Concession contract in Bosnia and Herzegovina: Introducing the World Commerce & Contracting Principles in the concession contract

Abstract

Recent years have seen a surge in popularity of concession projects, particularly in certain sectors such as energy, mining, and geological explorations. These projects are not only significant and beneficial for the investors, but they are also boosting local economies. The very foundation of such projects is the concession contract (CC)—contract with both public and private law elements determining the relations between the state organ issuing the concession and the private entity. This paper will focus on the case of Bosnia and Herzegovina (B&H) where CCs are often unbalanced and commonly unilaterally designed by the state party that dictates all of its provisions. Consequently, the private party is placed in a difficult, take-it-or-leave-it situation if it does not want to accept the CC as drafted by the state party. Potential steps toward the implementation of World Commerce & Contracting Principles (WCC Principles) in the CCs in B&H shall be presented, along with their predictable benefits and likely impact on the shortening and balancing the process of negotiating the CC in B&H.

Introduction

Concession is the right of use and exploitation of natural goods or performance of certain activities in the general interest, allowed by the competent authorities of State for exploitation, respectively, used by certain domestic or foreign subjects for a specified or indefinite period based on set conditions for concession compensation payment (Đerda, 2006). Within the EU concession acquis, concessions are defined as contracts where the consideration for the works or provision of services to be carried out consists either solely in the right to exploit the work or service or in that right together with payment (Sigma, 2011).

In most jurisdictions, in terms of the very nature of concession contracts (CCs), the so-called Build–Operate–Transfer (BOT) system prevails (Krasniqi, 2016). It represents a contractual arrangement whereby a private party undertakes to finance, design, construct, ¹ operate, and maintain an infrastructure project for a determined and limited period of time after which the entire project and the entirety of its facilities are transferred to the state organ which granted the concession. Such “return” of the project generally happens without payment of any compensation by the state body to the investor. Alternative forms of concession contractual arrangements exist, such as Build–Own–Operate and Transfer (BOOT) that is similar to the BOT agreement, except that the private party owns the infrastructure project during the specified term before its transfer to the Contracting Authority or its designee. Another alternative would be the Build–Own and Operate (BOO) which is a contractual arrangement similar to the BOT agreement, except that the private party owns the infrastructure project and no transfer of the project to the Contracting Authority or its designee at the end of the fixed period is envisaged (EBDR, 2017).

Although CCs have specific legal nature and a public entity is a party to this type of contracts, once public procedure, if prescribed by national legislation, is completed and a concessionaire is selected, the contract has all the elements of a private contract. Therefore, the World Commerce & Contracting Principles (WCC Principles) could be applied to this type of contracts in addition to the contracts involving private parties only.

What are the WCC Principles? As noted in their Introduction,

These contracting principles have been developed under the auspices of and are endorsed by World Commerce & Contracting and are referred to as the “World Commerce & Contracting Principles” or just “Principles.”

They are intended to serve as an international cross-industry set of guidelines to support the drafting of applicable contract clauses and/or the negotiation of applicable terms and conditions between a customer and a supplier. These Principles are intended to reduce or eliminate the need for negotiation and shorten cycle time to signature.

Participants who accept these World Commerce & Contracting Principles are free to use them in their entirety or on a case by case basis as they deem appropriate; however, it is expected that the benefits of their use will be maximized when both parties to a transaction agree to rely on them and draft and negotiate the relevant clauses accordingly.

In this paper, we focus on the CC from the perspective of Bosnia and Herzegovina (B&H). In particular, we examine the extent to which the WCC Principles could be used to facilitate the negotiation process between the parties.

Legal nature of CCs

Due to a combination of both the elements of public and private nature, the CC is among the most complex contracts concluded and implemented in the world of commerce and public–private partnerships (PPPs). ² CCs are rather similar to “PPP Contracts” which IBRD (2014) PPPs Reference Guide designates as the centerpiece of the partnership between the public and private entity, defining their mutual rights and duties, allocating risk, and setting out the project direction.

At the moment, in most contemporary modern jurisdictions, CCs are usually treated as a specific public law contract. According to Miranda (2007), CCs should be treated “as public policy mechanisms rather than private contracts because they involve subject matter critical to the populations.” General idea behind this concept of CC is that private entities are contracted by public bodies to deliver services or construct infrastructural or similar projects of public significance. Duration of the Concession Award is generally set out by national laws and regulations. Usually, this term is specified depending on the type of the concession, resources it provides for the private party, and expected returns from the implementation and exploitation of the concession activity. Miranda (2007) sees a great potential in concession projects because they can provide crucial support to developing countries and provide a vital source of income for financially unstable governments.

Negotiating a CC

Generally speaking, the position of contracting parties in CCs depends on the system of concession laws within national legal systems. In any case, the position of private entities and investors will usually differ depending on the phase of concluding the CC. In the tendering process, private investors should be treated equally and have the same realistic opportunity to participate in the public invitation ³ which will entirely determine the scope of the future concession project. Once a certain private entity is selected for the concession, they must be treated with full equality in their performance of the concession in order for the entire process to be fair and free from any state-given ultimatums.

Modus operandi of every CC is the continuous strategic and economic cooperation between a state organ and an economic operator—the concessioner—that provides services or fulfills infrastructural projects and activities, while being compensated by being granted the right to financially benefit from a certain resource of the State. With this in mind, it is clear how the public interest can be at stake in these types of contracts since the private entity is given a great deal of autonomy to use a public resource—a good or service which is generally considered as the property of State. The importance of protecting the public interest in the concession arrangement is especially reflected in the fact that many concession agreements between governments and private entities have failed to produce expected and adequate infrastructure or financial gains (Miranda, 2007). Of course, public interests must be protected with all legal means, but there is always the interest of private entities that must not be forgotten when weighing the costs and benefits of the concession project. These two interests—the interest of the State and the interest of the concessioner—are often conflicted, and it is out of that conflict that the State usually emerges as sort of a winner due to the particular concession-negotiating power that allows the State to tightly control the endeavors of the private entity. As a result of this superiority of the State, concessioners are often found in a take-it-or-leave-it situation when it comes to drafting the CC, this being entirely contrary to the prevailing contractual philosophy of party equality (Wilhelmsson, 2009).

CC in B&H: General overview

Concessions in B&H are a reflection of the complexity and numerous layers of the country's constitutional and legal structure. ⁴ The current political and administrative structure is highly decentralized to facilitate the fragmentation and hierarchy of the governmental system in B&H composed of the Government at the state level (Government of the B&H), two highly autonomous, entity-level Governments (Federation of B&H (FB&H) and Republika Srpska (RS)) and Brčko District of B&H. ⁵ Within the complexity of B&H political system, USAID's (2018) Guide for Investors singles out competent ministries to be the principal concession bodies in B&H.

At the state level of B&H, general policy framework for improving the legal environment and promoting PPP is regulated through the 2006 Policy on Granting Concessions in B&H. Despite the adoption of this key document, and as noted by the Concession Commission of B&H, ⁶ many matters of concession in B&H have remained unregulated, thus placing investors on the path of economic and legal uncertainty. Although more than 15 years have passed since the adoption of this policy, very few of the gaps and shortcomings were tackled. As a result, concessions in B&H remain unattractive both for the foreign and domestic investors. State legislation has mostly delegated these matters to the entity governments and their competent ministries, which resulted in an even wider divide and fragmentation of these economically important regulations.

EBRD (2011) showcases that the entire concession granting process in B&H is regulated by many laws ⁷ that mostly contain similar provisions with different regional and administrative applications. All of these laws relatively clearly regulate the selection procedure and provide a framework for the project agreement. In general, all of the applicable laws contain references to the principles of transparency, nondiscrimination, proportionality between contracting parties and the public, which is often not implemented in practice. Aforementioned laws represent a step in the positive direction, a step toward the introduction of a modern legal system in this area. It is important to point out the fact that the B&H authorities relied on international experts in the preparation and drafting of these laws, taking into account international legal sources. These laws are presented as the intention to create a reliable legal basis for granting concessions and as a tool to attract foreign investments. The harmonization of laws is therefore an imperative to avoid overlaps, inconsistencies, and loopholes which still dominate this legal area. Significant efforts are needed to achieve a coherent legal framework for the concessions and PPPs in B&H, even more than 25 years after the war.

According to Branković and Sudžuka (2017), the Law on Public Procurement refers to the awarding of public contracts by Contracting authorities of B&H (both entities—RS and FB&H—Brčko District, cantonal and municipal levels), while the granting of concessions by these authorities is regulated by similar laws on concessions and related laws and decisions that are both effective at state, entity and cantonal levels. Every country aiming to attract the private sector to the PPP system first has to ensure a sound legal environment. The private sector, as well as financial institutions, must be provided with the highest assurances that their rights will be respected and fulfilled prior to them making any investments or obligations. In the case of B&H, the country aspiring to join the European Union for more than two decades now, all national legislation ⁸ needs to be harmonized with the relevant EU concessions and PPP acquis and positive practices. ⁹

When it comes to the nature of goods or services that can be concessioned, in B&H concessions are mostly granted for exploitation of natural resources, construction of infrastructure facilities and other public goods, and general use (such as the use of forests, highways, major roads, and accompanying infrastructure). ¹⁰ The length of the concession is also defined by the CC. The maximum legal duration is 30 years with a possible exception of extending it up to 50 years (USAID, 2018).

Concessioning procedure in B&H

As mentioned above, the procedure for granting concessions in B&H is regulated at different levels of governance in line with the constitutional structure of the State and it is regulated with the Laws on Concessions at state and entity level as well as cantonal level in FB&H. Although the structure seems to be complicated, the procedure for granting concession under all abovementioned laws is similar. Generally speaking, the procedure for granting concession can be initiated by the competent authority, by the interested party, or through bids in the negotiated procedure. There are some slight differences among different levels and concession laws. However, in practice, the common method of granting concession is a tender procedure—public invitation which is announced upon declaring public interest (based on a proposal of the interested investor or initiative by public authorities). It is within this procedure that the essential elements of future contracts are determined as they are basically the criteria for the selection of the best bid within the tender process.

Elements of CC in B&H

Usually, the mandatory elements of the pending contract, included in the public invitation, include the following:

subject of concession,

terms and conditions of use of the subject of concession,

concession period,

concession fees (e.g. amounts, deadlines, payment method, and method of changing the concession fees),

starting date of the concession activity and deadlines for the implementation of the project,

type, amount, and method of providing security for the execution of the CC, and

conditions related to mandatory permits to be obtained upon signing the CC as a method of implementation of the concession project.

For these elements of a future contract, there is no room for negotiations between the parties as listed elements are mostly defined as a minimum requirement for the interested parties. At this stage of contracting, the public law nature of concession prevails over private law relations. However, once the most favorable future concessionaire is selected, there are certain elements that can be subject to inter-party negotiation. ¹¹

This stage of contracting gives a chance to future concessionaires to include clauses in the contract that may contribute toward the easier implementation of the project and ensure that the private investor is shielded from the State's arbitrariness. Moreover, clauses may be added that would secure the application of the widely accepted principle of equality of contracting parties.

Room for the implementation of the WCC Principles

As previously elaborated, CCs in B&H are highly complex and quite inflexible contracts whose terms and provisions can be characterized as inconsistent and varying from one concession to another. The uncertainty of this inflexible process often “scares” the investors away because they either do not know what to expect from the CC prior to their very engagement into the negotiation or because they are aware that the provisions which will define the key aspects of the CC will be laid down by the state authority, often unwilling to negotiate their position. The investors can be left without a forum in which they could propose contractual provisions they would like to install in the CC, or to express their concerns and effectively do something about the conditio sine qua non elements of the contract inserted by the State. Another factor contributing to this uncertainty of concessioning in B&H is the fact that not one, but presumably thirteen different authorities might engage into concessioning, each for their own resources and projects or portions thereof. What is more, they can do so in their particular way through a legal procedure of their own, eventually leading to the CC they have designed without regard for other legal circumstances in B&H or circumstances surrounding the private party and its oftentimes significant investment.

Every concession project in B&H is practically entirely different in its procedures and content, except for its complexity and long duration of the process. Generally, precontractual and contractual phases can take up to several months, even though the parties do not negotiate the most essential elements of the contract because they are seen as fixed by the public party. Here, we are mostly implying that the duration of the concession cannot be altered nor influenced by the private party since the public side is the one offering the concession with their fixed term. Similar restrictions exist when it comes to defining the most basic elements of the concession agreement, such as the price to be paid for concession or the quantity of the exploited resources. The private party is facing these contractual provisions as “take it or leave it” and is usually left with no negotiating power that can cause significant strategic and financial hardships for the investor.

Paving the way for application of the WCC Principles in CCs

Previously elaborated shortcomings and issues characterizing the system of concessions in B&H are paving the way for the central idea of this paper that revolves around the idea of implementing the WCC Principles into CC to promote transparency, economic security, and legal certainty of the concession project. To give traction to this idea of introducing the WCC Principles into CCs in B&H, several key steps ought to be identified:

Investors looking to enter into CCs must be familiarized with the WCC Principles, and they must understand the benefits and the ways they could better their position within the concession. Such benefits would be evident both during the negotiation and contracting phase by offering more clarity and certainty, and during the exploitation phase when their interests would be properly protected by well-founded contractual provisions regulating some of the crucial aspects of the concessioning, such as dispute resolution, assignment, and novation, compliance with laws, dealing with confidential information, force majeure events, payments, and prices. After realizing the benefits of the WCC Principles, in order for them to reach a certain CC, the investor would probably have to initiate such innovation and reach out to the state organ with the concrete proposal of the CC, or its key provisions, which would be based on WCC Principles.

State organs would need to demonstrate open-mindedness and consider adapting their approach to CCs so as to reflect WCC Principles. Even though reliance on the WCC Principles would also benefit the State party, resistance to this idea is expected, mostly due to the inertia that is present within state organs and other decision-making bodies having a say in drafting, concluding, and executing a particular CC. Once again, investor(s) would have to take an initial step and bring this idea to the State, hopefully with support of the relevant organizations and institutions aiming to protect the interests of the investors in B&H.

WCC Principles should eventually become the standard for CCs throughout the entire B&H. This, in turn, would contribute to the harmonization of concessioning procedures and, eventually, shorten and simplify the negotiation process of every concession project. The “open concept” of the WCC Principles would certainly enable every State party in B&H to implement the key elements of WCC Principles while remaining is in line with the applicable laws and regulations.

When it comes to individual WCC Principles and the ways they could improve the process of negotiating and concluding the CC, the primary focus in this analysis will be on the principles of alternative dispute resolution (ADR), assignment and novation, compliance with laws, confidential information, force majeure, payment terms, and prices and charges.

ADR

Dominant approach to dispute resolution in CCs in B&H is to primarily designate amicable dispute resolution, based on conciliation and agreement. If amicable dispute resolution fails, mostly due to the interests of the State party, what is then left for the aggrieved party is to pursue litigation in the basic (Municipal) state courts. However, as recognized in the WCC Principles, compared to ADR, court litigation consumes more time and slows down the project due to courts’ large caseloads. This is particularly true for B&H where court proceedings, in the first degree and appeal process, usually take several years.

The concession projects are usually financed by foreign investors. Therefore, international mechanisms for investment protection in terms of concession projects should also be taken into consideration. According to GIZ (2021), B&H has Bilateral Investment Treaties (BITs) with five out of its seven highest ranking investing states in 2019. These include Austria, Croatia, Luxembourg, Slovenia, and the United Kingdom. The direct foreign investment framework in B&H is intertwined. To illustrate, commercial law, corporate law and civil procedure are the domain of the entities; state and entity laws govern foreign investment, while rules on mediation are enacted at the state level only (The Covid-19 Restrictive Measures in Bosnia and Herzegovina & Risk Assessment of Covid-19 Related ISDS Claims, 2021).

B&H is also a Member State of the ICSID Convention. In addition, B&H is a signatory to a total of forty-three investment promotion and protection agreements, out of which thirty nine are BITs. Region-wise, B&H has four Intra-Western Balkans BITs with Albania, Serbia, Montenegro, and Macedonia. B&H also has BITs with Croatia and Slovenia, currently EU Member States and formerly part of Yugoslavia. There is no available model BIT or model BIT clause in B&H.

To promote a potentially faster and more reliable dispute resolution mechanism, CCs should implement the Alternative Dispute Resolution WCC Principle. This could be done by inserting a dispute resolution clause, as stipulated in the WCC Principles, according to which the parties should first attempt direct negotiation to resolve the dispute. Then, if both parties so agree, they ought to pursue mediation. If mediation too proves to be unsuccessful, then binding arbitration should be the final step—the last resort—to be used in resolving the dispute between the State and the concessionaire.

Assignment and novation

In accordance with the current practice regarding assignment and novation in CCs in B&H, both are possible on the condition of previously attaining the consent of the government overseeing the state organ which entered into the CC. However, such provisions usually lack clarity as to the extent of the effects that change in the subject of the CC can have.

As stipulated in the Assignment and Novation WCC Principle, the clause should, as a principle, exclude or limit the transfer of CC unless the original party had given its prior consent. In this aspect, State can be found in a difficult position if it is met with a new concessionaire that might use the concessioned resource differently, with different values, dynamics, and success.

Compliance with laws

Notwithstanding the preexisting legal obligation of every subject of law to comply with the law, the matter of compliance is of crucial importance for every concession project and, thus, must be clearly envisaged by the CC. Depending on the type of concession and the resource granted to the concessioner, parties must establish a list of laws and regulations with which both parties must strictly comply during the concession period. As envisaged by the Compliance with Laws WCC Principle, each party should be responsible for the costs, fines, and expenses associated with their respective failure to comply with the applicable laws.

Confidential information

All matters related to Confidential Information must be properly addressed in all CCs globally, and B&H should be no exception. The fact that one of the two parties engaging in a CC is a State, essentially an executive public organ or an authority that answers to other branches of the government, and the fact that the CCs are concluded upon public tenders, makes it is obvious that the provisions of the CCs cannot be fully confidential. Many aspects of the concession project and the CC are generally part of the public record. However, CCs usually do not regulate nor specify this in their provisions. Thus, Confidential Information WCC Principle should be applied to the CCs with all its steps, including the very definition of confidential information, obligations to safeguard confidential information, duration of this obligation, return of confidential information upon the expiration or termination of concession and, finally, remedies in case of a breach of confidentiality.

Most investors take the confidentiality of their business very seriously and, in order to protect their sensitive information, they may prefer to clearly define this matter in the CC to limit the scope of access to the project information which might be considered as confidential by one or both the parties. This should apply not only to the public body that concluded the concession, but also to any other public body or institution with access to the project details.

Force majeure

Performance of CCs should preferably be uninterrupted. However, due to certain predicaments, which are often referred to as force majeure, Vis Maior or “Act of God” that might not always be possible, regardless of the efforts of the contractual parties.

CCs in B&H generally touch upon the matters of force majeure by setting out a list of situations and events which are, for the purpose of a particular CC, envisaged as force majeure. However, these provisions, and particularly the list of events which are seen as force majeure, are not negotiated between the parties but are rather simply inserted into the CC by a State party. It would be important for both parties, as recognized by the Force Majeure WCC Principle, to negotiate the force majeure clause as part of their risk allocation, and to do so “in conformance with general industry practices and the level of risks in the applicable geographic areas of operation.” Particular emphasis should be on the very definition of events of force majeure, giving notice as well as on the rights and obligations which would be triggered by such an event.

Force majeure clauses have never been more important and have never deserved more attention in negotiations than during the global pandemic of COVID-19 which has reshaped the customary understanding of force majeure and the ways force majeure clauses address these difficult situations for any business endeavor, especially time-sensitive concessions whose exploitation is strictly limited by the basic provisions of the CC.

Prices and charges

Concession prices and charges for the goods/services exploited by the concessionaire are one of the focus provisions of every CC and a key consideration for the state body to enter into a concession with a private entity. The investor must pay a concession fee for the right to execute the concessioned activity (USAID, 2018). It is not rare that annual concession fees and prices can reach several million, or even billions of USD. Thus, it is obviously a very important aspect of the CC. In the case of B&H, concession prices and charges are usually set out per unit of the good which is the subject of the concession (e.g. for mining concessions, one ton of ore will be a pricing unit).

However, it is not always the case those prices and charges are open for negotiation but are rather predetermined by the State and are seen as a conditio sine qua non, a take-it-or-leave-it situation for the concessioner/investor. Another important observation about the B&H CCs is the fact that prices and charges are not always clearly set out in the CC. Consequently, both parties could benefit from the implementation of Prices and Charges WCC Principle.

Conclusion

Even though the WCC Principles are intended to serve as a set of guidelines for setting the conditions between a customer and a supplier in the entire private law relations, we have seen how their potential can be expanded to CCs. As seen from the discussion above, in CCs in B&H, there is no level playing field between the State and the concessionaire since the State is setting all the key elements of the contract and concession project. The application of the WCC Principles would ensure more fairness for the private party in the concessioning, provide at least partial party equality and eliminate or significantly reduce the need for negotiation of the provisions which exist as a part of the WCC Principles.

Situation could be greatly improved with the introduction of basic guiding principles which would provide flexibility and negotiability of the CC, and at the same time, predetermine some of its key concepts and elements. Both the private and the public parties would benefit from the application of the WCC Principles to the contractual phase in concessioning. Their application could shorten the negotiation process, create common grounds between the Investor and the State and introduce a firm, stable foundation for what is to be concluded as a CC. Some of the most important matters of the CC could be resolved by the direct application of the WCC Principles. Those usually heavily debated and negotiated provisions of the CC, such as dispute resolution mechanisms, compliance with laws and consequences of failure to comply, defining data security, secrecy, and privacy, force majeure, liability caps, and exclusions from liability could be absorbed from the WCC Principles and would certainly lead to more reliable, faster and more efficient concessioning in B&H.