Concession Agreement

PPP: CONCESSION
AGREEMENT
Prof.b.p.mishra
ximb
Content in this section has been drafted

primarily based on the Model Concession
Agreements for State Highways (BOT toll)
& Urban Rail Systems published by the
Planning Commission.
Concession Agreement
Basic purpose
A concession is a bundle of rights conferred on
the private entity in return of certain specified
obligations to be undertaken (risks that are
transferred)
Broadly, the PPP contract (Concession
Agreement) is designed to identify and set out
the rights and obligations of both the
procuring
authority
and
the
private
concessionaire
3
A
Concession
provides:
Agreement
mainly
Scope and purpose of the project

Rights and obligations of the parties
Details on execution of the project
Conditions for the operation of the
infrastructure or the delivery of the
relevant services
Modalities of transfer of the asset
after concession period
4
Key issues to be addressed
Ownership of assets during and after concession period

and cost of transfer
Detailing out payments/ rewards/ penalties
Fixing desired / minimum technical configuration:
Output based specifications
Quality of service, reliability
Allocating all important risks and responsibilities
O&M - routine, periodical, major maintenance
Billing (pricing/tariffs), collection and retention of
revenues
Monitoring mechanism - Independent Engineer, review
of accounts, etc.
Customer interface with complaint
5
redressal
Framework
Rights & obligations
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
Concession Agreement and Risk Mitigation

Reflecting the risk allocation in a Concession Agreement
Because risk allocation gets documented in

the Concession Agreement and is ultimately
governed by what the contractual provisions
read.
Concession Agreements should be structured
and managed so as to lessen the scope for a
government agency to unintentionally take
back risks for which it paid a risk premium to
allocate the risk to the private party
Contracts should accurately reflect Risk

Allocation
PPP tendering process reflects/attempts

to develop a continuing risk mitigation
strategy through the RFQ, RFP, and the
e.g. while the financial risk is partly
mitigated through examination of the
credit worthiness of the bidders during
the RFQ/RFP stage, in the contract this
will be further mitigated through
appropriate
clauses
such
as
substitution rights

Reflecting the risk allocation in a Concession Agreement
Risk allocation, to be effective, should be suitably dovetailed in

the service obligations, payment mechanism and the project
agreements
Service obligations: specifications should be drafted to
clearly reflect governments output requirements, while
minimizing any prescription as to how the service is to be
delivered or the asset maintained.
Payment mechanism: should be designed in a way that
will appropriately incentivize performance by private party
Other important agreements: risk allocation and
mitigation is managed through a complex contractual
structure. Parties will enter into various other agreements to
mitigate or re-allocate the risks they assume (e.g.
construction
contract,
O&M
contract,
off-take
agreements,
Risk
allocation agreed
by the
parties
will be
reflected
in their mutual
rights and obligations as set forth in the Concession Agreement 10
etc.)

Contractual clauses addressing various risks
Design, construction and commissioning risk:
Proper specification of project outputs to be

delivered
Review of designs
Commissioning tests, preferably through an
independent party
Linking contracted services to key performance
indicators and, in turn, to the payment mechanism
Sponsor risk:
Performance guarantee
Change in ownership provisions
Step-in rights to government
11

Financial risk:
Financial close
Escrow mechanism
Substitution rights
Step-in rights to government
Termination payments
Operating risk:
Well defined service standards with clear outputs which can be objectively
identified and measured
Linking contracted services to key performance indicators and, in turn, to
the payment mechanism
Address future service delivery demands
In-built options for upgrading technology as the contract term proceeds
Escrow mechanism that prioritizes project cash flows to meet O&M
requirements
12

Market risk:
Dealing with competition (clause regarding competing

facilities)
Provisions for variations in demand (e.g. variations in traffic)
Provisions for price/ tariff indexation
Force Majeure risk:
Minimizing the consequences through appropriate insurance

Performance obligations during the occurrence of FM event
Ensure that FM events do not include events that may be
prevented, overcome or remedied so as to ensure vigilance
on the part of the private party to prevent a risk event
before it occurs
13
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
14
Rights & Obligations of the

Parties
Understanding
Conditions
Precedent
(CP)
What
are CPs? Actions
that must
be fulfilled
before a party
to a contract is obligated to perform its functions
CPs* to be fulfilled by the
government
CPs to be fulfilled by the

concessionaire
Provide performance security

Provide / procure:
Right of way
Execute the following:
Financing Agreements
Approval from railway
Escrow Agreement
authorities
Substitution Agreement
Applicable permits relating
Shareholders Agreement
to environmetal protection
Damages for delay by the
and conservation of the site
concessionaire, 0.2% of
Damages for delay by the
performance security / day,
government, 0.1% of
until fulfilment of CP
performance security/ day,
(maximum 20% of
until fulfilment of CP
performance security)
* The above mentioned CPs are only partial/indicative.
(maximum 20% of
performance
security)
Rights
and obligations
of the parties under the agreement are subject
to fulfilment of Conditions Precedent
15

Parties
Obligations
of the concessionaire
Concessionaire
shall have the following obligations:
Comply with all applicable laws / permits
Perform and fulfil its obligations under the
financing agreements
Prepare development plan, drawings, engineering,
procurement, construction, operation and
maintenance at its own cost
Facilitate acquisition of land
No default under any project agreement(s) shall
excuse concessionaire from its obligations
Shall not undertake any change in ownership
without prior approval from government .
16

Parties
Obligations
of related
the concessionaire
Obligation
to Golden Share: (specific to MCA urban rail
systems)
Concessionaire shall issue and allot one nontransferable equity share of the company in favour
of the government and shall provide for the
following:
Nominee of the government in board of directors
of concessionaire
Irrevocable undertaking that all rights vested in
the government shall not be abridged by any act
done by the concessionaire
Irrevocable undertaking that any divestment of
17

Parties
Obligations
of the
government
Reasonably
support
the concessionaire to
Procure applicable permits

Obtain access to infrastructure &
utilities on terms comparable to other
commercial users
Prevent barriers being placed on project site
except for reasons of safety, emergency, national
security, law and order
Prevent parallel taxes, tolls or charges being levied
on assets of the project site
Shall undertake routine maintenance during
development period
18

Parties
Representations
and
warranties
Concessionaire
represents
and warrants to government
that:
It is duly organized and validly exists under the laws of India
It has the financial standing and capacity to undertake the
project
Shall not permit change in ownership except as per
provisions in the agreement and provided:
That the [existing promoters / consortium members] together
with their associates hold not less than 51% of its issued and paid
up equity as on the date of the agreement;
and that no member of the consortium (whose experience was
counted during scoring) shall hold less than 26% of such equity
during the construction period
Government shall represent and warrant to the

concessionaire that:
19
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
20
Project Development and Operations

Need for Performance Security
Concessionaire shall provide this (in the form of a

Bank Guarantee) within 180 days from date of
signing agreement
Performance security should be 5% of the Total
Project Cost for road projects (3% in the case of
urban rails)
Bid security submitted during RFP stage shall
remain in force till performance security is
submitted
Upon concessionaires default or failure to meet any
Conditions Precedent, the government shall
appropriate performance security as damages
Performance
It shall remain
a period initial
of one
yearover
from
Security isintoforce
protectfor
governments
handing
of assets/
properties
& alsobut
forms
part of
concessionaires
the
appointed
date,
shall
bethe
released
earlier
21
obligations
upon the concessionaire expending 20% of the Total

Right of Way (RoW)
The government grants access of RoW to the

concessionaire to access site for any survey,
investigations, tests afterinventorization
Government to provide access to RoW no later than
90 days from date of appointment. In the event of
delay, it shall pay to concessionaire INR 50 / day, for
every 1000 sq. mt. until RoW is procured
Site shall be free from Encumbrances &
encroachments. Concessionaire accepts to bear all
risks arising out of inadequacy or physical condition
of the site
Concessionaire shall bear all costs for any Special /
temporary RoW required in connection to access to
the site
22

Utilities, associated roads and trees
Concessionaire shall ensure that all existing

roads, RoW or utilities are kept in continuous
satisfactory use
Shifting of power, water, telephone lines by
concessionaire, wherever necessary, shall be
subject to applicable laws
Concessionaire shall allow access to site for
new utilities
Obtain applicable permits with assistance
from authority for felling of trees, cost to be
borne by concessionaire
23

Specific construction obligations
Concessionaire shall submit detailed designs,

construction methodology and quality assurance
procedures prior to commencement of construction
Concessionaire shall maintain existing roads during
construction so that traffic worthiness is not
deteriorated
Concessionaire shall prepare and submit drawings to
Independent Engineer
Concessionaire shall pay to government 0.1% of
performance security for each day if he fails to
complete project milestone with delay of more
than 90 days
In case of delay of over 270 days from scheduled
24

Monitoring of construction
Concessionaire shall:
Submit monthly progress reports no later
than 7 days after close of each month
Facilitate inspection by Independent Engineer
at least once a month
Conduct tests determining quality of
construction, confirming to specifications and
standards
Provide video recording every quarter on
progress of work
Independent Engineer to assess delay during
construction and inform concessionaire regarding
25

Commercial operations
Commercial Operation Date (COD) is the date on which

Completion Certificate or Provisional Certificate is issued.
The concessionaire is entitled to demand and collect fee in
accordance with the agreement from the Commercial
Operation Date (COD).In case of BOT annuity:
The concessionaire either receives bonus for early
completion or incurs reduction in the annuity for delayed
completion of the project.
In case of Operation & Maintenance contracts:
The COD of the project is the date on which all Conditions
Precedent have been satisfied
If COD does not occur prior to 91 days after scheduled date concessionaire shall pay damages calculated at 0.1% of
performance security per day, provided the delay is not due
to government and / or force majeure
26

Change of scope
Government may require a change of scope and reimburse

concessionaire accordingly
Concessionaire can also suggest change of scope for improved
and safer service for user by writing to government
All costs arising due to change of scope during construction
period shall be borne by concessionaire, subject to an
aggregate of 0.25% to the Total Project Cost (TPC). Any costs in
excess shall be reimbursed by the government
Further, if the cost arising out of change of scope orders issued
prior to the project completion date is less than 0.25% of TPC,
the difference shall be credited by the concessionaire to the
safety fund
0.25% of TPC is deemed to form part of the actual capital cost
of the project
Provision for additional works not contemplated in the original
agreement
27

Change of scope
If the additional works are likely to delay the completion of the

project, such works shall not be reckoned for purposes of
determining completion of the project and issuing the provisional
certificate
Concessionaire is entitled to nullify any change of scope order if it
causes:
the cumulative costs of all such orders to exceed 5% of the TPC (in
any continuous period of 3 years immediately preceding the date of
such change of scope order) or
such cumulative costs to exceed 20% of TPC at any time during the
concession period
Government can award additional works emanating from change

of scope to any person through open competitive bidding
The concessionaire has the option of matching best bid, provided
he participates in the bid process and his bid does not exceed the
best bid by 10% (subject to payment of 2% of bid amount to
government)
28

Change of scope
Reduction in scope of the project:
Scope of the project can be reduced if

concessionaire fails to complete works due to
force majeure or for reasons solely attributable to
government
For this, concessionaire shall pay 80% of the sum
saved and its obligations shall be deemed
fulfilled
If such reduction in scope causes a
reduction in the net after tax return of the
concessionaire, a full or partial waiver may
be agreed between the parties
29

Operation and Maintenance (O&M)
Conduct O&M in accordance with the agreement, either by

himself or by contracting-out
Shall prepare maintenance manual within 180 days from

scheduled date
Shall prepare maintenance programme not later than 45

days prior to beginning of each accounting year
Ensure safety, de-commissioning, lane closure (when

applicable)
Pay damages for breach of O&M obligations for each day of

delay until the breach is cured, at the higher of
0.5% of average daily fare and
0.1% of the cost of such repair or rectification as estimated by
the IE
Adhere to overriding powers of the government
30

Monitoring of O&M
Furnish monthly report no later than 7 days after close of

each month to the government party and the Independent
Engineer
Report unusual occurrence (same day) to government and

Independent Engineer shall inspect project at least once a

month and prepare an O&M inspection report
Independent Engineer to perform test to determine

conformity to maintenance requirements
Repair or rectify defects set forth in O&M inspection report
Submit monthly fee statement within 7 days from close of

each month
31

Independent Engineer (IE) is to be appointed by

government not later than 90 days from date of agreement
Initial tenure of the IE shall be three years
IE shall submit monthly reports to government
Remuneration to IE shall be shared by both parties 50:50, if

the fee of IE is within 2% of the TPC. Any excess costs are to
be borne by the government
Government may in its discretion terminate IE
Concessionaire can also report to the government for

terminating the IE due to valid reasons
IE to designate 2 persons to sign on his behalf as authorised

signatories
32
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
33
Financial Covenants
What is Financial Close?
Definition:
Financial Close means the fulfillment of all Conditions

Precedent to the initial availability of funds under the financial
agreements
Meaning:
Financial assistance required to the fund the project has been
arranged, and all conditions specified by the lenders for initial
drawdown of funds under the financing agreement(s) have
been achieved.
Rationale / objective for the clause:

Addresses the typical problem of infrastructure projects not
achieving financial close for long periods
Facilitates project implementation to commence as per agreed
timeframe thereby ensuring timely provision of needed
infrastructure
34
Financial Covenants
General provisions related to Financial Close
Concessionaire should achieve financial close within
180 days from the date of the agreement
In the event of delay, Concession Agreement may
provide for a further period (generally not exceeding
120 days) subject to payment of damages to the
government
Damages calculated at the rate of 0.1% of the
performance security for each day of delay
No damages shall be payable by concessionaire if
delay in financial close has occurred due to:
a)Force Majeure
b)Delay by the government in fulfilling the
Conditions Precedent
35
Financial Covenants
Termination due to failure to achieve Financial Close
If financial close does not occur within the period provided in

agreement or the extended period provided, then:
The Concession Agreement shall be deemed to have been
terminated by mutual agreement of the parties
The government shall be entitled to encash the bid security. If the
bid security would have been substituted by performance
security, the government shall be entitled to encash from it an
amount equal to bid security
What if?
a) Parties have determined the appointed date to precede the
financial close?
b) Financial close has not occurred solely as a result of the
government being in default of any of its obligations under
Conditions Precedent?
36
Financial Covenants
Grant or Premium?
Equity support
No
Grant
O&M support
Project
financially
viable?
Additional
concession fee
Yes
Premium
Upfront
concession fee
If the project is not financially viable, the bidder would seek an

appropriate Grant
37
Financial Covenants
Types of Grant
Purpose
Disbursement
Other
limitations
Grant: Equity support
Grant: O&M support
To be used for meeting the
To be used for meeting the O&M
Total Project Cost
expenses and debt service of

the project
Due and payable after
O&M support shall be omitted if
concessionaire has expended

his equity
Disbursed proportionately
with the loan funds
thereafter
Disbursement suspended in
the event of a concessionaire
default
Shall not exceed the sum
specified in the bid, and shall
in no case be greater than
equity.
Restricted to a sum not
exceeding 20% of the Total
Project Cost (30% in case of
Urban rail MCA)
the grant determined by

competitive bidding is 20% or
less
Shall be disbursed in quarterly
installments
First installment shall be
released within 90 days of COD
Each installment shall be equal

to 5% of the equity support and
will be continued until grant is
exhausted
The installment may be
increased to 7.5% if O&M
support is to be made at an
accelerated rate
38
Financial Covenants
Payment terms (e.g. MCA State Highways)
In case a Grant is sought
As per MCA, concession fee of Re 1 per annum.
In case a Premium is offered
As per MCA, concession fee of Re 1 per annum.

Premium, equal to 2% of the Total Realisable Fee, payable in form
of an additional concession fee from {Nth*} year of the concession
period where {Nth} year shall be determined through competitive
bidding
Annual increase in proportion of premium to realisable fee by an
additional 1% over the preceding year
For determining Total Realisable Fee it is understood that:
Number of PCUs in the first year following COD shall be higher of:
Actual PCUs and
Number of PCUs based on 2% CAGR over base traffic assumed
Number of PCUs in each subsequent year shall be higher of:

Actual PCUs
2% greater than number of PCUs reckoned in the immediately preceding year
In the event the concessionaire bids a date prior to COD for giving
effect to a higher bid, the specified premium shall be increased
accordingly with effect from COD
39
Financial Covenants
User fee (e.g. MCA State Highways)
Collection and appropriation of fee
Concessionaire will have sole and exclusive right to demand, collect
and appropriate fee from users, from the COD till the transfer date
Entitled to determine and collect, the fee due and an equivalent
amount
towards
pre-determined
liquidated
damages
for
unauthorised use, in case of evasion of fee
Upon request can provide discounted fee for frequent users
Concessionaire shall not collect any fee from a local user (non
commercial use)
Concessionaire may recover additional fee for overloaded vehicle at
the rate applicable to the next higher category
Revision of fee
Base fee (fee applicable on COD) shall be revised annually on
April 1
Revision on account of variation in WPI is restricted to 40% of the
variation in WPI
Re-appropriation of excess fee
If the traffic exceeds 120% of the design capacity, the fee levied
over and above shall be payable to the authority
40
Financial Covenants
Revenue shortfall loan
Provision:
If the realizable fare in any accounting year falls short of the
subsistence revenue as a result of an indirect political event, a
political event or a government default, then on the request from the
concessionaire, the government can provide a loan for meeting such
shortfall at an interest rate equal to 2% above the bank rate
Repayment of revenue shortfall loan:

A sum equal to 50% of the profit before tax of the
concessionaire shall be earmarked for repayment of the
revenue shortfall loan and interest thereon
It is to be paid within 90 days of the close of the
accounting year in which such profits have been made
Entire revenue shortfall loan and interest thereon shall be
repaid no later than one year prior to the expiry of the
concession period, otherwise the government is entitled
to terminate the agreement
41
Financial Covenants
Effect of variations in traffic growth
Provision:
Generally, the Concession Agreement provides for a modification in the
concession period, in order to deal with effect of variation in traffic growth
Computation of the modified concession period (as per

MCA state roads)
If the Actual Average Traffic falls short of the Target Traffic by
more than 2.5%: For every 1% shortfall in traffic, the concession
period to be increased by 1.5% (subject to maximum of 20% of
concession period)
If the Actual Average Traffic exceeds the Target Traffic by more
than 2.5%: For every 1% excess in traffic, the concession period shall
be reduced by 0.75% (subject to maximum of 10% of the concession
period)
Termination due to congestion

If the average daily PCUs in any accounting year shall exceed the
designed capacity of the system and shall continue to exceed for the
next 3 accounting years following thereafter, an indirect political
event shall deemed to have occurred and the government may in
its discretion terminate this agreement by issuing a termination notice
and making the termination payment in accordance with the
provisions
42
Financial Covenants
Competing facility
Restrictions on construction of competing facility:

Government shall not open a competing facility at any time
before the [12th anniversary] of the appointed date
Modification of the concession period:

If the competing facility is opened to traffic between [12 th] to
[17th] anniversary of the appointed date, then the concessionaire
shall be entitled to an additional concession period equal in
duration to the period between the opening of competing facility
and the [17th] anniversary
Compensation for competing facility:

In the event that a competing facility is opened to traffic in
breach of this agreement, the government shall pay to the
concessionaire, for each day of breach, compensation in a sum
equal to the difference between the average daily realisable fee
and the projected daily fee until the breach is cured
A project of one state / sponsor does not constitute a competing
43
facility for a project of another state / sponsor
Financial Covenants
Escrow Account
Escrow Account: The concessionaire shall prior to the appointed

date open an Escrow Account with a bank (Escrow bank)
Who are the parties to the Escrow Agreement?
1)
2)
3)
4)
Concessionaire
Government
Escrow bank
Senior lenders through the lenders representative
Deposits into Escrow Account: The concessionaire shall deposit

the following inflows and receipts into the Escrow Account:
)
)
)
The
The
The
The
all funds constituting the financial package

all fare and any other revenues from or in respect of the system including
the proceeds of any rentals, deposits, capital receipts or insurance
claims
all payments by the government, after deduction of any outstanding
concession fee
Withdrawals from the Escrow Account: The deposits into the

Escrow Account shall be appropriated every month in the order
specified in the Concession Agreement and Escrow Agreement
44
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
45
Other Contractual Provisions

Force Majeure events
Force Majeure events:
Are certain specific circumstances, which affect the performance by a party of

its obligations under the contract. These are for reasons beyond partys
reasonable control and which have an adverse material impact on the project.
Categories:
a) Non-political events e.g. natural calamities, act of God

b) Indirect political events e.g. civil commotion, wars, industry wide strikes
beyond a certain duration

c) Political events e.g. compulsory acquisition in national interest of project
assets, refusal to grant (without valid cause) necessary clearance and permits,
etc.
Impact & implication:
) Time for financial closure, project completion, and meeting toll collection
targets (if applicable)
) Cost increases to both parties and hence the issue of sharing the cost burden
to be decided. Cost could be beyond insured cover amounts
) Termination is a possibility in an extreme impact situation
46

Force Majeure events: allocation of costs
S. no.
Event
Amount
BEFORE APPOINTED DATE
Any category of Force Majeure

event
Parties bear their respective costs
AFTER APPOINTED DATE
Non-political event
Parties bear their respective costs
Indirect political event
Authority to reimburse one half of the amount

exceeding the insurance cover
Political event
All costs to be reimbursed by the authority
Force Majeure costs may include interest payments on debt, O&M

expenses, any increase in the cost of construction works on account of
inflation and all other costs directly attributable to the Force Majeure
event
Shall not include loss of fee revenues or debt repayment
obligations
47

Force Majeure events: termination payments
S. no.
Event
Amount
( BOT-Toll)
Amount
(BOT- Annuity)
Amount
(O&M of Highways)
Nonpolitical
90% of the debt due less

insurance cover
90% of the book value of

physical assets less insurance
cover
50% of debt due less

insurance cover
Indirect
political
Debt due less insurance

cover + 110% of the
adjusted equity
Discounted value of future

annuity payments
(discounting factor then SBI
PLR minus 3%)
Debt due + 150% of the

adjusted equity

annuity payments
PLR minus 3%)
Political
Debt due
Debt due and

product of average daily
fee multiplied by 60
48

Termination: on account of Concessionaire Default
Failure to provide fresh Performance Security, where

Performance Security has been encashed and appropriated as
per agreement. Failure to cure within cure period, for the
default for which Performance Security was appropriated
Failure to achieve the latest outstanding project milestone as
per the project milestone schedule, and continue to be in
default for 120 days
Concessionaire abandons or manifests intention to abandon
the construction or operation of the project
Failure to achieve project completion within 270 days from the
scheduled completion date
Failure to comply with maintenance requirements
Punch list items have not been completed within period
specified as per Concession Agreement (this is a list of
outstanding items provided at the time of issue of the
provisional certificate of completion)
49

Termination: on account of Concessionaire Default
Breach of any of the project agreements by concessionaire has

caused a material adverse affect
Concessionaire creates any encumbrances in breach of the
agreement / or concessionaire repudiates the agreement
A change of ownership has occurred in breach of provisions of
the agreement
Concessionaire is adjudged bankrupt or insolvent, or if a trustee
or receiver is appointed for the concessionaire
Concessionaire is in process of being liquidated, dissolved,
wound up, amalgamated or reconstituted (which would cause
material adverse effect), or is faced with a resolution / petition
admitted in court for winding up of the concessionaire
Failure to make any payment within the specified time to the
authority
Where the lenders representative has given notice to authority
to undertake suspension since the concessionaire has incurred
a financial default
50

Termination: on account of Government Default
Possible reasons for concessionaire to issue termination
notice to
government
Government commits a material default in complying with the
provisions of the agreement, which has a material adverse
effect on the concessionaire
Failure by government to make any payment to the
concessionaire within the period specified in the agreement
If government repudiates the agreement
51

Termination payments
Default by
Authority
Concessionaire*
Amount
( BOT-Toll)
Amount
(BOT- Annuity)
Amount
(O&M of Highways)
Debt due + 150% of the

adjusted equity

annuity payments
PLR minus 3%)
Debt due and

product of average daily
fee multiplied by 60

annuity payments
PLR plus 3%) less insurance
cover
50% of the debt due
90 % of debt due
insurance cover
*Note: no termination payment due or payable for Concessionaire Default prior to COD
52

Schedules: reference MCA for State highways
Part 1: Preliminary
Part 2: The Concession
Model
Concession
Agreement
Part
3:
Development
Operations
and
Part 4: Financial Covenants

Part 5: Force
Termination
Majeure
Part 6: Other Provisions

Schedules
and
Site of the project

Development of project
highway
Project facilities
Specifications and standards
Applicable permits
Performance security
Project completion schedule
Drawing
Tests
Completion & provisional
certificate
Maintenance requirements
Safety requirements
Monthly fee statement
Weekly traffic census
Traffic sampling
Selection of Independent
Engineer
Terms of Reference for
Fee notification
Escrow Agreement
Panel of Charted Accountants
Vesting Certificate and;
Substitution Agreement 53
Framework
of the parties
Risk mitigation
framework
Other important
agreements
Other contractual
provisions
Concession
Agreement
Project development
&
operations
Financial
covenants
54
PPP Contracting Structure

Other important agreements
PPP arrangements are complex. They often require a range of

supporting
agreements in addition to the Concession Agreement between
the
procuring authority and the concessionaire. These could include:
Financing agreement(s)
Escrow agreement
Construction contract
O&M contract
Interface agreement
Substitution agreement
Shareholders agreement in case of SPV structure
State support agreement

55

Other important agreements
Procuring
Authority
Substitution
Agreement
and
Escrow
Agreement
Sponsors
Concession
Agreement
Lender
s
Finance
Agreem
ents
Concession
aire
(SPV)
Constructio
n Contactor
Construction
Contractor
Equity
, etc.
Equity,
etc.
Holding
Company
O&M
Contract
Interface
Agreement?
O&M
Contract
or
56
Concession Agreements
The Concession Agreement would grant the concession to the

concessionaire to construct, operate and maintain the
infrastructure for the concession period
It must also grant sufficient rights relating to the property (the
subject of the concession agreement) to enable the
concessionaire to carry out its obligations, usually in the form of
a licence to use the land or a lease of that land for the whole of
the concession period, together with any necessary rights of
way or other licences over adjoining land
PPPs are complicated long term arrangements for the provision
of infrastructure and services. The documentation detailing and
supporting it can be equally complicated
The concessionaire is usually a limited recourse company and
will therefore not have the financial standing to accept a lot of
risk itself. It sometime therefore seek to flow down risks to
the construction contractor and the O&M contractor or use
insurance as a way of mitigating or offsetting risks
57

Finance Agreements
These documents control the relationship between the

concessionaire and the lenders and the flow of loan funds into
the project
The lenders would have a keen interest in the terms of all

other documents and will be ensuring that the risk
apportionment is sufficiently robust to enable them to provide
funding for the project
There would be provisions for termination of the finance

agreements, in the event of breach of their terms by the
concessionaire. The procuring authority will wish to ensure
that there are no hair trigger termination events in those
documents (events that would quickly lead to termination for
minor discrepancies)
Financial assistance by senior lenders. Covers loans,
guarantees, subscription to non-convertible debentures & other
debt instruments
58

Escrow Agreement
An agreement that is entered into jointly by the following parties:
a) Concessionaire
b) Lenders representative
c) Government agency and
d) Bank designated as Escrow Bank
Monies and properties received by the Escrow Bank is regarded as

being held in trust by the Bank and shall be segregated from other
funds and properties of the Bank (i.e. these shall not be considered as
assets of the Bank)
All deposits and withdrawals for payments related to the project are
to be undertaken through the Escrow Account under the Escrow
Agreement
The agreement provides for permissible withdrawals from
Escrow Account and priority of such withdrawals to different
categories of stakeholders
59
Escrow Agreement
Deposits in Escrow Account:
all funds constituting the financial package from:

1)Government: grants, loans
2)Concessionaire: funds from shareholders
3)Lenders: debt
all fare and any other revenues from or in respect of the system
including the proceeds of any rentals, deposits, capital receipts
or insurance claims
all payments by the government, after deduction of any
outstanding concession fee
Termination payments, if they occur, will also be through the

Escrow Account
During the period of suspension, the instructions of the
government will be complied with as if instructions were given
by the concessionaire
60

Construction Contract
There will normally be only one construction contract to

ensure that the concessionaire has a single recourse in the
event of any problems arising from the construction of the
infrastructure.
Generally, this will reflect the terms of the Concession

Agreement insofar as it relates to the construction:
to ensure that risk flows down as much as is practicable from the
concessionaire, but with necessary changes in default times,
notice periods and longstop dates, etc.
to ensure that the concessionaire has sufficient time to deal with
issues that arise from the procuring authority or from unexpected
events
61

O&M Contract
This contract is between the concessionaire and the O&M

contractor and will govern the operation of the services
agreed under the Concession Agreement including the
maintenance of the facilities constructed
As with the construction contract, it generally reflects the

provisions of the Concession Agreement insofar as it relates to
the provision of the services
It will include similar provisions as the output specification and
the payment and performance mechanism are in the Concession
Agreement
But is likely to have the periods for carrying out the services and
the periods for rectifying any failure to deliver the services
shortened for the protection of the Concession Agreement
62

Substitution Agreement
This is a tripartite agreement between the lenders, the

concessionaire and the procuring authority
This agreement governs the situation where there has been a
default by the concessionaire under either:
the Financing Agreements; or
the Concession Agreement
The agreement seeks to give the lenders protection of

their investment in the project, where such a default has
occurred and allows them to replace the concessionaire
with
another contractor (the Nominated Company
under the MCA)
It gives a period of 180 days (extendable by a further period of
90 days) to enable the lenders to appoint a Nominated Company
If a Nominated Company is not put in place within the period of
180 days (as may be extended), then the procuring authority
may terminate the Concession Agreement
63
Substitution Agreement-II
Substitution may arise out of:
a) Financial default by concessionaire: this includes

material breach in terms and conditions of financing agreements
continuous default in debt service by concessionaire for 3 months or
more
b) Occurrence of Concessionaire Default:

Under this circumstance, the government informs lenders
representative of the need to substitute concessionaire by a
Nominated Company
Procedure for substitution:

The senior lenders representatives may procure offers either
through private negotiations, public auction or tenders for the take
over and transfer of the assets and liabilities of the concessionaire
The proposed Nominated Company needs to fulfill the eligibility
criteria that were laid down by the government for the original
shortlisting for award of the concession
64

Interface Agreement
While not always used, these agreements regulate the

relationship between the construction contractor and the O&M
contractor (with the concessionaire joining in, in some cases)
They allocate responsibility and risk for problems that arise,

usually during the service period of the Concession
Agreement, affecting the provision of the services, that may
have been caused by the construction of the infrastructure
65
thanks
66

Concession Agreement

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Concession Agreement

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PPP: CONCESSION

Content in this section has been drafted

Scope and purpose of the project

Ownership of assets during and after concession period

Concession Agreement and Risk Mitigation

Because risk allocation gets documented in

Contracts should accurately reflect Risk

PPP tendering process reflects/attempts

Concession Agreement and Risk Mitigation

Risk allocation, to be effective, should be suitably dovetailed in

Concession Agreement and Risk Mitigation

Design, construction and commissioning risk:

Proper specification of project outputs to be

Concession Agreement and Risk Mitigation

Concession Agreement and Risk Mitigation

Dealing with competition (clause regarding competing

Minimizing the consequences through appropriate insurance

Rights & Obligations of the

CPs to be fulfilled by the

Provide performance security

Rights & Obligations of the

Rights & Obligations of the

Rights & Obligations of the

Procure applicable permits

Rights & Obligations of the

Government shall represent and warrant to the

Project Development and Operations

Concessionaire shall provide this (in the form of a

Project Development and Operations

The government grants access of RoW to the

Project Development and Operations

Concessionaire shall ensure that all existing

Project Development and Operations

Concessionaire shall submit detailed designs,

Project Development and Operations

Project Development and Operations

Commercial Operation Date (COD) is the date on which

Project Development and Operations

Government may require a change of scope and reimburse

Project Development and Operations

If the additional works are likely to delay the completion of the

Government can award additional works emanating from change

Project Development and Operations

Reduction in scope of the project:

Scope of the project can be reduced if

Project Development and Operations

Conduct O&M in accordance with the agreement, either by

Shall prepare maintenance manual within 180 days from

Shall prepare maintenance programme not later than 45

Ensure safety, de-commissioning, lane closure (when

Pay damages for breach of O&M obligations for each day of

Adhere to overriding powers of the government

Project Development and Operations

Furnish monthly report no later than 7 days after close of

Report unusual occurrence (same day) to government and

Independent Engineer shall inspect project at least once a

Independent Engineer to perform test to determine

Repair or rectify defects set forth in O&M inspection report

Submit monthly fee statement within 7 days from close of

Project Development and Operations

Independent Engineer (IE) is to be appointed by

Initial tenure of the IE shall be three years

IE shall submit monthly reports to government