Trapec S.A. 1 Bucharest Multi Sector – Public Private Partnership Municipality of Bucharest –...

1

Trapec S.A.

Bucharest Multi Sector – Public Private Partnership

Municipality of Bucharest – February 2006

PPP Recommendation Report

– Bucharest District Heating

2

Trapec S.A.District Heating in Bucharest today

RADET, the public DH operator, is facing problems, the most important are:

- Technical losses (decreasing from about 24% of the produced heat to around 15% in 2005)

- Disconnections from the DH network, competition with Natural Gas deliverer (decreasing from about 4707 in 2004 to around 1500 in 2005)

- Financial losses (2005 – the first profitable year since 2001)

The financial resources of RADET and the Municipality are insufficient to solve these problems in a satisfying way in near future

3

Trapec S.A.The Commitment of the Municipality towards EBRD

April 2003, a loan agreement between the EBRD (European Bank for Reconstruction and Development) and the General Council of the Municipality of Bucharest has been signed.

Among others, that agreement specified that a PPP – Public-Private Partnership has to be implemented within 24 months.

Therefore the TOR for the consultant focused only on PPP solutions.

No public-only solution has been analysed!

4

Trapec S.A.Why to involve a Private Partner in a Public activity?

The main results to be expected from a PPP agreement:

Acceleration of infrastructure modernisation and faster implementation of investment projects due to higher financial capabilities.

Reduced costs of operation through optimized processes.

Reduced risk allocation for the Municipality through risk sharing with the private partner.

High incentives to perform and improve quality of service delivered through direct correlation between financial returns and efficiency.

5

Trapec S.A.

Phase I

PPP tender / contract

Market Survey

PPP Recommendation Report

RADET: Internal Restructuring Plan

CGMB approva

l

Phase II

CGMB approva

l

PPP - Project Structure and State

6

Trapec S.A.Results of the project: Market Survey

Market Survey (finalised in December 2004)

• overall and general presentation of PPP concepts

• Detailed presentation of the legal and regulatory framework in Romania related to District Heating

• Presentation of different PPP case studies in Romania and Europe

PPP models for DH systems are possible and used and have the potential to be good solutions.

7

Trapec S.A.Collecting Real Time Information

In October 2005, a mission has been organised, in order to visit different European district heating organisation.Representatives of the General Council, of RADET and of the Municipality participated in that mission.

The visited DH operators were:Boras Energi in Sweden – Private operationTallinna Kute in Estonia – Concession, using a SPCFernwaerne Zurich in Switzerland – 100% Public operation

Main lessons learned:- All these solutions have advantages and disadvantages- All solutions are proofed to be successfully in practice - All the actors of these solutions are ready to support Bucharest in its

task → The Bucharest municipality is not alone!!!- An important success factor of all solutions are the actors behind the

solution.

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Trapec S.A.Results of the Project: Internal Restructuring Plan

Internal Restructuring Plan (IRP) for RADET (delivered in Oct. 2004 and approved in Jan. 2005)

• Deep analyse of the activity of RADET, pointing out the different problems RADET is facing.

• Proposition of actions to be performed in order to solve these negative internal factors

• RADET is currently implementing the recommendations according their priorities

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Trapec S.A.Transform RADET into a profitable

customer-oriented organisation

Customer management - new division in RADET

Customer management - new division in RADET

Streamline the activity of RADET towards the needs of its customersStreamline the activity of RADET

towards the needs of its customers

Improve the image of RADETImprove the image of RADET Develop the marketing activityDevelop the marketing activityImprove co-operation with

existing customers Improve co-operation with

existing customers

Cu

sto

me

rF

inan

ceP

roce

sses

Org

anis

atio

n

Define and apply performance criteria per process

Define and apply performance criteria per process

Separation of operation and maintenance activities

Separation of operation and maintenance activities

Investment division - new division in RADET

Investment division - new division in RADET

Increase the role of Dispatching Unit

Increase the role of Dispatching Unit

Relationship with Regulatory bodies and Municipality -

new department in RADET

Relationship with Regulatory bodies and Municipality -

new department in RADET

Efficient mechanism for tariff set-up and approval

Efficient mechanism for tariff set-up and approval

Productive and non-productive cost reduction

Productive and non-productive cost reduction

Cost centers per operational processes

Cost centers per operational processes

Transform RADET into a profitable company

Transform RADET into a profitable company

Re-organise the Financial Department

Re-organise the Financial Department

Clarify the status of assets forming the public domainClarify the status of assets forming the public domain

Negotiation of operation contract with CGMB

Negotiation of operation contract with CGMB

Lobby for separate tariff for thermal energy supply

Lobby for separate tariff for thermal energy supply

Define the future role of RADET

Define the future role of RADET

Define strategy (10 years) and Business Plan (4 years)Define strategy (10 years)

and Business Plan (4 years)Detail strategy and BP per divisions and departmentsDetail strategy and BP per divisions and departments

Certification of existing Quality Management System

Certification of existing Quality Management System

Apply for an Integrated Quality - Environment - H&S

Management System

Apply for an Integrated Quality - Environment - H&S

Management System

Implement the Management Information System

Implement the Management Information System Externalise non-core support

activitiesExternalise non-core support

activities

Externalise DH activities in Buftea and Otopeni

Externalise DH activities in Buftea and Otopeni

Smart outsourcing of maintenance activities Smart outsourcing of

maintenance activities

Motivate and

streamline the

workforce

Motivate and

streamline the

workforce

Management of External Thermal Energy Producers - new department in RADET

Management of External Thermal Energy Producers - new department in RADET

C1

F1F2

F3

F4

F5

C2 C3 C4

P4

P3

P7

P1 P5

P6

P2

O5

O8O1

O2

O9O6

O3 O4 O12O7

O10

O11O13

Balanced Restructuring Map

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Trapec S.A.Results of the Project: PPP Recommendation Report

• Prerequisites for starting a PPP procedure

• Service quality standards

• Options for developing a PPP solution

• Comparative analysis of the solutions

• Conclusions and recommendation

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Trapec S.A.

External factors are important causes of the present situation of RADET

The elimination of these factors is a precondition for a successful PPP tender

External factors can’t be influenced by RADET…

… but by the CGMB commission and PMB departments, lobby work on national policy level is needed

Prerequisites for a successful PPP implementation (2)

For a PPP success, the Municipality should continue its positive efforts to eliminate the negative external factors.

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Trapec S.A.Performance standards

Heat supply is a public service in Romania- universality, continuity, quality, affordability and consumer

protection have to be respected.

How can the Municipality control the quality of the service if this one is externalised, namely to a private partner?

Performance standard have to be defined, depending on the investment options and influencing them.

Defined performance standard will permit to assess, monitor and correct the level of services for the clients.

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Trapec S.A.Performance standards

A preliminary list of indicators to be included in the future contract is proposed in the Recommendation Report, divided as follow:

- General indicators: they describe the quality of services

- Technical indicators: they influence the investment needs

The final performance indicators list can be elaborated only after carrying out a technical study and after having an investment plans. These indicators should also be approved by the General Council of Bucharest Municipality

Setting of the performance standard is crucial for the success and acceptance of the PPP solution in Bucharest.!

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Trapec S.A.The different analysed PPP models

Solution 1

Solution 2

Solution 3

Solution 4

Solution 5

Private Management of RADET

Private Operation, using a new Company

Concession Contract with a new Company

Concession Contract with RADET, after privatization

Privatization of 48 small Heat Only Boilers and CasaPresei

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Trapec S.A.Method of the Detailed Comparative Analysis

0

50

100

1501. M arket risks

2. Social risks

3. Contract risks4. Investment risks

5. Operational risks

Solution 1 Solution 2



Mark max.

1 - Minor specificity → 5 - Significant specificity

New mechanism for managing existing RADET contractual liabilities towards his suppliers - √ 1 √ 2 √ 2 √ 2 √ 1

Continuation of restructuring programme according to PP objectives √ 1 √ 1 √ 2 √ 2 √ 2 √ 1

Transfer of operation and management know-how from the private operator - √ 0.5 √ 2 √ 2 √ 2 √ 1

Easy to be implemented √ 2 √ 0.5 - - - √ 1

Medium / Long term of P-P partnership (6…49 years) - - √ 2 √ 2 √ 2 √ 1

Existing private property assets of the Municipality to be used as shares in the new company - - √ 2 √ 2 √ 2 -

Implication of the operator to get a better relationship with clients and/or suppliers √ 0.5 √ 1 √ 2 √ 2 √ 2 √ 0.4

Specialisation of activities can have as result a better performance - - - - - √ 2

Immediate financial profit for Municipality resulting from selling the HoBs - - - - √ 2 √ 2

Positive experience of the PPP can be developed further on - √ 3 √ 2 - - -

New operation contract between Municipality and the operator - √ 0.5 √ 3 √ 3 - √ 0.5

Municipality control over the DH system operator (contractual) √ 1 √ 2 √ 3 √ 3 √ 2.8 √ 1.3

Profitable DH utility, resulting in profit for the new Commercial Company and royalty for Municipality - - √ 3 √ 3 √ 3 √ 2

Innovative solutions, brought by the PP, to motivate the client to pay the bills - √ 1 √ 2 √ 3 √ 3 √ 0.5

Commitment of the PP to get a sound company, able to offer the best price/quality ratio - √ 2 √ 2 √ 4 √ 4 -Acceptance of provisions of signed operation contract between PMB and RADET, in force at the moment of thePPP agreement signature

√ 2 √ 1.5 - - √ 4 -

Use private partner know-how and reputation for raising financing - - √ 2 √ 4 √ 3 √ 1

Positive experience in RADET (operation, dispatching) to be further used √ 4 √ 4 √ 2 √ 2 √ 2 √ 3.8

Better use of local financial resources - - 1 √ 2 √ 4 √ 4 √ 0.5

Existing experience of the Municipality in management of concession agreements (APANOVA) - - √ 4 √ 4 √ 4 √ 0.5

New local regulatory authority to monitor the PPP contract - - √ 4 √ 4 √ 4 √ 0.5

Capitalisation of the new company through the contribution of the private partner - - √ 2 √ 3 √ 4 -

Existing know-how on large investment management √ 3 √ 3 √ 2 √ 5 √ 5 √ 1Operator not in charge with the existing liabilities of RADET (EIB loan) - reliable partner for attracting funds fromIFIs, banks etc.

- - √ 3 √ 5 - √ 0.3

The private partner has an obligation of investment √ 1 - - √ 5 √ 3 √ 1.5

Sub-total S 14.5 22.0 48.0 64.0 59.8 22.8

Solution 3 Solution 4 Solution 5

2


3

4

5

S

Mark max.


New mechanism for managing existing RADET contractual liabilities towards his suppliers - √ 1 √ 2 √ 2 √ 2 √ 1

Continuation of restructuring programme according to PP objectives √ 1 √ 1 √ 2 √ 2 √ 2 √ 1

Transfer of operation and management know-how from the private operator - √ 0.5 √ 2 √ 2 √ 2 √ 1

Easy to be implemented √ 2 √ 0.5 - - - √ 1

Medium / Long term of P-P partnership (6…49 years) - - √ 2 √ 2 √ 2 √ 1

Existing private property assets of the Municipality to be used as shares in the new company - - √ 2 √ 2 √ 2 -

Implication of the operator to get a better relationship with clients and/or suppliers √ 0.5 √ 1 √ 2 √ 2 √ 2 √ 0.4

Specialisation of activities can have as result a better performance - - - - - √ 2

Immediate financial profit for Municipality resulting from selling the HoBs - - - - √ 2 √ 2

Positive experience of the PPP can be developed further on - √ 3 √ 2 - - -

New operation contract between Municipality and the operator - √ 0.5 √ 3 √ 3 - √ 0.5

Municipality control over the DH system operator (contractual) √ 1 √ 2 √ 3 √ 3 √ 2.8 √ 1.3

Profitable DH utility, resulting in profit for the new Commercial Company and royalty for Municipality - - √ 3 √ 3 √ 3 √ 2

Innovative solutions, brought by the PP, to motivate the client to pay the bills - √ 1 √ 2 √ 3 √ 3 √ 0.5

Commitment of the PP to get a sound company, able to offer the best price/quality ratio - √ 2 √ 2 √ 4 √ 4 -Acceptance of provisions of signed operation contract between PMB and RADET, in force at the moment of thePPP agreement signature

√ 2 √ 1.5 - - √ 4 -

Use private partner know-how and reputation for raising financing - - √ 2 √ 4 √ 3 √ 1

Positive experience in RADET (operation, dispatching) to be further used √ 4 √ 4 √ 2 √ 2 √ 2 √ 3.8

Better use of local financial resources - - 1 √ 2 √ 4 √ 4 √ 0.5

Existing experience of the Municipality in management of concession agreements (APANOVA) - - √ 4 √ 4 √ 4 √ 0.5

New local regulatory authority to monitor the PPP contract - - √ 4 √ 4 √ 4 √ 0.5

Capitalisation of the new company through the contribution of the private partner - - √ 2 √ 3 √ 4 -

Existing know-how on large investment management √ 3 √ 3 √ 2 √ 5 √ 5 √ 1Operator not in charge with the existing liabilities of RADET (EIB loan) - reliable partner for attracting funds fromIFIs, banks etc.

- - √ 3 √ 5 - √ 0.3

The private partner has an obligation of investment √ 1 - - √ 5 √ 3 √ 1.5

Sub-total S 14.5 22.0 48.0 64.0 59.8 22.8


2


3

4

5

S

Mark max.

(-1) - Minor specificity → (-5) - Significant specificity

Low/Medium solution impact on the thermal energy price / tariff level √ -2 √ -1.8 √ -1 - - √ -1.9

Low/Medium solution impact on the quality of service √ -2 √ -1.5 √ -1 - - √ -1.9

Short duration of P-P partnership (1-5 years) - -2 √ -2 - - - -

Non-performance of the operator (Low/Medium/High) √ -2 √ -1.5 √ -0.5 √ -0.5 √ -0.5 √ -1.9

Risk of non-acceptance by the operator of the “package” of legal agreements imposed by Municipality - - - - √ -2 -

Municipality is selling profitable assets (HoBs) - - - - √ -3 √ -3

Lack of Municipality's control related to the investment obligation for the privatised HoBs - - - - √ -3 √ -3

Difficult or no exit strategy for Municipality - - √ -2 √ -2 √ -3 √ -3

Impact of social issues during the restructuring process √ -1 √ -2 √ -3 √ -3 √ -3 √ -1.5

Operator in charge with the payback of existing liabilities (EIB loan) √ -3 √ -3 - - √ -3 √ -3.3

Positive experience in RADET not necessarily to be further used - - √ -3 √ -3 - √ -1

Value of assets (HoBs and goods of private property) not properly evaluated - - √ -3 √ -3 √ -3 √ -2.7Risk of unsuccessful transfer process from PMB to the new operator (assets - public and/or private property,resources, contracts, etc.) - - √ -3 √ -3 √ -3 √ -1.5

Present quality of the service not properly evaluated (performance indicators) - -3 √ -3 √ -3 √ -3 √ -3 √ -0.5

Supply tariff not in force √ -2 √ -2 √ -1 √ -1 √ -1 √ -1.8

Level of needed investments not properly evaluated √ -1 √ -1 √ -1 √ -3 √ -3 √ -0.5

Municipality still with high responsibility in coordination of the overall activity √ -4 - - - - √ -3.5

Municipality still with high responsibility in investment √ -4 √ -4 √ -4 - √ -2 √ -3.8

Difficult implemention of the PPP contract - √ -1 √ -2 √ -2 √ -4 √ -2

Sub-total W -26.0 -22.8 -27.5 -23.5 -36.5 -36.8

Solution 0 Solution 1 Solution 2 Solution 3 Solution 4 Solution 5

-4

-3

-2

W

Mark max.


Low/Medium solution impact on the thermal energy price / tariff level √ -2 √ -1.8 √ -1 - - √ -1.9

Low/Medium solution impact on the quality of service √ -2 √ -1.5 √ -1 - - √ -1.9

Short duration of P-P partnership (1-5 years) - -2 √ -2 - - - -

Non-performance of the operator (Low/Medium/High) √ -2 √ -1.5 √ -0.5 √ -0.5 √ -0.5 √ -1.9

Risk of non-acceptance by the operator of the “package” of legal agreements imposed by Municipality - - - - √ -2 -

Municipality is selling profitable assets (HoBs) - - - - √ -3 √ -3

Lack of Municipality's control related to the investment obligation for the privatised HoBs - - - - √ -3 √ -3

Difficult or no exit strategy for Municipality - - √ -2 √ -2 √ -3 √ -3

Impact of social issues during the restructuring process √ -1 √ -2 √ -3 √ -3 √ -3 √ -1.5

Operator in charge with the payback of existing liabilities (EIB loan) √ -3 √ -3 - - √ -3 √ -3.3

Positive experience in RADET not necessarily to be further used - - √ -3 √ -3 - √ -1

Value of assets (HoBs and goods of private property) not properly evaluated - - √ -3 √ -3 √ -3 √ -2.7Risk of unsuccessful transfer process from PMB to the new operator (assets - public and/or private property,resources, contracts, etc.) - - √ -3 √ -3 √ -3 √ -1.5

Present quality of the service not properly evaluated (performance indicators) - -3 √ -3 √ -3 √ -3 √ -3 √ -0.5

Supply tariff not in force √ -2 √ -2 √ -1 √ -1 √ -1 √ -1.8

Level of needed investments not properly evaluated √ -1 √ -1 √ -1 √ -3 √ -3 √ -0.5

Municipality still with high responsibility in coordination of the overall activity √ -4 - - - - √ -3.5

Municipality still with high responsibility in investment √ -4 √ -4 √ -4 - √ -2 √ -3.8

Difficult implemention of the PPP contract - √ -1 √ -2 √ -2 √ -4 √ -2

Sub-total W -26.0 -22.8 -27.5 -23.5 -36.5 -36.8

Solution 0 Solution 1 Solution 2 Solution 3 Solution 4 Solution 5

-4

-3

-2

W

Mark max.


2 Closer relationship with the clients (customer's service centers) √ 1 √ 2 √ 2 √ 2 √ 2 √ 1

Increased range of services (new requirements/needs) of the clients √ 0.5 √ 1 √ 2 √ 3 √ 3 √ 1

Economical development of the city, increasing the heat demand - √ 2 √ 2 √ 3 √ 3 √ 1

EU access including the implementation of the Acquis Comm. - √ 1 √ 3 √ 4 √ 4 √ 1

Capability of taking advantage of new technologies √ 0.5 √ 0.5 √ 2 √ 4 √ 4 √ 0.5

PMB playing role of "mediator" between the clients and the thermal energy suppliers - √ 2 √ 3 √ 4 √ 4 √ 0.5

Recognised name (brand) √ 1 √ 1 √ 4 √ 4 √ 1 √ 1

5New competitor on the thermal energy market (HOBs or future small cogen plants), influencing the developmentstrategy of the Municipality - √ 1 √ 3 √ 5 √ 5 √ 1

Sub-total O 1.0 8.5 19.0 27.0 24.0 6.0

Solution 5Solution 0 Solution 1 Solution 2 Solution 3 Solution 4

4O3

Mark max.


2 Closer relationship with the clients (customer's service centers) √ 1 √ 2 √ 2 √ 2 √ 2 √ 1

Increased range of services (new requirements/needs) of the clients √ 0.5 √ 1 √ 2 √ 3 √ 3 √ 1

Economical development of the city, increasing the heat demand - √ 2 √ 2 √ 3 √ 3 √ 1

EU access including the implementation of the Acquis Comm. - √ 1 √ 3 √ 4 √ 4 √ 1

Capability of taking advantage of new technologies √ 0.5 √ 0.5 √ 2 √ 4 √ 4 √ 0.5

PMB playing role of "mediator" between the clients and the thermal energy suppliers - √ 2 √ 3 √ 4 √ 4 √ 0.5

Recognised name (brand) √ 1 √ 1 √ 4 √ 4 √ 1 √ 1

5New competitor on the thermal energy market (HOBs or future small cogen plants), influencing the developmentstrategy of the Municipality - √ 1 √ 3 √ 5 √ 5 √ 1

Sub-total O 1.0 8.5 19.0 27.0 24.0 6.0

Solution 5Solution 0 Solution 1 Solution 2 Solution 3 Solution 4

4O3


Change of legal framework √ -3 √ -2 √ -2 √ -1 √ -1 √ -3.0

Change of regulatory framework √ -1 √ -1 √ -1 √ -1 √ -1 √ -1.0

Negative change of economical situation √ -2 √ -2 √ -1 √ 0 √ 0 √ -1.0

Change of local energy strategy √ -3 √ -3 √ -1 √ -1 √ -1 √ -3.1

Behavioural changes regarding the efficient use of heat √ -1 √ -1 √ -1 √ -1 √ -1 √ -0.9

Lack of political support √ -3 √ -3 √ -2 √ -1 √ -1 √ -2.4

Technological changes (new, cheaper DH solutions available for competitors) √ -1 √ -1 √ -1 √ 0 √ 0 √ -0.8

Increase of thermal energy price from the supplier (Elcen and IPP) √ -5 √ -1 √ -2 √ -2 √ -2 √ -5.0

Sub-total T -17.8 -13.3 -10.1 -7.2 -7.2 -17.3

Solution 4 Solution 5Solution 3Solution 2

T



Change of legal framework √ -3 √ -2 √ -2 √ -1 √ -1 √ -3.0

Change of regulatory framework √ -1 √ -1 √ -1 √ -1 √ -1 √ -1.0

Negative change of economical situation √ -2 √ -2 √ -1 √ 0 √ 0 √ -1.0

Change of local energy strategy √ -3 √ -3 √ -1 √ -1 √ -1 √ -3.1

Behavioural changes regarding the efficient use of heat √ -1 √ -1 √ -1 √ -1 √ -1 √ -0.9

Lack of political support √ -3 √ -3 √ -2 √ -1 √ -1 √ -2.4

Technological changes (new, cheaper DH solutions available for competitors) √ -1 √ -1 √ -1 √ 0 √ 0 √ -0.8

Increase of thermal energy price from the supplier (Elcen and IPP) √ -5 √ -1 √ -2 √ -2 √ -2 √ -5.0

Sub-total T -17.8 -13.3 -10.1 -7.2 -7.2 -17.3

Solution 4 Solution 5Solution 3Solution 2

T


SWOT analysis

+

Risks assessment

SWOT / Risk comparison

RADET today

Private management

Private operation

Concession

RADET privatisation

Generation privatisation

180 240 300

Risk

SW

OT

SWOT / Risk comparison

RADET today

Private management

Private operation

Concession

RADET privatisation


180 240 300

Risk

SW

OT

SWOT / Municipality's Risk comparison

RADET today

Private management

Private operation

Concession

RADET privatisation


50 110

Municipality's Risk

SW

OT

SWOT / Municipality's Risk comparison

RADET today

Private management

Private operation

Concession

RADET privatisation


50 110

Municipality's Risk

SW

OT

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Trapec S.A.The risks assessment

Evaluation and repartition of their negative impact on the level of

Public Service Quality

+

Risks assessment results

Total Municipality PP1. Market risks 79.78 10.63 69.15

2. Social risks 7.84 2.67 5.17

3. Contract risks 62.34 40.36 21.98

4. Investment risks 22.92 0.00 22.92

5. Operational risks 30.78 4.43 26.35

6. Force majeure 1.00 0.20 0.80

Solution 3 - Concession, using a new SPC

In the risks assessment, 6 categories of risks had been taken in account:

1 - Market risks regarding the existing

DH system;

2 - Social risks;

3 - Contract risks;

4 - Investment risks;

5 - Operational risks;

6 - Force majeure.

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Trapec S.A.Decision of the GCMB

GCBM should select the best option for DH Services in Bucharest and decide to continue the process with the implementation of the selected model.

Prior to every implementation the mentioned prerequisites have to be provided.

Trapec S.A. 1 Bucharest Multi Sector – Public Private Partnership Municipality of Bucharest –...

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