Sector:

Water and sanitation

Name of Agreement:

Concession agreement for wastewater project

Type of Agreement:

Concession agreement (build operate transfer - BOT) for a wastewater treatment and sludge treatment and disposal project, together with operation and maintenance and adaptation of existing facilities.

Region (if known):

Europe 

Year of Agreement/ Draft:

1999

Principal Author(s) (firm and contact person):

Prepared by international law firm for European country, with stable legal, political and regulatory regimes.

Annotated by:

Victoria Delmon, LEGPS, World Bank

Purpose and Context:

Agreement sets out terms on which Concessionaire is to build own operate and then transfer a wastewater treatment and disposal and sludge treatment and disposal plant. Utility pays Concessionaire a fee for such treatment and disposal.

Concessionaire is to finance the project.

Utility continues to operate and maintain existing facilities during construction period. Concessionaire to adapt Existing Facilities for use with the new Scheme once handover has taken place.

Circumstances where this contract may be appropriate:

This is a sophisticated BOT agreement for a wastewater treatment plant and is mainly relevant where funding is to be provided by the private sector Concessionaire, rather than a Design Build and Operate arrangement where funding for the project is from the Government. However, the agreement contains many provisions which could be adapted to more simple schemes.

It is drafted with a common law system in mind although it could be adapted to a civil law jurisdiction (subject to local laws)

Main  Features:

Concession Period is 25 years from Concession Award Date

Concessionaire with right and obligation at its cost to design, build, own, operate, finance and maintain the wastewater treatment and sludge treatment plant (3(1))

Concessionaire shall execute the Construction Works in accordance with the Concession Specification and shall pass the Performance Tests within the Time for Completion (11(1)) Various circumstances, including Force Majeure are listed for extending the Time for Completion (11(2))

15(3) – Concessionaire to enter Existing Facilities of the Scheme to carry out the installation and modification work detailed in the Construction Specification and from the Commissioning Commencement Date for an Existing Facility the Concessionaire shall accept all wastewater flows arising at that Existing Facility (15(4))

Concessionaire shall receive, treat, dispose of all wastewater arising in the Catchment Area and discharged into the Scheme (4(1))

Payments (23) – the Concessionaire is paid a Wastewater Treatment Contract Payment which is a variable charge based on volume of wastewater treated, together with a Sludge Treatment Contract Payment which is a variable charge based on volume of wastewater treated + suspended solids solution concentration collected + mass of imported sludge. [IT is not always acceptable to lenders to have no element of fees that are fixed as there will be no guaranteed payment stream for servicing the loans where there is only a variable charge).

There are revenue sharing arrangements (Part 11A, 3.2)

On days where the treated wastewater does not meet the Wastewater Standards (Part 11A, 2) then the Concessionaire shall not be entitled to a payment for that day (unless failure is due to influent exceeding influent specification).

Where wastewater arrives at wastewater treatment plant that contains elements that our outside the Influent Concentration Level or where a Pollution Incident occurs, the Concessionaire is to treat the elements are outside these levels in accordance with Good Engineering and Operating Practices (4(1)(b) and 4(3)) rather than the Core Requirements.

Concessionaire is to be paid for treated wastewater where failure to meet treated wastewater standards are due to influent being outside the specifications (Part 11A, 3.1)

Concessionaire to treat and dispose of all sludge arising from the treatment of wastewater at the Scheme together with sludge delivered by the Utility at the Sludge Delivery Point (5(1))

Utility is responsible for issuing Industrial Discharge Consents in the Catchment Area and is required to inform the Concessionaire where in the Utility’s opinion a consent will have a significant impact on the treatment process of the Scheme’s treatment plant and give the Concessionaire a reasonable opportunity to comment on the effect which the proposed discharge may have on its ability to meet its obligations (7). If any discharge would permit a new or increase in existing discharge equal to or exceeding Load Threshold the Concessionaire will notify Utility of the impact this is to have and whether Variations are required.

10(2) – Concessionaire responsible for obtaining and accuracy of required consents- even where these are obtained by the Utility (the Concessionaire is likely to try and amend this provision to share some of the risk for obtaining consents)

Existing Employees (18) – to be transferred to the Concessionaire on the Handover Date (advisable if permitted by law to have an agreed list of employees to be transferred together with details of salaries and benefits so that there are no surprises at the time of transfer) May also wish to consider whether there are constraints as to whether Concessionaire can terminate employment following Handover. Local laws should also be checked to ensure that employees can be transferred and to determine whether they are subject to civil servant pay scales or can be paid outside those rules.

Changes of Law – very limited circumstances where changes of law give rise to relief to the Concessionaire – it only relates to Qualifying Changes of Law which are specific to the concessionaire or to the wastewater industry. It is often appropriate to include a broader definition of changes of law that will give rise to relief of the Concessionaire’s obligations. The provision is further qualified in that there will be no right to a Variation unless the difference in cost arising from the change of law is above a specified threshold.

Step-in rights (22) – the Utility has the right to step-in and take over the Scheme in the event of a Concessionaire default which remains unremedied. There are no step-in rights for lenders – lenders may seek this and the local laws will need to be considered to determine whether it is possible to grant them step-in rights.

Force Majeure (definitions and 25) – the definition of Force Majeure is much more limited than might be expected – parties may wish to consider a much broaded definition on Force Majeure. For more on Force Majeure, click on Force Majeure Checklist. 

No party in breach of its obligations to extent prevents by Force Majeure Event. Force Majeure can give rise to an extension for Construction Completion Date and Concession Period (if arising in O&M Phase) (24(2)). Extended FM for 12 months gives rise to right to terminate (25(4)) (but there is no provision making any minimum payments to the Concessionaire in the event that it is prevented by FM from treating wastewater – this may give rise to a concern for lenders if there is no guaranteed payment stream for servicing the loans)

Termination – 26 – 29 – there are extensive provisions dealing with termination and the consequences thereof, what should happen in terms of employees, requirements for asset condition etc

31 – Restrictions on change of ownership of Concessionaire for the first [7] years of the Concession Period. A Utility will be anxious to tie the operator and the construction companies into the project for a certain period – generally the construction partners will want to leave the consortium after the Construction Period has come to an end or following the end of the Defects Liability Period. The operating company is more likely to be willing to remain for a longer period but beyond a certain period the operator will want flexibility and will probably charge a premium for being tied in.

Assignment and security (32) – neither party may assign its interests in the agreement or rights over property forming the Scheme or grant security thereover, other than for purposes of granting security for financing the Scheme

37 - Data supplied to the Concessionaire prior to contract is not warranted by the Utility. The Concessionaire is accepting risk of condition of existing facilities and site conditions etc. [The concessionaire is likely to resist this unless the data is independently verified and/or there has been plenty of opportunity for site inspections prior to contract].

Expert determination (43)

Dispute Resolution (44) – conciliation followed by Arbitration under UNCITRAL rules. For a discussion of Dispute Resolution provisions, click on Dispute Resolution Checklist.

Possible additional provisions that it might be appropriate to include:

As discussed above, risk for site conditions and for existing assets is transferred to Concessionaire. In some circumstances this may not be appropriate.

Step-in rights for lenders – see above.

Less restrictive definition of force majeure and change in law.

Provisions that may not be advisable to replicate/ may need further thought:

Force majeure provisions and change in law provisions

Provisions of wider general use:

Generally useful agreement with clear drafting, with the exceptions listed above.

Experience Since Coming Into Force (including any amendments)/ if draft form, whether it has been applied:

It has been a successful scheme with concessionaire delivering scheme on time and within specification.

Tracking Number:

Sanitationbot1