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Concessions for Infrastructure (A Guide to their Design and Award)
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 This report aims at helping policymakers understand issues related to the design, award, implementation, monitoring, and modification of concessions. It provides a guide to the complex range of issues and options involved in the implementation of concession arrangements, drawing on the experience of both industrial and developing countries. | | | | | 1. Introduction |  | | | Defining concessions | In this paper, a concession refers to "any arrangement in which a firm obtains from the government the right to provide a particular service under conditions of significant market power". | | Early concessions | Historical background on concessions: case studies from the 19th century show how concessions have worked and evolved over time. | | The rationale for concessions | Discusses the theoretical rationale for a concession, based on the existence of natural monopoly elements. Issues related to monopoly regulation (market structure, exclusivity) are set out. | | A comparison of different types of concessions | Briefly discusses the similarities and differences between different types of concessions, including management contracts, leases, "pure" concessions, BOTs, and rehabilitate-operate-transfers (ROTs). Points out that the difference with a divestiture is limited. |
| | | | | 2. The broad environment for concessions | | | | Government organization | Outlines the remaining government responsibilities in the context of a concession in the form of a checklist. Key issues to consider are the degree and form of decentralization and the potential for cross-sectoral regulation. | | The broader legal and regulatory environment | Provides a grid analysis for evaluating whether an existing legal and regulatory framework may be favorable for concession arrangements, including legal provisions related to resettlement, environmental and safety laws or general business operations provisions. Focuses on the needs of investors. |
| | | | | 3. Concession design | | | | Introduction | Guidelines for policymakers on how to define the contracting parties, the purpose and extent of the concession, allocating risks and the appropriate level of certainty versus flexibility. | | Allocation of responsibilities | Basic principles to guide the allocation of responsibilities between public and private parties to the contract. | | Price setting | Concession contracts will generally establish basic tariffs and provide provisions for dealing with the adjustment of tariffs over time. The paper focuses on how to design price structures, discussing alternative options for doing so and dealing with subsidies. Commonly for developing countries cost-covering tariffs rather than a subsidy-driven system is the preferred option in order to allow price signals to be more transparent. | | Price adjustment | Discusses the relative merits of alternative formula for updating prices, including rate-of-return, price-caps or revenue caps, based on two main criteria: risk-allocation and transaction costs. | | Performance targets, penalties and bonuses | Performance targets enhance incentives for a private operator to work efficiently and meet specified goals. Particular attention is paid to coverage targets and the need to define output rather than input performance targets. Penalties and bonuses should be designed to increase efficiency and minimize the regulatory burden. | | Public parties' security rights | Presents the tools (mostly financial) that governments can use to lower the risk of non-compliance by private operators (such as performance bonds or private insurance). | | Duration, termination and compensation | Discusses the relative merits of alternative formula for updating prices, including rate-of-return, price-caps or revenue caps, based on two main criteria: risk-allocation and transaction costs. | | Force majeure and other unforeseen changes | Categories of unforeseen changes and measures to deal with them are discussed. Those risks should be borne by the operators, who can usually take out insurance to protect themselves. | | Dispute settlement | Concession agreements can include a number of techniques to address conflicts, including judicial, quasi-judicial, administrative, arbitral, and non-binding alternative dispute resolution mechanisms, and should be addressed prior to the concession. |
| | | | | 4. Concession award | | | | Choosing the method of award | The method of awarding concessions is, alongside concession design, key to ensuring that the project will be funded. Methods of awarding concessions are discussed including competitive bidding, direct negotiations and competitive negotiations. | | Prequalification and shortlisting | Prequalification allows the government to extend the opportunity to bid only to those firms capable of providing the financial and technical expertise needed. Considerations include determination of the required expertise, definition of selection and evaluation criteria, the form of involvement by a lead party in a consortium, and the stage at which prequalification should take place. | | Bid structure and evaluation | A bid structure should address technical and financial feasibility, and may involve either a two-stage process or standardized technical minimums. In designing a financial bid, governments should seek simplicity and transparency, so as to ensure that the bid award does not require subjective judgments, and promote economic efficiency. | | Bidding rules and procedures | Use or reserve price, simultaneous, sequential and multiple round bidding, bid bonds, and cost sharing offer different ways to address transparency and economic efficiency in the bidding process. |
| | | | | 5. Regulatory institutions | | | | Establishing independent regulators | Effective regulation requires balancing the interests of the operator, the users, and the governments without being partial to any, along with the technical ability to address some complex, and necessary, regulatory functions. | | Reconciling independence with accountability | Measures to address checks and balances for a regulatory body include mandate and review, removal for misbehavior, transparent decision-making, review of budgets, annual reporting, and other scrutiny arrangements. | | Dealing with constrained regulatory capacity | High professional requirements and training for regulators is critical to avoid corruption, and may require bypassing civil service salary requirements (to prevent corruption) or contracting out some responsibilities to an independent firm. | | Determining the functions of utility regulators | Three basic models for regulatory institutions are: industry-specific, sector-specific, or multisectoral. The range of tasks for regulatory bodies depends on several factors such as potential conflicts of interest between tasks, public and government confidence in the regulator, and the agency's administrative expertise. | | Decision-making structure, procedural considerations, and implementation | While some countries grant decision-making authority to one person, commissions or boards are favored for their ability to address potential corruption issues. | | Finding alternative strategies | Alternatives are proposed to address situations where a regulator's independence cannot be certain. These include using the agency in an advisory role; conferring regulatory powers to state holding companies; forming a dedicated unit within a ministry; and using the court system or arbitration to address regulatory matters. |
| | | | | 6. Government support | | | | Types of government support | Governments can provide ongoing financial support through subsidies, financial investments or guarantees. | | Rationale and design issues | Common justifications for government support are: - The existence of uninsurable political risks.
- The assertion that some services should be provided below cost.
- The assertion that the government can bear risk at a lower cost than private investors.
The paper identifies when government support may be justified and how to choose between options for support depending on rationale. | | Government contingent liabilities | Correct valuation of the different types of government support for infrastructure projects is important for management of a government's overall exposure. The paper discusses how to correctly value government support and tools that can be used to manage the risks involved with providing such support. |
| | | | | 7. Annexes | | | | Choice of regulatory instruments | Outlines and sets out criteria for choice between instruments that can be used to define and regulate concession type arrangements, including public law instruments, licenses, private contracts, and decisions by regulatory authorities. | | A guide to power purchase agreements | Overview of issues to be addressed through a power purchase agreement between a state-owned electricity utility and a privately owned power supplier. | | Membership of dispute resolution bodies | Table of countries and their affiliations to ICSIC, New York, and Panama Conventions | | Lenders' security rights | A description of financial lenders security rights and the security packages that commonly exist to protect them. | | Investment insurance programs | Table of criteria and standards for participation in MIGA, Germany's C&L Deutsche Revision AG, Japan's EID/MITI, and the United States' OPIC. |
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