Concession Agreements - Concept of 'BOT'

Hi there!!

Recently I am working on a matter where I am introduced to the concept of 'concession agreement'. Surprisingly, there are OECD guidelines on laws relating to Concession, something I was never aware of till yesterday.

Before we analyse the concept of concession agreement from Income Tax and service tax point of view, it is very necessary to throw some light on the general concept of Concession Agreement

It is an agreement meant to deal with BOT arrangements. BOT stands for "Build, Operate & Transfer" ..Two parties involved here are 'Concession Authority' i.e. party that gives the concession and 'Concessioner' i.e party that enjoys the concession. This concession is given w.r.t a specified asset and for a specified period known as 'concession period'.

In a typical BOT arrangement, Concession Authority provides the Concessioner land or site owned by it for the purpose of constructing thereon an asset or project for the benefit of third party. The project is constructed as per the instructions given and design specifications given by the former. Concession Authority does not spend or invest anything on the construction of the project except by providing its land for the purpose of the project. All the initial investments in the project are made by Concessioner. Once the construction of project assets is complete, the ownership of the entire project vests in Concession Authority. On the other hand its possession and right of operate and retain the revenues arising therefrom vest in the Concessioner. This right is known as concession and it is given to the Concessioer for concession period. A right to operate the project is also accompanied by a responsibility of maintaining the project and serving the beneficiaries. The revenues arising from the project are earmarked for the initial investments in the project and the cost of running and maintaining the project. In short in BOT arrangements, Concessioner builds the project assets, operate it and enjoys the revenues therefrom during the concession period and at the end of such period hand overs or transfers the entire project to its owner i.e. Concession Authority.

Concession Agreements are available in various forms like build - operate -transfer, Build - lease- operate-hand over, Build - own -operate - transfer etc. Here the concession authority is interested in the construction of project and control thereon in the form of ownership. Whereas the Concessioner is interested in recovering its entire initial investments, operating costs and earning a reasonable rate of return at the end of concession period.

The arrangements are common in Government projects. Ex: Construction of roads, bridges where tolling rights are given to the Constructor for 10-15 years.

Given above is a brief description of simple form of BOT arrangement. More information on various types of BOT arrangement is easily available on Internet. Thanks to Google..! But I feel this basic introduction is sufficient for us to proceed with the analysis of concession agreements from tax point of view.. I promise, I will soon come up with some interesting stuff on this matter.

- mandar telang.