31 January 2012 Written by  Wondwossen Wakene

Concession

What is concession?

In its legal sense, concession is not clear contract so just like any other contract the requirements of the law of contracts should be met. But what makes concession a special contract is its being an administrative contract. With this, all the peculiarities that we tried to see in the last two chapters are conditioned upon.  In concession contracts what would otherwise be done by administrative authorities is done by another person called the grantee.

If so, nonetheless, concession is a special form of administrative contracts. This very nature in turn is regulated by Art 3207(2) of our civil code. It says:

“The concession of a public service is the contract where by a person, the grantee, binds himself in favor of an administrative authority to run a public service getting a remuneration ( there of) by means of fees received on the use there of”. Let us consider the elements one by one:

“Grantee”-One of the contracting parties, a private individual that enters in the activity of providing a public service. As the case may be this person can be a juridical or physical person.

“Grantor”- however will be the administrative authority. It is the administrative authority that undertakes to control the grantee and supervise the work of the same.

Public service-In chapter one, we said public service is one of the issues which necessitates government’s intervention in its provision. It is one of the reasons why we have administrative contracts. As per Art.3207 (1) it is any activity which a public community has decided to perform for the reason that it has deemed it to be necessary in the general interest and considered that private initiative was inadequate for carrying it out…”.The inadequacy of private initiative emanates from different reasons. Lack of infrastructural capital, expert management and exposure to externalities can be mentioned as reasons.

Remuneration-This makes the agreement onerous. It is not for free that the grantee will bind himself in favor of administrative authorities. He must get remuneration in the form of fees. So, users of the service will pay fees and these fees will be remunerations. The basic idea behind concession contracts is not profit. Still one cannot say that the grantee should run the service for free. Unlike other business undertakings the grantee is not as free as ever to set discriminatory prices. The public should equally benefit from the prices set by the parties.

Concession is an administrative contract among other things because one of the parties is an administrative authority-see Art .3132(1) cum Art. 3207. The involvement of administrative authorities however should be regulated. This clearly emanates from the responsibility that administrative authorities have for the good running of the public service.

The role of the administrative authority is supervisory. The grantee has a functional role. For fear of domination, this will result in direct exploitation by the administrative authorities. Art. 3210 (1) says the control should not be excessive. Otherwise, the nature of the concession will be altered.

3.2 Variation clause (3213)

The concession contract may have a stipulation to the effect that adjustments in prices and tariffs will be in place by default. Two issues are important here:

  1. The variation is conditional on changes occurring in the prices of certain materials, commodities or services. Not all variations in prices matter but only changes in certain materials, commodities or services. There should be a close relationship between the service provided by the grantee and the variable prices in materials, commodities or services. The changes should affect the prices of the public service. Unreasonable price adjustment is not favored here.

Example:

XYZ Co. has recently agreed to run a cafeteria in one of the institutions of the Federal Government. Among the services provided, food and drinks take the maximum share. Very recently the grantee is thinking of increasing the price of food in a significant way. When responding to the reasons behind the increment, the grantee mentions the increase in the price of fuel as one of the reasons in addition to the increase observed in the price of sugar. Now the institution in which the service is ran (the grantor) wants to solicit your opinion as to validity or invalidity of the adjustment. Advise it.

2. The new prices should be proportional to the change in the other prices. You may not impose disproportional tariff on users of public service under the guise of variation. In case of disputes, courts are authorized to fix prices. In the above example, one has to consider the magnitude of the increment in addition to the reasons of increment.

3.3. Revision clauses (3214)

Still the parties may agree to the effect that modification may be introduced “where economic circumstances change considerably…” The magnitude of the economic change is very much important in this case than the causes of the change. Because parties are free to agree on and about their terms, the law provides the possibility. How considerable should the economic change be? The determination depends on the specific condition of the time. The underlining element in the determination of the magnitude of the economic change must be the very implication of the change on the provision of the service. We must take considerable change to mean a change which significantly affects the position of the grantee to efficiently carry out the obligations under the contract. Changes in the prices of important raw materials, without which it is impossible to provide the service and the increase of which cannot be reasonably foreseen should entitle the grantee to have revision of the contract. Otherwise, minor economic changes as well as those economic changes that a reasonable business person may foresee must not be grounds of revision.

But Art 3214(1) simply mentions the possibility of revising tariffs without fixing the prices. (Note: do not forget that under Art.3213 (1), in addition to putting the possibility of revising prices, fixation of prices is also achieved). Here, parties therefore should sit down and negotiate the addition of an additional clause in the contract which will possibly be a clause fixing prices. If the parties fail to agree, “the court may fix a tariff” taking in to account the grantee i.e. a tariff ensuring an equitable remuneration to the grantee.(Art 3214/3/). Until now, we have discussed briefly about one from of modification called bilateral (contractual) modification. Now, we will turn to another form of modification called unilateral modification. Concession contracts are arranged to serve the public. They have public policy issue in account. To this end, one of the parties is an administrative authority having a supervisory capacity. For such reasons, administrative authorities have the prerogative of unilaterally modifying the terms of the contract. This prerogative is so valuable that it cannot even be reversed by agreeing to the contrary. (Art. 3216/3/).

By modification, we are referring to making the obligation of the grantee more burdensome. Art.3216/1/) envisages the possibility and also the grounds of doing so. Thus, administrative authorities may impose not only an obligation but even “all the obligations…” that go with the basic undertaking. The imposition of obligations presupposes conditions. Let us see these conditions:

  1. “… Fit for the proper operation…of the service…”.Because administrative authorities are responsible for the good running of the public service, they should make decisions coincident with such a responsibility. One is taking a course of action via Art. 3216 (1)). For example the grantor may make it an obligation on the grantee that the latter control and regulate unreasonable behavior in the vicinity of the institution where service is provided. To this end the grantee may have the obligation of prohibiting smoking in the institution ran by the grantee. This obligation might be burdensome but still legal.

II.  “…fit for the improvement of the service…”- The point is the modification should be inspired by such grand principles a responsible administrative authority should appreciate. Though we cannot talk about the extent in importance of the improvement to the public in general, it is not possible to deny that the improvement should be important to the public and it should not be a ground of abuse.

There are limitations and even prohibitions on this prerogative of unilateral modification. A brief discussion on the limitations and prohibitions will be available here.

1. Only service -related modifications are valid.Art.3217 (1) reads as “Only the clauses concerning the services and its operation may be modified”.

Administrative authorities may increase or reduce the service to be operated. They may also impose an extension of the service. In no case however the authorities may impose modifications which actually change the nature or object of the contract. This is an obvious legal remark serving as a safety measure to maintain concessions as they are. If the nature or object is changed they are no more concession contracts. The organizational change in particular is abhorred by the law. In particular such organizational change as substituting a management under state control for concession is prohibited.

Example:

K waterworks is a grantee which has undertaken the duty of providing water to the public with the local water supplies agency herein under called the grantor. Among the duties that the grantee has, providing water to more than ten villages is one. Explicitly, they have also agreed to the effect that the grantee shall undertake the installation of pipes to forty-four thousand households. Very recently however the grantor is thinking of expanding the extent of the service to additional twenty-thousand households. But the grantor is not sure as to the consequences of this decision. What advise can you give to the grantor? Under a similar setting, assume that the grantor is to modify the service provided by the company to include the task of providing consultation to the municipality on issues of advancing and expanding water supply to the community. What is your opinion on the new plan of the grantor?

  1. The nature of the service and the potential of the grantee-the nature of the service and the potential of the grantee are some the considerations that should be made when the administrative authority thinks of modifying the service. When we say the nature of the service we are referring to the fact that the modification should not result in the imposition of completely new service on the grantee. The introduction of novel services in the scene is not legal. The grantee   should not be forced to manage new (novel) service nor he be imposed with an obligation which surpasses his potential. Novel services might even be grounds of surpassing the potentialities of the grantee. As such novel services might be burdens on the grantee because they may come up with a special arrangement for their performance. Though possible to say that novel services are recognizable easily, it is possible to hold that the grantor may impose a new service on the grantee under the guise of extension. Even though courts will have a final say on the matter, it is still possible to outlaw such disguised extensions by resorting to the second option i.e. that the services surpass the potentials of the grantee. A service may surpass the potentials of the grantee in different ways. A service may be beyond the capacity of the grantee financially. In this case we say the service cannot be provided by the grantee given its financial capacity. At other times, the grantee may not have the required expertise to carry out the service. This independent treatment of the ways should not give the image that they are not related. For example, lack of financial capacity may be a ground not to have the required expertise from the market.

3. Financial interest of the grantee- financial benefits that accrue to the grantee as per the concession may not be modified   unilaterally by the authorities. On issues involving the interest of the grantee the grantor is not as such free to fix the remuneration unilaterally. In our previous example, would it be against the interest of the grantee if the grantor modifies the contract to the effect that the grantee will provide consultation services to sub-contractors engaged in the construction of water works? Why? Why not?

Last modified on Wednesday, 02 May 2012 13:05