Concession - what it is (in simple words), purpose and types of concession agreements

The state (grantor) can transfer almost any property to private owners for exploitation. The objects of the concession agreement are primarily socially significant objects - airfields, railways, housing and communal services facilities and other infrastructure facilities, as well as public transport systems, healthcare, education, culture and sports facilities.​

A private company (concessionaire) undertakes to build/reconstruct//invest in a state-owned facility, for which it receives the right to use it and make a profit from it. The property remains in state ownership.

Example of use on "Secret"

“How do we know about NEP? The main source for us is “The Golden Calf” and “12 Chairs” by Ilf and Petrov. Let me remind you that there was the Hercules concern - it is easy to recognize any modern state corporation. And besides “Horns and Hooves” there was a concession for the construction of a tram. Everyone forgets about it, although in principle it is something that fully corresponds to the concept of national projects, only at the local level: they built this unfortunate tram in Stargorod, when you could buy a donkey.”

(Chief economist of Expert RA Anton Tabakh - about the parallels between modern realities in the economy and the works of Ilf and Petrov.)

What is it: definition in simple words

A concession in the housing and communal services sector is a partnership form of interaction between the state (municipality) and private investors with the aim of involving part of their assets in the arrangement and improvement of social infrastructure facilities and the development of a complex of economic sectors that ensure the functioning of residential buildings, as well as creating safety, convenience and comfort of living and the stay of residents who are consumers of a range of housing maintenance services:

• heating;
• sewerage;
• light supply;
• water and gas;
• garbage removal;
• current repairs of buildings.

Relations between the concessionaire and the grantor are regulated by the Federal Law on Concession Agreements dated July 21, 2005 No. 115-FZ.

This document clearly regulates:

1. compilation procedure;
2. regulation of compliance with the terms of the agreement;
3. conditions under which termination of concession agreements is possible.

Nuances

Types of concession agreements:

According to the legislation of the Russian Federation:

BOT (Build - Operate - Transfer) - “Construction - management - transfer”. With this form of concession agreement, the concessionaire carries out the construction and operation of the facility, mainly on the basis of ownership, during the established period of validity of the agreement. Upon expiration of the agreement, the facility is transferred by the concessionaire to the state.​

In fact, it is more often used:

BTO (Build - Transfer - Operate) - “Construction - Transfer - Management”. With this form of partnership, the concessionaire first builds the facility, which is then transferred to the state (grantor) ownership immediately after completion of construction. Next, the constructed facility is transferred by the concessor for operation to the concessionaire.​

Concession transfer: basic provisions and regulatory laws in the Russian Federation

The definition of a concession agreement is given by Federal Law No. 115 in Art. 3:

Concession in the Russian Federation is legally possible only according to the BOT scheme: that is, after the creation (reconstruction) of real estate (and related movable) property, the concessionaire receives a temporary right to own and manage it, and after the expiration of the concession period, transfers it back to the state.

However, in practice, concessions in Russia are carried out according to the second scheme (WTO): the facility is built by the concessionaire, temporarily transferred to the state for registration, and then returned to investor management.

• A concession is a form of encumbrance on the property of the copyright holder.
• The concessionaire does not have the right to pledge the object belonging to him under the concession agreement or to alienate it in favor of third parties.
• Concession agreements are concluded on a competitive basis, and information about the competition, starting from 2014, must be posted on the official information website of the Russian Federation about tendering.
• Reconstruction of the facility includes: improvement of the structure;
• modification;
• replacement of outdated equipment;
• introduction of new technologies;
• changing the functions of parts of an object, etc.

Concession objects

Art. 4 Federal Law No. 115 defines the objects transferred under a concession agreement:

• highways and objects connected to them;
• railway, sea and river transport;
• sea ​​(river) vessels;
• airports and airfields;
• metro and public transport;
• pipeline transport;
• power plants and power lines;
• hydraulic facilities;
• objects of heat and water supply, sanitation;
• educational, social, cultural, sports, tourist and other facilities;
• healthcare institutions, sanatoriums and resorts;
• military warehouses;
• waste treatment plants;
• communal facilities;
• computer programs, databases. information sites (or information technology objects);
• other objects.

Concession for IT facilities

The rules of concession agreements for information technology facilities are regulated by a separate chapter of the law 4.1:

The grantor acquires exclusive rights to use the results of intellectual activity that are part of the concession object, according to the agreement. Moreover, at the time of concluding an agreement to modify an IT object, the grantor himself must have exclusive rights, and, if required, the consent of the copyright holder (Article 53.1 No. 155-FZ).

The concessionaire can use the results of intellectual activity only if he has exclusive rights to them when concluding a concession agreement.

Concession for utilities

A number of linear facilities (CHP, hot and cold water supply systems, sewer lines are concessioned, according to the rules established by Chapter 4 of this federal law:

• the subject of the Russian Federation within the territorial limits of which these objects are located must take part in the concession;
• sales of goods, works and services are carried out by the concessionaire at established tariffs and prices;
• a state or municipal unitary institution that transferred engineering communication facilities under a concession agreement must, within a year after signing the agreement, make changes to its charter regarding its activities
• (Article 39 No. 115-FZ).

Commercial concession

With a commercial concession, it is possible to transfer exclusive rights (trademarks, marks, know-how, etc.) from the concessor to the concessionaire for a certain period or indefinitely.

• The copyright holder may authorize the use of its commercial experience and business reputation, indicating the scope of this use, territory and scope of activity.
• Both parties to a commercial concession agreement, unlike a state one, can be KOs and individual civilians registered as individual entrepreneurs.
• The commercial concession agreement is concluded according to the rules of license agreements (Article 1027 of the Civil Code of the Russian Federation)
• The concessionaire may transfer all of its exclusive rights (or part of them) to other users under a subconcession agreement (Article 1029 of the Civil Code).
• The monetary reward that the concessionaire pays to the grantor can be in the form of: fixed payments;
• percent of revenue;
• the difference between the retail and wholesale prices of products at which they are sold to the copyright holder (Article 1030 of the Civil Code).

Data

• Objects of exclusive rights cannot be the subject of a concession agreement.​
• The Eurotunnel, which runs under the English Channel and connects England with continental Europe, was built under a concession agreement by Getlink, which operates it and receives income from transporting passengers.
• A commercial concession (or franchising) is a transaction between two private companies/entrepreneurs: one allows the other, for a fee, to conduct business on its behalf, using technology, raw materials, a business model, or a trademark.

Concession is...

I’ll tell you a fairy tale: once upon a time there was a bear, but he didn’t have a house. He came to the forest animals that lived in a house on the edge of the forest, and he asked to stay with them. And they answered him: “Repair our house, then we will allow you to live with us.”

The bear fulfilled the conditions of the animals, and they all began to live together and make good money. The moral of this tale is this: the animals entered into a concession agreement , everyone is happy and satisfied.

A concession is an agreement between the copyright holder and the investor (who is this?) on the construction or repair of any real estate object at the expense of the investor, provided that the investor will subsequently be able to use this property and derive material or other benefits from its use.

A document that confirms the fact of a concession agreement between the state and the investor is called a concession agreement.

Parties concession agreement:

1. grantor: state,
2. subjects of the Russian Federation,
3. municipalities (MO);

“Concession” translated from the Latin “concessio” means “ assignment, permission ”. That is, the state allows the use of its property subject to certain conditions.

V.I. Lenin (an outstanding politician and economist of the early 20th century) said:

A concession is a kind of lease agreement (what is it?). The capitalist becomes a tenant of part of state property for a certain period, but does not become the owner. Property remains with the state.

Practice

The largest concession project in Moscow in recent years is the construction of the Northern backup of Kutuzovsky Prospekt worth about 40 billion rubles.

• Payback through the collection of tolls (the maximum amount is set by the city). ​
• The investor fully finances the construction of the road, the preparation of the territory (relaying communications) and the city co-finances 50%.
• The city does not guarantee the profitability of the project. ​
• The city is funding the seizure and demolition of the construction site.​
• The concession period is 40 years.​

The concept of grantor and concessionaire

There are two parties to the contract. One of them plays the role of concessionaire , i.e. structure or person who implements the investment. Most often it is a private company or an entire group.

The second party is represented by a certain state that performs the duties of the grantor. In this case, the agreement is signed by the prime minister, the chairman of the government, the relevant minister, the head of the region or municipality. Bilateral relations are regulated by agreement.

Changing the concession agreement by the grantor

Based on a government decision, as well as proposals from the concessionaire, the grantor has the right to change:

1. Terms of the agreement regarding the timing and priority of providing land for carrying out its activities.
2. Stages of construction and reconstruction of the facility.
3. Technical descriptions of some parts and elements of the facility, subject to a reduction in the costs of construction and reconstruction of the corresponding facilities.
4. Reducing the cost estimate of the facility at the proposal of the concessionaire.
5. Reducing the deadline for providing documents that confirm the provision of a loan or the availability of one’s funds in the required amount.
6. The period for providing supporting documents regarding the fulfillment of the concessionaire's obligations.
7. Grantor fee period.
8. Competitive proposals, with the exception of those that serve as relevant criteria for the competition.

Confidentiality

The grantor does not have the right to disclose information that, according to the agreement, is confidential or a trade secret. Thus, the Law “On Information, Information Technologies and Information Protection” No. 149-FZ specifies the requirement not to transfer information obtained when obtaining appropriate access to third parties, unless there is the consent of the owner of this information. The same legal act states that special laws establish the conditions under which information is classified as a commercial, official or other secret; confidentiality must be maintained in relation to it, and legal liability is provided for the disclosure of data. Thus, the grantor and concessionaire can indicate in the agreement concluded a list of data that is secret.

Moreover, the confidentiality of information that constitutes a trade secret must be respected regardless of whether these clauses are provided for in the agreement or not. These legal relations are regulated by the Law “On Trade Secrets” No. 98-FZ.

Advantages and disadvantages

Advantages of concession agreements:

1. Providing comprehensive guarantees to private companies from the state, increasing the return on investment and reducing investment risks.
2. Preservation of property in state or municipal ownership.
3. Carrying out reconstruction or modernization of housing and communal services facilities without the use of subsidies from the budget.
4. Ensuring efficient property management by utility services.
5. The ability to control the activities of a private investor.

The disadvantages of using private financing for housing and communal services may include the following factors:

• The unwillingness of a significant part of potential investors of domestic companies to invest assets in the development of utility infrastructure, while the access of foreign investors to partner business projects in the housing and communal services sector is completely closed.
• There is a high probability of difficulties arising in the legal relations of the parties, which arise due to the imperfection of the legislative framework that requires improvement, since the area of ​​​​activity is relatively new.
• The spotty and chaotic nature of concession practice in certain regions where it is in its infancy.
• Deficiencies in the legal registration of routes, networks, and buildings regarding the registration of ownership rights to them.
• Debt in payment for part of the housing and communal services facilities, for which all documentation is in order.

Legal basis for concession activities

Definitions of concession stored in legal normative documents, set. Even in European Union countries with similar models of economic governance, differences in the interpretation of concessions are available to the public sector and are greater than the history of a century of preferential legislation. This is particularly noted in the New Single Market Rules adopted by the European Commission in December 1999. In this document, a concession is defined as a system of relationships in which a public authority charges a third party (a private or mixed company) with the management of amounts of infrastructure or other public services, subject to acceptance by this party of the business risk and obligations for the operation of the equipment. In other words, the state transfers the property of a private (mixed) concessionaire to a company owned by it under certain conditions fixed in the form of an agreement for a limited period for a fee. At the same time, the preferential facility remains state-owned, and the concessionaire has the rights to use and possess it.

As one party to a preferential agreement, the state is the Russian Federation and (or) its subject or actions of the municipality, this party is called a concessor. The other party is a domestic or foreign investor - a concessionaire.

Sometimes the concessionaire is also given the right of order by state-owned property. But for this purpose, each time he must obtain written permission from the authorized government agency. This practice was particularly used by the Soviet government during the New Economic Policy. The state undertakes not to interfere simultaneously with administrative operations, but exercises strict control over the implementation by the concessionaire of contractual obligations. After the object of the concession period, including also the production facilities created by the concessionaire, it is transferred to the state.

From the point of view of political economy, concessions seem to be a consolidation of the resources of two economic agents: the state in the form of its property and the private sector in the form of investment, management, and know-how.

There are different opinions about the essence of the concession: the licensed and preferential method is the same (tax plus royalties - payment for the right to develop and produce natural resources); concession is one of the types of agreement on compensation conditions (agreement on Compensation Conditions).

The concession in its modern sense could act as a tool for reducing investment risks, maintaining the operational tax burden of investment projects carried out by companies due to increased stability of the economic and legal environment during the periods of time in which companies understand the projects. These concessions (concession agreements) could create some enclaves of stability in an unstable environment.

Advantages of concession agreements

Among the advantages of the preferential form of government investment objects, the following can be noted:

• concessions remove the financial burden from the state, since the concessionaire assumes responsibility for meeting all costs of financing, management and maintenance of the facilities transferred to the concession, covering the costs, for example, through rates;
• concessions establish a rather rigid long-term structure according to the law, i.e. stable, relations between the state and the concessionaire;
• concession agreements make it possible to attract private investment, including foreign shares, without losing strategic control over vital systems and facilities.

Thus, the interests of the state are that:

• shifts the costs of investment and property maintenance to the private sector to increase its efficiency;
• the state fills the budget due to receiving preferential payments and removes funding from state facilities;
• solves socio-economic problems.

The interests of private business in preferential projects are as follows:

• the concessionaire receives state assets under long-term management that do not belong to him on favorable terms of payment for the concession, which is somewhat analogous to a lease;
• investment, the concessionaire has sufficient guarantees of income from funds as a state, since the concessionaire's partner bears a certain responsibility for ensuring a minimum level of profitability;
• in some cases (projects in the water sector - gas, heat supply) the state continues to pay additional from the budget to the concessionaire, provided that this will increase the quality of service;
• the concessionaire, having economic freedom, can increase due to increased productivity, innovative business profitability during the validity of the concession period, and at the same time the concession period is not reduced.

As the experience of many countries shows, one of the effective ways for the successful functioning of the public sector of the economy is to attract direct investment to the financing and management of state-owned property, not only as a result of privatization, but also on a preferential basis. In Russia, a country with a high level of nationalization of the economy, in conditions of an acute shortage of investment resources, the use of another form of investment of funds that is quite attractive to investors could bring significant benefits to the economy. The application for such agreements is also dictated by the lack of resources in the state, primarily financial and technological, for the effective functioning of the public sector of the economy.

Story

A concession can be considered as a form of private public partnership agreement. With this approach, it can be put on a par with “feeding,” which was formed in the 12th century and existed before the reforms of Peter I, and “farming,” which was the transfer by the state of the right to collect taxes and other state revenues to private individuals. ).

Feeding

Feeding is a type of grant from appanage and grand dukes to their officials, according to which the princely administration was maintained during the period of service at the expense of the local population.

Initially, feeding was sporadic. In accordance with the norms of Russian Pravda, collectors of fines (fine), city builders and other categories received a certain allowance in kind from the population. In the XII-XIV centuries, feeding played a significant role in the formation of the local government system. The princes sent boyars to cities and volosts as volostels and governors, and other service people as tiuns. The population had to support them (“feed”) during the full period of service. The feeding system reached its greatest development in the 14th–15th centuries.

Farming

Farming is the transfer, under certain conditions for a certain payment, by the state of the right to collect taxes and other state revenues. The tax farming system is essentially a prototype of concessions, a form of agreement between the state and entrepreneurs.

At first, farming was used in conditions of underdeveloped credit, subsistence farming, weak communications, and financial difficulties of the state. Farming first became widespread in Ancient Rome and Ancient Greece (IV century BC), in Ancient Iran (VI century BC).

Farming in the Middle Ages became one of the most important sources of initial capital accumulation.