Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

Railway Reform: Toolkit for Improving Rail Sector Performance
Annex 4: Concession Contract Guide
• Authority breach of an obligation, including any breach occasioned by third
parties for whom the Authority is responsible;
• Authority Changes or certain Future Upgrades; and
• Discriminatory or specific changes in law.
The Authority should bear the effects of certain Changes in Law and it may, after
careful consideration in certain schemes, be appropriate to add other (or railway
sector) specific events.
The Authority may face a request from the Concessionaire or its Funders to consider
additional items as Compensation Events. If the obligation is to make payment
by a due date, additional compensation is not required, as nonpayment is
addressed through provisions dealing with interest on late payment
If a Compensation Event occurs during the execution of New Upgrades, the
planned completion date may have to be postponed; usually by the length of any
delay caused (any long-stop date will be similarly put back). If revenue or increase
in revenue commences only when construction is complete, a practical
consequence is that the start date of the Concessionaire’s revenue stream or the
start date of increase in the revenue stream is also delayed and additional costs
are incurred. As a result, the Concessionaire may suffer significant additional expense
through finance charges and additional costs.
Therefore, prior to contract signature, it must be decided how to compensate the
Concessionaire for any delays in completing the New Upgrades that are the direct
result of a Compensation Event. One option is to retain the original Expiry Date
for the Term and compensate the Concessionaire for its loss; as an alternative,
the Concessionaire may agree to extend the Term.
If the Agreement includes provisions for liquidated damages, then the Concessionaire’s
liability for liquidated damages will also require relief for the period of
delay caused by the Compensation Event. Otherwise, the liquidated damages
provision risks failing completely, particularly if there has been a failure by the
Authority. The Concessionaire should also be relieved of any other liability for
Authority losses in respect of the Compensation Event. This relief should be
taken into account in determining consequences for the Authority of a Compensation
Event. The main advantages of not extending the Term are first, simplicity,
and second, Funders prefer this option because it preserves the senior debt loan
life cover ratio and equity return. Also, this approach offers the better incentive to
the Authority to manage its rights and obligations during the construction phase
in a way that avoids delay.
The Concessionaire should be obliged to exercise reasonable efforts to mitigate its
losses and costs, for example, by rescheduling the works timetable or redeploying
staff, which in the case of New Upgrades, could avoid delays to the planned completion
date, although mitigation may incur extra costs.
A common way to deal with Compensation Events is to rely on the Financial
Model prepared at the time of tendering. By using the model, the parties calculate
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