Concession agreements are highly regulated as concessionaires must adhere to a complex string of principles, rules and procedures.
In the EU, for instance, public procurement laws and regulations are governed by EU Directive 2014/23/EU.
Consideration for the works or services includes the risk of operating at an economic loss. There is no guarantee that profits will be made on the investment.
Calculating the Value of Concession Contracts
Evaluating Public and Private Procurement (PPP) agreements requires long-term planning. The primary focus is to calculate the estimated turnover for the lifespan of the contract – which is typically 25-30 years.
Consideration must be given to the amount of investment you will receive from third party stakeholders such as investors, grants and performance bonuses awarded by public authorities.
Also determine whether you can generate revenue from the sale of assets that form part of the concession contract, together with supplies and services, and possible income from competitions or awards.
The long-term future of most PPP projects is difficult to predict. The main risks are lower than expected channels of income and the volatility of costs for services and materials in a notoriously unstable market.
Estimates can clearly only be predicted at the time you are applying for the concession agreement. In accordance with Concession Contract Regulations (CCR) 2016, financial projections are permitted a 20% swing otherwise the contract must be recalculated.
A recalculation could have particular significance if regulators deem firms to have neglected thorough due diligence. Failure to comply with principles, rules and procedures stipulated by laws and regulations may mean the pouring body will cancel the contract and advertise it for other bidders.
The length of term plays a significant role in any decisive action governing bodies will enforce. The duration must allow the concessionaire to recoup some portion of the initial investment for that term.
Section 3 of the CCR states: “the value of a concession contract shall be the total turnover of the concessionaire generated over the duration of the contract, net of value-added tax, as estimated by the contracting authority or utility, in consideration for the works and services which are the object of the concession contract and for the supplies incidental to such works and services.”
The rules for calculating the value of a concession contract can be problematic if you are not familiar with public procurement laws and regulations. The terms of a concession agreement largely depend on its desirability.