Sec News Concession Agreement Definition

What Is a Concession Agreement?

A concession agreement is a contract that gives a company the right to operate a specific business within a government’s jurisdiction or on another firm’s property, subject to particular terms. Concession agreements often involve contracts between the nongovernmental owner of a facility and a concession owner, or concessionaire. The agreement grants the concessionaire exclusive rights to operate their business in the facility for a stated time and under specified conditions.

How a Concession Agreement Works

Also referred to as concession arrangements, concession agreements span various industries and come in many sizes. They include mining concessions valued in the hundreds of millions of dollars, as well as small food and beverage concessions in a local movie theater. Regardless of the type of concession, the concessionaire usually has to pay the party that grants it the concession fees. These fees and the rules under which they may change are generally described in great detail in the contract.

Concession agreements usually define the period of operation and insurance requirements, as well as fees. Payments to a property owner may include rent for the location, a percentage of sales revenue, or a combination of the two. Any additional expectations can also be spelled out in the agreement. For instance, the agreement can specify which of the parties is responsible for utilities, maintenance, and repairs.

The terms of a concession agreement depend in large part on its desirability. For example, a contract to operate a food concession in a popular stadium may not offer much to the concessionaire in the way of incentives. On the other hand, a government looking to attract mining companies to an impoverished area may offer significant inducements. These incentives could include tax breaks and a lower royalty rate.

A common area for concession agreements between governments and private businesses involves the right to use certain pieces of public infrastructure, such as railways. Rights may be granted to individual businesses—resulting in exclusive rights—or to multiple organizations. As part of the agreement, the government may have rules regarding construction and maintenance, as well as ongoing operational standards.

Benefits of Concession Agreements

At their best, concession agreements are a form of outsourcing that allows all parties to benefit from comparative advantage. Often, a country or company will own resources that it lacks the knowledge or capital to use effectively. By outsourcing the development or operation of those resources to others, it is possible to earn more than they could alone. For example, a country might lack the capital and technical skills to utilize offshore oil reserves. A concession agreement with a multinational oil company can generate revenue and jobs for that country.

Concession agreements may also be used to manage risk. Suppose a country invests a significant amount in the production of a single commodity. Then, that country will have a high idiosyncratic risk related to the price of that commodity. For example, the governments of Brazil and Mexico invested substantially in state oil companies. The value of their assets and their revenues declined significantly when the price of oil dropped in 2020. Countries that grant concessions stand to lose revenues from concession fees, but they do not risk nearly as much capital.

Criticism of Concession Agreements

Concession agreements are sometimes used to take advantage of other nations. For example, foreign countries and companies forced China to grant various concessions during the 19th century and the early 20th century. These concessions gave foreign entities the rights to develop and operate railways and ports within China. Furthermore, citizens of other countries often enjoyed extraterritoriality within their concessions. Extraterritoriality meant that foreign laws and courts settled legal disputes between the Chinese and foreigners in the concessions. Naturally, the decisions of these courts tended to go against Chinese businesses and consumers.

Examples of Concession Agreements

For example, a concession agreement exists between the governments of France and the U.K. and two private companies regarding the Channel Tunnel. The British Channel Tunnel Group Limited and the French France-Manche S.A. operate the Channel Tunnel, often referred to as the “Chunnel” under this agreement. The tunnel connects the two countries and allows for passenger and freight rail traffic between them. It is 31.5 miles long, with 23.5 miles running beneath the English Channel. That makes the Channel Tunnel the world’s longest underwater tunnel, as well as a major piece of public infrastructure.

On a smaller scale, vendors operate under concession agreements that have been granted by local governments, corporations, or other property owners. This activity can include restaurants and retail stores located in large airports, vendors at state fairs, or the selling of food and beverages from stands within state parks.