A concession is a well-established type of public-private partnership (PPP) in Russia which has been used since pre-Soviet times. It is also the only type of PPP regulated by federal law (namely, by the Law on Concessions). In Russia, there is as yet no separate federal law governing relations in the area of PPP, and local regulation in this sphere is limited. This explains why there is so much focus on the legislation relating to concession agreements.
A recent assessment of PPP development in Russia resulted in the drafting and adoption of a set of amendments to the Law on Concessions, with the aim of resolving various issues faced by investors wishing to implement concession projects in Russia.
First, the concept of a “concession” was widened. Formerly, an investor (the concessionaire) had to bear the costs of building and/or reconstructing the facility under concession, title to which passed to either the state or a municipal authority (the grantor)—and also to use or operate the facility under concession for a fixed period, after which rights to the facility were transferred to the grantor. It was not possible for the concessionaire to own the relevant facility.
Now, the concessionaire is entitled to purchase the facility on a preferential basis, provided that it fulfils its contractual obligations in good faith and that the facility is of a type included within the terms of the legislation.
While the concession has retained its specific focus on infrastructure (concessions may only be granted to facilities deemed to constitute infrastructure, such as highways, railways, pipelines, marine and river transport facilities, airports, river and sea ports as well as public utilities, healthcare facilities, and educational, cultural, sports and tourism facilities), the list of such facilities has been expanded to include inter alia waste management sites and social service facilities.
It is now also possible for one concession agreement to cover several concession facilities. Further, several public bodies can be parties to the same concession agreement in cases where the project involves the creation and/or reconstruction of a facility whose integral parts are or will be owned by different public bodies. As a result of these changes, highly complex projects may now be the subject of concession agreements.
Moreover, other properties intended for the purposes stipulated in a concession agreement and not directly associated with the purpose of the main facility may be transferred to the concessionaire, which, in turn, makes it possible to increase the project’s rate of return. Thus, for example, a concessionaire building and operating a school may also be granted the right to operate a canteen on adjacent premises for school children and staff.
The grantor’s right to participate in funding concession projects has also been expanded. Previously, this opportunity only existed in the implementation of projects involving the creation, construction and operation of motor transport infrastructure facilities. Further, the concessionaire was prohibited from charging third parties (end users) for the use of the facility under concession, which significantly reduced the economic efficiency of concession projects. These restrictions have now been abolished.
Additional changes have been made to the provisions regarding the financing of concession projects. Agreements between the grantor, the concessionaire and the lender determining the terms of any loan secured for a concession project, together with the parties’ rights, responsibilities and liability in the case of improper performance of their respective obligations—which formerly applied only where utilities and motor transport infrastructure facilities were the subject of the concession—now apply to all concession projects.
In addition, similar restrictions on using the concessionaire’s rights under a concession agreement as a means of securing performance of its obligations to lenders (eg, as collateral) have been lifted. These changes have made concession projects more attractive for lenders.
Assignment of the concessionaire’s rights and obligations under a concession agreement is now possible, provided this takes place before the facility under concession is commissioned. Moreover, since the forms for concession agreements approved by the Government of the Russian Federation serve as guidelines only and are not mandatory, the structuring of concession projects is now much more flexible.
At the same time, the legal position of the concessionaire has been bolstered. For instance, the grantor must consider the concessionaire’s request for modification of a concession agreement in the case of force majeure (a material change in the circumstances relied upon by the parties when entering into the agreement), as well as in cases where the parties become unable to perform their obligations due to state or local authority decisions and actions or failures to act. The grantor must also take measures that ensure a return on the concessionaire’s investment and receipt by the latter of an amount not less than that initially set out in the agreement, in the event that changes in the law adversely affect the concessionaire’s position.
Also of note is the newly introduced right to extend the term of a concession agreement without having to go through a tender process, albeit on a one-off basis and by no more than five years. This was not possible previously.
Finally, a simplified procedure has been established for land allocation for the purposes of implementing concession projects without a bidding process. Prior to these changes, it was frequently the case that separate bidding processes for the right to enter into leases were required, which dramatically complicated the implementation of concession projects and limited their attractiveness to investors.
It should also be noted that the investor is now able to initiate the implementation of a concession project. In this case, other parties wishing to implement the concession project must come forward within 45 days of the date on which information concerning the bidding process is posted on the relevant official website. However, the grounds on which the state authorities may reject such a concession project are currently unclear.
On the whole, it is fair to say that the amendments to the concession legislation described in this article aim to broaden the scope of application of concessions and to create a more attractive investment environment for PPPs in Russia. The Law on Concessions is swiftly becoming a universal framework law of the Russian Federation governing relations in the area of PPP. Furthermore, these provisions approximate international practice with respect to implementing concession projects which bodes well for further development of public-private partnerships in Russia.