October 2005

Russia has recently adopted a new law on concessions¹ providing a legal framework for infrastructure development and finance projects.   This article touches on some of its key features and potential issues that investors may face when exploring opportunities offered by the new law.

The Concessions Law applies to fourteen types of infrastructure including, inter alia, motorways, roads, railways, underground, other public transportation projects, pipelines, sea ports, airports, communal services, and various culture, sports and tourism facilities.   Despite the broad scope of the new law, it is unclear if it will apply to proposed projects such as the Moscow-St.   Petersburg toll road or the Moscow Central Ring Road.  Some press reports suggest that toll roads may be regulated by a separate law that is being drafted by the RF Transportation Ministry, rather than by the Concessions Law.

Similarly to concession regimes in other countries, the Concessions Law provides for BOT (build, operate, transfer) and ROT (rehabilitate, operate, transfer) concession models.  The law characterises concession as a contract²  and does not address concessions of a so-called institutionalised nature where the public and private sectors cooperate within a distinct legal entity. 

It should be noted that despite similarly sounding terms, the concept behind the Concessions Law is different from the "Commercial Concession" chapter in the Russian Civil Code, as the Civil Code chapter, in effect, addresses franchising.³

As is often the case with framework legislation in Russia, the Concessions Law only sets out general principles and leaves the details to be determined in implementing legislation and at the discretion of concession authorities.   The key aspects of the law are as follows:

Concession authority.   The law provides that a designated government body – deemed the "concession authority" – will have regulatory authority over a concession.   Generally, this body will be the executive authority at the appropriate level of government.  Thus, the Russian Government will oversee federal property, while the executive administration of the relevant region (oblast, krai, etc.) will oversee regional property.  The concession authority initiates the tender process, acts as a party in the concession documentation and controls the subsequent operation of the relevant infrastructure by the concessionaire.  The law also allows the authority to take part in financing of the project and/or provide guarantees to the concessionaire in accordance with applicable Russian legislation.

Concessionaire.   The Concessions Law does not impose any general restrictions on the identity of the concessionaire.   It can be a Russian or foreign legal entity, a partnership (not having the status of a legal entity) or an individual entrepreneur.  Russian and foreign concessionaires are expressed to have equal rights.  Depending on the nature of the property, specific requirements may be set out in the decision on concession and tender documentation.

Concession period.   No maximum concession period is prescribed by the law.   Such period is to be agreed by the parties.

Concession payments.   Concession payments can be made by the concessionaire throughout the life of the concession or only during certain periods, as agreed by the parties.   The law provides three possible structures for concession payments: (i) a single lump payment or periodic payments to the relevant state budget; (ii) a share of production or proceeds generated by the concessionaire; and (iii) a transfer of property owned by the concessionaire to the concession authority.  The parties can agree to use any of, or a combination of these structures.  Payment procedures and the frequency of payments are to be set out in the concession agreement. 

Concession site.   The land occupied by the infrastructure shall be leased to the concessionaire by the state for the period of the concession.   In relation to other property which may be required to operate the concession, and which is not owned by the state, the law entitles the concessionaire to agree upon the right to use such property with the owner of the property in a separate contract.  The concession authority has no obligation to assist the concessionaire in negotiating such rights.

Construction works.   The concessionaire may engage other persons to perform its obligations under the concession agreement.   The concessionaire remains liable for such other persons' actions as for its own in all cases. There is no requirement of the contractor's independence from the concessionaire.

Tolls.   The Concessions Law does not set out any particular structure for tolls to be levied on end users of the infrastructure.   The parties may agree upon terms and procedures for toll collection.  Certain restrictions exist in relation to works and services provided to consumers and financed entirely from RF budget funds.  The law prohibits imposing any tolls for such works or services in a concession agreement.

Tender.   Concession agreements must be entered into through a tender process.   This process is initiated when a concession authority adopts a decision on the concession.  The decision must set out the proposed terms of the concession, requirements to potential bidders, tender terms and procedures, selection criteria, timing of the whole process and other conditions. 

"Stability clause".   If there are legislative changes, the law only requires the parties to amend the concession agreement in order to restore the concessionaire's interests to the position they had been in before the changes.   Depending on the application of the Concessions Law in practice, concessionaires may be able to benefit from "grandfathering clauses" in legislation on the protection of investments.  In particular, Russia's Law on Investment Activities provides for up to a 7-year grandfathering period in relation to a "priority" investment project.⁴    However, there is a certain ambiguity as to what is a "priority investment project" for the purposes of the legislation on the protection of investments; accordingly, whether or not concessionaires could rely on such provisions is unclear.   In addition, the procedures and burden of proof for invoking this investment law stabilization regime is quite cumbersome; we are not aware that it has ever been invoked (or, at least, successfully).

Open Issues.   A number of important questions are not addressed in the Concessions Law.   For example, while the law describes the tender process and the decision on the concession in considerable detail, it does not at all address the criteria that the concession authority must use when deciding on the infrastructure to be transferred into a concession.  In particular, it is unclear how a company wishing to invest in an infrastructure project by way of concession can initiate the concession process and propose to adopt a decision on the concession in relation to relevant property.  Such uncertainty may result in unnecessary bureaucratic delay and abuses in the exercise of power by state officials.

Many legal issues remain to be resolved as well.   The Concessions Law does not address tax aspects and does not provide for any tax privileges.   Also, since a concession implies exclusivity, competition law issues will likely be critical as well.  Some of the infrastructure listed in the Concessions Law is subject to regulation as "natural monopolies".  The status of such natural monopolies is addressed in Federal Law No. 147-FZ dated 17 August 1995 "On Natural Monopolies", which imposes certain restrictions and control over entities deemed to be "subjects of natural monopolies".  The effect of such additional regulation of concessions, as well as of any other, more general competition issues that may arise, remains to be clarified.  Therefore, making sure that the Concessions Law ties in with other areas of law (tax, competition, budget and administrative legislation, etc.) is crucial for successful application of the law.

Overall, the adoption of the Concessions Law is undoubtedly a step forward, although its practical effect and significance remain to be seen.