Operating Risk Transfer

Operating risk transfer is the legal test that separates a concession contract from a standard public contract. Without it, no arrangement can lawfully be treated as a concession under EU or UK procurement law. Understanding precisely where this boundary sits, and how to structure contract terms to sit clearly on one side or the other, is essential for both contracting authorities and bidders across Europe.

What is Operating Risk Transfer?

Directive 2014/23/EU, Recital 18 and Article 5, defines the operating risk as the risk of exposure to the vagaries of the market. That risk must be real: there must be a genuine possibility that the concessionaire will not recoup its investments or costs. A theoretical, nominal, or negligible transfer of risk is insufficient.

The directive identifies two principal components of operating risk:

Demand risk is the risk that actual demand for the works or services is lower than expected at the time of award. If a toll road concessionaire is exposed to the possibility that fewer vehicles will use the road than projected, and that shortfall directly reduces its revenues, that is demand risk sitting with the concessionaire.

Availability risk is the risk that the concessionaire is penalised for failing to deliver the required standard or volume of output. In availability-based contracts, the authority makes periodic payments tied to the asset being available and performing correctly. If those payments are deducted when the asset is unavailable, the concessionaire bears availability risk.

A contract transfers operating risk if the concessionaire faces genuine exposure through either or both of these mechanisms. A contract does not transfer operating risk if the authority guarantees minimum revenues, underwrites shortfalls, or makes payments regardless of usage or performance. In such cases, the arrangement must be treated as a standard public contract under Directive 2014/24/EU or 2014/25/EU.

The Court of Justice of the EU has developed this doctrine through case law (most notably in cases such as Eurawasser and Privater Rettungsdienst) that pre-date the 2014 directive. The directive codified these principles, making the operating risk requirement a formal statutory test rather than purely a judicial construction.

Why operating risk transfer matters for bidders

The legal classification of a contract as a concession determines which procurement rules apply, which review mechanisms are available, and how the financial model must be structured. Bidders who assume a contract is a concession but find it reclassified as a standard public contract may face a completely different procurement process, different transparency obligations, and different challenge rights.

More practically, operating risk transfer defines the financial risk profile of the contract. A concessionaire carrying genuine demand risk over a 25-year concession duration must model downside revenue scenarios, fund a reserve account, and satisfy lenders that the project is bankable under stress conditions. A contract with guaranteed availability payments is a different financial proposition entirely, even if it looks similar in structure.

Bidders should analyse the draft contract's risk matrix, revenue mechanism, deduction regime, and force majeure provisions carefully before concluding that operating risk has been genuinely transferred.

Example

A Norwegian county authority commissions a new ferry service under two alternative contract structures. In structure A, the operator collects fares directly and the authority pays no subsidy. If passenger numbers fall, the operator absorbs the loss. Operating risk is clearly transferred. In structure B, the authority pays a fixed annual fee regardless of passenger numbers, and the operator keeps fares as additional income. If the fixed fee is sufficient to cover costs in virtually all scenarios, operating risk has not been genuinely transferred, and structure B is a standard public services contract.

Frequently Asked Questions

Can a contracting authority provide a minimum revenue guarantee and still call the arrangement a concession?

Only if the guarantee does not eliminate substantial risk. A modest floor guarantee that covers catastrophic demand collapse but still exposes the concessionaire to normal commercial variability may be compatible with concession classification. A guarantee that ensures cost recovery under virtually all realistic scenarios is not. The Court of Justice of the EU and national courts have examined this question in several cases, and the answer is always fact-specific.

What happens if a contract is mis-classified as a concession?

If a contract is awarded as a concession but should have been treated as a standard public contract, the award may be challenged for failure to follow the correct procurement procedure. In EU member states, remedies directives provide for ineffectiveness orders (voidance of the contract), financial penalties, and contract shortening. In the UK, the Procurement Act 2023 remedies framework applies.

Does operating risk transfer require the concessionaire to collect revenue directly from users?

No. The concessionaire may receive payments from the contracting authority rather than directly from users, provided those payments are genuinely variable and linked to performance or usage. An availability-based payment regime where deductions are significant and real does constitute operating risk transfer. What matters is not the payment mechanism but whether the concessionaire faces a genuine possibility of financial loss.