The discipline of construction and services concessions in the new Italian public contracts code (Act 18 April 2016, No. 50)

Act 18 April 2016, No. 50, the new "Code on public procurement and concession contracts" (hereinafter, the "Code"), transposed into Italian law the EU 2014 Directives on public procurement.

Amongst others provisions, Articles 164 – 178 introduce, for the first time, systematic rules on concession contracts (regulated by the Directive 2014/23/EU). In the earlier law (Act 12 April 2006, No. 163) only construction concessions were regulated while, for the services sector, the law merely referred to general principles on competition and non-discrimination.

Concession contracts are defined by EU Law as contracts concerning the execution of works or the provision and the management of services, the consideration of which consists either solely of the right to exploit the works or services that are the subject of the contract or in that right together with payment.

The operating risk is the main feature of a concession contract

The main feature of a concession contract is the transfer to the concessionaire of an operating risk of an economic nature. This principle was already the basis of existing discipline on concession contracts for works but, in the practical application of the law, economic operators (not only in Italy) aided by skilled lawyers, have developed model contracts in which the operating risk was reduced or even eliminated. This happened, for instance, in concession contracts related to real estate used by the same contracting authorities, with the requirement that these authorities pay construction and concession costs, regardless of the use of the real estate itself.

The recitals to Directive 2014/23/EU (at No. 18, No. 19 and No. 20) underline that the operating risk is the main feature of a concession contract, involving the possibility that the investment made and the costs incurred in operating the works or services may not be recouped.

That being said, Directive 2014/23/EU allows that a part of the risk remains with the contracting authority. The Directive specifies that the operating risk shall stem from factors that are outside the control of the parties, consisting in the risk of exposure to market fluctuations.

In line with the EU Directive, the Code (art. 3, lett. zz) provides that:

• the operating risk is the risk, transferred to the concessionaire, in exploiting the works or services encompassing demand or supply risk or both; it refers to the possibility that the variations of costs and revenues of the concession influence economic and financial balance;
• the concessionaire assumes operating risk where, under normal operating conditions, it is not guaranteed to recoup the investments made or the costs incurred;
• the part of the risk transferred to the concessionaire shall involve real exposure to market fluctuations, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible.

The Code, in line with the Directive, defines the components of the operating risk for a correct interpretation of contracts:

• construction risk, is the risk related to delivery delays, cost increases, technical problems related to the works and failure to complete them; it is essentially the same risk as that of the contractor;
• availability risk, is the risk linked to the concessionaire's ability to deliver the agreed upon contractual services both in volume and expected standards of quality;
• demand risk, connected to varying volumes of demand for the service that the concessionaire must satisfy, to reduced demand and, therefore, cash flows.

Economic and Financial balance and correct risk allocation

The Code stressed the financial viability of the operation, which constitutes a requirement for the success of the specific contractual model. Correct risk allocation results in economic and financial balance. According to the definition contained in the Code (article 3 lett. fff), economic and financial balance requires two simultaneous elements consisting of affordability and financial viability, where:

• affordability indicates the capacity of the project to create value during the validity of the contract and to generate profits adequate to the invested capital;
• financial viability indicates the capacity of the project to generate cash flow sufficient to guarantee loan repayment.

With the sole purpose of reaching economic and financial balance during tender procedures, the payment of a partial price by the contracting authority can be envisioned (article 165, comma 2):

• as a contribution;
• in the case of a construction tender, the contribution can be rights to the usage of real estate, within the capacities of the contracting authority and whose usage is instrumental and technically necessary for the construction works in question;
• the transfer of real estate property rights.

The price paid by the contracting authority cannot, however, be higher than 30% of the overall cost of the investment, including financial costs.

For the purposes of the price charged to the contracting authority, all advantages to the contracting authority, besides monetary compensation are to be considered, such as the value of public guarantees or other financing mechanisms.

The duration of the concessions

The duration of the concessions is determined in the tender offer on the basis of the works or services requested from the contractor and on the basis of the value and complexity of the concession itself (article 168, comma 1). In practical terms, the duration of the contract is based on objective economic criteria and is directly proportional to the necessity to recover the investment sustained by the contracting authority, which result from the financial plan (article 168, comma 2).

The duration of the concession provided for in the plan or, if shorter, in the contract is mandatory and cannot be increased even if circumstances impacting financial stability arise. This approach is based on the general interest in protecting competition in a free market, which mitigates against unreasonably long contracts. In addition, unreasonably long concessions can constitute an unacceptable obstacle to free movement of services and to freedom of establishment.

Modification of concession contracts

As a general principle of the Code (article 175) a new tender procedure is required where there are material changes to the initial concession. A modification shall be considered to be substantial in the case of substantial changes that significantly alter the essential elements of the initial contract (article 175, par. 1).

In any event, without prejudice to article 175, par. 1, a modification shall be considered to be substantial where one or more of the following conditions are met:

• the modification introduces conditions which, had they been part of the initial tender procedure, would have allowed for the admission of applicants other than those initially selected or would have attracted additional participants in the tender procedure or for the acceptance of a tender other than that originally accepted;
• the modification changes the economic balance of the concession in favour of the concessionaire in a manner which was not provided for the initial concession;
• the modification extends the scope of the concession;
• where a new concessionaire replaces the one to which the concession was initially awarded, in cases other than those for which such replacement is specifically permitted.

However, the Code provides some specific cases in which a modification to the initial contract is permitted without a new tender procedure. The possibility of technical and financial changes to concessions is consistent with the nature of concession contracts, since concessions are usually long-term contracts that are often subject to changing circumstances. In that respect Directive 2014/23/UE recognizes the need for a certain flexibility to adapt the concession to the supervening circumstances without a new tender procedure.

The Code states that concession contracts may be modified without a new tender procedure in the following cases:

• where the modifications, irrespective of its monetary value, have been provided for in the initial concession contract, on condition that:
  • they shall not provide for modifications or options that would alter the scope of the concession;
  • they do not result in an extension of the duration of the concession;
• for additional works and services provided by the original concessionaire that were not included in the initial concession, where a change of concessionaire is not viable due to economic or technical reasons;
• the modification is required due the following factors:
  • the modification is requested by circumstances which a diligent contracting entity was not in a position to foresee;
  • the modification does not alter the scope of the concession;
• where a new concessionaire replaces the one to which the contracting authority had initially awarded the concession as a consequence of either:
  • the application of a review clause of the concession contained in the tender documents;
  • the complete or partial taking over of the position of the initial concessionaire, following corporate restructuring, including takeovers, mergers, acquisitions or insolvency, provided that (a) the new economic operator fulfils the criteria for qualitative selection initially established and (b) that this does not entail other substantial modifications to the contract, notwithstanding the need of any prior authorizations of the authority, where required by relevant legislation;
• where the modifications, irrespective of their value, are not substantial.

For concession contracts below a certain threshold value modifications are also permitted without a new tender procedure, without any need to verify the substantial nature of the modifications (article 175, par. 4 and 5). In particular, where the value of the modifications is below both of the following values:

• the threshold of euro 5,225,000;
• 10% of the value of the initial concession.

In conclusion, concession contracts can be modified without a new tender procedure only in cases specifically provided for in the Code. In other cases a new procedure in line with the principles of equal treatment and transparency is necessary.

Termination, revocation and withdrawal of concession contracts

The Code contains a single provision governing termination, revocation and withdrawal of concession contracts (article 176).

The termination of the concession contracts is related to the self-defence power provided by the public law, which entitles the contracting authorities (public entities) to annul or revoke the awarding of contract (article 176, par. 1). Termination of the concession contracts occurs in the following cases:

• the concessionaire should have been excluded from the tender procedure because he did not meet the general admission requirements (article 80);
• unlawfulness of the award procedure as established by the Court of Justice of the European Union in accordance with article 258 TFUE;
• unlawful modifications to the concession contract for breach of obligations to put in place a new tender procedure.

In case of the revocation by the contracting authority for unlawfulness of the tender procedure for not attributable to the concessionaire, the Code grants the concessionaire the right to be compensated by the contracting authority (article 176, par. 3).

Both for revocation and withdrawal for breach, the Code provides for the right of the concessionaire to be granted a compensation (article 176, para. 4), consisting in:

• the value of the works, as well as the additional charges or, if the work has not yet be completed, the costs actually incurred by the concessionaire;
• the penalties and other costs incurred or to be incurred in consequence of the termination/revocation;
• an indemnity in respect to loss of earnings compensation equal to 10% of the value of works still to be carried out which is equal to the present value of the part of the service of the monetary costs of the operations envisaged in the business plan attached to the concession contract.

In the different case of revocation for reasons attributable to the concessionaire, he is responsible pursuant to the general principles set forth in the Civil Code governing breach of contract.

Moreover, in this case the Code provides for step-in by another economic operator designated by the financers (article 176, par. 8). Subject to the consent of the contracting authority, this economic operator replaces the concessionaire and carries on the concession. However, unlike the provisions of the earlier Code, the replacement of the concessionaire shall be limited to the time necessary for carrying out a new tender procedure.

The transitional regime concerning the concession contracts already assigned without competition or with the project financing formula

With regard to concession contract still in progress and not assigned through a project finance formula, or assigned without a public tender procedure, the Code provides for competition. In this sense, the Code (article. 182) provides the concessionaire’s obligation to:

• assignment of a share of the works, services or supplies equal to 80% through a public tender procedure;
• proceed to the realization of the remaining 20% by means of in-house companies, or entrusting its execution to third parties through a simplified public tender procedure (invitation to five competitors).

The Anti-bribery Authority (ANAC – Autorità Nazionale Anti Corruzione) shall verify compliance with this rule.