The Russian State Duma has passed the Federal Law On Incorporation of Amendments to the Federal Law “On Concession Agreements” and Certain Legislative Acts of the Russian Federation (hereinafter the “Draft Law”) in its first reading.

The main objective of the Draft Law is to establish a procedure for the transfer of rights of possession and/or use of state-owned or municipal facilities for heat, power and water supply and waste water treatment. Amending as it does Federal Law № 416-FL of December 7, 2011 “On Supply of Water and Waste Water Disposal” (hereinafter the “Law On Supply of Water”) and Federal Law № 190-FL of July 27, 2010 “On Supply of Heat” (hereinafter the “Law On Supply of Heat”), the Draft Law clarifies that rights of possession and/or use of such facilities can be transferred either under a lease agreement concluded through a tender process or under a concession agreement concluded in observance of the competitive bidding procedures established by the legislation. The Law On Supply of Water and the Law On Supply of Heat are being amended to clarify the procedures to be followed when holding a tender for the right to enter into lease agreements for such facilities and introduce a substantial set of new provisions that reflect various particularities of business operations that involve such facilities.

This briefing focuses on the changes that enactment of the Draft Law will introduce to the tender process, the procedure of concluding concession agreements for the aforementioned facilities, and the content of such agreements.

The Draft Law contains a raft of amendments to Federal Law № 115-FZ of May 21, 2005 “On Concession Agreements” (hereinafter the “Law On Concession Agreements”). All of the changes that will be discussed below relate only to facilities for the supply of water, heat and electricity, sewerage and waste water treatment; the procedures to be followed when entering into concession agreements for other types of facilities will not change as a result of adoption of the Draft Law.

Key amendments:

1. The list of essential terms of a concession agreement is being enlarged. The Draft Law adds the following terms to the list:

  • long-term parameters to monitor the concessionaire’s performance;
  • a list of measures aimed at achieving the concessionaire’s target performance indicators;
  • the total capital expenditure to be made by the concessionaire over the entire term of the concession agreement;
  • target performance indicators for the concessionaire.

The amount of investment that the concessionaire must provide to build and/or refurbish the facility that is the subject of the concession agreement over the entire term of the latter is limited to the total amount of capital expenditure.

2. Requirements are clarified with respect to the content of a concessionaire’s investment program under which it, as a utilities organization, will provide services to the public, including with respect to the concessionaire’s financial needs established under the program.

3. The Draft Law establishes additional requirements applicable to the decision to enter into a concession agreement, on the basis of which a tender will be held. Now such a decision must include design specifications for preparing a list of measures to achieve the target performance indicators for the concessionaire specified in the terms and conditions of the tender, as well as the requirement that such list be submitted in the framework of the bid.

4. The content of the tender documentation is being expanded. Now it must include the following terms:

  • target performance indicators for the concessionaire and long-term parameters to monitor the concessionaire’s performance;
  • design specifications for preparing a list of measures to achieve the target performance indicators for the concessionaire;
  • requirement that the tender participants submit the aforementioned list of measures as part of their bid;
  • net supply in the year preceding the first year of the lease agreement, as well as projected net supply for the entire effective term of the concession agreement;
  • purchase price of energy in the year preceding the first year of the lease agreement, and projected prices for the entire effective term of the concession agreement;
  • losses and specific consumption of energy per unit of net supply in the year preceding the first year of the lease agreement (for each type of energy used);
  • amount of non-controlled expenses, determined in accordance with the Russian legislation on electricity, heat and water supply and sewerage (excluding the cost of energy, concession fees and profit tax);
  • method of regulating the tariffs (method (of ensuring) return on invested capital or method (long-term) of indexing the established tariffs (requisite gross income));
  • method of regulating the tariffs (method (of ensuring) return on invested capital or method (long-term) of indexing the established tariffs (requisite gross income));
  • maximum/minimum parameters of the tender criteria;
  • amount of concession fees;
  • maximum annual growth of the requisite gross income of the concessionaire generated by the regulated activities.

With regard to the facilities in question it is envisaged under the Draft Law not to include any requirements in the tender documentation which are applicable to the tender participants (including requirements on their qualifications and professional and business qualities) or on the basis of which bidders are pre -selected. The risk that unscrupulous entities might be admitted to a tender is offset by the establishment of an additional criterion based on which a potential bidder’s application may be rejected: if the average of the applicant’s current and noncurrent assets over the three years preceding the date of the application plus the applicant’s projected costs do not meet the minimum value set by the Government of the Russian Federation, and if during any year of the concession agreement the requisite gross income of the applicant changes to an extent that exceeds the threshold specified in the tender documentation. It appears that the first restriction may pose certain difficulties for SPVs that wish to take part in concession projects if they fail to provide a guarantee of a person that meets the requirements. Generally speaking, these changes clearly aim to prevent the restriction of competition in this field.

5. Fundamentally different (compared to other subjects of concession agreements) criteria are introduced for the evaluation of participants’ bids. These criteria will be:

  • capital expenditure to be made by the concessionaire in each year of the concession agreement;
  • expenditure to be financed by the grantor to build and/or refurbish the subject of the concession agreement;
  • expenditure to be financed by the grantor to use (operate) the facility and/or other obligations undertaken by the grantor to finance expenditure;
  • long-term parameters to monitor the concessionaire’s performance, not provided for in the tender documentation.

A separate procedure is established for the evaluation of bids in accordance with the new tender criteria.

6. In May 2012 amendments were made to the Law On Concession Agreements which substantially modified the procedure for entering into concession agreements. As a result it became possible, subject to mutual agreement of the parties, to change the terms of a concession agreement that were set out in the decision on its conclusion and based on the winner’s bid, and to negotiate with the winner of the tender to clarify the terms of the future agreement. In terms of protection of competition, the appropriateness of these changes raised some doubts among experts. The Draft Law expressly states that in relation to facilities for heat, power and water supply and waste water treatment the provisions envisaging the possibility for parties to modify the terms of a concession agreement are inoperative. Moreover, this relates to all terms of the agreement, not only those contained in the decision on conclusion of the concession agreement and the winner’s bid. Furthermore, when a tender is held with a view to concluding a concession agreement for such facilities, the possibility of negotiating with the winner of the tender is excluded. Obviously, the main aim of these changes is also a desire on the part of legislators to prevent the restriction of competition that currently exists in the sphere of water and heat supply.

Adding a substantial number of relatively ‘technical’ provisions to the current Law On Concession Agreements and tightening existing procedures governing the tender procedure, the Draft Law imparts much more transparency to the procedures involved in entering into and performing agreements. This should have a positive impact on competition and help prevent abuses in this sphere. At the same time, however, the current version of the Draft Law needs to undergo a number of legal and technical changes to ensure the contemplated changes fit into the existing legal framework.

Should the Draft Law ultimately be enacted, the changes it envisages will take effect two months after the date of its official publication.