Background
The dispute centred on a concession agreement for the construction of a waste transfer station with solid municipal waste sorting facilities, concluded on 6 October 2022, between Aiylga LLC and the Republic of Sakha (Yakutia).During the inspection, the prosecutor’s office identified systemic violations involving the misuse of budgetary funds allocated as the concession grantor’s fee. An analysis of the expenditure revealed the following:
- Discrepancies with the estimate: the composition and scope of certain works specified in the reports did not fully correspond to the design and estimate documentation;
- “Excess” work: some of the work charged for payment was not included in the estimate documentation; and
- Fictitious/unconfirmed volumes: there was no actual confirmation of the completion of certain works.
The concessionaire in the case under consideration contested the violation of budget legislation and the terms of the concession agreement, relying on the fact that budgetary funds were spent in accordance with the purposes defined in the concession. The concessionaire’s position was based on the following:
- Argument regarding timing: since construction of the facility is not complete, and the deadline for fulfilling the concessionaire’s obligations has not yet arrived, there are no grounds for verifying the quality and compliance of the completed work; and
- Procedural violations: the concessionaire insisted that the prosecutor’s office’s submission was incorrect, which, in particular, lacked indications of the specific rules of law violated, the specific expenses deemed inappropriate, and proposals for eliminating the violations of the law, etc.
- Firstly, the court stated that the non-expiry of the concession does not preclude the prosecutor’s office from overseeing compliance with legislation during the implementation of national projects;
- Secondly, the court established instances of misuse of budgetary funds, since some of the work and/or its cost were not included in the estimate documentation, or there was no actual confirmation of completion of the work; and
- Thirdly, the court distinguished between the concepts of “quality of work” and “targeted expenditure of funds”. Discrepancies between the scope and volume of work financed using budgetary funds and the estimate documentation constitute a direct violation of budget legislation, irrelevant to the quality of the unauthorised work performed.
Practical outcome and risks for market participants
The case under consideration is not just a routine dispute between economic entities, but a marker of changing government policy in the field of PPPs. A clear conclusion can be drawn: the era of “flexible” budgetary fund allocation under concessions is ending. The market is entering a phase of strict public financial control. Concessionaires are increasingly finding it difficult to rely on the long-term nature of the agreement or the possibility of subsequent adjustments when it comes to spending budgetary funds here and now.Advice for market participants
- Budget discipline: treat budget documentation that has undergone a state review as an immutable law. Any deviation may entail the risk of expenses being deemed inappropriate.
- Transparency of performance: implement mechanisms that prevent the payment for work without actual confirmation of its completion. Fictitious or unconfirmed volumes can be identified not only during final acceptance but also during ongoing supervision.
- Inadmissibility of arbitrary interpretations: the argument that “a concession is not a government contract” is practically ineffective when it comes to budget expenditure. Control is becoming equally strict for all forms of public investment.
