What Is a Service Concession Contract

The operator recognises a financial asset to the extent that it has an unlimited contractual right to receive money or other financial assets from the licensor for or at the direction of the licensor. The operator has an unconditional right to collection if the licensor contractually guarantees to pay the operator The 2004 Public Procurement Directives only partially covered concessions, and the lack of clear EU rules has led to legal uncertainty and obstacles to the freedom to provide services. It has also led to distortions in the functioning of the internal market, such as the direct award of contracts without transparency or competition.B. This process risked national patronage, fraud and corruption. This lack of proper regulation has led to economic inefficiency and has had a negative impact on obtaining the best value for money for public funds. In response, Directive 2014/23/EU on the award of concession contracts was adopted in 2012. EU countries had to transpose this directive into national law by 18 April 2016. IFRIC 12 Service Concession Contract Guide In February 2011, Deloitte`s global IFRS office published IFRIC 12 Service Concession Contracts – A Practical Handheld Guide. At best, concession contracts are a form of outsourcing that allows all parties to enjoy comparative advantages. Often, a country or company has resources that lack the knowledge or capital to use them effectively. By outsourcing the development or exploitation of these resources to others, it is possible to earn more than they could on their own. For example, a country may lack the capital and technical skills to use offshore oil reserves.

A concession contract with a multinational oil company can create revenue and jobs for that country. IFRIC 12 clarifies that the operator does not recognize the associated infrastructure as its tangible capital assets because it does not have the right to control the use of the infrastructure. Where the operator provides construction or modernisation services, it shall recognise an intangible asset to the extent that it is granted the right to charge fees to users of a public service and/or financial asset to the extent that it is granted an unconditional contractual right to receive cash in exchange for its services. SIC-29 requires such information. In the UK, the threshold for concession contracts is £4,104,394. A concession of land or property by a government may be a lease for specific purposes in exchange for services or a specific use, a right to take over and profit from a particular activity. A concession may include the right to use certain existing infrastructure necessary for the conduct of a business (e.g. B a water supply system in a city); In some cases, such as mining.

B, it may only be the transfer of exclusive or non-exclusive easements. IFRIC 12 allows the possibility that both types of agreements can exist under a single contract: to the extent that the government has provided an unconditional payment guarantee for the construction of the public sector asset, the operator has a financial asset; To the extent that the Operator must rely on the public to use the Service in order to receive payment, the Operator has an intangible asset. A concession contract is a contract that gives a company the right to operate a particular business in the jurisdiction of one government or on the ownership of another company under certain conditions. Concession contracts often involve contracts between the non-governmental owner of a facility and a concession owner or concessionaire. The agreement grants the concessionaire the exclusive right to operate his business in the factory for a certain period of time and under certain conditions. A concession or concession contract is the granting of rights, land or property by a government, local authority, company, natural or legal person. [1] The Guide is intended to serve as an illustrative tool for the reader in the application of IFRIC 12 service concession agreements, providing an analysis of ifric 12 requirements and practical advice with examples that address some of the most complex issues related to service concession agreements. The guide provides guidance on the scope, definition of the accounting model, specific characteristics of usual concessions (take-or-pay agreements, capacity availability, etc.) and much more. For example, there is a concession contract between the governments of France and the United Kingdom and two private companies concerning the Channel Tunnel.

British Channel Tunnel Group Limited and the French company France-Manche S.A. operate the Channel Tunnel, often referred to as “Chunnel” under this agreement. The tunnel connects the two countries and allows the transport of passengers and goods by rail between them. It is 31.5 miles long, with 23.5 miles under the English Channel. This makes the underwater tunnel the longest in the world and an important part of the public infrastructure. A common space for concession contracts between governments and private companies includes the right to use certain parts of public infrastructure, such as railways .B. Rights can be granted to sole proprietorships – resulting in exclusive rights – or to several organisations. As part of the agreement, the government could have rules for construction and maintenance, as well as ongoing operating standards. Within the European Union, the award of concessions by public authorities is subject to regulation. Works concessions have been subject to procurement rules for some time, as Directive 2004/18/EC of the European Parliament and of the European Council on public procurement applies to works concessions and the award of service concessions of cross-border interest is subject to the principles of the Treaty on the Functioning of the European Union. However, on 26 February 2014, the European Parliament and the European Council adopted another Directive 2014/23/EU on the award of concession contracts[4], which required EU Member States to adopt national legislation on the award of concession contracts worth EUR 5 186 000 awarded from 18 April 2016.

Concession contracts can also be used for risk management. Suppose a country invests a large sum in the production of a single commodity. Then this country will have a high idiosyncratic risk in terms of the price of this product. For example, the governments of Brazil and Mexico have invested heavily in state-owned oil companies. The value of their assets and revenues has declined significantly as the price of oil has fallen in 2020. Countries that grant concessions will lose revenue from concession rights, but they do not risk as much capital. Also known as concession agreements, concession contracts cover various industries and are available in many sizes. These include mining concessions worth hundreds of millions of dollars, as well as small food and beverage concessions at a local cinema. Regardless of the type of concession, the concessionaire must generally pay the concession fee to the party granting the concession fee.

These fees and the rules by which they can change are usually described in detail in the contract. Public services such as water supply can be operated as a concession. In the case of a public service concession, a private company enters into an agreement with the government to have the exclusive right to operate, maintain and implement investments in a public service (e.g. B, privatization of water) for a number of years. Other forms of contracts between public and private entities, namely leases and management contracts (often referred to by the French as leasing in the water sector), are closely related, but differ from a concession in terms of rights and remuneration of the operator. A lease gives a company the right to operate and maintain a public service, but the investments remain the responsibility of the public. Under a management contract, the operator collects revenue only on behalf of the government and in turn receives an agreed fee. The objective of IFRIC 12 is to clarify how certain aspects of the IASB`s existing literature apply to service concession contracts.

Concessions are a particularly attractive way to implement projects of public interest when the state or local authorities need to mobilise private capital and know-how to supplement scarce public funds. They support a significant part of economic activity in the EU and are particularly common in network industries and in the provision of services of general economic interest. Concessionaires may, for example, build and manage motorways, provide airport services or operate water supply networks. In the private sector, the owner of a concession – the concessionaire – usually pays either a fixed amount or a percentage of the income to the owner of the company from which he operates. [2] Examples of concessions within another company include concessions in sports venues and cinemas, as well as concessions in department stores operated by other retailers. Short-term concessions can be granted as advertising space for periods of a single day. On October 31, 2011, the International Public Sector Accounting Standards Board (IPSASB) issued IPSAS 32 Service Concession Arrangements: Grantor, which aims to address the lack of international guidance on how governments and other public entities should declare their participation in service concession agreements, which are often used to build the infrastructure used to maintain and improve essential public services. is mandatory. The operator seizes an intangible asset to the extent that it receives a right (a licence) to collect royalties from users of the public service.

The right to charge fees to users of the public service is not an unconditional right to receive money, as the amounts depend on the extent to which the public uses the service. IFRIC 12 does not address government accounting for service concession agreements. .