Prsentation PowerPoint

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PPP Projects in the Heating Sector Lithuanian
Private Perspective
2006, November 22th 23rd VILNIUS
Jean SACRESTE
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Dalkia in Lithuania First heat supplier and first
CHP operator Through PPP agreement (concession)
30

Birzai
(2003)
15
Palanga
(2000)
15
(2000)
Telsiai
15
Kelme
(2000)
Carte
- 10 implantations - About 45 of market share -
CA -137 M Euros (2005) - 1500 employees -
Heat production - 3,2 TWh/year - Electricity
production - 1,1TWh/year - More than 700 000
people heated - 970 km of main pipes
15
(2000)
Kazlu Ruda
20
(2000)
Vilkaviskis
25

15

Alytus
(2001)
15
25
Vilnius
Marijampole
30
Litesko 1312 MW th
(2002)
(2000)
Druskininkai
(2003)
Vilniaus energija 2357 MW th. 384 MW el.
15 duration of lease agreement (2000) Date of the
contract
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Two examples of PPP in District Heating Sector in
Lithuania, Vilnius and Marijampole
Marijampole In 2000, was signed lease agreement
for 15 years between Litesko (Dalkia) and the
municipality of Marijampole. In 2004, the
agreement was prolonged by 10 additional years
including new commitments for Litesko Vilnius In
2002, was signed lease agreement for 15 years
between Vilniaus energija (Dalkia) and the
municipality of Vilnius How and why these
contracts fulfilled needs of the two
municipalities? First because the form and the
spirit of the agreements where ownership stays in
public hands and operations in private ones under
the control of the Regulator
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The  business model  of Dalkia in Lithuania

• Lease agreement (concession scheme) 15 to 30
  years
• Renting of assets to the municipal heating
  company. Transfer of activity, staff and
  liabilities
• Commitment on investments to modernize and
  renovate, with commitment to give back assets
  with, as a minimum, the same book value as it was
  at the beginning of the contract
• Heat tariff indexed on a formula (external
  index gas price, inflation, etc), under the
  control of Price Commission
• Payment of renting fees to cover taxes, cost of
  control and municipal fee

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WHY SUCH A MODEL?
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District Heating Network Types of Management
Scheme

• Regarding existing DHN many solutions exist
• State or Municipal company, owner of the assets
  and operator of the facilities
• Private company (more frequently after a
  privatization scheme)
• Former Municipal company progressively
  transformed in an quasi independent company (eg.
  some German Stadtwerke)
• JV between municipality and a private company to
  create an operating company with or without
  transfer of ownership of assets to this operating
  company
• Concession to an operator with various solutions
  regarding commitments on assets (maintenance,
  renovation, new devices)

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The two main models

• In fact all these cases can be summarized in two
  main models for District Heating
• Privatization
• Concession (or lease agreement)
• Privatization means that the local authority
  sells to one company the DHN, assets,
  commitments, business without term. This
  privatization can be total or partial
• NB If local authority keeps more than 50 or
  golden shares with direct control of operations,
  it is not really a privatization
• Concession means that the local authority
  transfers to one company the operation of the DHN
  with some commitments on assets and other aspects
• NB We must not make confusion between legal
  scheme (what kind of transfer) and type of
  regulation. Inside a privatization scheme, prices
  and other conditions connected to public service
  can be (and are) defined

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What are the issues?

• Basically, for the local authority, the main
  questions regarding possible evolution of an
  existing DHN are
• Does the local authority want to keep the control
  of operations?
• Does the local authority want to keep the
  ownership of the assets?
• How is the situation regarding long term debts
  and the capacity to invest and to find financing?
• What is the long term policy of the local
  authority regarding infrastructure?
• What are the main needs of people supplied by the
  DHN?
• Do exist, outside the issues specific to the DHN,
  some constraints able to influence choice?

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Why to choose a lease model instead to choose
to privatize?

• EVERYTHING DEPENDS ON CHOSEN CRITERIA

• CRITERIA FOR STATE OR LOCAL AUTHORITY OWNER OF
  THE FACILITIES
• IMMEDIATE INCOME
• LT GUARANTEE ON ASSETS
• PRICE FOR END USERS
• SOLUTIONS FOR SOCIAL/MANAGERIAL PROBLEMS
• ..

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2 ...............................................
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• CRITERIA FOR END USER/FINAL CUSTOMER
• PRICE
• COMFORT
• EASY RELATIONSHIP WITH SUPPLIER

• The Local Authority MUST CHOOSE

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What were the choices of Municipalities?Example
of Vilnius

• In 2001, Vilnius Municipality who were facing
  more and more issues regarding future and
  sustainability of its District Heating, chose to
  launch an international tender for a 15-year
  lease agreement, with goal to reach specific
  targets.
• - Decreasing of tariff, keeping predictability of
  future evolution
• Keeping ownership of assets and control on them
• Securing a modernization plan for the facilities
  first by focusing on demand side and renewal of
  the network
• Transferring debts and liabilities from
  municipal budget
• Obtaining long term income for the budget
• All these needs led the municipality to choose a
  concession scheme similar to what had be done in
  Marijampole, Alytus, and in many cities in
  Europe

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WHAT ARE THE ADVANTAGES OF A CONCESSION SCHEME?
B
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FOR THE COMMUNITY REPRESENTED BY LOCAL AUTHORITY
OR DIRECTLY BY THE STATE

• KEEPS THE OWNERSHIP OF ASSETS
• - LONG TERM POLICY OF INFRASTRUCTURE
• - EG 20-50 YEAR POLICY VERSUS 15-25 CONTRACT

• CAN ENSURE LIMITATION OF PRICES AND THEIR
  EVOLUTION TO END USERS

• SETS UP A CLEAR COMMITMENT REGARDING
• - MEASURABLE RESULTS
• - INVESTMENTS (LONG TERM PLAN, REORIENTATIONS
  AND EVOLUTIONS, )

• TRANSFERS MANAGEMENT OF DAY-TO-DAY OPERATIONS TO
  A PRIVATE OPERATOR,
• INCLUDING STAFF ISSUES (MOTIVATIONS, ADJUSTMENTS,
  CAREER EVOLUTION,)

• RECEIVE A RENTAL FEE OR EQUIVALENT

• AT THE END OF THE CONTRACT GETS BACK A
  RENEWED PUBLIC SERVICE COMPANY WITH INCREASED
  VALUE ON THE MARKET

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FOR THE END USER

• GETS POSITIVE IMPACT ON LEVEL OF PRICES. (IN
  VILNIUS HEAT PRICE FOR INHABITANTS WAS
  IMMEDIATELY DECREASED BY 5)

• GETS TRANSPARENCY OF PRICES AND THEIR EVOLUTION

• HAS A COUNTERPART FOR ANY CLAIM OR
  INSATISFACTION
• - CHANGES HIS STATUS FROM USER TO CLIENT

• PAYS FOR A SERVICE, NOT A TAX

FOR THE REGULATORS

• GLOBALLY THEY KEEP THE SAME ROLES AND
  RESPONSIBILITIES, MAYBE WITH ADDITIONAL DEGREES
  OF FREEDOM TO CONTROL PRICES AND INVESTMENTS

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FOR THE PRIVATE OPERATOR

• OPERATES A LONG TERM CONTRACT ON CLEAR BASES
  ALLOWING TO MANAGE PROFIT THROUGH IMPROVEMENT OF
  EFFICIENCY AND PRODUCTIVITY

• KNOWS HIS COMMITMENTS AND CAN PLANIFY HIS ACTION

• HAS A DIRECT RELATIONSHIP WITH END USER

• DOES NOT BUY HIS CONTRACT. THUS CAN HAVE A
  NORMAL PROFIT NO NEED TO INCREASE PRICES IN
  ORDER TO FINANCE THE PURCHASING COST CF.
  CRITERIA ABOVE NO RETURN ON EQUITY

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KEY FACTORS TO SUCCESS

• POLITICAL DECISION
• CLEAR AND TRANSPARENT TENDERING PROCESS
• CLEAR DEFINITION OF GOALS AND RESPONSIBILITIES OF
  PARTNERS
• EFECTIVE MECHANISM TO SOLVE DISPUTES
• BALANCE OF INTERESTS BETWEEN PRIVATE OPERATOR,
  LOCAL AUTHORITIES AND CONSUMERS

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Key Factors of Success (II)
Long term lease agreement (concession scheme of
15 30 years) with commitments on price,
investments and liabilities
95 MEuros invested in Vilnius District Heating in
the first 5 years Erection of green CHPs,
Technical approach and investments
Legal agreement (contract)
ISSUES
Focus on client ( customer centers, surveys,
price policy, elimination of group substations,
individualization)
Orientation to final customer

• Conditions of success are
• Good understanding of local issues
• Clear political decision (e.g. in Vilnius and
  Marijampole Municipalities)
• Be flexible and reactive, close to local issues

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And now, what will be?
After seven years of quasi stability of heat
prices, Lithuania faces a new issue, the dramatic
increase in gas cost 45 in January 2006 A
similar increase planned for 2007 and 2008 (maybe
more !) That implies investments for
diversifying fuels (around 19 of fuels for
heating are from biomass) and increasing
efficiency (development of CHP connected to
district heating, reduction of heat losses,
individualization of heating at flat level,
) We need operators focusing on solutions. PPP
will be a good tool to mobilize funds and to
realize efficient investments for future
infrastructure through clear commitments Coupled
with a policy of improvement of building
insulation, we can reach a double target
increasing independency from Russian gas and
decreasing in heat cost for inhabitants
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CONCLUSION
Experience of Dalkia in District Heating in
Lithuania proved that PPP could be a prospective
and efficient solution It allows a cooperation
between local authorities in charge of long term
infrastructure policy and a private operator
aimed to renew this infrastructure in the most
efficient way strongly, oriented towards
clients It supposes common view on goals and
targets with clear milestones it is not
the easiest way, we think it is a good one