Russian Federation: New in Investment Legislation. Review of the Main Provisions of the Federal Law "On Concession Agreements"

Last Updated: 9 February 2006
Article by Angelika Lyubivaya

Attracting additional private investments to the Russian economy and ensuring that state property is used effectively are the two main tasks to be solved at the current stage of the economic reforms being implemented in the country. The Federal Law "On Concession Agreements," No. 115-FZ adopted on July 21, 2005 (hereinafter the "Law"), aims to facilitate solving these tasks.

Concession agreements, widespread in the modern world, are new for contemporary Russian law. In essence, such agreements are an alternative to privatization and are of special interest due to the fact that they allow for attracting investments in spheres where privatization of real estate objects is prohibited or restricted in accordance with Russian legislation.

The name of the Law reflects its content. The Law not only determines all significant conditions of a concession agreement, but also establishes the list of real estate that can be the object of a concession agreement, regulates the procedure for its conclusion, determines guarantees of investors’ rights and rights to exercise control over fulfillment of a concession agreement on the part of the respective state or municipal authorities.

Subject of a Concession Agreement

A concession agreement is an agreement between an investor (concessionaire) and the Russian Federation, a subject of the Russian Federation or a municipality (right holder), in accordance with which the concessionaire undertakes to create or reconstruct at its own expense the real estate specified by the concession agreement, the ownership rights to which are held or will be held by the right holder, to use this real estate, and the right holder undertakes to grant the concessionaire the right to possess and use this real estate.

The object of a concession agreement that is to be reconstructed must be owned by the right holder and free from rights of third parties. Change of the designated use of the concession agreement object to be reconstructed, pledge of the concession agreement object by the concessionaire or alienation thereof is not permitted.

Unless the concession agreement provides otherwise:

  • the products and revenues received by the concessionaire as a result of performing the activities stipulated by the concession agreement are property of the concessionaire;
  • the risk of accidental loss of and damage to the object of the concession agreement is borne by the concessionaire;
  • property created or acquired by the concessionaire in the course of fulfilling the concession agreement that is not the object of the concession agreement is property of the concessionaire;
  • exclusive rights to the results of intellectual activities received by the concessionaire at its own expense in the course of fulfilling the concession agreement are held by the concessionaire.

The concessionaire’s right to possess and use the object of the concession agreement is subject to state registration as an encumbrance of the right holder’s ownership rights.

Object of a Concession Agreement

The Law contains an exhaustive list of the real estate that can be an object of a concession agreement, which includes first of all, real estate excluded from civil turnover and real estate whose turnover is restricted, as well as real estate that can be owned only by the state or a municipality. In our opinion, the following real estate objects are of principal interest:

  • objects of production and engineering infrastructure of airports;
  • objects of railway transportation;
  • objects of sea and river ports;
  • objects of health services, education, culture and sport;
  • objects used for performance of therapeutic and preventive treatments, medical activities, organization of recreation and tourism;
  • objects of the public utility infrastructure system;
  • objects of underground and other municipal transportation.

Parties to a Concession Agreement

As mentioned above, the parties to a concession agreement are the right holder and the concessionaire.

The right holder:

  • the Russian Federation, as represented by the Government or other federal executive authority authorized by the Government;
  • a subject of the Russian Federation, as represented by the state authority of the subject of the Russian Federation;
  • a municipality, as represented by the local authority.

The concessionaire:

  • an individual entrepreneur;
  • a Russian or foreign legal entity;
  • two or more of the legal entities specified above acting within the framework of an ordinary partnership agreement without having formed a legal entity.

Change of the parties to a concession agreement by assignment of the right to claim or transfer shall be allowed upon the concessionaire’s consent from the date of putting the object of the concession agreement into operation.

Term of a Concession Agreement

The Law does not establish a maximum term of validity of a concession agreement. It is stipulated that the concession agreement shall establish this term. A minimum term of a concession agreement shall be established in consideration of creation (reconstruction) of the object of the concession agreement, the volume of investments in the creation thereof, and the term of payback of such investments.

Payment under a Concession Agreement

A concession agreement provides for a fee to be paid by the investor-concessionaire to the right holder during the period of utilization (operation) of the object of the concession agreement. The amount and form of and procedure and term for paying the concession fee shall be determined by the concession agreement. The concession fee can be established as a flat fee payable from time to time or as a lump sum to the respective budget, or as a share of the products (revenues) received by the concessionaire as a result of performing the concession activities.

Procedure for Concluding a Concession Agreement

A concession agreement shall be concluded in accordance with the standard concession agreement by holding a competition (closed or open) for the right to conclude the concession agreement. A separate chapter of the Law is devoted to the procedure for concluding a concession agreement. In particular, it regulates the authorities adopting the decision on a concession agreement, the content of the decision on the concession agreement, the composition of the competition documentation, sample criteria of the competition and their parameters, the functions of the competition commission, the procedure for determining the competition winner, the content of the minutes on the results of the competition and the deadlines for their signing, and the procedure for concluding the concession agreement.

The form of the standard concession agreement is approved by the Government of the Russian Federation.

Control Over Fulfillment of a Concession Agreement

On the part of the right holder, control over the fulfillment of a concession agreement is exercised by the authorities representing the Russian Federation, subject of the Russian Federation or municipality during the conclusion of the agreement. Authorized representatives of the above authorities have unobstructed access to the object of the concession agreement as well as to documentation related to activities provided for by the concession agreement. The right holder is entitled to exercise control over:

  • observance of the deadlines for creating or reconstructing the object of the concession agreement;
  • investment;
  • ensuring the compliance of the technical and economic indicators of the object of the concession agreement with the indicators stipulated by the concession agreement;
  • usage of the object of the concession agreement in accordance with the designation established by the concession agreement.

Particularities of Granting a Concessionaire a Land Plot for Lease (Sublease)

The land plot on which the object of the concession agreement is located or which is necessary for performance of concession activities is granted for lease (sublease) to the concessionaire by the right holder for the term of validity of the concession agreement. An agreement on lease of the land plot shall be concluded with the concessionaire no later than 60 days as of the signing of the concession agreement.

Unless the land plot lease agreement provides otherwise, the concessionaire is not entitled to transfer its rights under the land plot lease agreement to other parties or sublease the land plot.

Guarantees of Investors’ Rights

The Law stipulates three types of guarantees for investors-concessionaires:

  1. Guarantees of performance of the activities stipulated by the concession agreement – provide for protection of rights in accordance with the Constitution of the Russian Federation, federal laws and other regulatory acts and for compensation of concessionaires for losses caused by illegal acts of state and local authorities.
  2. Guarantees of equality of concessionaires – provide for equal rights of investors, including foreign legal entities, excluding discriminatory measures.
  3. Guarantees of concessionaires’ rights in case of unfavorable changes in legislation – provide for amendment of the concession agreement in case of enactment of regulations worsening the investor’s position. The procedure for making such amendments is determined by the concession agreement.

The state, needing additional investments and intending to enhance its investment attractiveness, is interested in ensuring investors’ rights no less than investors are themselves. However, the guarantees established by the Law are, in our opinion, of a declarative nature. Due to this, considerable significance must be attached to particular concession agreements under which investors’ interests, by virtue of use of legal mechanisms, shall be protected more reliably.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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