Concession Agreement

A concession agreement refers to a contractual arrangement between a private company and a government authority. Under this arrangement, the private company gains the right to carry out business operations on government property, provide public services, or undertake an infrastructural project. These activities are performed for a specified period and under defined terms and conditions.

Such contracts facilitate the outsourcing of public sector tasks for the welfare of society while ensuring the profitability of private companies. It is common in Public-Private Partnerships (PPP) and similar models where private firms are hired to provide public services or complete infrastructure projects. These projects often facilitate essential public services such as healthcare, transportation, and education.

A concession agreement is a contractual arrangement between a government body or public sector entity and private firms, permitting the latter to commence business on the former’s facility or property at the specific terms and conditions for a certain period. It comes in different sizes, from running a canteen at a public park to building the infrastructure of a nation. Also, such contracts can be seen in almost all types of industries. The term concession states that private firms' permission to use government property or facility for a fixed period is required under the stated terms and conditions.

Such an arrangement mentions the terms and conditions of such a deal between the government and the private companies. It states the rights of the concessionaire, the contract period, fees, insurance requirements, rent, or revenue sharing proportion, or both. However, such terms are at the discretion of the involved parties and the type of project. However, these contracts are often exposed to regulatory, political, financial, legal, and operational risks to the parties. 

Moreover, it may bind the parties to specific terms like revenue sharing, termination conditions, maintenance cost, performance standards, dispute redressal mechanism, etc. Therefore, it is essential for private companies to carefully go through such agreements before signing to safeguard their interest and ensure cordial relations. 

Let’s now explore the different forms of concession agreements: 

1. Model Concession Agreement (MCA): The PPP concession agreement is an arrangement that facilitates Public-Private Partnerships (PPPs). It is commonly used for infrastructure development in the country, such as the construction of dams, bridges, highways, roads, rails, airports, and more.
2. Administrative Concession: Another arrangement where the public sector firm authorizes a private company to use its facility, goods, or services for a given period; in exchange, it charges a certain fee from the latter.
3. Highway Concession: Here, the government grants permission to a private construction company to construct a highway on public land, manage it, and collect tolls from the public as a source of revenue.
4. Mining Concession: The government extends the right to perform mining operations, i.e., dig, explore, research, and utilize the minerals or resources in a precisely measured area, to a particular mining company for a fixed tenure.
5. Build-Operate-Transfer (BOT): Such an agreement allows the private firm to construct and operate a project or facility for a specific period. After this tenure, the facility is handed over to the government, which is the actual owner of the property.
6. Management Concession: Here, the private entity or concessionaire has the right to run and manage the facility or provide services for a specific period while expecting incentives or penalties based on their performance.
7. Lease Concession: In such a concession, the grantor or the government leases property or infrastructure to a private firm that is responsible for its maintenance and operations during the lease period.
8. Other Concession Agreements: Various other concession contracts can exist, including food and beverage concession agreements and petroleum or oil and gas concession agreements.

The government enters into different forms of national and international concession agreements to ensure the uninterrupted development of the nation and economy. The parties can use various sample concession agreements available online or create one of their own. Meanwhile, some of the relevant cases of concession are discussed below:

Example #1

Suppose the local government released a tender for medical supplies to its public hospitals in the city. The officials selected XYZ Pharma’s application for this one-year tender on the condition that the pharma company would ensure a constant supply of medical equipment, drugs, and surgical items throughout the tender period. Thus, the government enters into a concession agreement with XYZ Pharma Co. 

Example #2

As per an article published on January 11, 2021, the Prince George’s County Public Schools (PGCPS) and Prince George’s County Education & Community Partners (PGCECP) collaborated on an alternative construction financing project for six public schools aimed at addressing the overcrowding issues and modernizing the existing facilities. The $1.24 billion program was finalized in mid-December 2020, along with the design, build, finance, and maintenance of schools. The project is expected to be completed by 2023. 

The PGCECP included Fengate Capital Management Ltd., Gilbane Development Company/Gilbane Building Company, Stantec, and Honeywell, who will be responsible for delivering and maintaining the schools for the next 30 years. This initiative would accommodate around 8,000 students and guarantee 15 years of useful life for all major building systems. Additionally, a $1 million endowed fund was established to support scholarships, internships, and apprenticeships, with a total value of $4.7 million.

The program aimed to procure at least 30% of total eligible costs to minority-owned businesses, community-based enterprises, and community-based small businesses, thereby stimulating the economy while saving approximately $174 million in deferred maintenance and construction costs compared to traditional procurement models.