Concession contracts in Spain’s new Public Procurement Law

Written on 22 Mar 2018

The new Public Procurement Law introduces important new features in the area of public works concession contracts and services concession contracts.

On 9 March 2018, Public Procurement Law 9/2017 of 8 November (the “LCSP“) entered into force, transposing, inter alia, Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts. It introduces important new features in the field of concession contracts, such as the abolition of the public service management contract and, as a substitute it introduces the new services concession contract into our legal system. Consequently, the concession contract is subdivided into two types of contract, works concession contracts and services concession contracts, the common denominator of which is the need to transfer the operational risk to the concessionaire, as discussed below.

However, insofar as the rules governing the works concession contract are applicable to the services concession contract (provided that they are compatible with the nature of the services concession contract, as established in article 297 of the LCSP) firstly, we will summarize the most important new features that commonly affect both types of contracts, and then we will comment on the most outstanding issues that, from our point of view, affect each type of contract in a particular way:

(i) Firstly, as we have already mentioned, we must refer to the principle of “operational risk transfer“. This change is more terminological than conceptual, since this principle is not far from its predecessor, the “principle of contractors’ responsibility”.

In order for a contract to be classified as a concession contract, it is essential that the contractor assumes the “operational risk” of performing the contract, otherwise we would be faced with a works or services contract, as the case may be. When does the rule consider that the concessionaire should assume the concessional risk? “(…) when it is not guaranteed that, under normal operating conditions, it will recover the investments made or cover the costs incurred as a result of the operation of the works that are the object of the concession” (art. 14 of the LCSP).

Operational risk may include demand risk, supply risk or both. Demand risk is that which covers the variation in demand – if it is higher or lower than expected when the contract was signed (for example, the concessionaire assumes the risk of traffic jams on the motorway). Supply risk (equivalent to “availability risk”) is understood as the risk of not being able to supply the contractually agreed quantity or the quality standards determined in the contract.

It justifies the rule that the risks transferred to the concessionaire must involve an actual exposure to the uncertainties of the market, which implies that any estimated potential loss incurred by the concessionaire “is not merely nominal or negligible” (art. 14 in fine).

(ii) For its part, the rule establishes that the duration of concession contracts shall be limited and calculated on the basis of the works and services which constitute their subject matter. If the contract is for a period of more than five years, the maximum duration of the concession may not exceed the period considered as reasonable for the concessionaire to recover the investments made to operate the concession, together with a return on the capital invested, taking into account the investments required to achieve the specific contractual objectives.

(iii) In that regarding the remuneration of the concessionaire, the LCSP modifies certain provisions of General Taxation Law 58/2003 of 17 December determining that the tariffs received by the concessionaire are non-tax financial contributions of a public nature.

(iv) Similarly, with regard to the economic rebalancing of the concession, among other issues, the possibility that the contractor may withdraw from the contract when it is overly burdensome for him (that is to say, if it implies an annual net increase in costs of at least 5% of the net turnover of the concession for the period remaining until the conclusion of the same) is contemplated in the following two scenarios:

a) When a general provision is adopted by an Administration other than the grantor after the conclusion of the contract.

b) When the concessionaire is required to incorporate into the works or the operation technical advances which improve them considerably and whose availability on the market, in accordance with the state-of-the-art, has occurred after the conclusion of the contract.

The following is a summary of the most relevant new features related to each type of concession contract.

In this respect, as far as the works concession contract is concerned:

(i) The content of the feasibility study is extended to include issues such as the need to justify the impact of the concession on budgetary stability or the existence of possible State Aid and its compatibility with the Treaty on the Functioning of the European Union.

Another new feature is that if the feasibility study has been prepared by private initiative, the author of the study will be entitled to five extra points in addition to those obtained by the application of the award criteria in the bidding process.

(ii) With regard to the effects of the termination of the concession contract for reasons attributable to the Administration, although the Administration still needs to pay the concessionaire the amount of the investments made in connection with the expropriation of land, the execution of construction works and the acquisition of assets necessary for the operation of the works covered by the concession, taking into account the rate of depreciation, the period for determining the straight-line method of depreciation is reduced from 6 to 3 months.

During the parliamentary processing of this amendment, it was argued that since the success of the works concession depends on the possibility of financing the works object of the concession, it is necessary to increase legal certainty and reduce to the extent possible the uncertainty regarding the economic rights of the parties in the event of early termination of contracts.

With regard to the new service concessions feature, the following are among the most significant novelties:

(i) Two of the public service management modalities are outside the scope of the LCSP: the interested management contract (gestión interesada) and the state-assisted contract (concierto). With regard to the mixed-economy company (article 277 of the previous rule), the possibility that a concession contract may be awarded directly to a mixed-economy company on the terms set out in the twenty-second additional provision of the rule is upheld.

Therefore, the new Law follows the criteria established by the European Court of Justice (Judgment 196/08- ACOSET) and the European Commission concerning the direct award of contracts to mixed economy companies.

Notwithstanding the foregoing, apart from the application of the LCSP, it must be borne in mind that the figure of the state-assisted contract (concierto) maintains its regulation in articles 143 and thereafter of the Decree of 17 June 1955 approving the Regulations on Services of Local Corporations.

(ii) In addition, a maximum term of forty years is established for services concession contracts involving the execution of works and the operation of services, as opposed to the maximum of fifty years established in the previous regulation.

Finally, it is worth mentioning that this regulation repeals Royal Legislative Decree 3/2011, of 14 November, which approves the consolidated text of Public Sector Contracts Law and, in accordance with the first transitory provision of the LCSP, it will be applied to procurement records, the announcement for which has been published after its entry into force and, in the case of negotiated procedures without advertising, the date of approval of the specifications will be taken into consideration.

In this regard, administrative contracts awarded prior to its entry into force shall be governed, in terms of their effects, compliance and termination, including their modification, duration and extension regime, by the previous regulations.