Concession agreement
A concession agreement is a negotiated contract that grants rights to a company by a government, local authority, or other legal entity.
There are two types of concession agreement:
- Works: Where a contractor is contracted to perform construction works in return for payment which is, in full or in part, the right to exploit the works. For example, a contractor who builds a bridge may be given the right to levy a toll on bridge-users.
- Services: Where a contractor is contracted to provide a service and payment is received, in full or in part, from the usage of that service. For example, a contractor is contracted to operate, maintain and invest in public utilities such as water or rail services.
Both types of concession agreement involve a transfer to the contractor of the ‘operating risk’, i.e. the risk that either the demand or supply are not sufficient to make the service or work a profitable venture.
Complex Private Finance Initiative (PFI) projects may include a concession agreement, providing private contractors with the rights to use certain assets. In conferring these rights, however, the government or legal authority may stipulate certain expectations with regard to the level of maintenance and investment that is undertaken, as well as operational standards that must be met.
An example of a high-profile concession agreement is that which exists between the French and British governments and the private contractors The Channel Tunnel Group Ltd. and France-Manche S.A. for the operation of the Channel Tunnel.
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