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Construction and PPP/PFI: Market “contra legem”
Long-term concessions provide governments keen to deliver quality infrastructures with both public control and the private management of operations. The concession contract is critical as it defines the commercial and operational parameters of the project and regulates the parties’ rights and obligations.
A main feature of the concession contract is striking a balance in risk allocation between the concessor and the concessionaire in all major project areas, including matters such as political events, changes of law, economic factors, competition, pricing, and legislative authority. However, conditions do sometimes change fundamentally and unexpectedly over the duration of the contract making it difficult to preserve the balance. The principle of "efficient financial equilibrium" is the concessionaire's remuneration basis, in other words, allowing it to earn a fair rate of return on its investments.
In late 2004 the Portuguese Government ("Concessor") concluded a concession contract with BRISAL - Auto-Estradas do Litoral, S.A. ("the Concessionaire"), for the conception, financing, project implementation and maintenance of large sections of motorway and associated services in the centre coastal region of Portugal.
The Concessionaire also concluded, with certain public works contractors (Litoral Atlântico, Construtores, ACE), a contract for the actual construction of the relevant sections of motorway ("the Contractors"). During the course of these works certain exceptional events occurred which significantly delayed construction as well causing unforeseen costs, in particular, circumstances arising from the environmental impact evaluation undertaken, amongst others.
Specifically in relation to the environmental problems, the Ministry for Environment issued an unfavourable Environment Impact Declaration (EID) which concluded that the environmental viability of the construction areas did not guarantee that the execution of the project would comply with applicable legal limits on noise emissions.
The Concessionaire proceeded to challenge this decision arguing that, within the environmental impact evaluation procedures, if certain legal formalities had been followed, which were disregarded, then it is likely that the EID would have been granted.
The challenge was successful and by order of the Secretary of State for Environment the unfavourable EID was set aside and subsequently a favourable one issued. However, these steps affected the execution and expropriation project works and ultimately resulted in a four month delay in the commencement of the construction works.
The liability of the Concessor for this delay was recognised by the Secretary of State for Environment, however, the former refused to acknowledge its liability for the circumstances or their consequences on the contract, namely in relation to the construction completion time limits.
This is a recurring problem in concession contracts which relates in short to the "Owner of the Works" refusing to acknowledge any circumstances claimed against it which might result in an extension to the time limits and increase in the respective associated costs. This approach has in certain circumstances very serious negative consequences on the financial equilibrium of the contracts and construction companies which are forced to take on additional costs not anticipated when putting together their initial budgets and which are subsequently irrecoverable.
In addition, this almost systematic refusal to agree to extend the contractual time limits for completion of the works forces the contractors to accelerate their work, in an attempt to comply with previously established deadlines to avoid the application of significant contractual penalties.
Despite being aware of the position adopted by the Central Government, as exemplified above where the Secretary of State for Environment set aside the unfavourable EID, there continues to be a trend of not recognising problems when they arise which are in no way the fault of the contractors, and forcing them to increase their efforts to meet contractual commitments without being compensated for this.
The result of this is that most companies involved in the construction of public infrastructures, particularly in the area of motorways, complete these works by running up enormous losses which, in the great majority of cases, cannot be attributable to them and result from difficulties and delays outside of their control.
This situation is not helped by the initial approach of contractors who, eager to get in the work and due to cash flow problems, have a tendency to quickly agree and sign up to ill considered and disadvantageous agreements due to the need to ensure that financial resources are in place.
This pressure to get financing and agreements in place quickly results, in practice, to companies giving up legitimate claims and the enforcement of their rights under contractually established dispute resolution mechanisms with obvious, avoidable and consequent losses.
Whilst it is undeniable that there is great public interest in ensuring that fundamental motorway infrastructures are concluded as quickly as possible, this should not be done by railroading or rejecting the legitimate interests and rights of construction companies operating in that sector and which consequently also play important roles in the economy as a whole. Certainly this is the intention behind the applicable legislation and the contracts which are executed but not the practice of the Portuguese State.