A concession makes the private partner (concessionaire) responsible for the full delivery of services in a specified area, including all capital investments, almost like a geographically delimited monopoly. Although the private partner operator is responsible for providing the assets, such assets are publicly owned even during the concession period.
The concessionaire collects the payments directly from the service end users. The fee schedule is typically established by the concession contract, which also includes provisions on how it may be changed over time. A concession contract is typically valid for 10 to 15 years and renewable up to 30 years so that the operator has sufficient time to recover the capital invested and earn an appropriate return over the life of the concession. The government organization may contribute to the capital investment cost, if necessary. This can be an investment "subsidy" to achieve commercial viability of the concession. Alternatively, the government organization can be compensated for its contribution by receiving a portion of the incomes generated.
Concessions are an effective way to attract private finance required to fund new construction or rehabilitate existing facilities. A key advantage of the concession arrangement is that it provides incentives to the operator to achieve improved levels of efficiency and effectiveness since gains in efficiency translate into increased profits and return to the concessionaire. The transfer of the full package of operating and financing responsibilities enables the concessionaire to prioritize and innovate as it deems most effective.
Key drawbacks include the complexity of the contract required to define the operator's activities. The government organization needs to upgrade its regulatory capacity in relation to fee schedules and performance monitoring. Further, the long term of the contracts (necessary to recover the substantial investment costs) complicates the bidding process and contract design, given the difficulty in anticipating events over a 10 to15 year period. This drawback may be countered by allowing a periodic review of certain contract terms in the context of the evolving environment.
There is additional risk that the operator will only invest in new assets where it expects payback within the remaining period of the contract unless provisions for these events are set out in the contract. Because of the long-term, comprehensive nature of the contracts, they can be politically controversial and difficult to organize. It can also be argued that concessions go against open competition given the limited number of qualified operators for a major infrastructure network. The government partner must make sure that the concessionaire will not have an opportunity to become a full monopoly, and provide measures to allow additional operators into the market when necessary. Failure in regulating and policing may lead to the phenomenon of regulatory capture in the concession area.