On April 27, 2013 the Federation Council approved a draft law “On Amendments to the Federal Law “On Concession Agreements” and Certain Legislative Acts of the Russian Federation” (hereinafter – the Law). The key aim of the Law is to provide the main instruments for ownership and/or usufruct right transfer in relation to water disposal facilities and water and heat supply facilities (hereinafter – Utility Facilities). Through amendments to the Federal Law as of December 7, 2011 No. 416-FZ “On Water Supply and Disposal” (hereinafter – the Law on Water Supply) and to the Federal Law as of July 27, 2010 No. 190-FZ “On Heat Supply” (hereinafter – the Law on Heat Supply), the Law specifies that such transfer is possible either by a lease agreement made on the basis of a tender or through a concession agreement in accordance with tender procedures provided by law. The Law on Water Supply and the Law on Heat Supply have been amended to specify a tender procedure for a lease agreement in relation to the facilities concerned, as well as a significant number of provisions have been introduced that reflect business activities involving Utility Facilities.

This review contains a summary of the most significant amendments introduced to the Federal Law as of 21.07.2005 No. 115-FZ “On Concession Agreements” (hereinafter – the Law on Concession Agreements), the Law on Water Supply and the Law on Heat Supply.

The Law on Concession Agreements

All amendments described below relate only to Utility Facilities, concession agreement procedures regarding other facilities will not change due to the Law.

General regulation

The control over concessionaire’s activity under a concession agreement has been specified. Public access to the outcomes of such control is provided, through publishing them in the Internet. Tender information is published at an official Internet website www.torgi.gov.ru. Earlier, the Law on Concession Agreements provided only that such website shall be determined by the Government of the Russian Federation.

Warranties of concessionaires' rights have been expanded: the Law underlines that concessionaire’s investment programmes approved in accordance with the Russian laws shall contain arrangements included into a concession agreement according to the requirements of the Law on Concession Agreements.

Procedures for parties have been set forth for cases when during the term of a concession agreement applicable tariffs have been changed: as agreed by parties and with competent authorities, determination, alteration, adjustment of regulated tariffs during the term of a concession agreement shall be performed under the rules existing at the moment of such change, and not under rules existing at the moment when such concession agreement was made.

Procedures of parties have been specified for cases when in the course of the performance of a concession agreement made in relation to Utility Facilities, unowned facilities have been discovered that relate to a concession facility from the technological point of view and form part of the structures relating to the concession facility. In this case it is permitted to transfer concessionaire ownership and/or usufruct rights to such facilities if their aggregate volume estimate does not exceed 10 per cent from the concession facility balance value determined at the date of a concession agreement, without any auctions. Earlier, this matter was not regulated, which gave rise to doubts in relation to the validity of such property transfer to a concessionaire, given an obviously large amount of such situations. The establishment of limitation on balance value is governed by the legislator's intention to prevent potential abuses in this sphere.

Tender procedure

A resolution approving a concession agreement in relation to Utility Facilities, in addition to mandatory elements provided earlier, shall include 1) an assignment and 2) a requirement according to which tender participants shall indicate arrangements in their bids ensuring that the assignment objectives and minimum operating indicators targets of a concessionaire are met, with the description of the main aspects of such arrangements. Furthermore, some additional requirements have been provided for an assignment: it shall contain the values of necessary heating capacity, necessary capacity of water supply networks, sewerage systems and their structures in certain supply, connection (technological connection), reception, feed, and take-over points, as well as terms of putting the capacities into and out of operation.

In relation to Utility Facilities, a number of additional requirements to tender documentation have been set forth. In comparison to other facilities tender documentation, this tender documentation shall contain, e.g., a concession agreement draft, an assignment mentioned above and a list of arrangements, an applicable tariff regulation method1 and other elements.

In relation to Utility Facilities, new tender criteria have been set forth, as well as the procedure for assessing participants' bids according to such criteria. Such criteria can include:

  • the cap on concessionaire's expected expenses for creation and/or modernisation of a concession facility, for each year within the term of a concession agreement;
  • the amount of expenses funded by a concessor for creation and/or modernisation of a concession facility, for each year within the term of the concession agreement, if a resolution approving the concession agreement and tender documentation provide that the concessor may bear the expenses for the creation and/ or modernisation of such facility;
  • the amount of expenses funded by a concessor for the operation of a concession facility, for each year within the term of the concession agreement, if a resolution approving the concession agreement and tender documentation provide that the concessor may bear the expenses for the operation of such facility;
  • long-term concessionaire's activity regulation criteria;
  • concessionaire's activity targets.

Long-term criteria of regulating a concessionaire's activity, provided as tender criteria, include:

  • the base level of operational expenses;
  • energy saving and power efficiency indicators;
  • the rate of return on invested capital, net working capital ratio, if tender documentation provides a method of ensuring return on invested capital or return on invested capital method;
  • income rate, if tender documentation provides an existing tariff capitalisation method, or an indexation method.

Bid content is assessed from the standpoint of their impact on discounted revenue and on the concessionaire's activity indicator value. The rules for calculating a discounted revenue are set forth by law, too.

In relation to concession agreement tenders, a limitation has been set forth, applicable to Utility Facilities, prohibiting negotiations with the winning bidder that can result in a change in concession agreement terms and conditions.

Terms and conditions of a concession agreement

In relation to Utility Facilities, an additional list of material concession agreement requirements has been provided. Such requirements include the following:

  • the values of long-term concessionaire's activity regulation criteria;
  • an assignment and the main arrangements for creation and/or modernisation of a concession facility, ensuring that the concessionaire's assignment objectives and minimum operating indicators targets are met, with the description of the main aspects of such arrangements;
  • the cap on a concessionaire's expected expenses for creation and/or modernisation of a concession facility within the full term of the concession agreement;
  • targets for Utility Facilities safety, quality, power efficiency, as well as targets for other technical and economical indicators of such facilities provided by tender documentation (hereinafter – concessionaire's activity target indicators);
  • reimbursement procedure in relation to concessionaire's expenses that are to be reimbursed according to the heat and water supply and disposal regulations of the Russian Federation and have not been reimbursed to it as of the expiry date of the concession agreement.

The fact that concessionaire's activity indicators have been included to the list of material terms and conditions can be considered as that the legislator has adopted a new approach to activity under a concession agreement, according to which it is considered as an integral process with its own characteristics. This approach is much more reasonable than the assessment of concessionaire's activity as the performance of some contracted works, the main criteria of which is their compliance to technical indicators of a facility under development.

Concession agreement amendment procedure has been made more complicated, applying to concession agreements made in relation to Utility Facilities. Now, in order to amend it, a preliminary approval of an antimonopoly authority shall be obtained, and in certain cases – of a tariff regulation authority. The procedure of obtaining such approval will be established by secondary legislation.

In relation to Utility Facilities, a requirement to secure concessionaire's obligations through an irrevocable bank guarantee has been set forth.

The Law on Heat Supply and the Law on Water Supply

Amendments to these laws are, for the most part, similar, and, therefore, they will be reviewed together.

The Law on Heat Supply and the Law on Water Supply include the notions of safety and power efficiency of Utility Facilities. They are indicators applied to determine the performance level of concessionaire's obligations to create and/or modernise a concession facility, the obligations of a regulated organisation to implement investment programmes (as well as, in relation to water supply facilities, an operational programme) and to regulate tariffs. The competence of authorities assigned regarding the approval of such indicators has been specified.

The Law on Heat Supply and the Law on Water Supply provide the following types of long-term criteria: the amount of invested capital, the term for return on invested capital in case tender documentation provides a return on invested capital method, as well as other long-term tariff regulation criteria established by the Government of the Russian Federation in relation to tariff regulation method provided by tender documentation, which are not included into the tender criteria.

Long-term regulation criteria in relation to tariffs included into the tender criteria include: the basic amount of operational expenses; energy saving and power efficiency indicators; the rate of return on invested capital, net working capital ratio, if tender documentation provides a return on invested capital method; income rate, if tender documentation provides an indexation method. Also, the necessity to apply long-term criteria provided by a concession agreement is underlined separately.

Similarly to the innovations to the Law on Concession Agreements described above, the Law on Heat Supply and the Law on Water Supply contain an opportunity, according to an agreement between the parties and with an authority assigned, to apply a tariff determination and change procedure in relation to tariffs applicable not at the date of a lease agreement, but at the moment when such tariffs were determined or changed.

Both laws establish a distinct interrelation between an executed concession agreement and concessionaire's obligations contained therein, and investment programmes approved for concessionaires that are utility organisations. This interrelation is determined subject to safety, quality and power efficiency indicators of Utility Facilities: they will be the basis for the determination of utility organisation's tariffs and the extent to which a concessionaire performs its obligations.

Among the main Law innovations is the creation of special chapters regulating the peculiarities of the transfer of ownership and/or usufruct rights to Utility Facilities in state or municipal ownership. Only two options for such transfer are provided: under a lease agreement or under an executed concession agreement, with a limitation according to which, if the time period between the date when even only one of the Utility Facilities in state or municipal ownership has been put into operation and the date when a tender announcement was published is more than five years, or if the date when even only one of such Utility Facilities has been put into operation cannot be determined, the transfer of ownership and/or usufruct rights to such facilities shall be performed under a concession agreement only.

Lease agreements in relation to Utility Facilities in state or municipal ownership shall be executed following a tender for such agreements, subject to the requirements of antimonopoly legislation and the new version of the Law on Heat Supply and the Law on Water Supply, accordingly. Similarly to the Law on Concession Agreements, special requirements to tender documentation, tender criteria and their assessment procedure have been set forth. Such tender documentation criteria can include the amount of financial support necessary for a lessee and provided by a lessor for the purposes of expenses and income shortfall recovery, as well as long-term regulation criteria provided by law. It should be noted that, as opposite to concession agreements, in relation to lease agreements the Law expressly provides an opportunity for a lessor to compensate not only its incurred expenses, but also the shortfall in its income.

As is the case with the assessment of concession tender bids, the bids of lease tender participants shall be assessed from the point of view of their impact on a discounted revenue, the calculation procedure for which is provided by Law.

Proper performance by a lessee of a Utility Facilities lease agreement shall be secured by a bank guarantee only.

The material terms and conditions of a lease agreement are provided by Law. Such terms and conditions include the values of long-term state tariff regulation criteria and time limits for supply cessation in relation to the corresponding goods and services, as well as a permitted extent for the non-supply of such goods or services, the excess of which is a material breach under a lease agreement. Also, the rights and obligations of the parties to such agreement, the grounds for its termination and the list of material breaches have been provided.

The Law has been adopted in order to ensure an efficient usage of property and to raise funds for the utility sector. The amendments introduced by the Law materially contribute to the interrelation between the existing tariff regulation and existing regulations in concession and lease agreements sector. It is assumed that, notwithstanding that certain provisions have become stricter (e.g., the necessity to obtain a preliminary consent of an antimonopoly authority to change the provisions of a concession agreement), a more distinct system of warranties provided to a private partner will contribute to a greater amount and performance efficiency of concession and lease agreements.

The Law is to become effective from January 1, 2014, except for the main provisions related to the execution procedure for Utility Facilities lease agreements, which will become effective from the publishing date of the Law.