Changing the rules of the concession game

Changing the rules of the concession game (1st of 2 Parts)

 

Are concessions public-private partnership (PPP) arrangements? What is a concession? What are examples of concession agreements? What are the harmful effects of changing the rules of the concession game during the life of the contract?

  • Concession broadly speaking. Broadly, a concession is a license, franchise or grant of authority. Without a concession, a proprietary function or the “business” aspect of government cannot be “shared” or entrusted to a private-sector proponent (PSP) or concessionaire.
  • Concessions as PPPs. A concession is either a distinct type of a PPP embodied in a separate contract or is integrated into other PPP modalities. The transmission concession awarded to the National Grid Corp. of the Philippines and the two water concessions granted to Manila Water and Maynilad belong to the first type. These concessions were made by government corporations.

For the second type, all operate under the BOT law and its variants, i.e., build-operate-transfer, build-transfer-operate, build-own-operate, rehabilitate-operate-transfer (ROT) and rehabilitate-own-operate (ROO), and joint-venture arrangements carry with them concession provisions.

Local concessions, say for public markets and ferry systems, can also be considered. Under the template ordinance of Memorandum Circular 120-2016 of the Department of the Interior and Local Government, a concession is defined as “A contractual arrangement whereby the financing and construction of a new facility and/or rehabilitation of an existing facility is undertaken by the PSP after turnover thereof to it, and includes the operation, maintenance, management and improvement, if any, of the facility for a fixed term during which the PSP generally provides service directly to facility users and is allowed to charge and collect the approved tolls, fees, tariffs, rentals or charges from them. The local government may receive a concession or franchise fee during the term of the contract and/or other consideration for the transfer, operation or use of any facility. There may be a transfer of ownership of the asset or facility after the concession period has ended.”

  • Akin to ROT or ROO. Concessions, like the ROT and ROO modalities under the BOT law, are “brownfield” projects where there are existing facilities—like transmission lines and water pipes—that require rehabilitation and improvement.
  • Different laws. What sets apart concessions from the ROT and ROO modalities are the governing laws. ROT and ROO modalities are governed by the BOT law, while concession arrangements are governed by different laws. For the transmission and water concessions, the Electric Power Industry Reform Act, or Epira (2001) and the National Water Crisis Act (1995), respectively, are the applicable laws, even if the BOT law was already an existing law
    at that time.
  • PPPs face the same risk—successor risk. Even if governed under distinct laws and divergent regimes, concessions, like any other PPP, are exposed to the same risk. Unfortunately, after government sets policies, after a PSP wins in a bidding or challenge, after parties affix their signatures to a contract, after regulatory approvals are obtained, after loans are contracted, after investments are made by the concessionaires, during the life of the operations and management of the awarded project, there remain uncertainties. The two major concessions are now facing the future-proofing test.

To be continued

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