The government's main objectives of a concession agreement are:
• Successful construction of the infrastructure asset. In most PPP transactions, the design and construction of the infrastructure asset is undertaken by the private sector. The project company's design and construction of the infrastructure adequately achieves the object of the project and that the design and construction is completed in a timely manner. The government should not be responsible for any default in the design and construction of the infrastructure project (except in the limited circumstances that the defect or delays were caused by the government).
• Quality and quantity of infrastructure service. The project company provides an adequate infrastructure service (measured in terms of output including quality) throughout the period of the concession. Properly defining the responsibilities of the private sector is key to the successful implementation of the project. The government needs to be able to articulate its needs and expectations of the private sector in clear and quantifiable terms. What the measures of infrastructure services quality and quantity are will depend on the industry sector.
• Accessibility of the service. The project company should ensure that the services are available to everyone in the geographical area of the concession. The issue of universal service obligations has broader policy and industry implication and cannot only be dealt with only at the concession agreement level. Ideally, policies and regulations are put in place to ensure that infrastructure services, even when provided to a private sector through concessions, are or will be made available to the poor or those in remote areas. In developing countries where there may not be the policy framework to ensure universal access, concessions should address the issue of universal access, if only in that localised area where the concession has been granted.
• Regulatory compliance. The project company should observe relevant safety and environmental protection standards. For some developing countries, the regulatory regime with respect to the industry sector may be evolving or underdeveloped, and the concession agreement may be a mechanism to provide for economic regulations or other regulatory objectives, until a fully fledged regulatory system can be instroduced.19
• Acceptable tariff. The charges levied on the public (or consumer) should be "reasonable". "Reasonableness" in this context depends on many factors, including the cost of providing the infrastructure, the affordability to the consumers, and the implications for the wider economy (because infrastructure services such as water, electricity and telecommunications are often inputs for productions of other goods and services in the economy).
• Adequate maintenance. Proper works of maintenance and repairs are carried out to ensure: i) that the project company provides an adequate service and ii) that the infrastructure is in a good condition when it is transferred to the government at the end of the concession period.
• Fair return on the investment. There are three aims of the design of the tariff structure. First, to assure lenders that there are sufficient revenues to cover the project's debt service. Second, to assure equity investors that they will recover their investment and earn a reasonable return on their investment. Third, to ensure reasonable profit sharing between the sponsors and the government if the project is more successful than anticipated. From the sponsors' point of view, the third object may be controversial. The sponsors have invested in the project, and any returns from the project, after paying for the borrowing and other costs of the projects, ought to belong to the sponsors as compensation for having undertaken the commercial risk in relation to the project. On the other hand, "excessive" returns by the project sponsors means that either the public (through paying for the infrastructure services) or the government (and therefore indirectly the public through the tax system) is paying more for the infrastructure project than it should be. Consequently concession agreements sometimes contain measures to prevent the project company from making "windfall profits." For example, by shortening the length of the concession period if the project achieves certain income threshold, or by providing for the project company to set aside income earned above a certain threshold for the government or for other funds. Care must be taken to ensure that the design of any mechanisms against "windfall" profits does not effectively destroy the incentive for the project company to operate in an efficient manner.
In addition to its rights under the concession agreement, the government may ensure that its objectives are met by enacting legislation, or by holding shares in the project company that would prevent the project company from taking certain action without the government's consent.
Finally, it is prudent for the government to require that the sponsors guarantee certain (if not all) obligations under the concession agreement. This is because while a concession agreement is usually an agreement between the government and the project company, the project company is usually a special purpose vehicle specifically incorporated to conduct PPP project, the government should look to rely on companies that have experience, established presence and long-term financial history to provide a performance guarantee. This is especially true where the sponsors are also the contractors responsible for the construction of the infrastructure facility.
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19 Christopher Clement-Davies, Public/Private Partnerships in Emerging Markets: Structuring the Concession Agreement, 4