THE NEED FOR PROPER LEGISLATIVE STRUCTURE IN CONCESSION DEVELOPMENT PROJECTS

 By: Jayson Schwarz LLM

 Public, Private, Partnership Model

Governments today are trying to deal with the tremendous financial burden of creating new infrastructure and/or refurbishing the old.  Developing countries generally lack the financial resources and operational experience to develop and properly operate these essential projects. Established “Western“ style countries are finding it extremely difficult in light of massive social welfare obligations and aging infrastructure to keep up with the major refurbishing necessary to maintain essential systems, never mind creating massive new structures.   Governments have increasingly looked to the “Public, Private, Partnership” (or “PPP”) as a means of satisfying the needs of the public while simultaneously stimulating economic growth through the involvement of private enterprise. This concept has received world-widel support, and active implementation of the PPP seems to have become recognised as a desirable end.[i]

The Concession

The Concession concept and its derivatives is one of the mechanisms for accomplishing the objectives of the PPP. The concept of concession agreements has many definitions however they all appear to speak to the same issues. The EU defines a concession agreement as “a public procurement with the exception that the consideration for the activities to be performed consists solely of the right to operate the facility, or consists of this right combined with a price to be paid”[ii] The Multilateral Centre for Private Sector Development in Istanbul stated: “Concession Agreement means an agreement pursuant to which a Contracting Authority grants rights and agrees the obligations to be undertaken in relation to the construction, refurbishment or provision of Infrastructure or the exploration for and/or exploitation of Natural Resources (including any related treatment or transport facilities);”[iii] The World Bank and Economic Commission for Africa explained the concession system as follows:  “Under a concession system the state grants a franchise the right to finance, build, own, operate, and maintain a public infrastructure for a given period, and to charge users for that service. Concessions are normally stand-alone, single-purpose entities that are expected to finance themselves eventually, if not initially, without recourse to their shareholders. They are independent corporate entities run by a dedicated staff that seeks career advancement within the concession company. Invariably, the successful concession has been created because of a compelling economic need. . . In order for a concession to be successful, the State’s granting authority must be clearly defined.”[iv]

From a practical legal practitioners standpoint a concession “gives the BOT[1] owner the right (it wants to be exclusive) to provide the service which its infrastructure produces (e.g. electric power, toll roads, an airport etc.). It will be time limited to the period of the BOT and will usually contain the inducements (which vary deal to deal) to bring the BOT project into the country in the first place.”[v] These definitions assist in the understanding of the nature of the concession.

Concession Benefits

The concept of the concession has great attraction to government because of the many benefits that are derived, some of which are hereafter set forth:

1. Capital: “mobilizing capital to meet investment needs without adding to sovereign debt;”[vi] In other words providing access to new capital, not from the public purse and if structured properly not requiring credit stretching guarantees. In effect government off balance sheet financing.
2. Efficiency: private entities are generally more efficient than government operated enterprise. The profit motive requires economies not as necessary in government modality.
3. Political: achieving visible political gain through the efficient completion of the project, without any or minimal government spending yet providing the public with the benefit of the long term ownership of the project.
4. Education: local population is trained for operation and as part of the concession, technological improvement and access thereto, upgrade and education of the indigenous population (creation new skill sets, etc.) can be structured to form a part of the agreement.
5. Allocation of Risk: Government risk can be restricted to specifically those items accounted for in the concession agreement. The private sector is much better suited to identify and manage risk. This results in risk efficiency. [vii] In addition it is primarily, the lender groups and the investors who bear the burden of ensuring economic success.
6. Optimization: “provide contemporary management skills and optimize performance; and improve the efficiency and quality of services (DFAT, 1998).”[viii]
7. Economics: Positive increase in economic and market activity which will provide overall positive impact on levels of employment and short term gains during construction process. This will in turn allow for expansion and satisfaction of overall government policy. It will further enhance the standard of living particularly in developing nations.

Concession Structures

Concessions are operated through a variety of structures. Build Own Operate Transfer (BOOT) seems to be the mechanism for development that will require the least amount of governmental assistance provided that all legal and other regulatory structures are in place before the concession agreement is drafted and signed.   If this model does not suit the situation, there are a wide variety of other project structures that can be employed, including Build Own Transfer (BOT), Build Transfer Operate (BTO), Build Own Operate (BOO), Build Lease Transfer (BLT), Build Lease Operate Transfer (BLOT), and Build Rent Operate Transfer (BROT). In addition there are the Rehabilitate Operate Transfer (ROT), where a private developer takes over an existing infrastructure facility or project and restores or improves it and Rehabilitate Own Operate (ROO) and Design Build Finance Operate (DBFO).  BOO is not a true partnership as the private developer retains ownership of the project. BOO would appear to be more suited to government in desperation or projects with such high risk that the upside gain would not allow for the return of the asset to the government. “The nature of the project is directly correlated to the private sector risk involved.”[ix]

Concession Problems

It is the BOOT or BOT project that symbiotically allows for the partnership between government and the private sector to achieve the goals of both parties. This does not mean however, that there is or will be any form of guaranteed success, or that the process is flawless. The Infrastructure Finance Regional Workshop[x] developed the following list of the factors that contributed to some of the potential problems:

1. “existence of a wide gap between the perceptions and expectations of government and the private sector regarding risk;
2. lack of clarity about government objectives and political commitment;
3. unpredictable governmental approval processes;
4. lack of an appropriate legal/regulatory framework;
5. insufficient transparency and competition leading to high transaction costs;
6. lack of mechanism to provide long term debt;
7. insufficient management capacity and poor financial condition of public enterprises seeking to attract private investment.”

This seems to indicate even more strongly that the success or failure of the enterprise will be directly correlated to the basis for communications between the government and the developers. This paper will advocate that those issues are best dealt with, not solely in the concession agreement or the boardroom, but in the legislative structure that is put into place in order to facilitate the project in the first instance.

Factors Necessary to Encourage Investment

BOT[2] projects are expanding the frontiers of PPP and creating projects of various scales.[xi]  There are a number of theories as to what factors are of critical importance to the developer, lender or investor in order to encourage them to commit their time and resources to the project.

David Levy stated in his article BOT and Public Procurement: A Conceptual Framework, that the “Two factors identified as crucial for the success of a BOT project are (1) “a critical need for the project” and (2) “a near-monopoly situation in the provision of a service or product.”[xii] He goes on to speak of some of the other issues that affect BOT projects. Levy worries about the consistency of the procurement process. “Despite the long term nature of these partnerships, a conceptual framework which harmonizes the BOT process with sound government procurement practice has not been consistently applied.”[xiii]  Part 1 of his article focuses on the theme of international views of good government practice; he speaks to issues of procurement, transparency and the like. Levy acknowledges the need for definitive enabling legislation. “ While BOT projects must rely on a legal framework – – including well defined contractual and property rights – – which facilitates private investment” [xiv] The concern, is to provide a legislative framework that addresses a wide range of issues, including those of importance to the investor. This framework should have as an integral part thereof, an ability to allow for the orderly and efficient structuring of the consortium and its financing. The author explains the concept of host country guarantees and the various methodologies of accomplishing this facility, complete with a warning to avoid the government giving too much and ending with, in effect, a public project.

The Organization of American States Americas Business Forum Workshop stated that to promote a stable macro-economic environment needs certain policies including . . . “ foreign exchange convertibility, a fair tax regime and a credible judicial system.”[xv] The Inter-American Development Bank said that in order to attract BOT projects to emerging and deeply unstable economies it has “required the support of multilateral agencies (MLA) and the introduction of risk sharing agreements between the public sector and private concessionaires.”[xvi]

Projected cash flow of the project can be another grave concern and is tied directly into the entire concept of security. It is very important to realise that project cash flow may be one of the only truly financeable assets of an infrastructure project, as “Once it is accepted that infrastructure projects can no longer be financed directly by the public sector, the project cash flows have to be the source of finance.”[xvii]

 Lenders, developers and investors all have various concerns of stability. The World Bank and European Centre for Applied Research in Economics in an article dealt with this and said, “The key concerns of regulated businesses are whether their assets will be expropriated, whether changes in exogenous factors are recognised by the regulator; and how long they are able to keep the benefits of efficiency improvements.”[xviii] Much analysis has been done as to what various governments need to do to attract foreign investment and expertise to bring these infrastructure projects forward.[xix]

The Need for Concession Law

There is a consistency that runs through the various papers, conferences and analyses of ongoing commonality with respect to the requirements necessary to formulate concession agreements. The underlying consistency seems to be the fact, that in order to provide the necessary values to encourage and support investment, a comprehensive Concession Law must be developed, containing within it adequate security provisions to allow for the necessary comfort of investor and lender to facilitate the capital requirements.

In their paper Legal Institutions and Financial Development, Thorsten Beck and Ross Levine[xx] question why certain countries have well developed growth enhancing financial systems and others do not through the application of the law and finance theory. This is extremely relevant to the creation of adequate and functional concession legislation. Beck and Levine describe the first part of the theory as follows: “that in countries where legal systems enforce private property rights, support private contractual arrangements, and protect the legal right of investors, savers are more willing to finance firms and financial markets flourish. In contrast, legal institutions that neither support private property rights nor facilitate private contracting inhibit corporate finance and stunt financial development.”

In application to the issue at hand it would appear that investors and lenders would be more inclined to select a PPP in a jurisdiction where the legal structure was sufficiently advanced to offer the inducement of legal and therefore by extrapolation financial stability and security.

The article goes on to discuss the application of Coasian economic theory to the issue and indicates, “Effective legal institutions allow knowledgeable and experienced financial market participants to design a vast array of sophisticated private contracts to ameliorate complex agency problems (Coase, 1960; Stigler, 1964; Easterbrook and Fischel, 1991)[xxi]”. This is precisely what occurs in the concession agreement process. A myriad of contracts are composed to recognize the multiplicity of tasks, obligations and relationships within and without the consortium put together to develop the project and contemporaneously define the relationships with the government with whom the deal is being struck.

It is interesting to note that the authors find that “Civil law countries will have weaker property rights protection and lower levels of financial development than countries with other legal traditions.”[xxii] This leads to the interesting question of whether those civil law jurisdictions, could potentially frame their concession legislation to overcome the very biases inherent in the basic legislative approach, to provide the necessary fundamentals to encourage the investor/lender community.

            In his article J. Michael Robinson Q.C.[xxiii] discusses the fact that a complete lack of laws can in fact be beneficial as it affords the opportunity to draft laws “comprehensively and properly”. . . to “produce a modern and effective legal regime meeting the requirements of modern capital markets.” Again this re-enforces the basic premise that the better the legislative fundamentals put in place for the project the more encouragement will be offered to the financial community.

            A good example of what can be done from the ground up, was outlined in a paper by James Hogan and Aigoul Kenjebayeva concerning the Republic of Kazakhstan and the encouragement of petroleum development.[xxiv] Although not precisely directed at PPP projects, by analogy the evolution of statute has provided a solid basis for the development of the petroleum industry.

            The lack of formal legal parameters surrounding PPP projects can lead to disadvantage even for developed countries. Jan van Balen discussed the fact that in Europe, because there is no actual law concerning concession agreements, rather just a series of Interpretive Statements[xxv], there seems to be constant confusion of laws arising from such questions as: is this works, services or both; which tendering process to use; what specific regulations of the Procurement directors apply; etc. The issue of appropriate concession laws becomes very critical. In the “Advice of the Economic and Social Committee the author summarizes that the Committee stated that the “lack of common legislation for concession agreements and the diverse national legislations in this area are a cause of the slow realisation  . . . Europe will suffer a competition disadvantage with regard to other continents. This is because insecurity about the applicable legal context hampers the possibilities of attracting private financing, especially money from the international financial markets where legal requirements in a PPP context are very much needed.”[xxvi]

This was also recognized in Australia where in a report forming part of the Local Government Infrastructure Financing Manual it was stated as a conclusion that “the key to the successful PPP is the successful legislative and contractual framework.”[xxvii] Therefore we can project the assumption, that it is essential there be properly structured concession laws uniform in base application that can be tailored to suit the individual PPP project.

In the Guidelines for Procurement under IBRD Loans and IDA Credits: (The World Bank)[xxviii]:  the four general considerations imply the need for legislation although not specifically stated, as a term of procurement. In order however, to achieve compliance, the appropriate legislation would be necessary.

This concept continues to be of the highest priority to the private sector. In an article in The World Bank Research Observer the authors state that among the dangers facing private enterprise is the fact Governments can be quite fickle. What is promised as an inducement at the front end can quickly disappear when the investment has been made and the private partner is at the mercy of the whims and winds of public favour.[xxix]  In order to avoid these risks it is imperative that the legislative structure provides a fail-safe for contractual operation. Quite often guarantees are used to estop governmental inconsistency, but this can defeat the intention of a PPP project; as subject to the extent of the guarantees, a PPP can quickly become a public project.  The authors, Irwin, Klein, Perry, and Thobani, support the position, that it is the use of policy and legislation as opposed to guarantees, that will lead to enhancement of desirability and the encouragement of private investment. “One of the best things governments can do to make projects more attractive without issuing guarantees is to put in place good policies that generally reduce risks and raise expected returns. . . When developing countries have introduced good policies and maintained them for a few years, they have also been successful in attracting private infrastructure capital without guarantees.”[xxx].  “In order to properly allow for risk assessment the passage of legislation putting investors qualms to sleep is paramount in the structure of concession laws and thereafter the concession agreements. Risks of political and governmental action or inaction and force majeur need to be covered in conjunction with possible expropriation, taxes, exchange, duties, structure and security issues.”[xxxi] This article is published under the aegis of the World Bank and it continues to stress the logical and empirical[xxxii] necessity of adequate legislation as part of its overall approach. When evaluating the concerns of lenders and the direction to be taken the authors bring the matters back to fundamental economic concerns. “There is critical concern over whether a government will maintain the reforms effected to launch the concession is a concern that continues to plague the investors or lender. If questions of after the fact variation cause concern, how much more apprehension if statutory protection is not adequately effected lending serious additional costs to the overall activity.”[xxxiii]

In an article in the Infrastructure Journal[xxxiv], Clement-Davies, Stasevicius, and  Zverev, review concession laws in general and in particular Lithuania’s new concession laws. They refer to the concession laws as “the underlying legislative framework on which many of the project’s legal features may eventually have to depend”[xxxv]. The European Bank for Reconstruction and Development (“EBRD”) organized a competition for review and amendment of Lithuania’s concession laws. The authors recognised that without appropriate and well-structured concession laws infrastructure development through the PPP process will be extremely limited.[xxxvi] The Lithuanian law evolved taking into account other jurisdictions and guides available. The authors summarised that they hoped the law to “be a clear, robust, flexible and durable piece of legislation, which will play a significant part in the successful implementation of Lithuania’s PPP programme. It is, of course, a specifically Lithuanian legislative act, not a mirror-image imported from another jurisdiction.”[xxxvii]

The international recognition of the need for adequate, responsible and comprehensive concession laws has been a topic of much interest and will continue to draw numerous articles, reports and discussions. On a very common sense approach, it is virtually impossible to visualize private sector participants, whether in undeveloped or economically mature countries, risking capital without the appropriate legislative structure in place to support and protect loans and investments. The over-utilization of government guarantees simply removes the project from being a true PPP to a public project based on the financial credibility of the country involved and frankly, in most circumstances where this is necessary, the credit worthiness of the host government will already be suspect and the projects will not move forward.

Concession Legislation Guidelines

This paper will hereafter examine two of the formats for concession laws that have been proposed. It is suggested however that each of these regimens has broad application and although extremely useful from both a positive and negative approach, it is only through “custom tailoring” that the statutory regulation of a PPP will be most successful.

            The Organisation for Economic Co-operation and Development (“OECD”) in combination with the Istanbul Stock Exchange (“ISE”), and a group of experts from NIS, Black Sea and South-East European Countries[xxxviii] have developed a legal framework[xxxix] entitled Basic Elements of a Law on Concession Agreements with three practical objectives: ”(a) to provide information to Eurasian legislators on the guiding legal principles and best international practices with respect to concession agreements; (b) to contribute to the harmonization of the relevant legislation in the Eurasian region; and (c) to elaborate on these principles and practices with a view to providing assistance to Eurasian Governments in the negotiation of actual concession agreements.”[xl] The intention was to have the Basic Elements apply to both infrastructure and natural resource projects. The approach taken was to use broad brush strokes to give parameters yet allow the parties to tailor their specific transaction and not curtail the intention of the PPP.

            The format of the Basic Elements            is extremely facilitory. The framework is broken into five sections with extremely helpful explanatory notes.

Section I deals with the scope of the law and definitions. The scope issues are dealt with in one simply written paragraph.[xli]The definition section for example is precise, yet allows for expansion to include a particular product, project or service that may have been overlooked.

Section II, the authorizing sections, permits direct and ancillary agreements to be entered into. There may be constitutional questions of authority to delegate this power in the first instance, and Article 3.2 appears to satisfy this issue. It then goes on to allow the state to exclude what it wills from Concession Agreements. The approach is simple yet precise, avoiding ambiguity and providing a positive road to follow.

Section III provides the outline for the selection methodology in arriving at a successful agreement. It provides for transparency, fairness in the selection process, competitiveness, publication requirements and methods of dealing with complex projects. All of which are intended to provide integrity to the process, an essential ingredient to a successful PPP infrastructure regime. The Basic Elements then provide, very helpful evaluation criteria to assist governments in determining the value of a bid on a variety of levels, with equality of treatment a prime consideration and including technical, financial and socio-economic issues. The selection process and method of award are all explored in a very understandable manner giving guidelines and supporting or adding to existing government methodologies or allowing for adaptation to the infrastructure approach. The flexible intention of the Basic Elements is re-enforced in Articles 10 and 11 that provide for substitute bidders, multiple selection and those situations where the host state may wish to allow an arrangement without competition (i.e. urgent need, security holder takeover and the like).

The intent of Section IV was to allow for an enacting state an opportunity to review the project award and its validity.[xlii] This was to be a failsafe to prevent corruption, fraud and the like in the process. What is particularly innovative is that the section was designed to allow for said review and at the same time protects designated innocent third party lenders from having their security vanish, based on an allegation of impropriety and an attempt to cancel the contract (by using the “designated” lender definition a further safeguard for both sides is in place). The section further provides a method for having a review conducted and a certificate issued verifying the bona fides of the transaction.  This would certainly be a requirement of any lender prior to advancing funds.

Section V deals with the content of the concession agreement. Article 14 begins by describing the contents as being subject to negotiation and then provides in Article 15, a shopping list for inclusion. It is important to note that the intention was such that nothing was carved in stone and the points although comprehensive are merely a starting place for the negotiation process. The participants would arrive at a contract based on flexibility and reaction to the needs of the individual project. Three Articles are drawn from the list in Article 15 and given separate status. They are security, dispute resolution and stabilization.

Article 16, “Security Interests” needs to be read in conjunction with Article 15(l) that allows for assignment. This provides for cash flow assignment to security holders. Although left broadly, this is an area where the Basic Elements could have provided more particular legislative format to satisfy the needs of lenders. It is inadequate to allow for “step-in” and like processes to be handled in “other ancillary or related agreements”[xliii]. It would have been more preferable to see a more rigorous and structured methodology in this area, within the concession law proposed. Article 17 in enabling the use of “international arbitration” is very attractive in allowing participants to agree on a venue for dispute resolution that satisfies their concerns. Article 18 allows for protection of the contractor for things like change in government and subsequent legislative change and so provides that the financial consequences must be “clearly and precisely described”[xliv]

            The Basic Elements provides a succinct and flexible basis for government to prepare both legislation and agreement for proper concession situations enabling the PPP to move forward. It is however only a skeleton and any situation will require draftsmen, lawyers, government and private sector participants to craft the laws necessary to support the PPP contemplated in order to achieve the degree of security necessary for investors and lenders to proceed. Governments without any concession laws should look to enacting general legislation similar to the Basic Elements, to encourage the private sector to recognize that theirs is a jurisdiction “ready to do business”.

                        The United Nations Commission on International Trade Law (“UNCITRAL”) has recently completed its Legislative Guide on Privately Financed Infrastructure Projects.[xlv] The Guide in its Introduction sets out its purpose as follows: “The purpose of the present Guide is to assist in the establishment of a legal framework favourable to private investment in public infrastructure. The advice provided in the Guide aims at achieving a balance between the desire to facilitate and encourage private participation in infrastructure projects, on the one hand, and various public interest concerns of the host country, on the other.”[xlvi] The purpose of the Guide seems to be, to help draft or provide the legal framework necessary to facilitate infrastructure projects, but as it unfolds it appears that the Guide is more of a reference, assisting to establish significant guidelines of what concession laws should attempt to achieve, but also many of the recommendations are indications of what ought not to be included in concession laws. This is an extremely comprehensive document, over 200 pages in length and should be used to assist in reviewing existing laws, creating, modifying, amending and recommending the construction of concession laws together with the UNCITRAL view of best practices to facilitate a PPP project. Despite the enormous amount of material, UNCITRAL has attempted to maintain as much flexibility as possible in the general construction of the laws.

            The Guide is set up to provide information in an orderly fashion. The Introduction has two sections. Section A, lays out the parties roles, the organization and scope of the Guide together with the terminology used therein. Section B reviews the background scenarios that contribute to the preliminary matters necessary to organize and proceed with the creation of the structure or amendment or restructuring of existing structure to give legal life to an infrastructure project. This includes a review of monopolistic scenarios and competition policy, review of various sectors that generally invite PPP projects and examination of various kinds of private sector participation.  An extremely useful portion is the section explaining the various kinds of financing structures and the identification of the various participants in a PPP project. The Introduction provides a good start for understanding the basic concepts necessary to deal with the creation of the legislation.

            “In Chapter I, General Legislative Considerations, the Commission delves into the combination of the State’s constitutional law and privately financed infrastructure projects, comments on the government’s scope of authority to award concessions, along with relevant general guidelines, and discusses the importance of administrative coordination”.[xlvii] In addition the Chapter reviews the issue of authority to regulate infrastructure services. One area covered is the need for the contracting authority to, in effect, establish the parameters of the project. In other words assess feasibility, economic advantage, and estimated cost and revenues. Without this no private entrepreneur can make a risk v. return assessment in order to make a decision to commit the resources to begin. In solicited proposals this is critical to success.

            Chapter II, Project Risks and Government Support discusses the concept of transfer of risk to the private sector and the concept of “project finance”[xlviii]as a stand-alone methodology and then proceeds to analyse the various forms of risk that can attach to projects of this type. The Chapter then delves into potential solutions through contractual arrangement, government support (guarantees, specialized legislation, equity participation, loans, subsidies and tax considerations, etc.) The Guide then turns to the international community to establish other forms of guarantees to facilitate the project. This Chapter is extremely useful, not so much for its assistance in the drafting of a generalized concession law, but rather to provide insight and assistance in the concession agreement process. There are certainly items that can be incorporated as part of a specific requirement in any legislative exercise for a particular project.

            Chapter III deals with the Selection of the Concessionaire. “In line with the

advice of international organizations, such as UNIDO (UNIDO BOT Guidelines pg 96) and the World Bank (International Bank for Reconstruction and Development, Procurement under IBRD and IDA Loans, Washington, D.C., 1996, para. 3.13 (a)), the Guide expresses a preference for the use of competitive selection procedures, while recognizing that sometimes concessions may be awarded without competitive procedures according to the legal tradition of the country concerned.”[xlix] Transparency, preparation, pre-selection, evaluation, notice of award, record of selection proceedings, contents of information provided, and procedures are all given exhaustive treatment. The Chapter also explores the questions of unsolicited proposals and confidentiality. Finally the issue of Review Procedures is explored. Like Chapter II, the Guide provides detailed information for every circumstance and provides warnings of those issues to avoid and those that need to be included. If there is a failing, it is the very complexity, that would seem to limit and inhibit a government from implementing a general concession law that can be amended to suit individual projects. The sheer volume of information would seem to lead to a very over legislated state if proceeded with in total compliance with all of the suggested intricacies.

            Chapter IV focuses on the terms of the concession agreement. It discusses the kinds of legislation needed and then examines the various sections of the contract including financial arrangements. Again for the most part this is extremely helpful information for all parties to assist in understanding and having a blueprint of procedure to follow. The issue of Security Interests[l] allows for a government to determine if it has adequate security legislation in place in order to accommodate the needs of the parties. Where the Guide falls short is the treatment of Assignments, which can be of critical importance to lenders basing their advances on project viability and continuance after default.[li] It is in this Chapter that the issue of governing law appears[lii] Further the various standard contract terms are dealt with but also the issues of Step-in rights are discussed and outlined. Again there is much information that can be selectively utilized to arrive at the concession laws and agreement needed for a specific project.

            Chapter V “addresses the issues of extension and termination of projects. Covered in this range of topics are the financial arrangements upon termination and the wind-up and transitional measures to be taken, the possible transfer of assets to the contracting authority or to the concessionaire, and the possible transfer of technology. Definitions and explanations of the different types of terminations preface these arrangement options. In addition, suggestions as to host government compensation is explored.”[liii]

            Chapter VI discusses the settlement of disputes. It cites different options for resolving disputes between contracting authority and concessionaire, such as negotiation, conciliation, non binding expert, mini trial, referee and dispute board proceedings, as well as arbitration or judicial proceedings. The settlement of commercial disputes and disputes involving other parties is also reviewed.[liv] In addition recommendations concerning sovereign immunity are examined. This is an extremely important area of consideration and the Guide, although thorough, does not seem to stress strongly enough the issue that it matters not how well the concession laws or concession agreements are prepared if there is no true means of judicial enforcement.”[lv] As always the Guide offers a myriad of methodologies, leaving the parties to try and agree on a satisfactory methodology of both enforcement and dispute resolution.

            Chapter VII addresses as best it can be addressed the concept of all of the other laws and statutes that will have to be created, modified or applied in the concession process. These laws will have an impact on the private sector that will view them as they apply to the project. Although overly ambitious to try and cover all exigencies, the Guide succeeds in pointing out the relevance of reviewing the overall statutory infrastructure and its interrelationship with prospective concession laws.

The UNCITRAL Guide provides a wealth of information to form background in assisting understanding of the formation of concession law and agreement. It would appear however that its best use is a resource tool assisting in the understanding of what is required, what may be done and what should be avoided.

Retrospective

            As the demand for new and/or refurbished infrastructure continues to grow internationally, so grows the need for the funding of such development. Whether the project is located in a struggling third world country or in Ontario, Canada the need for certainty of repayment and return is paramount to developers, investors and lenders. There are many factors to be considered in the evolution of the concession structure. A strong, flexible, coherent, concession law dealing with broad concepts will encourage the private sector to examine at first instance the possibility of involvement in a PPP and protect the interests of the participating government.  Once the decision is made this general concession law should be able to be moulded to allow for the enactment of special concession laws geared specifically to the project and encouraging the negotiation of the appropriate concession agreement.

            When good concession laws are joined by a reliable justice system and other laws enacted or modified to support the terms of a concession agreement, an environment will be created that will be inviting to the private sector and reduce the requirements of host guarantees and similar underlying facilities and underwriting.

The PPP has been, is and will continue to be, a major force for infrastructure development. The economic progress and success of the PPP will rely to a great deal on the security of legislative structure wherever the project may be.

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Leora F. Klapper, Inessa Love, Corporate Governance, Investor Protection , and Performance in emerging Markets: Public Policy Research Working Paper 2818, The World Bank Development Research Group Finance April 2002

David A. Levy, BOT and Public Procurement : A Conceptual Framework, 7 Ind. Int’l & Comp. L. Rev. 95

Local Government Infrastructure Financing Manual, Conclusions and Recommendations Australian government Department of Transportation and Regional Services, National Office of Local Government Publications, July 2002 Guidelines for a, Report prepared July 2002 for NOLG by SGS Economics & Planning Pty Ltd. in association with Local Government Ministers’ Conference

Charles Scott-Malden, Let’s Get Wrecked: PPP or Not PPP? Infrastructure Journal, 14 Kensington Court, London, W8 5DN, United Kingdom  (c) Torcello Publishing Ltd, March, April, 2002

Andrew Marsden, Time to Invest? A Private Equity Investor’s Perspective of Opportunities in the European Infrastructure Market, Infrastructure Journal, 14 Kensington Court, London, W8 5DN, United Kingdom  (c) Torcello Publishing Ltd, Oct 02

Roger McCormick, Project Finance Articles and Papers 1986-1999, published by the firm Freshfields (a London based international law firm and are available on request from the firm to its London office)

 A.Merna and N.J. Smith, Projects Procured by Privately Financed Concession Contracts, Volume 2, Asia Law & Practice Ltd., 1996

Nicholas Moller, How to Protect Lenders on Thai Projects, 5/1/99 Int’l Fin. L. Rev. 2529, (1999 WL 23416785)

J. Michael Robinson, Q.C., Director, International Practice Group, Fasken Martineau, Toronto, Canada, The Build, Own, Operate and Transfer Model for Public/Private Infrastructure Projects in emerging Markets, 1997,updated 1998 and 1999

Pablo Serra, Regulation, Competition and Privatisation, Evidence form Utility and Infrastructure Privatisation in Chile, OECD Advisory Group on Privatisation, 12^th Plenary Session, Helsinki, September 17,18, 1998

Slovenia: Workshop on Private Participation in the Power Sector – February 1999, Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) ESM211, C/o Energy, Mining and Telecommunications Department, The World Bank, 1818 H Street, NW, Washington, DC 20433, U.S.A.

Sub–Saharan Africa Transport Policy Program, The World Bank and Economic Commission for Africa, SSATP Working Paper No 26, Privately Financed Road Infrastructure, Michael J. Hamilton May 1996

Endnotes

[1] Defined hereafter at page 4

[2] hereafter, for the purposes of this paper, where we refer to BOT we also include BOOT

[i] a)       “The private sector should play a more active role, and the multilateral institutions should contribute to that objective.” Organization of American States, Americas Business Forum, March 18-21, 1996, Report to the Final Plenary, Workshop IID: Infrastructure Financing Chairman: Hernan Sommerville, Rapporteur: Juan Jose Echavarria, Report to Government paragraph A7

b)         “Recognizing the need to build sustainable methods to finance the large demand for urban infrastructure, efforts are underway throughout the region to establish new mechanisms to tap private capital markets and to promote financing under market conditions.” Infrastructure Finance Regional Workshop Sponsored by United States Agency for International Development (USAID) Indonesia, March 1997, Infrastructure Finance: Implementing Market-based Financing Options Issues in Finance Options, James Leigland USAID, Tim Alexander USAID, Hal Minis Research Triangle Institute, Priscilla Phelps RTI

c)         “Australia has recognised the that there will be a substantial increase in spending necessary to maintain local government infrastructure networks and services as well as create new facility. In order to do this there has been realisation that PPP may be one of the more important methodologies.”  Australian government Department of Transportation and Regional Services, National Office of Local Government Publications, July 2002 Guidelines for a Local Government Infrastructure Financing Manual, Conclusions and Recommendations, Report prepared July 2002 for NOLG by SGS Economics & Planning Pty Ltd. in association with Local Government Ministers’ Conference, Local Government Infrastructure Financing Manual

d)         “The government has three strong reasons to take further action on infrastructure: *A tremendous need exists for upgrading and increasing capacities in virtually every type of infrastructure. The cost of these necessary investments is beyond the financial capacity of the public sector-even when borrowing in international capital markets is taken into account.*Even if the public sector could finance all the necessary expansion, international experience shows that private sector investors could also make valuable contributions toward ongoing maintenance, upgrades, and efficient operation of infrastructure facilities.” Slovenia: Workshop on Private Participation in the Power Sector – February 1999, Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) ESM211, C/o Energy, Mining and Telecommunications Department, The World Bank, 1818 H Street, NW, Washington, DC 20433, U.S.A.

[ii] Unravelling EU Laws on PPP,  European Public Finance (EPF),Jan van Balen, a lawyer at Dutch law firm Boekel De Nerée pg 33

[iii] MULTILATERAL CENTRE FOR PRIVATE SECTOR DEVELOPMENT –ISTANBUL, Basic Elements of a Law on Concession Agreements, Organization for Economic Co-operation and Development (OECD), published under the responsibility of the OECD and the Istanbul Stock Exchange.

Rainer Geiger Deputy Director Directorate for Financial Fiscal and Enterprise Affairs OECD and Mr. Aril Seren, Senior Vice Chairman of the Istanbul Stock Exchange and Secretary General of the Federation of Euro-Asian Exchanges pg11 13.2(b)

[iv] Sub–Saharan Africa Transport Policy Program, The World Bank and Economic Commission for Africa, SSATP Working Paper No 26, Privately Financed Road Infrastructure, Michael J. Hamilton May 1996

[v] The Build, Own, Operate and Transfer Model for Public/Private Infrastructure Projects in emerging Markets, J. Michael Robinson, Q.C., Director, International Practice Group, Fasken Martineau, Toronto, Canada, 1997,updated 1998 and 1999, pg. 4

[vi] See   ⁱ b) above

[vii] See   ⁱ b) above

[viii] See  ⁱ  c) above at (2.4 pg6)

[ix] See  ⁱ  c) above at (2.2 pg4)

[x] See   ⁱ b) above

[xi] “… private sector initiative is invading areas that were previously considered in the exclusive domain of the public sector.” Infrastructure Financing with Unbundled Mechanisms, Inter-American Development Bank December 1997, No. IFM-109, Jose’ A. Trujillo, Remy Cohen, Xavier Freixas, Robert Sheehy pg.1

[xii] BOT and Public Procurement : A Conceptual Framework, David A. Levy, 7 Ind. Int’l & Comp. L. Rev. 95

[xiii] See  ^xi  above pg 1

[xiv] See  ^xi  above pg 6

[xv] See   ⁱ b) above

[xvi] Infrastructure Financing with Unbundled Mechanisms, Inter-American Development Bank December 1997, No. IFM-109, Jose’ A. Trujillo, Remy Cohen, Xavier Freixas, Robert Sheehy, pg 1

[xvii] See  ^xiii  above

[xviii] Information, Accounting and the Regulation of Concessioned Infrastructure Monopolies, Phil Burns (London Economics) and Antonio Estache (World Bank and European Center for Applied Research in Economics) pg 19

[xix] INTERNATIONAL CONFERENCE ON TRADE AND INVESTMENT, Maximising the Benefits of Globalisation for Africa, Dakar, 23-26 April 2003, Support to private sector and trade development, Lessons learned from experiences, Chimère Diop

Pg 7 “In July 2002, a Ministerial declaration was issued to outline some key common principles and best practices to attract private investment in South East Europe. African countries should consider sharing those principles in their efforts to establish a favourable climate for both international and regional investment. Some of those principles and best practices are: (i) transparency of national policies and regulations and administrative practices affecting foreign and domestic investment; (ii) fair and equitable treatment of domestic and foreign investments with full protection of property rights including intellectual property; high standards on expropriation and compensation; (iii) unrestricted access of investors to effective dispute settlement mechanisms including international arbitration.”

“Box 12: Attracting Investment: Key Principles and Best Practices

The Participating Countries recognize the following principles which, to the extent applied, contribute to a favourable climate for both international and regional investment:

• Transparency of national policies, laws and regulations and administrative practices affecting foreign and domestic investment;

• Coherence and stability of these laws, regulations and administrative practices; changes made in light of evolving circumstances should respect the rights of investors established by that time;

• National treatment for foreign investors at both the pre and post establishment stage; exceptions should be clearly and precisely formulated and periodically reviewed with a view to phasing them out;

• Timely and unrestricted transfer of the proceeds of the investment and guarantee for the repatriation of the capital when the investment is terminated;

• Fair and equitable treatment of domestic and foreign investments with full protection of property rights including intellectual property; high standards on expropriation and compensation;

• Unrestricted access of investors to effective dispute settlement mechanisms including international arbitration;

• Movement of key personnel for the investment and simplification of visa regulations;

• Transparency of incentive measures;

• Simplification of administrative procedures for the establishment of new companies, the take-over of existing companies, the granting of permits, concessions and licenses as well as for other operations or transactions needed for the establishment or development of private investment;

• Transparent and equitable regulations and procedures for privatization and de-monopolization;

• Respect of internationally agreed principles of corporate social responsibility including the OECD Guidelines for Multinational Enterprises;

• Good corporate governance and integrity in public administration;

• Removal of barriers to trade, which have a negative effect on investment, through increased regional cooperation;

• Promotion of investment policies and measures consistent with their commitments to sustainable development, protection of the environment and the observation of internationally recognized core labor standards.”

[xx] Legal Institutions and Financial Development, Thorsten Beck and Ross Levine

World Bank Policy Research Working Paper 3136, September, 2003

[xxi] See ^xx at page 4

[xxii] See ^xx at page 14

[xxiii] See ^v  at page 6

[xxiv]  James Hogan and Aigoul Kenjebayeva, 1/1/01 Int’l Fin. L. Rev. 99102 (2001 WL 15390681)

[xxv] see ⁱⁱ above: Relevant EU law as regards PPPs: EU Treaty 25 March 1957 (Rome) / 7 February 1992 (Maastricht); Works Directive 93/37/EEG 14 June 1993; Deliveries Directive 93/36/EEG 14 June 1993; Services Directive 92/50/EEG 18 June 1992; Utilities Directive 93/38/EEG 14 June 1993: Interpretative Statement of the European Commission: OJ-EG C121, 2000/04/29; Advice of the Economic and Social Committee: OJ-EG 2001/C, 14/19.

[xxvi] see ⁱⁱ above at page 34

[xxvii] see ⁱ  c above at page 30

[xxviii] Guidelines for Procurement under IBRD Loans and IDA Credits The World Bank, 1818 H Street, N.W. Washington, D.C. 20433, © Fifth printing January 1999

“While in practice the specific procurement rules and procedures to be followed in the implementation of a project depend on the circumstances of the particular case, four considerations generally guide the Bank’s requirements:

(a)    the need for economy and efficiency in the implementation of the project, including the procurement of the goods and works involved;

(b)    the Bank’s interest, as a cooperative institution, in giving all eligible bidders from developed and developing countries[xxviii] an opportunity to compete in providing goods and works financed by the Bank;

(c)     the Bank’s interest, as a development institution, in encouraging the development of domestic contracting and manufacturing industries in the borrowing country; and

(d)    the importance of transparency in the procurement process.”

[xxix] Managing Government Exposure to Private Infrastructure Risks, Timothy Irwin, Michael Klein, Guillermo E. Perry, Mateen Thobani, The World Bank Research Observer, vol. 14, no. 2 (August 1999), pp. 229–45 at page 230

[xxx] see ^xxix at page 231

[xxxi] see ^xxix at page 234

[xxxii] see also Corporate Governance, Investor Protection , and Performance in emerging Markets: Public Policy Research Working Paper 2818, The World Bank Development Research Group Finance April 2002, Leora F. Klapper, Inessa Love for statistical support of this position.

[xxxiii] see ^xxix at page 235

[xxxiv] Infrastructure Journal, 14 Kensington Court, London, W8 5DN, United Kingdom  (c) Torcello Publishing Ltd, 2003, Laying the Foundation Stone: Lithuania’s new Concessions  Laws, Lessons  for PPPs  in Central  and  Eastern Europe  and  the CIS, Christopher Clement-Davies, Giedrius Stasevicius, and Alexei Zverev

[xxxv] see ^xxxiv at page 60

[xxxvi] “If the Concessions Law is seriously deficient, or has not yet been introduced, it can greatly compound the difficulties of putting infrastructure projects together. Conversely, a clear and comprehensive legislative framework should significantly facilitate the project’s successful structuring, negotiation and completion. It is noteworthy that many of these recommendations are in the form of negatives – statements about what Concessions Laws should not attempt to achieve or restrictions that they should not contain. A great deal of the difficulties that arise with these laws in practice derive from attempts to impose unnecessary constraints or excessive detail on infrastructure projects. And, whilst common-law and civil law traditions, respectively, may tend towards somewhat different approaches in this  context, it has clearly proved possible to frame legislative recommendations which straddle these two legal philosophies (and their various permutations). The ‘fundamentals’ would typically need to cover the following ground:

• scope and definitions

• power and authority

• selection of concessionaries

• tendering procedures

• exceptions to competitive tendering

• negotiation procedure

• content and validity of concession agreement

• security and ‘stepin’ rights

• dispute resolution

• miscellaneous”

[xxxvii] see ^xxxiv at page64-65

[xxxviii] see ⁱⁱⁱ above at pages  49 – 51

[xxxix] see ⁱⁱⁱ above

[xl] see ⁱⁱⁱ above at page 6

[xli] “This Law is concerned with the powers of Contracting Authorities to enter into Concession Agreements, the procedures for the selection of Contractors, the content of Concession Agreements and related matters.”

[xlii]   The explanatory notes by Roger McCormick of Freshfields, provide the reasoning behind Section IV:

“It is in the interests of the international community as well as the interest of any particular host state that:

(a) fraud and corrupt practices are eradicated as far as possible from award procedures for new capital projects and, when they are discovered, are appropriately punished; but also that:

(b) the legislative framework for foreign (and domestic) investment is such that those who invest very substantial sums of money in a country’s infrastructure can do so with reasonable certainty that the complex contractual structure on which they rely for a return of their investment and its repayment is reasonably secure; investors will be prepared to take certain kinds of project risks but very few investors are prepared to take the technical risk that fundamental project contracts such as the Concession Agreement may be void or invalid.”

[xliii] See ⁱⁱⁱ above page 13, Article 3.1

[xliv] see ⁱⁱⁱ above at page 27

[xlv] United Nations Commission on International Trade Law (“UNCITRAL”) – Legislative Guide on Privately Financed Infrastructure Projects

[xlvi] see  ^xlv above at page 2

[xlvii] Cadwalader Wickersham & Taft, Attorneys at Law with offices in New York, London, Charlotte and Washington, participated in the drafting of the Guide and in 1999 posted an article on the internet summarizing the provisions. (http://library.lp.findlaw.com/articles/file/00343/001203/title/Subject/topic/International%20Law_International%20Organizations/filename/internationallaw_1_245)

[xlviii] see  ^xlv above at page 37

[xlix] see  ^xlv above at page 61

[l] see  ^xlv above at pages 118-123

[li] see  ^xlv above at page 123

[lii] see  ^xlv above at page 134

[liii] see ^xlvii above

[liv] see ^xlvii above in part

[lv] see ^v above at page 6, where Robinson says “ Lest I leave readers with the impression that such new concession/BOT laws eliminate all problems with the concession, I hasten to add that the absence of judicial precedent and effective court systems in many of these countries leaves the effective application of such laws highly problematic. This makes compulsory international arbitration all the more important.”