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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.
8
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
9
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
10
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
11
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.
12
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.
13
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.!
14
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
15
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
Solution 3 Solution 4
Solution 5 Solution 0
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
Solution 0 Solution 1 Solution 2
3
4
5
S
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
Solution 0 Solution 1 Solution 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.
(-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.
1 - Minor specificity → 5 - Significant specificity
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.
1 - Minor specificity → 5 - Significant specificity
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
(-1) - Minor specificity → (-5) - Significant specificity
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
Solution 0 Solution 1
(-1) - Minor specificity → (-5) - Significant specificity
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
Solution 0 Solution 1
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
Generation privatisation
180 240 300
Risk
SW
OT
SWOT / Municipality's Risk comparison
RADET today
Private management
Private operation
Concession
RADET privatisation
Generation privatisation
50 110
Municipality's Risk
SW
OT
SWOT / Municipality's Risk comparison
RADET today
Private management
Private operation
Concession
RADET privatisation
Generation privatisation
50 110
Municipality's Risk
SW
OT
16
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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