Amendments to the Law on Concession Agreements to attract investment in the utilities sector

Russia
Available languages: RU

The rules regulating the implementation of concession projects for the construction, reconstruction and operation of water supply and water disposal facilities (the “Water Facilities”) in Russia have been substantially amended as of 1 January 2017. The Federal Law “On Concession Agreements” now includes a separate chapter devoted to the regulation of concession projects in this field, which was introduced by Federal Law No. 275-FZ “On Amending the Federal Law ‘On Concession Agreements’”* dated 3 July 2016 (the “Law”). The Law also contains other notable amendments that apply irrespective of the type of concession facilities.

The Law is expected primarily to make private investment in the Russian water supply and water disposal sector more attractive, especially taking into account the guaranteed demand and the 5% rate of return on investment guaranteed by the Russian state.

Amendments devoted to projects involving Water Facilities

Parties to a concession agreement

The economic rationale underlying concession projects requires that the tariffs for the concessionaire’s services ensure the return on investment and cover the operating costs of the concessionaire. Although Water Facilities in Russia are usually owned by municipalities, which act as grantors under concession agreements, tariffs are set by the authorities of the relevant Russian region. This, in practice, often resulted in such tariffs not covering the concessionaire’s costs under the concession agreement. Municipalities were not in a position to resolve the situation, as they were not competent to set the tariffs, and according to Russian law (Article 308 of the Russian Civil Code), an agreement cannot impose obligations on third parties – in this case, on the relevant region responsible for tariff regulation. To avoid such situations, the Law now requires that the concerned region be a party to the concession agreement.

Removing factors hampering the implementation of concession projects

In practice, the conclusion of concession agreements frequently affected incumbent state operators of Water Facilities. Pursuant to the Law, enterprises and institutions that have the rights of operational control and operational management to Water Facilities now must, within one year of the concession agreement’s effective date, amend the list of their activities to exclude those activities involving rights to the concession object. Thus, the Law has removed an obstacle previously hindering the conclusion of concession agreements which made it impossible for water supply and water disposal companies to pursue their activities as per the objects clause of their charter. When an enterprise or institution has no other activity, it will be subject to liquidation.

The Law has also resolved the issue of the impossibility to effect state registration of the rights to certain types of immovable property to be transferred to the Concessionaire, namely water supply networks and water pump stations, sewerage systems, sewerage pump stations, heat supply networks. The Law now allows, subject to specific conditions, transferring rights to such immovable property to the concessionaire before their cadastral and state registration.

Restrictions imposed on concessionaires and others

The Law expressly prevents concessionaires from:
  • transferring the right to possess or use Water Facilities to third parties;
  • assigning rights and transferring liabilities under a concession agreement to foreign persons/entities; and
  • placing the rights under a concession agreement into trust management.
As for the ownership title to the Water Facilities subject to a concession agreement, it cannot be transferred to others, whether it be the concessionaire or third parties.

Moreover, under the Law, foreign entities cannot act as concessionaires in relation to Water Facilities. That said, the Law does not limit the right of Russian legal entities controlled by foreign companies to be parties to concession agreements; in practice, such legal entities are usually the ones that become project companies acting as concessionaire.

As the tariffs for water supply and water disposal services provided by a concessionaire are subject to state regulation, any decrease in such tariffs prevented concessionaires from further performing their obligations under the relevant concession agreement. This was one of the obstacles to the implementation of concession projects in this field. To remove this obstacle, the Law allows concessionaires to defer the performance of their investment obligations if the Russian Government resolves to change the tariffs, the essential gross profit margin or long-term parameters.

Amendments affecting all types of concession objects

The Law clarified the procedure for holding tenders to award concession agreements. It now sets out that the obligation to reimburse the grantor for the expenses in connection with organising a tender for a concession agreement and preparing the tender documentation can be imposed on the concessionaire. This provision deals with the fact that state bodies or municipalities usually do not have funds to organise tenders.

The Law also provides that the state bodies will monitor the conclusion and performance of concession agreements, as well as the implementation terms, the amount of investment and the accomplishment of targets. The Russian Government is to adopt a monitoring procedure and confirm which body will be in charge of monitoring. If you have any questions on the matters referred to in this Alert, do not hesitate to contact CMS Russia experts Artem Rodin and Paul Miasnikof or your regular contact at CMS Russia.

* in Russian