Keys to Concession Agreements

Understanding the Structure Concessions come in many shades, colours, and subject matters: Build Operate and Transfer (BOT), Leaseholds, Management Concessions and more. The aim is to part with the operation of the asset for a given period whilst the operator provides a public service and makes a profitable income. Understanding the structure of the Agreement is very important to drafting a composite Agreement.

Phases Many concessions Agreements after they are signed would still have phases – depending on the structure of the Concession. Typically, it would be that the Agreement is signed on a “signature date”, then phase one would be the “Conditions Precedent” which simply refers to the items that one or both parties needs to fulfil before the asset is physically handed over to the Concessionaire. Some good examples may be the fact that the Concessionaire is required to provide some level of Financial Security, make some payment as an entry fee or achieve some regulatory icings. On the part of the Government some state support guarantees may be expected.

If we pass the Condition Precedent stage (or some are waived) then the asset that is handed over would usually need construction or rehabilitation when handed over to the Concessionaire. The amount of time this is scheduled to take is usually called the “Construction or Project stage”.

Then comes the “Operational phase” – when the asset is finally put to work and the money begins to roll in to the Concessionaire – or both parties if the deal is one for profit sharing.

Commencement date A typical question that arises from these phases is when the term of the Concession begins to run? There are several options: the day the agreement is signed; the day the parties meet the conditions precedent; the day the asset is handed over; the day construction phase is completed or the date on the certificate of completion; or the date the Concessionaire actually starts collecting money. The choice depends on the equity of the situation and the economic dynamics.

The Parties

It is very important to get the parties right or else one may have an agreement that is void from the start. In many scenario’s the owner of the asset may not be the party negotiating. For example the Bureau of Public Enterprise negotiating on behalf of a Government agency. Also where Government support guarantees are provided the question arises as to whether the Government should not off necessity be a party to the Agreement (in addition to the relevant agency). The rule of thumb is to ensure that the asset owner and people who have serious obligations to fulfill under the Agreement are parties. On this aspect it is better to err on the side of excess.

One key aspect with the parties is the Consortia principle. Many concessionaires would be several people lumped up into one company called a “Special Purpose Vehicle”. The agreement needs to unveil and mention specifically who these constituent parties are and have a follow up clause that requires the Asset holders consent before they effect any changes to their shareholding structure.

How is the Asset transferred? Discussion on the parties majorly deals with who can transfer the asset. This still leaves the question of how the asset is transferred. The local law dealing with asset transfers must be complied with. For example where the asset includes landed property under a Certificate of Occupancy, it follows that in addition to the Concession Agreement, the Concessionaire must have a lease agreement for the term of the Concession duly registered at the lands registry.

Risk Allocation Risk and risk mitigation are the heartbeats of any business venture.

What are the risks that need to be allocated?

They are very many, but the key ones would usually fall into one of these broad categories: Political risks – shift in government policy or unrests for example. Economic risks – the expected number of passengers dwindled as the operations commenced. Operational risks: The operator lacks the competence to run the business or installed the wrong type of equipment.

These risks are usually allocated by having a risk allocation chart as a Schedule to the Agreement or by drafting the risk allocation as obligations of the parties. The party whose obligation it is bears the risk from cradle to grave. The risks may typically be shared amongst these parties and in some this load bearing order, Concessionare naturally being the greatest risk taker and income earner: Concessionaire; Lender, Asset holder, Government, Subcontractor, Insurer,

Insurance. Insurance is a major item in any Concession Agreement. Given the value of the concessioned asset both the Concessionaire and the Government have a vested interest in getting credible Insurance cover.

This Insurance would usually cover all possible risks: force majuere, workmens compensation, political risk and more. In Nigeria, the current Insurance Act provides that Nigerian Insurance companies should be patronized assets within Nigeria and these provisions arguably limits offshore Reinsurance. These provisions do pose a disincentive for an offshore investor and has been taken care of in several ways – one of which is to ask the Government for a waiver as regards the Reinsurance aspect.

Changes Clause Typical Concessions have a term that runs from 10 years up to 30 years. Given the term, the Concessionaire is concerned about changes that may occur in future. One of them is a change in Law that causes a material adverse situation – for example the Government passes a legislation that makes it impossible for the Concessionaire to run profitably. Depending on the situation, some concessionaires request Guarantee’s from Government to cover these possibilities. There is definitely a clause in every good Concession Agreement that covers this aspect.

Non Compete Clauses An investor who is given an airport to build, operate and transfer for 30 years wants some assurance that the Government does not start a similar project 1 kilometre away that competes with them and dilutes their projections for return in investment (ROI). At the same time, it may become necessary in 10 years time to build a new airport. These issues must be negotiated in such a way to achieve comfort for all the parties: Concessionaire, Government and the Lender.

Lenders Comfort Concession Agreements are by design supposed to be “bankable”. They should therefore be attractive to a potential Lender from the onset. This is a major role for the financial adviser and the lawyer to fashion out a “bankable” Concession Agreement. One method that has become a norm is for Concession Agreements to have the attached “Subsitution Agreements”. A substitution agreement basically allows the Lender to step into the shoes of the Concessionaire as operator if and when the need arises, and the terms for doing so.

Credible Concessionaire A concessionaire that lacks the financial and technical muscle to operate the asset is a disaster waiting to happen. Agreements are therefore crafted to impose certain hurdles (usually as conditions precedents) to ensure that the Concessionaire shows credibility before the asset is handed over. This may usually come in a cocktail of vairables: set minimum equity participation; criteria for participation in the special purpose vehicle; and all types of guarantees and financial security. Many agreements add a Financial close as a condition precedent – that the Concessionaire must submit a full package of equity, debt and in-kind contributions to convince the Asset holder that he is prepared to deliver before the asset is handed over.

Financial Model The financial adviser would ordinarily tackle the nuances of: Whether the Concessionaire pays an entry fee? How much? What is a profitable and acceptable term for the Concession? The lawyer should simply provide a Schedule (perhaps the most important one) to the Agreement that will accommodate all these financial wizardry. Very convenient? Are many lawyers arithmetic shy?

I am certain that you will remember many things i failed to add. Fantastic! At least you are beginning to see the angles.

Ayuli Jemide, is the Lead Partner DETAIL – a firm of commercial solicitors.

Understanding the Structure Concessions come in many shades, colours, and subject matters: Build Operate and Transfer (BOT), Leaseholds, Management Concessions and more. The aim is to part with the operation of the asset for a given period whilst the operator provides a public service and makes a profitable income. Understanding the structure of the Agreement is very important to drafting a composite Agreement.

Phases Many concessions Agreements after they are signed would still have phases – depending on the structure of the Concession. Typically, it would be that the Agreement is signed on a “signature date”, then phase one would be the “Conditions Precedent” which simply refers to the items that one or both parties needs to fulfil before the asset is physically handed over to the Concessionaire. Some good examples may be the fact that the Concessionaire is required to provide some level of Financial Security, make some payment as an entry fee or achieve some regulatory icings. On the part of the Government some state support guarantees may be expected.

If we pass the Condition Precedent stage (or some are waived) then the asset that is handed over would usually need construction or rehabilitation when handed over to the Concessionaire. The amount of time this is scheduled to take is usually called the “Construction or Project stage”.

Then comes the “Operational phase” – when the asset is finally put to work and the money begins to roll in to the Concessionaire – or both parties if the deal is one for profit sharing.

Commencement date A typical question that arises from these phases is when the term of the Concession begins to run? There are several options: the day the agreement is signed; the day the parties meet the conditions precedent; the day the asset is handed over; the day construction phase is completed or the date on the certificate of completion; or the date the Concessionaire actually starts collecting money. The choice depends on the equity of the situation and the economic dynamics.

The Parties

It is very important to get the parties right or else one may have an agreement that is void from the start. In many scenario’s the owner of the asset may not be the party negotiating. For example the Bureau of Public Enterprise negotiating on behalf of a Government agency. Also where Government support guarantees are provided the question arises as to whether the Government should not off necessity be a party to the Agreement (in addition to the relevant agency). The rule of thumb is to ensure that the asset owner and people who have serious obligations to fulfill under the Agreement are parties. On this aspect it is better to err on the side of excess.

One key aspect with the parties is the Consortia principle. Many concessionaires would be several people lumped up into one company called a “Special Purpose Vehicle”. The agreement needs to unveil and mention specifically who these constituent parties are and have a follow up clause that requires the Asset holders consent before they effect any changes to their shareholding structure.

How is the Asset transferred? Discussion on the parties majorly deals with who can transfer the asset. This still leaves the question of how the asset is transferred. The local law dealing with asset transfers must be complied with. For example where the asset includes landed property under a Certificate of Occupancy, it follows that in addition to the Concession Agreement, the Concessionaire must have a lease agreement for the term of the Concession duly registered at the lands registry.

Risk Allocation Risk and risk mitigation are the heartbeats of any business venture.

What are the risks that need to be allocated?

They are very many, but the key ones would usually fall into one of these broad categories: Political risks – shift in government policy or unrests for example. Economic risks – the expected number of passengers dwindled as the operations commenced. Operational risks: The operator lacks the competence to run the business or installed the wrong type of equipment.

These risks are usually allocated by having a risk allocation chart as a Schedule to the Agreement or by drafting the risk allocation as obligations of the parties. The party whose obligation it is bears the risk from cradle to grave. The risks may typically be shared amongst these parties and in some this load bearing order, Concessionare naturally being the greatest risk taker and income earner: Concessionaire; Lender, Asset holder, Government, Subcontractor, Insurer,

Insurance. Insurance is a major item in any Concession Agreement. Given the value of the concessioned asset both the Concessionaire and the Government have a vested interest in getting credible Insurance cover.

This Insurance would usually cover all possible risks: force majuere, workmens compensation, political risk and more. In Nigeria, the current Insurance Act provides that Nigerian Insurance companies should be patronized assets within Nigeria and these provisions arguably limits offshore Reinsurance. These provisions do pose a disincentive for an offshore investor and has been taken care of in several ways – one of which is to ask the Government for a waiver as regards the Reinsurance aspect.

Changes Clause Typical Concessions have a term that runs from 10 years up to 30 years. Given the term, the Concessionaire is concerned about changes that may occur in future. One of them is a change in Law that causes a material adverse situation – for example the Government passes a legislation that makes it impossible for the Concessionaire to run profitably. Depending on the situation, some concessionaires request Guarantee’s from Government to cover these possibilities. There is definitely a clause in every good Concession Agreement that covers this aspect.

Non Compete Clauses An investor who is given an airport to build, operate and transfer for 30 years wants some assurance that the Government does not start a similar project 1 kilometre away that competes with them and dilutes their projections for return in investment (ROI). At the same time, it may become necessary in 10 years time to build a new airport. These issues must be negotiated in such a way to achieve comfort for all the parties: Concessionaire, Government and the Lender.

Lenders Comfort Concession Agreements are by design supposed to be “bankable”. They should therefore be attractive to a potential Lender from the onset. This is a major role for the financial adviser and the lawyer to fashion out a “bankable” Concession Agreement. One method that has become a norm is for Concession Agreements to have the attached “Subsitution Agreements”. A substitution agreement basically allows the Lender to step into the shoes of the Concessionaire as operator if and when the need arises, and the terms for doing so.

Credible Concessionaire A concessionaire that lacks the financial and technical muscle to operate the asset is a disaster waiting to happen. Agreements are therefore crafted to impose certain hurdles (usually as conditions precedents) to ensure that the Concessionaire shows credibility before the asset is handed over. This may usually come in a cocktail of vairables: set minimum equity participation; criteria for participation in the special purpose vehicle; and all types of guarantees and financial security. Many agreements add a Financial close as a condition precedent – that the Concessionaire must submit a full package of equity, debt and in-kind contributions to convince the Asset holder that he is prepared to deliver before the asset is handed over.

Financial Model The financial adviser would ordinarily tackle the nuances of: Whether the Concessionaire pays an entry fee? How much? What is a profitable and acceptable term for the Concession? The lawyer should simply provide a Schedule (perhaps the most important one) to the Agreement that will accommodate all these financial wizardry. Very convenient? Are many lawyers arithmetic shy?

I am certain that you will remember many things i failed to add. Fantastic! At least you are beginning to see the angles.

Ayuli Jemide, is the Lead Partner DETAIL – a firm of commercial solicitors.

Understanding the Structure Concessions come in many shades, colours, and subject matters: Build Operate and Transfer (BOT), Leaseholds, Management Concessions and more. The aim is to part with the operation of the asset for a given period whilst the operator provides a public service and makes a profitable income. Understanding the structure of the Agreement is very important to drafting a composite Agreement.

Phases Many concessions Agreements after they are signed would still have phases – depending on the structure of the Concession. Typically, it would be that the Agreement is signed on a “signature date”, then phase one would be the “Conditions Precedent” which simply refers to the items that one or both parties needs to fulfil before the asset is physically handed over to the Concessionaire. Some good examples may be the fact that the Concessionaire is required to provide some level of Financial Security, make some payment as an entry fee or achieve some regulatory icings. On the part of the Government some state support guarantees may be expected.

If we pass the Condition Precedent stage (or some are waived) then the asset that is handed over would usually need construction or rehabilitation when handed over to the Concessionaire. The amount of time this is scheduled to take is usually called the “Construction or Project stage”.

Then comes the “Operational phase” – when the asset is finally put to work and the money begins to roll in to the Concessionaire – or both parties if the deal is one for profit sharing.

Commencement date A typical question that arises from these phases is when the term of the Concession begins to run? There are several options: the day the agreement is signed; the day the parties meet the conditions precedent; the day the asset is handed over; the day construction phase is completed or the date on the certificate of completion; or the date the Concessionaire actually starts collecting money. The choice depends on the equity of the situation and the economic dynamics.

The Parties

It is very important to get the parties right or else one may have an agreement that is void from the start. In many scenario’s the owner of the asset may not be the party negotiating. For example the Bureau of Public Enterprise negotiating on behalf of a Government agency. Also where Government support guarantees are provided the question arises as to whether the Government should not off necessity be a party to the Agreement (in addition to the relevant agency). The rule of thumb is to ensure that the asset owner and people who have serious obligations to fulfill under the Agreement are parties. On this aspect it is better to err on the side of excess.

One key aspect with the parties is the Consortia principle. Many concessionaires would be several people lumped up into one company called a “Special Purpose Vehicle”. The agreement needs to unveil and mention specifically who these constituent parties are and have a follow up clause that requires the Asset holders consent before they effect any changes to their shareholding structure.

How is the Asset transferred? Discussion on the parties majorly deals with who can transfer the asset. This still leaves the question of how the asset is transferred. The local law dealing with asset transfers must be complied with. For example where the asset includes landed property under a Certificate of Occupancy, it follows that in addition to the Concession Agreement, the Concessionaire must have a lease agreement for the term of the Concession duly registered at the lands registry.

Risk Allocation Risk and risk mitigation are the heartbeats of any business venture.

What are the risks that need to be allocated?

They are very many, but the key ones would usually fall into one of these broad categories: Political risks – shift in government policy or unrests for example. Economic risks – the expected number of passengers dwindled as the operations commenced. Operational risks: The operator lacks the competence to run the business or installed the wrong type of equipment.

These risks are usually allocated by having a risk allocation chart as a Schedule to the Agreement or by drafting the risk allocation as obligations of the parties. The party whose obligation it is bears the risk from cradle to grave. The risks may typically be shared amongst these parties and in some this load bearing order, Concessionare naturally being the greatest risk taker and income earner: Concessionaire; Lender, Asset holder, Government, Subcontractor, Insurer,

Insurance. Insurance is a major item in any Concession Agreement. Given the value of the concessioned asset both the Concessionaire and the Government have a vested interest in getting credible Insurance cover.

This Insurance would usually cover all possible risks: force majuere, workmens compensation, political risk and more. In Nigeria, the current Insurance Act provides that Nigerian Insurance companies should be patronized assets within Nigeria and these provisions arguably limits offshore Reinsurance. These provisions do pose a disincentive for an offshore investor and has been taken care of in several ways – one of which is to ask the Government for a waiver as regards the Reinsurance aspect.

Changes Clause Typical Concessions have a term that runs from 10 years up to 30 years. Given the term, the Concessionaire is concerned about changes that may occur in future. One of them is a change in Law that causes a material adverse situation – for example the Government passes a legislation that makes it impossible for the Concessionaire to run profitably. Depending on the situation, some concessionaires request Guarantee’s from Government to cover these possibilities. There is definitely a clause in every good Concession Agreement that covers this aspect.

Non Compete Clauses An investor who is given an airport to build, operate and transfer for 30 years wants some assurance that the Government does not start a similar project 1 kilometre away that competes with them and dilutes their projections for return in investment (ROI). At the same time, it may become necessary in 10 years time to build a new airport. These issues must be negotiated in such a way to achieve comfort for all the parties: Concessionaire, Government and the Lender.

Lenders Comfort Concession Agreements are by design supposed to be “bankable”. They should therefore be attractive to a potential Lender from the onset. This is a major role for the financial adviser and the lawyer to fashion out a “bankable” Concession Agreement. One method that has become a norm is for Concession Agreements to have the attached “Subsitution Agreements”. A substitution agreement basically allows the Lender to step into the shoes of the Concessionaire as operator if and when the need arises, and the terms for doing so.

Credible Concessionaire A concessionaire that lacks the financial and technical muscle to operate the asset is a disaster waiting to happen. Agreements are therefore crafted to impose certain hurdles (usually as conditions precedents) to ensure that the Concessionaire shows credibility before the asset is handed over. This may usually come in a cocktail of vairables: set minimum equity participation; criteria for participation in the special purpose vehicle; and all types of guarantees and financial security. Many agreements add a Financial close as a condition precedent – that the Concessionaire must submit a full package of equity, debt and in-kind contributions to convince the Asset holder that he is prepared to deliver before the asset is handed over.

Financial Model The financial adviser would ordinarily tackle the nuances of: Whether the Concessionaire pays an entry fee? How much? What is a profitable and acceptable term for the Concession? The lawyer should simply provide a Schedule (perhaps the most important one) to the Agreement that will accommodate all these financial wizardry. Very convenient? Are many lawyers arithmetic shy?

I am certain that you will remember many things i failed to add. Fantastic! At least you are beginning to see the angles.

Ayuli Jemide, is the Lead Partner DETAIL – a firm of commercial solicitors.