Chapter IV. CONCLUSION AND GENERAL TERMS OF THE PROJECT AGREEMENT

Paragraph
Legislative recommendations 
Notes on legislative recommendations 1-48 
Section
A. General considerations 1-6 
1. Legislative approaches 1-4 
2. Conclusion of the project agreement 5-6 
B. General terms of the project agreement 7-47 
1. The project site 8-12 
2. Easements 13-16 
3. Exclusivity 17-21 
4. Legal status of the concessionaire 22-34 
5. Assignment of the concession 35-38 
6. Security interests 39-45 
7. Duration 46-47 
C. Specific terms 48 

LEGISLATIVE RECOMMENDATIONS

Legislative approach to the project agreement
(1) It is advisable to limit the legislative provisions on the mutual rights and obligations of the host Government and the project company to those strictly necessary, such as provisions on matters for which prior legislative 
authorization might be needed, or that might affect the interests of third parties or that relate to essential policy matters (see paras. 2-4).

Conclusion of the project agreement
(2) It is advisable to simplify the procedures for the conclusion of the project agreement and to identify in advance the authority or authorities competent to approve and sign the project agreement on behalf of the host Government (see paras. 5-6).

The project site
(3) Where the land for the project site has to be acquired by the host Government through expropriation, it may be desirable to provide that all expropriations required for privately financed infrastructure projects be carried out pursuant to the most expeditious proceedings available under the laws of the host country (see paras. 8-12)
(4) Easements that might be needed by the project company may be provided in sector-specific legislation (see paras. 13-16).

Exclusivity
(5) It is advisable for the law to leave it for the host Government and the project company to agree on whether the host Government needs to undertake not to facilitate or support the execution of a parallel project that might generate competition to the project company (see paras. 17-21).

Legal status of the concessionaire
(6) The host Government may wish to require that project consortia establish an independent legal entity with a seat in the country. Where deemed to be in the public interest, the law may authorize the host Government to award projects to foreign companies (see paras. 26-27).
(7) It may not be advisable to set forth the legislative requirement of a fixed sum as minimum capital (see paras. 29-30).
(8) The law might require that the activities of the project company be limited to the development and operation of a particular project or projects awarded to the project company. The law might further require that fundamental changes in the statutes and by-laws of the project company or the transfer of effective control over the project company need to be approved by the host Government (see paras. 31-34).

Assignment of the concession
(9) The project company should not have the right to assign the concession without the consent of the Government. The conditions under which an approval to the assignment of a concession prior to its expiry may be granted may include:
(a) acceptance by the new concessionaire of all obligations under the project agreement;
(b) evidence of the new concessionaire=s technical and financial capability as necessary for providing the service (see paras. 35-36).
(10) The concessionaire may be authorized to award subconcessions, subject to prior approval by the host Government (see paras. 37-38).

Security interests
(11) Where the physical assets comprised in the infrastructure are not owned by 
the project company, it advisable for the law to clarify whether and to what 
extent the project company may create security interests over those assets (see 
paras. 40-42).
(12) It is useful for the law to enable the project company to create security 
over the rights arising out of the project agreement, provided that the 
enforcement of such security does not affect the obligations of the project 
company under the agreement (see paras. 43-44). 
(13) It is further useful for the law to authorize the creation of security 
interests over the shares of the project company, subject to the approval of the 
host Government (see below, para. 45).

Duration
(14) Where it is found desirable to adopt legislative provisions limiting the 
duration of concessions to a maximum number of years, it is advisable to provide 
a period sufficiently long to allow the project company to repay its debts and 
to achieve a reasonable revenue, production or usage level (see paras. 46-47).

NOTES ON LEGISLATIVE RECOMMENDATIONS
A. General considerations
1. The Aproject agreement@ between the Government and the project company is the 
central document in an infrastructure project. The project agreement defines the 
scope and purpose of the project, the rights and obligations of the parties; it 
provides details on the works to be performed by the project company and sets 
forth the conditions for the operation of the infrastructure or the delivery of 
the relevant services.
1. Legislative approaches
2. Three main approaches have been used by national legislation with regard to 
the content of the project agreement. The laws of some countries scarcely refer 
to this type of agreement, while the laws of other countries contain extensive 
mandatory provisions concerning the content of clauses to be included in the 
agreement. An intermediate approach is taken by those national laws that list a 
number of issues to be addressed in the project agreement without regulating in 
detail the content of its clauses.
3. Legislative provisions on certain essential elements of the project agreement 
may serve the purpose of establishing at the outset of negotiation a general 
framework for the allocation of rights and obligations between the parties. They 
may be intended to provide legislative guidance to the public authorities 
involved in the preparation of project agreements at different levels of 
Government (national, provincial or local). Such guidance may be found 
particularly useful by public authorities lacking experience in the negotiation 
of project agreements. Some countries may further consider that legislative 
provisions on certain elements of the project agreement may enhance the 
Government=s negotiating position vis-?vis the project company. Lastly, 
legislation may sometimes be required so as to provide the Government with the 
authority to agree on certain types of provisions.
4. The possible disadvantage of legislative provisions dealing in detail with 
the rights and obligations of the parties is that they might deprive the 
Government and the project company of the necessary flexibility to negotiate an 
agreement that takes into account the needs and particularities of a specific 
project. Therefore, it is advisable to limit the scope of legislative provisions 
concerning the project agreement to those strictly necessary, such as, for 
instance, provisions on matters for which prior legislative authorization might 
be needed or those that might affect the interests of third parties or 
provisions relating to essential policy matters on which variation by agreement 
is not admitted.
2. Conclusion of the project agreement
5. Privately financed infrastructure projects are typically carried out pursuant 
to written agreements between the Government and the project company. The 
negotiation and signature of a written agreement is often expressly required by 
the law. Some national laws prescribe certain formalities for the conclusion and 
entry into force of the project agreement. In some countries the terms of the 
agreement negotiated between the awarding authority and the selected project 
consortium may be subject to approval by a higher authority. Sometimes the entry 
into force of the project agreement is subject to an act of parliament or even 
the adoption of special legislation.
6. With a view to expediting matters and avoiding the adverse consequences of 
delays in the project=s timetable, in some countries the authority to bind the 
host Government is delegated in the relevant legislation to designated 
officials, so that the entry into force of the project agreement occurs upon 
signature or upon the completion of certain formalities, such as publication in 
the official gazette. In countries where such a procedure might not be feasible, 
or in which final approvals by another entity would still be required, it would 
be desirable to consider ways to avoid unnecessary delay. It is important to 
bear in mind that the risk of the project being frustrated by lack of approval 
after negotiations have been completed is not one that the project company would 
be ready to assume. Where approval requirements are perceived as arbitrary or 
cumbersome, the host Government might be requested to provide sufficient 
guarantees to the project company and the lenders against such risk. In some 
countries where those approval requirements exist, Governments have sometimes 
agreed in the project agreement to compensate the project company for all costs 
incurred in the event the final approval of a project is withheld for reasons 
not imputable to the project company.

B. General terms of the project agreement
7. Project agreements are typically lengthy documents that deal extensively with 
a wide variety of general and project-specific issues. Possible legislative 
implications of what in national laws appear to be core provisions are discussed 
in this section.
1. The project site
8. Where a new infrastructure facility is to be built on land owned by the host 
Government, or an existing infrastructure facility is to be modernized or 
rehabilitated (such as in Amodernize-operate-transfer@ or 
Arehabilitate-operate-transfer@ projects), it will normally be for the host 
Government, as the owner of such land or facility, to make it available to the 
project company. The host Government may either transfer to the project company 
title to the land or facilities or retain title thereto, while granting the 
project company a right to use the land or facilities and build upon it.
9. Both in cases where the infrastructure facility will be transferred back to 
the host Government or will be permanently owned by the project company, it is 
advisable that the parties establish the condition of such land and facility at 
the time it is handed over to the project company. Such determination may reduce 
disagreements at the time the infrastructure facility is returned to the host 
Government. Therefore, the project agreement should provide for the inspection, 
measurement and demarcation of such land and existing facility prior to its 
being transferred or made available to the project company. Further matters 
which would be typically dealt with in the project agreement include procedures 
for handing over the land or facilities and the submission of required 
documentation.
10. The situation may become more complex when the land is not already owned by 
the host Government and needs to be purchased from its owners. In the case of 
projects that originate from an unsolicited proposal from the private sector 
(see chapter III, ASelection of the concessionaire@, paras. 87-93) or 
infrastructure facilities of relatively high commercial potential that are not 
deemed to be a national priority, the host Government might not see a compelling 
reason for undertaking to acquire the land and make it available to the project 
company. In most cases, however, the project company may not be in the best 
position to assume the responsibility for purchasing the land needed for the 
project. The project company may fear the potential delay and expense involved 
in negotiations with possibly a large number of individual owners and, as 
necessary in some parts of the world, to undertake complex searches of title 
deeds and review of chains of previous property transfers so as to establish the 
regularity of the title of individual owners. Therefore, it is typical for the 
host Government to assume the responsibility for providing the land required for 
the implementation of the project, so as to avoid unnecessary delay or increase 
in the project cost as a result of the acquisition of land. The host Government 
may purchase the required land from its owners or, if necessary, acquire it 
through expropriation.
11. Where expropriation procedures are required, various preparatory measures 
may need to be taken to ensure that construction works are not delayed. In 
countries where the law contemplates more than one type of expropriation 
proceedings, it may be desirable to provide that all expropriations required for 
privately financed infrastructure projects be carried out pursuant to the more 
expeditious of those proceedings, such as the special proceedings that in some 
countries apply for reasons of compelling public need (see chapter I, AGeneral 
legislative considerations@, paras. 36-37).
12. The right to expropriate private property is usually vested in the 
Government, but the laws of a number of countries also authorize public 
utilities or public service providers (e.g. railway companies, electricity 
authorities, telephone companies) to perform certain actions for the 
expropriation of private property required for providing or expanding their 
services to the public. Particularly in those countries where the award of 
compensation to the owners of the property expropriated is adjudicated in court 
proceedings, it has been found useful to delegate to the concessionaire the 
authority to carry out certain acts relating to the expropriation, while the 
host Government remained responsible for accomplishing those acts that, under 
the relevant legislation, are conditions precedent to the initiation of 
expropriation proceedings. Upon expropriation, title to the land is often vested 
in the host Government, although in some cases the law may authorize the host 
Government and the project company to agree on a different arrangement, taking 
into account their respective shares in the cost of expropriating the property.
2. Easements
13. Besides the acquisition of property for the construction of the facility, 
there might be a need for ensuring the project company=s access to such 
property, in cases where the location of the site of the project is such that 
access to it requires transit on or through the property of third parties. The 
nature of the project may also be such that it requires the project company to 
enter property belonging to third parties (e.g. to place traffic signs on 
adjacent lands; to install poles or electric transmission lines above third 
parties= property; to install and maintain transforming and switching equipment; 
to trim trees that interfere with telephonic lines placed on abutting property). 
The right to use another person=s property for a specific purpose or to do work 
on it is generally referred to in the Guide by the word Aeasement@.
14. Easements usually require the consent of the owner of the property to which 
they pertain, unless such rights are provided by the law. Except for cases where 
the required easements affect only a small number of adjacent properties, it is 
usually not an expeditious or cost-effective solution to leave it to the project 
company to acquire easements directly from the owners of the properties 
concerned. Instead it is more frequent that those easements are acquired by the 
host Government, through expropriation procedures carried out simultaneously 
with the expropriation of the project site.
15. A somewhat different alternative might be for the law itself to provide the 
type of easements given to the project company, without necessarily requiring 
the expropriation of the property to which such easements pertain. Such an 
approach might be used in respect of sector-specific legislation, where the host 
Government deems it possible to determine, in advance, certain minimum easements 
that might be needed by the project company. For instance, a law specific to the 
power generation sector may lay down the conditions under which the 
concessionaire obtains a right of cabling for the purpose of placing and 
operating basic and distribution networks on property belonging to third 
parties. Such a right may be needed for a number of measures, such as 
establishing or placing underground and overhead cables, as well as establishing 
supporting structures and transforming and switching equipment; maintaining, 
repairing and removing any of those installations; establishing a safety zone 
along underground or overhead cables; removing obstacles along the wires or 
encroaching on the safety zone.
16. Under some legal systems, the project company might be under an obligation 
to pay compensation to the owner, as would have been due in the case of 
expropriation, should the nature of the easement be such that the use of the 
property by its owner is substantially hindered.
3. Exclusivity
17. One of the central issues dealt with in project agreements is whether the 
right to operate the infrastructure or to provide the service is exclusive or 
whether competing infrastructure will be allowed to operate. Exclusivity may 
concern the right to provide a service in a particular geographical region (e.g. 
a communal water distribution company) or embrace the whole territory of the 
country (e.g. a national railway company); it may relate to the right to supply 
one particular type of goods or services to one particular customer (e.g. a 
power generator being the exclusive regional supplier to a power transmitter and 
distributor), or to a limited group of customers (e.g. a national long-distance 
telephone carrier providing connections to local telephone companies).
18. For countries wishing to adopt general enabling legislation on privately 
financed infrastructure projects, a flexible approach to deal with the issue of 
exclusivity may be for the law to provide that the Government is authorized to 
grant exclusive concessions when it is deemed to be in the public interest, such 
as in cases where the exclusivity is justified for reasons of technical or 
economical viability. The awarding authority may be required to state the 
reasons for granting an exclusive concession for each particular case. Such 
general legislation may be supplemented by sector-specific laws regulating the 
issue of exclusivity in a manner suitable for each particular sector (see 
chapter II, ASector structure and regulation@, ___).
19. An additional issue that may be raised in some projects is whether the 
project company may be given an assurance that no competing infrastructure will 
be allowed to operate. Some national laws contain provisions whereby the 
Government undertakes not to facilitate or support the execution of a parallel 
project that might generate competition to the project company. In some cases, 
the law contains an undertaking by the Government that it will not alter the 
terms of such exclusivity to the detriment of the project company without the 
project company=s consent. In other countries, such an undertaking may be 
implied in general rules applying to concessions or in general principles of 
administrative law particularly where the relevant activity is or used to be the 
object of a State monopoly.
20. Provisions of this type may be intended to foster the confidence of project 
company shareholders and lenders that no parallel competing project will be 
carried out or that the basic assumptions under which the project was awarded 
will be respected. However, they may limit the ability of the host Government to 
deal with changed circumstances as the public interest may require. For 
instance, the required tariff level to allow profitable exploitation of a toll 
road may exceed the paying capacity of low-income segments of the public. Thus, 
the host Government may have an interest in maintaining open to the public a 
non-toll charging road as an alternative to a new toll road. These arrangements 
are not unusual for road transportation projects.
21. Therefore, it may be preferable for the law to authorize the host Government 
and the project company to find a suitable solution in the project agreement, 
rather than regulating the matter in the same fashion for all projects. The 
possibility of subsequent changes in the host Government=s policy for the sector 
concerned, including a decision to promote competition or to build parallel 
infrastructure, could further be dealt with by the parties in the provisions 
dealing with changes of circumstances (see chapter VIII, ADelays, defects and 
other failures to perform@, ___).
4. Legal status of the concessionaire
22. Project agreements typically contain provisions on the legal status of the 
concessionaire and deal with the question whether the concessionaire has to be 
established as an independent legal entity or whether the project may be awarded 
collectively to a project consortium. Provisions on these matters are often 
contained in national legislation on privately financed infrastructure projects 
as well.
23. As understood in business practice, a consortium is a contractual 
arrangement whereby a group of enterprises undertakes to cooperate in carrying 
out a project without integrating into an independent legal entity. Consortia 
have been widely used in the construction industry for the development of large, 
capital-intensive projects requiring technical expertise in different fields. 
Consortia are commonly regarded as purely contractual arrangements which do not 
have a juridical personality of their own. However, there is no uniform legal 
regime governing consortia. They may fall under different contractual categories 
provided in national laws and the legal status of consortia as well as the 
rights and obligations of their members vary in different legal systems. 
24. Forming a project consortium may present some advantages, such as more 
flexibility in dealings among the consortium members and with their business 
partners than in a separate project company. Avoiding double taxation may also 
be a reason for choosing not to establish an independent legal entity in the 
host country, in case there is no bilateral double taxation agreement between 
the host country and the country or countries where the foreign investors have 
their residence for taxation purposes. There might also be instances where the 
host Government would wish to retain the possibility of engaging consortia for 
infrastructure projects, depending on the scale and nature of the project, or 
with a view to holding all consortium members jointly liable for the entire 
project.
25. For those countries that wish to retain such possibility, the law might give 
the awarding authority the option to award the project to a consortium or to 
require that a separate legal entity be established by the selected project 
consortium, depending on the needs of the project. However, a number of issues 
would need to be addressed in the project agreement, and extensive negotiations 
and detailed provisions might be required to ensure coordination among members 
of the consortium, adequate liaison with the host Government, as well as 
clarifying the extent of responsibilities and liabilities of each of the members 
of the consortium for the execution of the project.1
26. More common, however, are legislative provisions requiring that the 
concessionaire be established as an independent legal entity. From the 
perspective of the host Government, an independent legal entity facilitates 
coordination in the execution of the project and may provide a mechanism for 
protecting the interests of the project, which may not necessarily coincide with 
the individual interests of all of the consortium members. This aspect may be of 
particular importance where significant portions of the services or supplies 
required by the project are to be provided by members of the project consortium. 
Since a substantial part of the liabilities and obligations of the project 
company, including long-term ones (project agreement, loan and security 
agreements, construction contracts), are usually agreed upon at an early stage, 
the project may benefit from being independently represented at the time those 
instruments are negotiated. 
27. The host Government may further wish to require that the project company be 
established under the laws of the country. The host Government may consider that 
the exercise of its regulatory and monitoring functions in respect of the 
services provided by the project company might be hindered if the project 
company were subject to the laws of a foreign jurisdiction. Furthermore, given 
the public interest in the project company=s activities, the host Government may 
wish that the project company comply with national accounting and publicity 
provisions (e.g. publication of financial statements; publicity requirements 
concerning certain corporate acts). However, such a requirement emphasizes the 
need for the host Government to have adequate company laws in place (see chapter 
I, AGeneral legislative considerations@, paras. 46-49). The ease with which the 
project company can be established, with due regard to reasonable requirements 
deemed to be of public interest, may help to avoid unnecessary delay in the 
implementation of the project.
28. The appropriate time for the establishment of the project company is a 
matter to be considered in the light of the different interests involved in a 
typical project. Moved by the interest to start the implementation phase as soon 
as possible, some host Governments might be inclined to require that the project 
company be established at the earliest possible stage. However, it should be 
borne in mind that firm and final commitments by the lenders and other capital 
providers typically may not be available prior to the final award of the 
concession, particularly where a separate legal entity is the envisaged vehicle 
for raising funds for the project, such as in a Aproject finance@ transaction 
(see AIntroduction and background information on privately financed 
infrastructure projects@, paras. 68-71). Therefore, it is generally advisable to 
require that the project company be established within a reasonably short period 
after, but not before, the award of the project.
29. Another important issue in connection with the establishment of the project 
company concerns the equity investment required for the establishment of the 
project company. The host Government has a legitimate interest in seeking an 
equity level that ensures a sound financial basis for the project company and 
guarantees its capability to meet its obligations. Such interest may be 
satisfied by requiring that the project company be established with a certain 
minimum capital. In some countries, that issue is dealt with in the law itself, 
by prescribing a fixed sum or establishing a percentage of the total project 
cost as the minimum capital of the project company. In other countries, these 
issues are not addressed in the legislation and are left for the procuring 
entity to decide, sometimes after negotiations with the selected project 
consortium.
30. The total investment needed as well as the ideal proportion of debt and 
equity capital vary from project to project so that it would normally be 
difficult to establish a fixed sum or percentage that would be adequate for all 
instances. Thus, it may be undesirable to provide a legislative requirement of a 
fixed sum as minimum capital for all companies carrying out infrastructure 
projects in the country. A more flexible approach might be to establish 
individual requirements taking into account the particular circumstances of each 
project or type of infrastructure. Where the total expected cost of the project 
cannot be estimated in advance by the awarding authority, the minimum capital 
required for the establishment of the project company could be indicated in the 
solicitation of tenders or request for proposals. Where it is not feasible to 
estimate in advance the project cost, or in the event the host Government 
prefers to negotiate the amount or ratio of equity investment offered by the 
selected project consortium, the awarding authority might prefer to have the 
flexibility to arrive at an adequate minimum capital in the course of the 
selection process. In countries where the project is awarded by a formal act of 
the host Government, such as a decree or notice of award, the required minimum 
capital of the project company could be indicated in such act.
31. In addition to the question of minimum capital, national laws may contain 
provisions concerning the form under which the project company has to be 
organized. Some laws specifically require that the project company be 
incorporated as a certain type of company, while other laws make no provision on 
this subject. In cases where it is considered important to specify the form in 
which the project company is to be established, it is desirable to bear in mind 
the interest of the consortium members in ensuring that their liability will be 
limited to the amount of their investment. In order to avoid a subsidiary 
liability for payment of the project company=s debts, its shareholders will 
normally prefer a corporate form in which their liability is limited to the 
value of their shares in the company=s capital, such as a joint stock company. 
They would be unwilling to carry out a project that would require them to assume 
unlimited liability for the project company=s debts.
32. Some laws contain provisions concerning the scope of activities of the 
project company, requiring, for instance, that they be limited to the 
development and operation of a particular project. Such restrictions might serve 
the purpose of ensuring the transparency of the project=s accounts and 
preserving the integrity of its assets, by segregating the assets, proceeds and 
liabilities of this project from those of other projects or other activities not 
related to the project. Also, such a requirement may facilitate the assessment 
of the performance of each project since deficits or profits could not be 
covered with, or set off against, debts or proceeds from other projects or 
activities. At the same time, however, the host Government might be interested 
in reserving the possibility of integrating other projects under a common 
management, in the event the same project company is awarded a complementary 
project in a separate selection process.
33. The host Government might also be interested in ensuring that the statutes 
and by-laws of the project company will adequately reflect the obligations 
assumed by the company in the project agreement, and that no decision will be 
made that might hinder the execution of the project. Therefore, the law may 
provide that changes in the statutes and by-laws of the project company require 
prior authorization by the host Government. In other countries such a level of 
control is achieved by requiring the participation of the host Government, as a 
privileged shareholder, in the project company, with the proviso that certain 
decisions necessitate the positive vote of the host Government in the 
shareholders= or board=s meeting. In requiring governmental approval for 
modifications of the statutes and by-laws of the project company or for other 
corporate decisions, it is desirable to weigh the public interests represented 
through the State against the need for affording the project company the 
necessary flexibility for the conduct of its business. The daily management of 
the project would be impaired if even minor matters concerning the company=s 
internal affairs routinely required prior governmental clearance. One possible 
solution might be to limit the right of the host Government to object to a 
proposed amendment to those cases that concern provisions deemed to be of 
essential importance (e.g. amount of capital, classes of shares and their 
privileges, liquidation procedures) and which could be identified in the project 
agreement. 
34. The host Government may have a legitimate interest in ensuring that the 
original members of the project consortium maintain their commitment to the 
project throughout its duration and that they will not be replaced by entities 
unknown to the host Government. Thus, the law may provide, in addition to the 
matters mentioned above, that the transfer of effective control over the project 
company requires the prior approval of the host Government.

5. Assignment of the concession
35. Concessions are granted in view of the particular qualifications and 
reliability of the concessionaire and in most legal systems they are not freely 
transferable. Therefore, national laws frequently prohibit the assignment of the 
concession without the consent of the Government, which may also be required for 
a transfer of the right to control the project company. General legislative 
provisions of this type may promote the confidence of the public in the control 
being exercised by the Government in respect of the qualifications of 
infrastructure operators or public service providers.
36. Some countries have found it further useful to mention in the legislation 
the conditions under which an approval to the transfer of a concession prior to 
its expiry may be granted, such as, for example, acceptance by the new 
concessionaire of all obligations under the project agreement and evidence of 
the new concessionaire=s technical and financial capability as necessary for 
providing the service. General legislative provisions of this type may be 
supplemented by specific provisions in the project agreement setting forth the 
scope of those restrictions, as well as the conditions under which the consent 
of the host Government may be granted. 
37. Unlike a full assignment, a subconcession involves the transfer, to another 
entity, of the responsibility to carry out one particular activity falling under 
the concession. In cases where the project company is given the right to provide 
ancillary services, or where the concession involves multiple activities capable 
of being carried out separately, the project company may wish to engage another 
entity to carry out some of those activities by way of a subconcession. Where 
the concession itself is not transferable, there may be obstacles to a 
subconcession without legislative authorization. Under normal circumstances, 
however, the host Government would have no compelling reason for excluding 
altogether the possibility of subconcessions, provided that it can be satisfied 
of the reliability and the qualifications of the subconcessionaire. It may 
therefore be desirable for the law to clarify that the concessionaire is 
authorized to award subconcessions, subject to prior approval by the host 
Government.
38. Another related issue concerns the method for selecting a subconcessionaire. 
Some countries have special rules governing the award of contracts by public 
service providers, and in some countries the law expressly requires the use of 
tendering proceedings for the award of subconcessions. Rules of this type were 
often adopted at times where nearly all infrastructure was owned and operated by 
the State, with little or marginal private sector investment. Their purpose was 
to ensure economy, efficiency, integrity and transparency in the use of public 
funds. However, in the case of infrastructure projects implemented by 
privately-owned entities, there may no longer be a compelling reason or public 
interest for prescribing to the concessionaire the procedure to be followed for 
the award of subconcessions. 

6. Security interests
39. The financing documents for privately financed infrastructure projects 
typically include extensive security arrangements. Even in cases where the 
potential market value of the infrastructure might be less than the cost of the 
investment, security in form of tangible assets might cover at least part of the 
sums borrowed by the project company. Security over negotiable instruments, 
receivables and intangible rights might also be important factors for reducing 
the lenders= exposure to the project risks and possibly enhancing the terms of 
the loans. Thus, the project company will normally have an interest in being 
able to pledge to the lenders all or some of the assets, property and rights 
that arise out of the concession.
(a) Security over the physical assets
40. Legal obstacles to the creation of security interests over the physical 
assets comprised in the infrastructure may arise where those assets remain in 
the property of the State throughout the project term. If the project company 
lacks the title to the property it will in many legal systems have no (or only 
limited) power to encumber such property.
41. However, in some countries the creation of some form of security may be 
possible, particularly where the project company is granted a leasehold interest 
or right to use the relevant property. Such security would not attach to the 
property itself, but to the rights and interests granted to the project company 
under the project agreement. Furthermore, security interests may also be created 
where the concession encompasses different types of State property, such as when 
title to adjacent land (and not only the right to use it) is granted to a 
railway company in addition to the right to use the public infrastructure.
42. It is advisable that the law expressly clarify the extent to which the 
project company may create security interests over the physical assets comprised 
in the infrastructure, for instance by indicating the types of assets in respect 
of which such security interests may be created or the type of security 
interests that is permissible. However, the Government will be interested in 
that security interests created by the project company do not adversely affect 
the project. Therefore, the law may require the approval of the Government, 
usually to be reflected in the project agreement, in order for the project 
company to create such security interests.
(b) Security over intangible assets
43. The right to operate the infrastructure is in most cases not transferable 
without the consent of the Government, a circumstance which usually precludes 
the creation of security interests over the concession or licence. However, even 
if the concession itself may not be pledged, the law in some countries 
authorizes the project company to create security interests over the rights 
arising out of the concession or licence or the proceeds therefrom. Those 
proceeds typically include the tariffs charged to the public for the use of the 
infrastructure or the price paid by the customers for the goods or services 
provided by the concessionaire. They may also include the revenue of ancillary 
concessions. Security of this type is a typical element of the financing 
arrangements negotiated with the lenders.
44. Security interests in the form of assignments or pledges of the proceeds of 
the concession do not affect the Government=s title to the physical assets of 
the concession and usually do not raise the same policy concerns that might be 
raised by mortgages or similar charges. However, since the enforcement of some 
of such security might lead to situations where creditors substitute for the 
concessionaire in the exercise of certain rights arising out of the concession 
agreement, such security interests may affect the Government, the public or the 
project company=s contracting parties or customers. Therefore, it may be useful 
for the law to provide that, for the purpose of financing the construction or 
operation of the facility, the project company may, with the consent of the 
Government, create any form of security over the rights arising from the project 
agreement, provided that the enforcement of such security does not affect the 
obligations of the project company under the agreement with regard to the 
project or its operation. 
(c) Security over shares of the project company
45. The establishment of security interests over the shares of the project 
company raises, in principle, concerns similar to those raised by an assignment 
of the concession. Where the concession may not be assigned or transferred 
without the consent of the host Government, the law sometimes prohibits the 
establishment of liens or other security over the shares of the project company. 
It should be noted, however, that security over the shares of the project 
company is a type of security commonly required by lenders in project finance 
transactions and that general prohibitions on the establishment of such security 
may unnecessarily limit the project company=s ability to raise funding for the 
project. As with other forms of security, it might therefore be useful for the 
law to authorize the project company to create such security subject to the host 
Government=s prior approval.

7. Duration
46. The desirable duration of a project agreement may depend on a number of 
factors, such as the operational life of the facility or the time needed for the 
project company to repay its debts and amortize the initial investment. 
Therefore, it might not be feasible for the law to establish a duration period 
that would be appropriate to all types of projects. However, a number of 
countries have found it desirable to adopt legislative provisions limiting the 
duration of infrastructure concessions to a maximum number of years. Some laws 
provide for a combined system requiring that the project agreement should 
provide for the expiry of the concession once the debts of the project company 
have been fully repaid and a certain revenue, production or usage level has been 
achieved, subject to a maximum limit of a fixed number of years. Where it is 
found desirable to adopt legislative provisions limiting the duration of 
concessions to a maximum number of years, the limitation should permit fixing a 
period sufficiently long to allow the project company to fully repay its debts 
and to achieve a reasonable profit.
47. With regard to the method for calculating the duration of the concession 
period, national laws offer different solutions. Some laws expressly include the 
construction phase, as well as any extension given for reasons of force majeure, 
as part of the concession period. Other laws, however, expressly provide that 
the time necessary for the execution of the project is not taken into account 
when calculating the duration of the concession period. Some laws achieve the 
same result by providing that the period of concession begins to run upon 
completion of the construction. The rationale for including the construction 
period in the total concession period is to encourage the project company to 
complete the construction works ahead of schedule, so as to benefit from a 
longer period of exploration of the facility. This element of encouragement is 
not available in case the law excludes the construction from the overall 
concession period. 
C. Specific terms
48. In addition to the essential provisions discussed in the preceding section, project agreements typically deal with a wide variety of other issues which are discussed in the following chapters of the Guide, such as the extent of 
Government support provided to the project (see below chapter V, AGovernment support@); schedule of works (see chapter VI, AConstruction phase@); conditions of operation of the infrastructure, level and quality of services, tariff structure and price adjustment provisions (see chapter VII, AOperational phase@); provisions and remedies in the event of default or breach of the project agreement, provisions dealing with changes of circumstances and 
unforeseen events, performance guarantees and insurance obligations of the project company (see chapter VIII, ADelays, defects and other failures to perform@); transfer of the facility at the end of the project period, possibility of extension and causes of early termination of the project agreement (see chapter IX, ADuration extension and early termination of the project agreement@); provisions on applicable law and dispute resolution mechanisms (see chapter X, AGoverning law@ and chapter XI, ASettlement of disputes@).

* * *
1 A brief discussion of issues arising out of contracting construction works with a non-integrated group of enterprises is contained in the UNCITRAL Construction Legal Guide (chapter II, AChoice of Contracting Approach@, paras. 9-16). Some of the issues mentioned therein might also apply, mutatis mutandis, to negotiations concerning privately financed infrastructure projects, including the following: how the difficulty of bringing a claim against consortium members from different countries, should a dispute arise, may be overcome; how the 
dispute-settlement clause may be formulated so as to enable any dispute between the host Government and several or all the members of the consortium to be settled in the same arbitral or judicial proceeding; how guarantees to be given by third parties as security for performance and quality guarantees to be given by members of the consortium are to be structured; what ancillary agreements may have to be entered into by the Government; whether there are any mandatory rules of the law governing an agreement with a group of contractors.