Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
Annex 4: Concession Contract Guide
on the winning bid being countersigned by the Authority to make the Agreement.
Regardless of the option selected, the bid bond should be extended to cover the
achievement of Conditions Precedent to the Agreement becoming effective.
As indicated, a performance bond that lasts the life of the Term is unlikely to be
cost-effective. The considerable expense that the winning bidder has incurred to
reach that stage creates an incentive to proceed. However, it may be prudent to
have a performance bond—specified by either time period, or expenditure level.
Shareholder investment, for example in New Upgrades, coupled with Funder
loans puts real risk money at stake, some or all of the benefits of which will accrue
to the Authority, although the benefit will be less if there is a full payout to
the Funders regardless of the reason for termination. A considerable amount is at
stake; thus, a performance bond provision should not only stipulate a financial
institution with a high credit rating, specifying the credit agency and rating, but
also allow the bond to be returned to the issuer at a point specified by either time
period, or expenditure level.
The interval just before the Term expires is the next period when the Authority is
most exposed to risk. Usually, there will be a requirement that on expiration of
the Term, assets should be of a standard commensurate with rail system operation
(see Hand Back post). At a suitable point in time before expiration, concession
assets should be inspected. To the extent work is required to reach that standard,
the Concessionaire should lock up dividends and other payments in an escrow
account sufficient to meet the requisite expenditure; or the Concessionaire
should procure a bond issued (by an issuer of the same financial strength as for
the issue of the performance bond). The escrow account or the bond should exist
until the requisite work is complete and the final inspection, which would ordinarily
take place after Hand Back has been satisfactorily carried out.
2.13 Obligations of the Concessionaire
To the extent economically and commercially sustainable, Concessionaire rights
and obligations pursuant to the Agreement should be at Concessionaire cost and
risk, without recourse to Authority credit or guarantees. If the Authority intends
financial support, whether actual or contingent, the basis should be specified in
the Agreement.
Unless the Agreement includes contrary provisions (for examples, see the concept
contained in section 2.20 (Preservation of Concessioned Assets) it may be appropriate
for the Concessionaire to have unrestricted authority to negotiate terms
and conditions of all necessary contracts with all suppliers, commercial service
providers, and users in respect of the concession and its obligations under the
Agreement. If Authority financial support is involved, Concessionaire procurement
rules and procedures and the extent of their application should be agreed in
advance between the Authority and the Concessionaire.
To the extent viable under the circumstances pertaining to the scheme, the Concessionaire
should agree to raise the required finance to complete the New Upgrades
in accordance with Agreement terms and conditions. If loans and credits
are sought to be arranged based on Authority guarantees or backstopping such
loans in favor of the Funders, then more of the scheme’s risks will fall on the
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