Infrastructure Contracts
INFRASTRUCTURE CONCESSION CONTRACTS: AN INTRODUCTION
#2/July 08
What is infrastructure concession contract? What are the advantages and disadvantages of concession contracts? This paper addresses these two questions. Also, it outlines the basics of infrastructure concession contracts.
I. Introduction Ownership of public assets is a sensitive issue for all governments. However, budgetary shortfalls as well as the repeated failure of governments all over the world to maintain these assets have forced them to change their attitude towards private ownership of such assets. As a result, policymakers have devised various ways in which the private sector can be brought in to maintain and operate public assets. Thus, concession contracts, through which ownership rights continue to reside with public authorities save operation rights and associated returns being transferred to private players, have been gaining popularity around the world. Under concession contract, private partner gets exclusive rights from the government to operate, maintain and sometimes even carry out investment in a public utility for a given period of time. In return, the private party pays either a fixed sum, a percentage of revenue from the utility or a combination of the two to the government for exclusive rights over a facility. Revenue to the private party comes from the user fee charged to users of the facility. There are different types of concession contracts, including: ex-leasing, franchise, buildoperate-transfer (BOT) etc. Private finance initiatives (PFIs) may also be considered similar to concessions. The major advantage of a concession is that it allows certain public assets, for which private ownership is economically inefficient and politically not possible, to be maintained and operated efficiently by private players. Bidding for concession contracts introduces competition into the industry, albeit in an artificial sense. Such competition often induces private players to
#2/July 08
What is infrastructure concession contract? What are the advantages and disadvantages of concession contracts? This paper addresses these two questions. Also, it outlines the basics of infrastructure concession contracts.
I. Introduction Ownership of public assets is a sensitive issue for all governments. However, budgetary shortfalls as well as the repeated failure of governments all over the world to maintain these assets have forced them to change their attitude towards private ownership of such assets. As a result, policymakers have devised various ways in which the private sector can be brought in to maintain and operate public assets. Thus, concession contracts, through which ownership rights continue to reside with public authorities save operation rights and associated returns being transferred to private players, have been gaining popularity around the world. Under concession contract, private partner gets exclusive rights from the government to operate, maintain and sometimes even carry out investment in a public utility for a given period of time. In return, the private party pays either a fixed sum, a percentage of revenue from the utility or a combination of the two to the government for exclusive rights over a facility. Revenue to the private party comes from the user fee charged to users of the facility. There are different types of concession contracts, including: ex-leasing, franchise, buildoperate-transfer (BOT) etc. Private finance initiatives (PFIs) may also be considered similar to concessions. The major advantage of a concession is that it allows certain public assets, for which private ownership is economically inefficient and politically not possible, to be maintained and operated efficiently by private players. Bidding for concession contracts introduces competition into the industry, albeit in an artificial sense. Such competition often induces private players to