This report is not a step-by-step guide on how to negotiate concessions. Nor is it an attempt to identify model contracts or clauses. Rather, it aims at helping policymakers and their advisers to better understand some of the most important and difficult issues related to the design, award, implementation, monitoring, and modification of concessions. Here, we broadly define concessions as any arrangements in which a firm obtains from the government the right to provide a particular service under conditions of significant market power. While it is impossible to succinctly summarize the multiple issues discussed in the report, and while in many cases there is no single "best" answer to a particular question, some key recommendations emerge. They deserve to be emphasized. The following ten recommendations constitute a nonexhaustive list.
The main rationale for concessions is that they can facilitate the regulation of natural monopolies. In markets that are naturally competitive, direct competition between firms can usually work well without recourse to concessions. Before awarding concessions, governments should therefore first determine whether competition can be made to work in the relevant activities, possibly through reforming the market structure.
Governments often grant exclusive rights to the concessionaire. But, in many cases, this may not be desirable. Permitting entry by new competitors helps ensure that direct competition will take place wherever possible and can pressure the incumbent to maintain good performance. In addition, many of the objectives pursued through the granting of exclusive rights—such as making deals more attractive to private operators or ensuring that some redistributive social goals are met—can often be achieved through other means.
While many aspects of a concession are transaction- or sector-specific, several key principles related to the award, design, or monitoring of concessions are substantially identical across sectors. There will often be important advantages in clearly specifying such principles in cross-sectoral laws or regulations applicable to private infrastructure schemes in general.
The allocation of risks between the involved parties is at the core of concession design. While theoretical principles are well known risks should be borne by the party best able to control, manage, or hedge against them-their application in practice often raises numerous difficulties. A careful analysis will often be necessary to distinguish between costs that are truly exogenous to the operator (that is, those against which the company cannot protect itself) and those that are not. Only exogenous costs should be passed on to other parties such as consumers, suppliers, or the conceding authority.
Striking an adequate balance between certainty and flexibility is another main challenge of concession design. Performance targets, for example, can be designed so as to allow for renegotiations under specific, pre-established procedures. Usually, they should focus on the end results to be achieved rather than on the means to be used in order to preserve the flexibility of the concessionaire's operational arrangements.
Concessioning infrastructure services is always a complex exercise that raises new sets of questions and problems for the administration. It is absolutely essential for governments to retain qualified and experienced experts who are able to provide sound advice on the range of issues discussed in this report.
Tracking Number: WorldBankToolkitsorConcessionsInfrastructure_1998_English