions. It also simplifies the bidding process and builds confidence among the bidders and financiers investing in infrastructure development. Further, following standardised MCAs reduces the costs and risks of smaller government agencies and private parties undertaking small scale projects at the local level as in most cases they do not have access the same level of expertise as the agencies and forums developing the MCAs.
But the implementation of MCAs also has several disadvantages. Many a time the format and language of MCAs are copied without giving due consideration to the specific implications of each project. The structure of MCAs is rigid. Concession agreements are often complex and long term contracts and it is not possible to anticipate all the risks that may arise during the execution and operation of the project undertaken. In such circumstances, the lack of a flexible approach harms the interests of private parties.
What are the recent developments in Concession Agreements?
Government of India has set up various committees from time to time to monitor the development of concession agreements. B.K. Chaturvedi committee was set up in 2009 to resolve procedural impediments to the National Highways Development Project (NHDP). In its report the committee recommended several changes in the MCAs. It advocated the removal of the termination clause, instead, it proposed the extension of the concession period if the concessionaire continued to augment the facility. It also proposed to give an option to the promoters to divest their 51% stake after two years from the commercial operations date, implementation of 3 modes of delivery (BOT Toll, BOT Annuity and EPC) and permitting the lenders to apply a charge on escrow accounts.
In 2015 a committee was set up under the chairmanship of Mr. Vijay Kelkar to revitalise the PPP Model of Infrastructure. In its report, the committee recommended developing a mechanism for review and renegotiation for bringing flexibility in concession agreements.
What are the major legal issues with Concession Agreements?
Legal issues with respect to Concession Agreements fall mostly in the domain of Competition Law. One of the principles relevant to Concession Agreements is the Doctrine of Essential Facilities. This doctrine first came up in the case of MCI Commc’ns Corp. v. AT&T in the United States. It says that a dominant firm controlling an essential facility cannot refuse access to other firms.
In India, the Supreme Court has recognised the doctrine of essential facilities with respect to concession agreements in the case of VST Industries Limited v. VST Industries Workers’ Union and Anr. In this case, the Supreme Court held that a private entity controlling or operating any infrastructure facility in India through Concession Agreement should be deemed to be carrying out a public function and such entities are obliged to act in public interest.
In the case of Arshiya Rail Infrastructure Limited v. Ministry of Railways & Ors. The Competition Commission of India observed that the Doctrine of Essential Facilities can be invoked only in specific circumstances. For example, when providing access to the facility is reasonable and technically feasible and when the possibility of lack of effective competition is very remote.
Concession agreements are of fundamental importance for the development of infrastructure in the country. MCAs have proved very useful in simplifying the concession agreements. It has reduced the time lags and costs involved in undertaking such agreements. But the excessive rigidity of the structure of MCAs is harming the interests of private entities and deterring them from investing in the infrastructure sector. Effort should be made to address the concerns of the improper allocation of risks and to allow for renegotiation of concession agreements following the recommendations of Kelkar Committee Report.
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