Russian Federation: Concession Agreements In Russia

I. INTRODUCTION
§ 23:1 Overview

II. CONCESSION AGREEMENT
§ 23:2 Overview
§ 23:3 Conclusion of a concession agreement
§ 23:4 Provisions of a concession agreement
§ 23:5 Term of a concession agreement
§ 23:6 Operations

III. RISKS OF INVESTORS
§ 23:7 Overview
§ 23:8 Security and assignment
§ 23:9 Protection of investors' rights
§ 23:10 Concessionaire's liability
§ 23:11 Termination of a concession agreement and dispute resolution

IV. TENDER
§ 23:12 Overview
§ 23:13 Resolution on the conclusion of a concession agreement
§ 23:14 Tender documents
§ 23:15 Tender criteria
§ 23:16 Tender commission
§ 23:17 Tender notice
§ 23:18 Submission of applications for tendering
§ 23:19 Opening of envelopes containing applications for tendering
§ 23:20 Pre-selection of bidders
§ 23:21 Submission of bids
§ 23:22 Opening of envelopes containing bids
§ 23:23 Procedure for bids consideration and evaluation
§ 23:24 Procedure for determination of successful bidder
§ 23:25 Contents of report on tender results and execution deadline
§ 23:26 Publication of notice on tender results, bidders' notification of tender results
§ 23:27 Procedure for conclusion of concession agreement

I. INTRODUCTION

§ 23:1 Overview

Concessions are an effective tool for attracting private capital to infrastructure facilities. The introduction of relevant Russian legislation has, therefore, been long awaited. In 2005, Russia adopted new legislation opening the door for concession agreements into many parts of the public sector including transportation, energy, education, health care, and utilities. The Russian Law "On Concession Agreements"1 (the "Law") contains the most general provisions on concession, including entities involved in the concession granting process, concession facilities, selection procedure, concession agreement as well as certain financial security and government support issues, but neglects including clear and detailed regulation of issues of the relations between the state and private investors during implementation of concession projects. The thrust of regulation of the relations between the state and a concessionaire upon conclusion of a concession agreement has been transferred by the lawmaker to the agreement itself, the conditions under which depend on the specificity of the object of concession, the volume of required investments, etc.

The Law complements the Law On Foreign Investment (June 9, 1999) and the Land Code (October 25, 2001). In addition, it contains an exhaustive list of areas (objects of concession agreement) in which state concessions can be granted.2 These areas are:

  • motor roads and transport infrastructure engineering works, including bridges, flyovers, tunnels, vehicle parking lots, vehicle checkpoints and trucks toll collection facilities;
  • railroad facilities;
  • pipeline transport facilities;
  • sea and river ports, including port hydraulic works, and their production and engineering infrastructure facilities;
  • sea and river vessels, vessels for combined (river-sea) navigation as well as vessels providing icebreaker assistance, vessels engaged in hydrographic and scientific research activities, ferry crossings, dry-docks and floating dry-docks;
  • airfields or buildings and/or structures intended for aircraft takeoff, landing, taxiing and parking;
  • airports production and engineering infrastructure facilities;
  • hydraulic structures;
  • facilities designated for the production, transmission and distribution of electrical and thermal power;
  • utility infrastructure systems and other utility facilities, including water-, heat-, gas- and power-supply facilities, sewage disposal and treatment facilities, household waste processing and utilization (burial) facilities, facilities designated for the illumination of urban and rural populated areas and landscape redevelopment;
  • underground railroad and other public transport;
  • facilities used for medical and preventive treatment activities as well as for the organization of public recreation and tourism;
  • healthcare, education, culture and sports facilities as well as other cultural and social amenities.

If an object of a concession agreement or other non-state/ municipally-owned property is intended for use in accordance with its common designation, to provide for a uniform production process and perform the activity contemplated by the concession agreement, the grantor may enter into a contract with the owner of such non-state/municipally-owned property. Such a contract determines the procedure for providing the property to the concessionaire; however the grantor must condition the emergence of rights and obligations under such a contract to the emergence of relations under the concession agreement.

The enactment of the Law is hoped to mark the beginning of a new era that allows for a higher degree of cooperation between the private and public sectors in Russia. The ability for a viable Russian public private partnership model to be developed is now more likely as a result of the Law. In addition, alternative legal structures that have been developed over last few years in order to implement various types of BOT/BOOT (build-(own)-operate-transfer) projects may now be based on a more reliable and certain legal framework. The success of the Law will, however, depend on its smooth implementation and consistency of application by state/ municipal authorities and courts together with the absence of renewed debate on the scope of the Law and the resulting legal uncertainty such debate would bring.

II. CONCESSION AGREEMENT

§ 23:2 Overview

The Law "On Concession Agreements"3 (the "Law") provides for the conclusion of a concession agreement between the private investor ("concessionaire") and the relevant state/municipal authority ("grantor") that owns the respective immovable property (facility). Relations between the parties to a concession agreement are regulated by civil law. However, the concession agreement is quite an inflexible instrument, because most of its provisions are stipulated by the Law and may not be changed or excluded by the parties.

Under the concession agreement the concessionaire is obligated to (re-)construct and use/exploit the relevant facility in the manner specified in the agreement and receive any earnings from its use of the facility. In return for granting the concession, the state/municipal authority receives a concession fee from the concessionaire.

Other related services in connection with the facility are not covered by the concession agreement (e.g. relating to utilities, supply or to the exercise of the concession). Careful drafting contractual arrangements supplementing the concession agreement will be required for the purpose of regulating all related matters.

§ 23:3 Conclusion of a concession agreement

A concession agreement is concluded by way of conducting an open or closed tender. The general rule is to conduct an open tender; a closed tender is conducted if the concession agreement is to be concluded for an object of strategic significance for the country's defense or if information constitutes a state secret. The tender winner is determined by the tender commission. The criteria for selecting the winning bidder are not set up in the Law "On Concession Agreements;"4 rather they shall be identified in the tender documentation on a case-by-case basis. In case of any breach of the tender procedure, any third party may file a claim to invalidate the tender results and, as a consequence, the concluded agreement. Russian law does not provide any scale of severity for such procedural breaches, so that any violation may lead to the project being set aside.

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Footnotes

1 The Russian Law "On Concession Agreements," No. 115-FZ (July 21, 2005).

2 The Russian Law "On Concession Agreements," No. 115-FZ, art. 4 (July 21, 2005).

3 The Russian Law "On Concession Agreements," No. 115-FZ (July 21, 2005).

4 The Russian Law "On Concession Agreements," No. 115-FZ (July 21, 2005).

Originally published in Corporate Counsel's Guide to Doing Business in Russia

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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