Concession agreements: from private contract to public policy.

Author:Miranda, Nicholas

NOTE CONTENT INTRODUCTION I. THE PRIVATE, CONTRACTUAL CREATION OF CONCESSION AGREEMENTS A. Preventing Democratic Deliberation B. Insulation from Public Knowledge or Influence II. FROM INSULAR CREATION TO NEGATIVE POLICY OUTCOMES A. Making Inefficient Choices: Corruption, Timing, and Tariffs 1. Personal Gain 2. Nearsightedness 3. Rate and Fee Adjustments B. Provoking, Ignoring, and Exacerbating Opposition III. RECONSTRUCTING CONCESSION AGREEMENTS AS PUBLIC POLICY A. Reconceptualizing Concession Agreements as Matters of Public Policy 1. Critical Subject Matter 2. Purported Enactment for Public Effect 3. Effective Constraints Placed on Future Policy Determinations B. Constructing Procedural Reforms from Recasting Concession Agreements 1. Democratic Control and Local Consultation 2. Transparency, Responsiveness, Accountability, and Increased Stability and Success CONCLUSION INTRODUCTION

In September 1999, the Bolivian government signed a forty-year concession agreement with Aguas del Tunari, a consortium led by a British subsidiary of Bechtel, for water supply and sanitation services in Cochabamba, Bolivia. (1) Six months later, the government cancelled the agreement amid sustained and escalating rioting by the local population and returned responsibility for the water service to the municipal authority. (2) Although the Cochabamba concession is remarkable for its swift and abject collapse, its fate is part of a larger pattern.

A concession agreement is an agreement between a government and a private company (the "concessionaire"), in which the government transfers to the company the right to maintain, produce, or provide a good or service within the country for a limited period of time, but the government retains ultimate ownership of the right. (3) A substantial number of these agreements signed between the governments of developing countries and foreign corporations have recently failed, across many different subject matters and geographic areas. (4) In the water industry alone, at least seven major concession agreements have collapsed in the last decade. (5) Some experts estimate that as many as fifty percent of all concession agreements signed since the mid-1980s have been renegotiated or cancelled. (6) This Note seeks to aid the understanding of why these concession agreements break down. It argues that concession agreements fail because their governmental function clashes with their private method and venue of creation.

In their regulatory, proprietary, and administrative capacities, governments perform a variety of functions, not all of which qualify as public policy creation. Under the rubric I set forth, a government creates public policy when it addresses a subject matter that the populace views as properly a matter of public concern, and when its actions are likely to affect broadly the public's well-being. This definition of public policy tracks that found in legal dictionaries (7) and in the work of political scientists Charles L. Cochran (8) and Steven Kelman. (9) Given the breadth of this definition and its mix of both objective and context-specific components, what qualifies as public policy will necessarily vary based on the history and conditions of a given country. (10)

In effective governance, the function that the government performs matches the method and venue the government uses. (11) Typically, to create public policy, an efficient government uses a highly visible and transparent venue (for example, a legislature or publicly accessible meeting) and an openly participatory and deliberative method (for example, a bill passage procedure). (12) By contrast, to make a personal deal, two people or groups work in a private venue through the insular method of bilateral negotiation. (13) When a potential conflict arises between the function and the method or venue, an effective government will mediate the conflict through procedural reforms. For example, an American administrative agency (a generally opaque venue) introduces a public notice, comment, and debate period (a more participatory method) when it engages in public policy rule making. (14)

Part I of this Note explains that governments and concessionaires (that is, the private companies that enter into concession agreements) often conceive of and create concession agreements as traditional bilateral contracts, soliciting, negotiating, and enacting them in an opaque venue and by an opaque method involving only a few high-level government officials, lawyers, and company representatives. Part II shows how the venue and method of concession agreements' creation contribute to the agreements' failures by inducing government officials to make ineffective policies and by exacerbating local opposition to the agreements. Part III argues for reconceptualizing concession agreements as traditional matters of public policy; it then suggests some procedural reforms to eliminate the identified mismatch and thus increase the sustainability and efficiency of concession agreements.

Scholars and advocates have suggested many large-scale substantive changes to concession agreements. This Note does not attempt to address the merits of these suggestions, which include schemes to alter the number or subject matter of concession agreements agreed to by foreign governments, (15) their duration, (16) and the regulatory regimes that should surround them. (17) Instead, this Note provides a novel explanation for concession agreements' failures and sets the groundwork for procedural remedies to enhance their viability.


    This Part describes how actors currently create concession agreements as traditional bilateral contracts. It focuses on two aspects of the process-- revention of democratic consideration and insulation from public knowledge.

    Governments, concessionaires, and scholars traditionally treat concession agreements as private, bilateral contracts between high-ranking national officials and the concessionaire company. Two aspects of the creation process reveal this approach. First, officials preclude broad, open deliberation at each stage of the creation of concession agreements: they remove initial debate over the agreements from legislative procedure; negotiate the agreements directly with prospective concessionaires; and give the signed agreements the immediate force of law. Second, the parties shield the agreements from public knowledge or influence: they provide the public with limited information about the concessionaire selection process and content of the concession agreements, and limited influence over the result.

    1. Preventing Democratic Deliberation

      Executive government officials treat concession agreements as private contracts by precluding democratic deliberation at each step of the process. First, they initially prevent the legislature from debating the merits of pursuing a concession agreement. This removal clearly distinguishes the concession agreements from other matters of domestic public policy created through deliberative legislative action, both in the United States (18) and the countries discussed in this Note. (19)

      In many developing countries, parties face preliminary difficulties in pursuing concession agreements. Many national constitutions and statutes require majority state-ownership and maintenance in the sector of the desired concession agreement. (20) Even where no formal statutory barriers to the agreement exist, practical obstacles, such as the dearth of standardized rules or organized oversight regimes governing concessions, remain. (21)

      To address these initial obstacles to concession agreements, the government official who spearheads the effort (often a member of the executive branch) frequently makes unilateral decisions. The official will simply ignore the limiting constitutional or statutory provisions, as well as practical obstacles, and will often negotiate an agreement that seems to conflict with existing domestic law. (22) Or, the official will clear these obstacles through pronouncement. For example, in 1997, the President of Bolivia used an executive decree to enact the legislation that ultimately paved the way for the Cochabamba concession by establishing the Office of Water Regulation and the procedures for concession agreements. (23) In the Philippines, President Ferdinand Marcos enacted Presidential Decree Number 705, which allowed the newly created Forestry Department to enter into service contracts "with any foreign person or entity" for "exploration, development, exploitation or utilization of the forest resources." (24) Even when these provisions to enable concession agreements technically do pass through the legislature, international actors and government officials often fast-track them without much time for vigorous debate. The president or other government official--sometimes influenced by major international actors such as the World Bank or International Monetary Fund--employs such a heavy hand that he or she effectively circumvents the legislative process. (25) Thus, government officials treat concession agreements as bilateral contracts by precluding effective legislative consideration at the earliest stages of the agreement.

      This contractual treatment extends beyond the early planning stages of concession agreement creation and through the negotiation and enactment phases. Participants also treat concession agreements as traditional bilateral contracts when they engage in private, bilateral negotiations over the terms of the agreements. A small cadre of government officials often negotiates the contract outside of a democratic or legislative procedure. Government officers personally meet the preselected private company and lawyers, in small groups away from the legislature and the public, to discuss the terms of the concession agreement as though it were a traditional private contract. In the case of the Cochabamba concession...

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