Concessions allow private companies to manage public assets. They aim for transparency, fairness, and mutual recognition.
These agreements can benefit everyone, but that’s not always the case. In Kenya, projects like the Nairobi Expressway and the Standard Gauge Railway receive praise for upgrading infrastructure. However, many criticize them for being too expensive.
The main difference between a concession and a public contract is how revenue works. In concessions, private companies make money through their operations.
On the other hand, public contracts require the government to pay for services or infrastructure upfront.
Understanding Concession Agreements
A concession is an agreement between a government and a private company. In this deal, the government allows the private company to use state-owned property or facilities for a set time.
The agreement includes important details about each party and the goal of the concession. It specifies where the business will be located and what type of business it will operate.
A concession also includes terms and conditions. These rules outline how to change, end, or extend the agreement.
Concessions are based on principles of equal treatment, transparency, and mutual recognition.
Examples of Concessions In Kenya
Kenya has implemented several public-private partnership (PPP) concession agreements.
One recent and controversial deal is the Adani Group’s proposal to upgrade the Jomo Kenyatta International Airport (JKIA).
The Adani Group from India proposed to invest $1.84 billion (242 billion Kenyan shillings) to expand and operate JKIA for 30 years.
Their plan included building a new terminal and taxiway system, with an expected 18% return on investment.
Many Kenyans protested against this deal. They accused the government of skipping a competitive bidding process and not allowing public input.
Protesters also voiced concerns about labor practices, such as hiring non-Kenyan workers and corruption allegations linked to the Adani Group.
On Thursday, November 21, President William Ruto announced the cancellation of the Adani deal during his State of the Nation Address in Parliament.
This cancellation came just a day after Adani Group chairman Gautam Adani faced fraud charges in the US.
The president also canceled another concession agreement between Adani Energy Solutions and Kenya Electricity Transmission Limited (KETRACO).
Adani had received a KSh 95.6 billion contract to operate and maintain transmission lines and substations for 30 years to help reduce power blackouts in Kenya.
Another notable concession in Kenya was the Standard Gauge Railway (SGR) project, which connects Mombasa to Nairobi and later extended to Naivasha.
The construction cost KSh 360 billion (now about KSh 420 billion) and was built by the China Road and Bridge Corporation (CRBC) with funding from the Chinese government.
While the construction was a direct contract, operations began under a concession managed by CRBC’s subsidiary, Afristar.
The Nairobi Expressway was also built through a concession. The CRBC was awarded the contract to construct and operate the expressway under a build-operate-transfer model.
This project has received praise for easing traffic, but many criticize the high toll fees.
Concession vs Public Contract
A concession is an agreement where the government allows a private company to operate, manage, and sometimes invest in a public asset or service for a set time.
The private company can earn money by charging users for the service or asset it manages, such as toll fees for the Nairobi Expressway.
On the other hand, a public contract is an agreement between the government and a private contractor to deliver specific goods or services.
The government pays the contractor with tax money after the task is completed. The main goal of a concession is to privatize the operation and management of a public asset or service.
In this case, the private company builds a road, collects toll fees until it recoups its investment plus interest, and then transfers the road to the government.
In contrast, under a public contract, the contractor builds the road and receives payment from the government once the work is finished.
After that, the government is responsible for the operation and maintenance of the road.
Types of Concession Agreements
Concessions can be divided into two main types: service concessions and resource concessions.
Service concessions focus on providing operational services. These agreements allow private companies to manage and operate facilities like roads, airports, or public transport.
Resource concessions involve extracting and using natural resources. In these agreements, private entities are granted the right to explore and utilize resources like minerals, oil, or gas.
Each type of concession serves a different purpose, either by providing essential services or by managing natural resource extraction.
Service Concessions
In a service concession, a private entity receives the right to operate and maintain a public service or facility for a specified period.
The private entity invests its resources to enhance service quality and receives compensation through user fees, government payments, or a combination of both.
For example, a company that manages toll roads, such as the Nairobi Expressway, collects toll fees as payment for the costs incurred in the road’s construction and ongoing maintenance.
Under this arrangement, the private entity has full control over the management of the project or facility.
Resource Concessions
Resource concessions permit a private entity to explore, extract, or utilize natural resources like minerals, oil, gas, or forests.
These agreements are typically long-term and may include provisions for profit-sharing or royalties paid to the government or granting authority.
Such arrangements enable private companies to leverage natural resources while providing financial returns to the government or community that supplies these resources.
What is a concession fee?
A concession fee charges businesses that operate on property owned by another party, typically the government or a private entity.
Businesses situated in high-traffic areas, such as airports, shopping malls, and other public spaces with significant foot traffic, commonly pay this fee.
Typically, authorities structure the concession fee as a percentage of the gross revenues generated by the business, which distinguishes it from a tax.
This approach aligns the interests of the private entity with the performance of the service, as higher revenues result in higher fees paid to the government or granting authority.
This means that the fee varies based on the performance of the business: higher revenues lead to a higher fee, while lower revenues result in a lower fee.
This arrangement aligns the interests of property owners and businesses, as both benefit from increased customer traffic and sales.
Concession fees serve as a means for property owners to derive revenue from their assets while allowing businesses to operate in prime locations.
When do businesses pay a concession fee?
Businesses incur a concession fee in two primary scenarios:
- Operating within Existing Premises: A business pays a concession fee when it receives the right to operate within the premises of a larger entity, such as an airport or shopping mall. In these high-traffic areas, the business leverages existing foot traffic to generate revenue and, in return, pays a concession fee typically based on a percentage of its gross revenues.
- Brand Licensing: A business pays a concession fee when it obtains a license to provide services using another company’s brand name. In this case, the concession fee often correlates with the brand’s equity and market reach, allowing the business to utilize the established reputation to attract customers.