Concession Contracts in Romania THE LEGAL REGIME OF NEWLY CREATED ASSETS IN THE CARRYING OUT OF CONCESSION CONTRACTS In Romania, a country whose Constitution specifies that public assets may be exploited by the private sector under concession (with concession being a widely used term for exercising ownership rights over public property), the concession contract is regulated under Emergency Ordinance no. 54/2006 concerning the legal regime of public property concession contracts and Emergency Ordinance no. 34/2006 concerning the award of Government procurement contracts, public work concession contracts and public services concession contracts. Thus, a difference has been drawn between the concession of public property, on the one hand, and the concession of public works and services, on the other. In order to carry out a concession, the Grantor must make available to the Grantee, a natural or legal person, an asset of the public or private domain of the State, counties, cities or communes. On the other hand, in order to meet the obligations assumed under the concession contract, the Grantee may use his or her own assets or may hire assets to be used for the same purpose. Likewise, in concession contracts whose object is carrying out public works, new assets may be generated that did not exist before the conclusion of the concession contract. Consequently, what is the legal regime of all such assets during concession and when does the concession contract run out? What is the legal regime of the assets the Grantee will create under the terms of the concession contract (investment) that are not covered by the rights arising from the concession contract? Is it possible for the Grantee to acquire private ownership rights over them and, pursuant to the concession contract, for ownership rights over the assets created by the Grantee to be acquired by the Grantee? In order to clarify these issues, we believe a summary introduction of the legal provisions in force that regulate concession contracts according to their object, i.e. public property assets, public works and public services, would be worthwhile. Concession of public property assets The concession contract for public property assets is defined as the contract concluded in a written form under which a public authority, called the Grantor, transfers, for a limited period of time, to a person called the Grantee, who acts at his or her own risks and personal responsibility, the right and duty to exploit a public property asset in exchange for a royalty. The validity of the concession contract should not exceed 49 years counted from the signature date, with the possibility of extending its validity by no more than half of its initial duration. Parties to a concession The capacity of Grantor is awarded to central and local authorities, according to the destination of assets, which may belong to the public or private property. Any Romanian as well as foreign natural or legal person may become a Grantee. 30, A.S. Puskin St., Sector 1, 011996 Bucharest, Romania tel: (+4) 0311 00 11 26 / 27 /28 fax: (+4) 0311 00 11 29 www.sova.ro
Procedures prior to the conclusion of concession contracts In the case of concession contracts, their conclusion is preceded by a mandatory procedural stage called the administrative initiation procedure. Thus, the concession occurs upon the initiative of the Grantor, or as a result of a proposal accepted by the Grantor. The concession has to be approved based on an opportunity study drawn up by the Grantor, through a decision of the Government, local councils, county councils or the General Council of the Bucharest Municipality, as appropriate. Concession rules The legal provisions in force have enshrined the following rule: for awarding concession contracts or the interdiction thereof shall be made, as a rule, through a tender or through direct negotiations. Exceptions to the rule are allowed for national companies, national corporations and commercial companies operating under the authority of entities that are Grantors, for which direct awards and sub-concessions are permitted. The concession contracts The concession contract has to include mandatory contract provisions, to be specified in the regulatory part of the contract (the task book) and provisions agreed upon by the Parties, which complete the provisions in the task book without prejudice to the object of the concession. Moreover, a distinct mention must be made for the categories of assets to be used by the Grantee in carrying out the concession, i.e.: (a) returnable assets, which have to be returned to the Grantor by full right, free and unencumbered, upon the expiration of the concession contract (b) own assets, which, upon the expiration of the concession contact, remain the property of the Grantee. The Parties rights and obligations The Grantor has the following rights: to modify unilaterally the concession contract; the right to control that the Grantee fulfils its contractual obligations; the right to terminate the contract when the Grantee fails to observe contract obligations, with the Grantee paying damages to the Grantor. Likewise, the Grantor is bound to pay damages to the Grantee when a unilateral modification of the contract or the termination of the contract prejudices the Grantee. The Grantee has two kinds of rights, namely, the rights connected to the management of the assets under concession and the rights of pecuniary nature. The Grantee may not be forced to bear any increased burden connected to the execution of its obligations and it shall personally provide the public services and carry out the public works under the concession contract, without the right to sub-concession. Public services/works as objects of concession According to Government Emergency Ordinance no. 34/2006, the concession contract for public services is a concession contract whose object is the provision of services, with the difference that, in exchange for the services provided, the Contractor, in its capacity as a Grantee, is awarded the right to exploit the services for a specified period of time or such right accompanied by the payment of a money sum established beforehand. The concession of public works is defined as a Government procurement contract whose object is to carry out works, with the difference that, in exchange for the works carried out, the Contractor, in its capacity as a Grantee, is awarded the right to exploit the outcome of its works for a specified 2
period of time or such right accompanied by the payment of a money sum established beforehand. The award of these special public contracts starts with the publication of a participation announcement in the Official Journal of the European Union which includes at least the information which must be provided in the standard form approved by the European Commission. The publishing of the participation announcement is mandatory for all instances in which the estimated value of the concession contract exceeds the lei equivalent of 5,000,000 euros. The concession contracts are awarded following the same procedures as in the case of Government procurement contracts. The legal regime of assets used by the Grantee Consequently, in order to conclude a concession contract for the construction and exploitation of a built structure, investors, in their capacity as Grantees, may choose from three alternatives: a) a concession contract whose object is a public property asset (if the contribution of the Grantor is a plot of public property land); b) a concession contract whose object is the carrying out of construction works and the exploitation of the outcome of such works; c) a concession contract whose object is the exploitation of a public service that entails the construction to a built structure as an addition (if the exploitation of the built structure concerned fits in the classification of public services warded to the Grantee). a) As regards the concession of a built structure under public ownership, the centre of the matter resides in Government Emergency Ordinance no. 54/2006 and, as mentioned above, there is a different legal regime applicable to the assets belonging to the personal wealth of the Grantor and those belonging to the personal wealth of the Grantee. The situation in this case is simple, because the conclusion of a concession contract does not entail the creation of a new asset, but rather, it entails the exploitation of a public property asset in exchange for a royalty fee. The law spells out the regime of pre-existing assets: the assets belonging to the public wealth (in our case the land) made available to the Grantee, which acquires the right to own and use them, shall be retuned to the owner at the end of the concession time, and so shall the assets owned by the Grantee. The problem is further complicated when a structure is intended to be constructed on public property land in addition to the main obligation of exploiting the land. Which property is the newly created asset? There is a majority opinion that, pursuant to the theory of accession (Articles 489-494, the Civil Code), the ownership rights over the newly created asset accrues directly to the wealth of the Grantor as the structure is being built, without the need for the owner of the land to express its wish to this end. Artificial real estate accession, which is the building of a structure on a plot of land owned by a person other than the owner of the materials used for construction, is regulated by Article 492 of the Civil Code, which sets up two presumptions. According to the first presumption, the construction was made by the land owner himself and the construction was made at his expenses in terms of materials and labour. According to the second presumption, any structure constructed on a piece of land is deemed as belonging to the land owner, until otherwise proved. Since these are two relative presumptions, once they are both invalidated, the theory of accession becomes inapplicable to the acquisition of ownership rights over the building concerned. Whereas by using the first presumption the Grantee may easily prove that the construction was made by him and not the Grantor and that the materials and labour used were at his expenses, an interesting problem emerges when use is being made of 3
the second presumption. This may be invalidated by including in the concession contract some provisions for the recognition of the Grantee s ownership rights over the building as well as of the surface rights connected to the construction. Yet, according to the Constitution, public property assets may not be alienated. They may only be awarded for administration; they may be leased out or rented out, in accordance with the legal provisions in force. Moreover, the doctrine has it that the ownership right over such assets may not be subjected to dismemberment. Accordingly, no surface right may be instituted on public property assets, and any contrary provision in the concession contract should bee deemed null. Consequently, in the case of concession contracts whose object is a piece of public property land, the second presumption of Article 492 of the Civil Code may never be invalidated (virtually becoming an absolute presumption) and the ownership right over the building shall accrue to the wealth of the land owner. What rights exist of the Grantee over the Grantor in connection with the construction of the building and of what nature? We have indicated above that the land owner also becomes the owner of the construction, but, in order to prevent the Grantor from enriching at the expense of the Grantee, the Grantor shall compensate the Grantee. This way, a right to liability due from the part of the Grantee is accrued to the wealth of the Grantor, grounded on the principle of enrichment without just cause, pursuant to Article 494 of the Civil Code. According to this principle and in theory only because the Grantee knew when constructing the building that the land does not belong to him the Grantor may ask the Grantee to demolish the building and pay damages for the prejudice incurred. But the very existence of the concession contract nullifies this possibility on the part of the land owner (and invoking it would be tantamount to an abuse of rights), and the only possibility is that the Grantor preserve the building under his ownership and compensate the Grantee. As regards the extension of the obligation to compensate, this is determined again by Article 494 of the Civil Code, under which the Grantor may opt between paying the value of the materials used and the labour costs and paying an amount equal to the added value acquired by the lands as a result of the building having been constructed. The existence of the extension of the right to be paid compensations on the part of the Grantee over to the Grantor is applicable when the concession contract comes to an end. Thus, when the contract ends on the expiration date, the liability right of the Grantor does not survive past the end, given that the economic advantages obtained by the Grantee as a result of exploiting the asset for the time initially agreed upon by the Parties shall be deemed as fully covering the value of the investment made by the Grantee (the costs sustained by constructing the building included). When the concession contract is terminated before the agreed date, a difference can be made between termination because of the fault of the Grantee or because of other reasons. If the termination is due to reasons other than the Grantee s fault, the Grantee is entitled to damages, whose extent will be determined in accordance with the provisions mentioned above, and the common law provisions regarding partial payments will also apply. If the termination of the contract is the due to some fault of the Grantee s, it will be deemed that the Grantee bears all risks, including the preclusion of the right to claim damages for the construction of the building at his own expenses. b) When a construction is intended to be built on a public property land in the name and at the expenses of the Grantee, this will be an instance of a public works concession contract, which will be considered in accordance with the provisions of Government Emergency Ordinance no. 34/2006. In this situation, there is no doubt over the accrual to the wealth of the Grantor of the ownership right over the newly created asset. This interpretation is not affected by the nature of 4
the public or private ownership of the Grantor over the land concerned. If we start from the definition of the concession contract, we will see that the concession contracts may be likened to public works contracting. Thus, in exchange for constructing the structure, the Grantee is awarded the right to exploit the asset. Since the right to exploit the new asset is awarded, we may conclude that this exploitation is only a price form under which the Grantee pays the Grantor for acquiring ownership rights over the building. As far as the nature of the legal relations after the expiration of the concession rights is concerned, the considerations mentioned above will be valid for the contracts regarding the concession of public assets. c) More specific situations arise in practice when the exploitation falls into one of the categories of public services that may be provided by the Grantee. Thus, the Parties consider constructing the building as accessory to the main activity of providing the public service concerned. When the building is being constructed on a public property land, the considerations mentioned above regarding the impossibility to subject the Grantor s ownership rights to dismemberment and the newly created asset becoming the Grantor s property will equally apply. When the land is private property, the theory of accession may not be invoked, as we showed above by invalidating both presumptions established under Article 492 of the Civil Code. This may be performed in practice by including in the concession contract certain provisions expressly stating the Grantee s ownership rights over the building as well as the surface right over the land involved. Only in the absence of such provisions may there be talk of the property right accruing to the wealth of the Grantor pursuant to the theory of accession. When, according to the provisions of the concession contract, the ownership rights over the building are awarded to the Grantee, there will obviously be no more right of the Grantor claiming liabilities from the Grantee in connection with the construction of the building. But, when the Grantor has ownership right over the building in accordance with the theory of accession, the considerations mentioned above regarding the existence and extension of the liability right of the Grantee over the Grantor to recover his investment will apply. Given all the considerations above, from the point of view of investors, the most profitable situation in terms of economic profit is the conclusion of a public services contract under which the potential investor will benefit from the profits derived from the very exploitation of the service concerned (and full deduction of costs) as well as from the recovering of the real estate investment made and from ownership rights over the building constructed, by the inclusion of the necessary provisions in the framework of the concession contract negotiated with the public authority. Paula Sandulescu Senior Associate Sova & Partners 5
Sova & Partners is a Romanian multidisciplinary business group that comprises our law firm, a bankruptcy and liquidation firm, and an EU funding consultancy group. We cover a broad range of business and legal practices, such as banking and finance, corporate restructuring and bankruptcy, commercial contracts, privatisations, mergers and acquisitions, project finance and energy, real estate, tax, and industrial property. Our partnership was founded in 1997 in Bucharest, Romania with an unparalleled commitment to excellence and a priority in providing the highest quality service to our clients. Our firm has experienced consistent and dynamic growth by keeping in line with the latest business trends and developments in the law. It has built an integrated multidisciplinary, business-oriented culture, aimed at achieving our clients objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest. Sova & Partners is a leader in the market, ranked among the top five law firms in Romania, both domestic and foreign. We have a strong, experienced, talented and highly educated team of professionals that include several partners, senior associates, associates, and trainees. In addition, we have a legal support team comprised of translators, paralegals, and legal staff that works closely with our attorneys to provide the most comprehensive resources to our clients. We represent domestic and multinational companies and corporations operating in the fields of industry, commerce and services, telecommunications, oil, media, as well as government agencies and public authorities. In order to deliver our clients' requests expeditiously, Sova & Partners cooperates with a host of specialised national and international law offices. Banking and Finance Competition Corporate and Commercial Dispute Resolution Employment Law IT & Telecom Intellectual Property Judicial Restructuring and Bankruptcy Project Finance and Energy Public Procurement Real Estate Tax The starting point at Sova & Partners for legal counsel and all other activities is solid analysis based on careful examination of all legal and economic issues. Our firm s aim is to provide excellence of services by developing imaginative solutions to complex problems in order to meet our clients' requirements. We provide such solutions through our team of experienced lawyers and tax advisors who have excelled in their academic and professional careers. We have built an integrated, business-oriented culture, aimed at achieving our clients objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest. 6