Concession Agreement

A concession agreement is the long-term contract between a government or public authority and a private company (the concessionaire) that grants the concessionaire the right to finance, build, operate, and collect revenue from a public infrastructure facility over a specified concession period, after which the facility reverts to the government.

What is a Concession Agreement?

The concession agreement is the legal foundation of any ppp, bot, or boot structure. It sets out every material right and obligation of the concessionaire and the government: the construction obligations and programme, the performance standards for operations, the tariff or availability payment formula and how it adjusts over time, the grounds for early termination, the compensation mechanism if the government terminates, the insurance requirements, and the transfer conditions at concession expiry.

Concession agreements for major infrastructure are typically 200 to 400 pages of highly negotiated commercial and legal text, drafted either under the host country's civil or common law and often referencing standard clauses developed by multilateral bodies. The World Bank's PPP Knowledge Lab, the EBRD model concession documents, and the UNCITRAL model provisions on PPP legislation are common reference frameworks. Development banks funding concession-backed projects often require the concession agreement to be acceptable to the bank as a condition of financing, giving them indirect influence over its terms.

The concession agreement interacts with a suite of ancillary agreements: the shareholders agreement among consortium members, the direct agreement between the government and project lenders (giving lenders cure rights if the concessionaire defaults), the offtake agreement where applicable, and any government support agreement.

Why Concession Agreements matter for bidders

Reviewing a draft concession agreement before bid submission is one of the most consequential tasks in PPP bidding. The financial model underpinning the bid price depends on the tariff formula, force majeure provisions, termination compensation, and change-in-law protection embedded in the agreement. Provisions that seem acceptable in a contract summary can be ruinous in the fine print, particularly those governing what constitutes a "material adverse government action" triggering compensation, and how construction delay events are classified. Legal and financial advisers who specialise in infrastructure PPP are essential members of any bidding consortium.

FAQ

What is a "direct agreement" in a concession structure?

A direct agreement is a contract between the project lenders and the government that gives lenders the right to cure the concessionaire's defaults and step in to prevent the concession agreement being terminated, protecting the lenders' security over the project.

How is a concessionaire's revenue structured?

Revenue comes from user charges (tolls, tariffs), availability payments from the government, or a combination. The tariff or payment formula, and how it adjusts for inflation and volume, is one of the most commercially critical provisions of the concession agreement.

What happens if the government terminates the concession early?

Most concession agreements require the government to pay compensation on early termination, calculated using a formula that covers the concessionaire's outstanding debt, equity investment, and an agreed return, with the exact amount depending on whether termination is for cause or convenience.