Toolkit for PPP in roads & highways Overview of Toolkit / PPPs in the highways sector Public sector framework for PPP development PPP Policy Framework Key project components for PPP and project cycle Project selection Concession contracts Project preparation: due diligence / feasibility / financial aspects / contract management Competitive selection of Concessionaires PPPs and the current global economic crisis 1 1
Presenter Philippe Dewast, Legal Specialist 2
WHAT DOES CONCESSION MEAN HOW IS IT USED (UNCITRAL) NO CONCESSION MODEL WORLDWIDE 3
BUT A WIDE NUMBER OF VARIATIONS (countries, legal systems) WITH COMMON FEATURES - identity of parties (public authority) - nature of contract (public service) - length of contract (long) 4
WHAT IS WRONG? WHY? WHAT CAN BE DONE? 5
WHAT IS WRONG IS IT WRONG? A study made for the WB in 2004 questions the validity of the concession model SOME STATISTICS Over 40% of infrastructure concessions in Latin America were renegotiated within 2 yrs of signature But only 48/2485 projects worldwide were cancelled. 19 in Toll roads 6
The answer is NO Concession contracts IS IT WRONG But there is or was clearly l a problem of renegotiation in Latin America (in fact almost exclusively in Mexico) The 2004 study for the WB considers this renegotiation issue as the biggest problem with concessions, and highlights some solutions. 7
WHY WAS THERE SOMETHING WRONG IN LA? The cause of this situation was found in the belief by bidders that if renegotiation was feasible and likely their behavior and bid would be affected The effect of that situation was bad because it undermined all the benefits of the competitive process (Public Authority and Concessionaire would renegotiate on a one to one unequal basis) But more importantly it undermined the very concept of the concession contract 8
WHY WAS THERE SOMETHING WRONG IN LA? What the study recommended was that Governments should not concede to opportunistic requests for renegotiation, and let operators abandon the concession, a price worth paying for establishing the Government reputation as being tough with renegotiation, thus discouraging future agressive bids. This may be right, but what a price to pay and what a waste There must be another solution 9
WHAT CAN BE DONE TO REMEDY THIS SITUATION The objective is clear: improve the design of concessions to secure long term sector efficiency and foster compliance with contract conditions by both parties The recommendation is twofold: concession contracts should include provisions focusing on long term sector efficiency, discouraging opportunistic bidding and renegotiation, and provisions i required to implement regulations that t impede renegotiations and force contract compliance The treatment:force t t contract t compliance to avoid renegotiation 10
What can be done to remedy the situation Agreement with symptoms, diagnostic and therapy Disagreement with the means to implement therapy Independent regulator will only force compliance, in pathological instances, when there is an obligation to comply the issue therefore is to identify an obligation to comply or perform 11
Renegotiation or adaptation In other countries outside Latin America, where the issue of opportunistic renegotiation does not arise, there will still be instances where parties may be led to renegotiate, following changes in circumstances This is the classic issue of adaptation of long term contracts to changes in circumstances: should this change lead to a negotiation in order to adjust the contract, or should one party be allowed to impose its terms? As for Latin America, the issue here is to identify an obligation to comply or perform, in order to avoid renegotiation 12
Renegotiation or adaptation But what is wrong with renegotiation? First, there is the side effect described d by JL Guasch in his study about the anti-competitive effect of the renegotiation But secondly and perhaps more importantly, tl there is the risk that parties will not agree and the project will collapse, with the resulting costs (particularly transaction costs, possibly financing costs, and project delays). No one has any obligation to conclude a negotiation. 13
Concession contracts The true nature of a concession contract The obligation to comply or perform we were trying to identify does exist in a concession contract in certain legal systems In some countries with traditions of public service concessions, a concession contract is not a standard commercial contract between parties of equal rights or strength, but rather a hybrid instrument combining features of a contract and of a regulation. An administrative contract Renegotiation is not an issue because the Public Authority does need to negotiate, for it can impose its requirement, under certain conditions to its concessionaire who has no option but to perform 14
Concession contracts The true nature of a concession contract The consequence of such an extraordinary right is the automatic compensation of the concessionaire, for the additional costs arising from the change, so that the financial equilibrium of the contract is restored The effect of such a system is: to give the Public Authority confidence that t it will obtain the changes required by the public interest, without having to «negotiate» them, and the risk of failure while the concessionaire is confident that whatever changes and unilateral modifications are imposed on him, the financial equilibrium of the contract will be maintained and his profit with it 15
The true nature of a concession contract This system produces a climate of mutual confidence that allows long term partnership to develop for the benefit of private concessionaires and of public infrastructures, that is the objective of long term sector efficiency referred to in the 2004 WB study This is the law in many countries of continental law tradition, where it applies without or even despite any express provision to the contrary There is nothing that prevents countries of a different legal tradition to implement it. The United States Federal Law has recently incorporated provisions of similar effect. India? 16