Concession Agreements

This HiQSTEP project is initiated by the European Commission, Directorate General for Enlargement Negotiations – DG NEAR.  The overall objective of the project is to support the beneficiaries in rationalizing and streamlining their PPP (Public Private Partnership) and concession frameworks in the energy sector with particular emphasis on concession agreements.

The specific objectives are the following:

• To provide an updated assessment of the legal framework of the PPPs (and concessions) in Eastern Partner Countries with emphasis on energy related PPP projects and concessions;
• To identify the PPP units established in Eastern Partner countries, assess the tasks entrusted to them as well as their decision making and enforcement capacities;
• To develop a standardized proposal for the procurement procedure and award of concession agreements;
• To develop an online portal specifically for PPPs in Eastern Partner Countries.

The study was initiated with an inception meeting in December 2016 and findings were presented in August 2017. During the project, missions were carried out to the six partner countries (March/April 2017), taking the opportunity to consult with major stakeholders, exchange information and draft, in cooperation with the legal experts of the Eastern Partner Countries and the involved authorities.

The final reports can be found under the Document repository.

The project team performing the tasks were:

• Mr. Przemyslaw Musialkowski, team leader of the HiQSTEP project and coordinator
• Mr. Vardan Grigoryan, lawyer, Armenia
• Ms. Asya Chalabova, lawyer, Azerbaijan
• Mr. Maxim Shapelevich, lawyer, Belarus
• Ms. Tamta Nutsubidze, lawyer, Georgia
• Ms. Tatiana Viery and Ms. Elena Stratulat, lawyers, Moldova
• Mr. Vitaliy Radchenko, lawyer, Ukraine
• Ms. Evangelia Vassilaki, lawyer, international legal expert
• Mr. Vagn Bendz Jørgensen, M.Sc. Econ, study team leader and international energy expert
• Mr. John Cherouvim, web developer

The project is carried out by a consortium comprising Kantor Management Consultants (Consortium lead), ibf, ICMPD and Eptisa in close cooperation with DG NEAR and DG Energy.

Findings

In 2014 the European Commission introduced three new directives regulating concessions and PPPs for energy:

1. Directive 2014/25/EC on coordinating the procurement by entities operating in the water, energy, transport and postal services sectors, repealing directive 2004/17/EC. The directive was to be implemented by 18 April 2016.
2. Directive 2014/23/EU on the award of concession contracts. The directive was to be implemented by 18 April 2016.
3. Directive 2014/24/EU on public procurement, repealing directive 2004/18/EC. The directive was to be implemented by 18 April 2016.
4. For oil and natural gas exploration and production concessions the older Directive 94/22/EC on the Conditions for Granting and using Authorisations for the prospection, exploration and productions of hydrocarbons is still in force.

It can be difficult to distinguish between concessions and PPPs, as they both are part of the same family.

In general, a concession is defined as the right to undertake and profit from a specified public activity over the long term and is subject to the economic risks related to the activity. In some cases, the concessionaires obtain an exclusive right to develop the activity within an area, but there could also be more concessionaires working in the same field.

In the Terms of Reference of this project under HiQSTEP, a concession is defined as a “long term (25-30 years) complex public-private partnership (PPP) where the concessionaire assumes responsibilities and risks traditionally borne by the contracting authorities and normally falling within their remit. The main feature of a concession is that the right to exploit the works and/or services always implies the transfer to the concessionaire of an operating risk of economic nature involving the possibility that the concessionaire will not recoup the investments made and the costs incurred in operating the works or services awarded under normal operating conditions, even if a part of the risk remains with the contracting authority or contracting entity”.

Concessions are normally used when a public owned natural monopoly outsources the activity to an economic operator. A concession is a sub-category of public-private partnerships, and can take various forms. Public Private Partnerships involve a combined effort by both the public and the entrepreneur with a larger risk to the public compared to concessions.

Component 1

Among the six Eastern Partner Countries, a variety of alternatives exists as to how PPPs and concessions are treated and how different types of PPPs are recognised. In most cases the definition of “concession” is not in line with the EU criteria. In some cases, PPP law is supplemented by a concession law, which is again supplemented by public procurement legislation (Moldova, Ukraine). It should be stressed that PPPs/concessions are rarely regulated by a single legal document, but rather by various legal texts of different hierarchy (laws, decrees, governmental decisions, policies etc.). In three Eastern Partner Countries, PPP laws coexist with concessions laws (Belarus, Moldova, Ukraine). In Armenia (where concessions are mentioned in the procurement law) a combined PPP/Concession law was recently approved. In Georgia and Ukraine old concession laws exist, however, they have never been applied in practice and an ad hoc special framework has been elaborated by the Ministry of Energy for all PPP projects in the field of energy. At present, new legislation on PPP and Concessions are in progress.

Finally, none of the jurisdictions have a specific law regulating PPP/concessions for the energy sector, although in Ukraine there is a specific provision according to which the gas distribution and supply, and electricity generation, distribution and supply sectors are eligible for PPP.

In Azerbaijan, there is no PPP law, however procurement is conducted according to the Subsoil Act and the Energy Law as well as according to the Law on Implementation of Construction and Infrastructure Facilities under Special Funding of 2016. In practice, any production sharing agreement (PSA) for oil and natural gas is approved by a law and overrules any other potential conflicting law. The details of a PSA have to be negotiated with the line ministries involved. Given such considerable national resources of oil and natural gas, emphasis on this is to be expected. It should be mentioned that elaboration of a PPP legislative framework is on the Government’s program for 2020 and to be implemented by the Ministry of Economy.

It shall be mentioned that within the Eastern Partner Countries activities are ongoing towards alignment to the new EC directives often with support from donors. The legal framework is therefore in constant development.

The Report on Component 1 provides details on the countries legislation and practices for concessions and PPPs.

Component 2

Establishment of PPP units in the Eastern Partner Countries is already done in Moldova, Belarus, and Ukraine. In Armenia and Georgia there is ongoing work for such units, which could be finalized in 2017/18. Azerbaijan might establish PPP units in connection with the PPP legislative framework by 2020, but no decision has been taken.

The Report on Component 2 provides details of the functioning of PPP units in the countries.

Component 3

3 proposals for model contracts for oil/natural gas exploration and extraction, electricity distribution and power generation facilities are presented together with guidelines for the procurement process.

The Report on Component 3 contains details on the model contracts.

Sincere thanks go to the national legal experts and stakeholders in all six countries who provided information through interviews and responses to questionnaires.