ENERGY AND RESSOURCES LAW 2004 WATER CONCESSION CONTRACTS

1. ENERGY AND RESSOURCES LAW 2004 WATER CONCESSION CONTRACTS I - WHY IS IT NECESSARY TO PROVIDE FOR CHANGE AND FLEXIBILITY IN WATER CONCESSTION CONTRACT ? The major differences between Concession contracts and other water service contracts involving private participation ; The level of risk / opportunity in Concession contract does not compare with other forms of contract such as management contract or Affermage; It creates sometimes a controversy in the industry since : - For many the level of risks to be borne by the private Concessionnaire is too high. The Concessionnaire undertakes to design, finance build and operate at is own risk including the commercial risks with little guarantee to be able to sell the services to the individual and users at a level permitting to render investment profitable on the long term. - For others this view is over simplistic. The Concession is certainly the most attractive scheme for the Public Authority which may get a good infrastructure and good services provided by the Concessionaire at no cost or at very limited cost with real guarantees that the services will meet the public expectations and with the right to take back the infrastructure in good operating conditions and at no cost at he end of the venture; 2

2. 3 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS • The track record of the international wave of water Concession scheme developed in the 90’s is disappointing. • However with a closer look, the cause for the failure is often due to the lack of adequate set of clauses or mechanisms permitting to provide for change and flexibility in an appropriate manner. In too many cases the Concession contract have been approached like any other kind of Public contract with inadequate preparation and inadequate bidding procedures. • Indeed, the true nature of a Water Concession and also to a large extent to an Affermage contract is a contract between the Concessionaire and thousand of users of the services to which the service has to be delivered at competitive prices for decades and including possible changes in order to take care of the needs of the end users (changes in a number of the users, change in quantity and quality of the water or in the nature or the price of the services, change in the technology, etc.) • Water Concession is therefore a Public Private Partnership scheme sometimes closer to company law principles than to any other kind of one to one contract. Such fundamentals trigger a set of particulars principles an conditions which must be reflected in the Concession contract or in the underlying regulations inter alia in order to adapt the infrastructure and the services to the need of the public.

3. 4 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS II - WHAT CAN WE LEARN FROM THE EXPERIENCE OF THE LAST DECADE ? • The parties had a real difficulty to agree on suitable set of contractual clauses integrating at the same time two major legal principles: - Pacta sunt servanda - Rebus sic stantibus • And more especially to take into account the following: - The general interest of end users who have the right within certain limit to benefit from of a vital public service at a price that he can afford; - A duty for the Concessionaire to adapt the infrastructure and the service to future requirement of existing of future users when public interest command it; - A duty of the Public Authority to regulate the life of the Concession venture in an equitable manner including inter alia a duty to adapt the contract in order to permit the Concessionaire to render the services and to make a reasonable profit when changes of circumstances beyond the reasonable control of the Concessionaire takes place.

4. 5 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS III - HOW TO ESTABLISH THE BASIC UNDERLYING PRINCIPLES AND CONTRACTUAL CLAUSES PROVIDING FOR CHANGE AND FLEXIBILITY ? • By sharing the economic and legal international experience with a good understanding of their context. This experience is very extensive, too much unknown internationally, and specially by the new countries interested by Concession and Affermage; • A lot of practical guidance can be find in the long history of Concession contracts; • Many common features have emerged from thousand of water Concession contracts which have been developed in some countries such as France or other civil law countries; • It is also important to remember that: - The general history of Concession contract dates back to roman ages; - The modern history of Concession contract has been very much related to water in the 18th century (several canals in France and in Europe have developed the Concession model);

5. 6 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS - The more recent history starting in the 1850’s has seen the development of Concession in several sectors : Gas Concession, Water Concession, Railway Concession, the Electricity Concession, Highway Concession, Port Concession, etc. - The history shows that the Concessions which necessitate at the same time the construction of a physical infrastructure and the obligation to render a competitive service directly to the end users have many common features such as importance of investments, obligation to render a service which is seen as an essential service for the public, obligation to adapt the service to the needs of the end user for decades in an optimised manner (not least since the end users are by definition an influential political group as voters). • Those common features have permitted for more more than 150 years to refine the equilibrium of a Concession venture which is reflected inter alia in the particular rights and obligations of the Concessionaire on one hand and of the Public Authority on the other hand.

6. 7 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS IV - ILLUSTRATION OF SOME BASIC RIGHTS AND OBLIGATIONS MORE SPECIFIC TO CONCESSION AND AFFERMAGE CONTRACTS • Special rights of the Public Authority The Public Authority should generally enjoy, inter alia, the following rights: - to terminate the venture not only for default if the Public Service is not properly performed but also for convenience almost at any time with prior notice, if such termination is justified by the public interest - to modify the original agreement in order to adapt the service to the best interest of the public; - to impose sanctions, such as liquidated damages and/or penalty clauses, against the Concessionaire as an interim remedy - to impose other coercive measures, in the case of a fundamental breach of its obligations by the Concessionaire, such as an automatic lien on the property and use of the workforce and equipment of the Concessionaire.

7. 8 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS • Special rights of the Concessionaire On the other hand, the Concessionaire should generally enjoy additional rights seldom found commercial contracts, including inter alia the following: - The right to immediate indemnification when the Public Authority exercises its additional rights in the interest of the Public, based on the principle of full compensation, including not only the costs incurred but also loss of profit (“damnum emergens” and “lucrum cessens”). Such compensation can be paid either in cash or in kind (by granting additional rights to the Concessionaire); - The right to be compensated when an unforeseen impediment (“sujétions imprévues”) occurs, i.e. in cases of unforeseeability of a technical nature increasing the costs of the Concessionaire above a certain threshold; - The right to be compensated when the change is the economic circumstances affects the financial equilibrium of the venture beyond a certain threshold (rebus sic stantibus principle); - The right to make reasonable profits when the Concessionaire justifies good and efficient performance;

8. 9 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS V - HOW TO APPROACH THE NEGOCIATION OF A WATER CONCESSION CONTRACT ? 1) Avoiding two of the most common mistakes: • To create a single purpose company as a Concessionaire without track record, without sufficient and legally enforceable back up from an experienced water Company. Do not dream too much on the apparent benefit of limiting liability trough aggressive project finance approach and complex structured debt; • To rely too much of the magic of an outside regulatorto resolve future issues. Take as principle that an outside regulator will have little chances to make good and balanced decision on future issues if the Public Authority and the Concessionaire have been unable to agree and further to easily impose the same on the Concessionaire, on the Public Authority and on the beneficiaries of the services;

9. 10 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS 2) Before negotiating the contractual terms, assess the overall situation by making an in depth analysis of the technical and socio-economic situation including various scenario and adequate sensitivity test • Do not make a proposal until you are satisfied with the nature and quality of those studies. In most cases, the available studies are not sufficient for a reasonable assessment of the current and future situation and additional studies including various scenario and sensitivity test will be necessary. If not prepared to fund those studies, it is often better not to consider the venture at all; • Use those studies as the basis for proposing the initial financial equation of the Concession taking into account the specifics of the project including in particular a sufficient definition of the nature and condition of the public service to be rendered and of the initial tariff; 3) Establish the base line economic scenario bearing in mind its future use • Discuss and agree the financial equation as the base-line scenario showing that the Concessionaire will get a reasonable profit commensurate with the risk taken (including as a case may be an element of direct subsidy). • Promote this base-line scenario as the master piece for the whole venture with the view of permitting to easily determine the impact of the future changes (their origin the quantification of their impact, etc.);

10. 11 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS 4) Prepare yourself to propose appropriate set of clauses • Recognise that it is not possible to foresee all the future situation and do not attempt to write detailed clauses including for instance laundry list of risk allocation and smart formula. Lessons from most Concession contract reveal that this is a dead end in the long term; • Analyse the existing regulations of the country including their actual and likely future implementation on several issues such as force majeure, hardship, right for a public authority to amend or terminate a private contract providing for public service, ownership rights, conditions to obtain various permit, etc. (use an international Concession due diligence matrix for this purpose); 5) Propose a set of appropriate clauses focusing generally: • On the particular rights and obligation of the Public Authority and of the Concessionaire as summarised above; • On the content of the Public Service obligations; • On the right of the Concessionaire to financial equilibrium and profit if he justifies compliance with the contract and best industry practices;

11. 12 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS 6) And more generally in relation to change and flexibility • On the Organisation of regular and transparent reporting system providing inter alia for regular reports on the main financial parameters of the Concession based on a “Concession accounting plan” itself deriving from the financial equation. Regular report on the Concessionaire performance and on the various problem encountered. The clauses should also provide for regular meetings between the Concessionaire and the Public Authority (partnering techniques should be used if and when necessary); • On a simple and straightforward quantification system for any claim to be used inter alia when the Concessionaire is requested for reasons of public interest to provide a service clearly outside of the initial scope the Concession; • On preventive ADR techniques such as ad hoc panel or review or adjudication board in order to facilitate any future agreement between the public Authority and the Concessionaire; • On the involvement of an outside regulator if all guarantees of fairness, professionalism and independence are provided (rather seldom in practice). • On an appropriate and effective arbitration system.

12. 13 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS VI - CONCLUSION • Providing for change and flexibility in water concession contract is not a sophisticated transactional lawyer game attempting to deal with any possible future contingencies and to out negotiate the Public Authority by transferring as much as possible the risks to it. • Always remember that a Concession contract is less a traditional contract than a real Public Private Partnership relationship triggering the need to permanently adapt the services to the best interest of the end users and for which close co-operation between the Public Entity and the Concessionaire on the basis of clear and transparent principles is the best guarantee of long term success; • The key is to share as from the beginning the economic fundamentals and the nature and quality of the Public Service to be rendered. Sometimes the Concessionaire may even participate to the capacity building of the Public Authority. This is quite far from the traditional attitude of a transactional lawyer involved in the negotiation of more traditional projects !; • Negotiate the contract only when the base line scenario is sufficiently defined together with the related financial equation and accounting plan of the Concession

13. 14 ENERGY AND RESSOURCES LAW 2004WATER CONCESSION CONTRACTS • Satisfy yourself that the main legal principles specific to the Concession which have been refined and tested from many years in numerous Concession Contracts and which are the basis of the long term equilibrium of the venture have been understood and accepted both by you and by the Public Authority. • Propose a set of clauses specifically dealing with those fundamental issues including a set of clauses on flexibility and changes including detailed procedures which permits in practice to guide the parties with an heavy hand for easy agreement on future changes; • With those simple principles and with an appropriate negotiation team somewhat different from the team to be used for more traditional contract, the Water Concession and Affermage contract have all the chances to be a win win venture and to be the ultimate example of successful Public Private Partnership.

14. 15 THANK YOU Marc Frilet Frilet Société d’Avocats94 boulevard Flandrin75016 Paris France Tél : 00 33 1 56 26 00 40Fax : 00 33 1 56 26 50 21 e-mail : avocats@frilet.com