Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
Annex 4: Concession Contract Guide
Annex 4
Concession Contract Guide
1 Introduction
The aim of a Concession Agreement is to create the best value for money in the
provision of railway services. The Agreement seeks to balance the contributions
of the public and private sectors so that public service obligations are met as economically
as possible while maintaining acceptable service levels; these tasks are
sometimes best undertaken by the private sector, with some government support.
Drafting the contractual arrangement known as the Concession Agreement
should be preceded by conducting a comprehensive feasibility study that includes
legal due diligence and risk review, which can differ from country to country.
In contractual arrangements, a key difference between civil law and common law
jurisdictions is judicial interpretation of agreements. Generally, in common law
countries, the law assumes that parties have set out the specifics of their agreement
in the contract. Therefore, under law, the contract means what it says. By
contrast, civil code countries rely more on the provisions in the civil code, hence,
contracts tend to be shorter because they do not need to repeat what is in the
code. In addition they are interpreted on a purposive basis, namely, “What was
the intent of each party?”
To a degree, if project finance is used, international lenders tend to demand comprehensive
documentation rather than rely on judicial interpretation, or failing
that, the results of arbitration. However, if lenders can rely on being fully paid out
by the state in the event that an agreement is terminated, they may be less concerned
but the state is considerably more exposed to residuary risk.
The public sector would be well advised to consider the following: (i) Should it
recapture some benefit from refinancing arrangements that improve the equity
return? (ii) Should it rely on a financial model to make adjustments under the
Concession Agreement? (iii) How should it calculate compensation upon termination
if a corporate finance structure is adopted instead of a project finance
structure? Concession Agreements would then reflect the outcome of these decisions.
1.1 Purpose of Concession Agreement
The three main objectives of a Concession Agreement are the following:
• Promote an understanding of the main responsibilities and risks that are to
be undertaken by the parties to the agreement;
The World Bank Page 239