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CASE STUDY: CONCESSION OF TALLINN HEATING COMPANY

CASE STUDY: CONCESSION OF TALLINN HEATING COMPANY. Risto Vahimets In Vilnius, November 23, 2006. Brief History of Tallinn Heating Co. Tallinn Heating Co wa s the only district heating company in Tallinn. It was engaged in supplying the town with thermal energy and hot water.

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CASE STUDY: CONCESSION OF TALLINN HEATING COMPANY

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  1. CASE STUDY:CONCESSION OF TALLINN HEATING COMPANY Risto Vahimets In Vilnius, November 23, 2006

  2. Brief History of Tallinn Heating Co • Tallinn Heating Cowas the only district heating company in Tallinn. It was engaged in supplying the town with thermal energy and hot water. • Until 1996, heat energy in Tallinn was supplied by two companies: • ME Linnasoojus • Tallinna Soojusvõrk • ME Linnasoojus owned and operated 46 local boiler houses and distributed both heat generated in its own boiler houses as well as heat purchased from Tallinna Soojusvõrk. Tallinna Soojusvõrk, an operating unit of AS Eesti Energia, owned and operated 5 large boiler plants and the main pipelines and distribution networks.

  3. Tallinn Heating Company created • Based on the decree of the Government of Estonia of January 12, 1996, and the decree of the Tallinn City Council of February 14, 1996, all the assets and liabilities of Tallinna Soojusvõrk were transferred to ME Linnasoojus. On March 15, 1996, AS Tallinna Soojus (Tallinn Heating Co), the main supplier of heat energy in the City of Tallinn, was formed on the basis of ME Linnasoojus.

  4. Business • The company owns power plants and networks; • More than half of heat capacity is purchased from Eesti Energia Iru combined production power plant; • The company sells to private consumers, businesses as well as large apartment houses.

  5. TALLINN HEATING CO IN 1999/00 • Heat sales - 2402GWh • Heat purchased - 1364GWh • Heat production - 1038GWh • Leakages - 20,7% • Pipe network - 445km • Net Sales - 693mEEK • Profits - (-49mEEK) • Tariffs: • In local networks 359 EEK/MWh • In central network 349 EEK /MWh • Employees - 419

  6. Choices in 2000 • City remains the operator? • Privatization? • Concession?

  7. Timeline – decisions made • On July 5, 2000 Tallinn City government formed a panel for arranging of sale of shares in Tallinn Heating Co; • On April 19, 2001 Tallinn City government formed a panel for finding a strategic partner for Tallinn Heating Co; • On May 31, 2001 Tallinn City Council decided to give its consent to the concept of giving a 30 years concession for the enterprise of Tallinn Heating Co; • On June 21, 2001 Tallinn City government formed a panel for arranging of the concession of Tallinn Heating Co enterpise; • On September 17, 2001 final tenders were invited from qualified bidders for 30 year concession; • On October 31, 2001 Tallinn City government gave its consent to sign a concession agreement with AS Tallinna Küte (subsidiary of Dalkia International S.A.) • On January 1, 2002 the concession agreement came into force. • On January 1, 2032 the concession will expire.

  8. Timeline, tender process • Announcement; • Issuing of the information memorandum; • Deadline for qualification applications; • Qualified Bidders selected; • Issuing of the draft Enterprise Lease by the Tallinn HeatingCompany; • Due diligence period for all Qualified Bidders; • Enterprise Lease negotiations with all Qualified Bidders; • Final clarifications and changes to the invitation to tender; • Submission of final proposals for Enterprise Lease; • Final Bid date; • Preferred and Second Best Bidder selected; • Final negotiations with the Preferred Bidder; • Signing; • Closing.

  9. How was the winner elected? • Tallinn City used the following evaluation criteria: • Concession payments (30% weight); • Proposed heat price changes for customers during 6 years (30% weight); • Business plan (30% weight); • Experience (10% weight).

  10. Concession agreement in brief • 30 years term; • The enterpise of the Tallinn Heating Co (all assets, rights, liabilities, employees and agreements) transferred under the concession, so called “enterprise transfer” concept under Estonian law was used for a first time for such a large transaction; • Services Levels under the Concession and rights of the Tallinn City to monitor were agreed; • Safety, Security and Environmental conditions agreed; • Extensive reporting requirements for the concessionaire; • Tariff ceilings were agreed; • Concessionaire gave a performance bond; • Rules for replacement of assets and returnal of assets as well as sale of new assets acuired to the enterprise were agreed, i.e. returnal of enterpise (all rights, liabilities, employees and agreements); • Other customary provisions.

  11. Why do a ppp like this? • Need for cash? • Lack of cash for investment? • State or city are not good managers for businesses? • Anti corruption measure? • Better services/prices for consumers?

  12. TALLINN HEATING CO IN 2005/06 [1] • Heat sales - 1757GWh 2402GWh in 2000 • Heat production - 890GWh 1364GWh in 2000 • Heat purchases - 1219GWh 1038GWh in 2000 • Pipe network - 390km 445 km in 2000 • Leakages - 17% 20,7% in 2000 • Net Sales - 720mEEK 693mEEK in 2000

  13. TALLINN HEATING CO IN 2005/06 [2] • Profits (excl. concession payments to the city) - 131mEEK -49mEEK • Tariffs: - 451 EEK/MWh 359EEK/MWh • Employees - 274 419

  14. How does it look so far? [1] • Need for cash? • City did receive 210MEEK initial payment and is receiving annual concession payments. That was big money then. Not anymore. • Lack of cash for investment? • That was definitely an issue for the city and was solved well by the concession. Would Tallinn have money for investments today? Yes it would, city has a surplus budget. • State or city are not good managers for businesses? • Leakage reduction, profitability, reduction in the number of employees seem to indicate this. Markets have also reduced, but not that much.

  15. How does it look so far? [2] • Anti corruption measure? • One of the most prominent drivers for Estonian privatizations. • Better services/prices for consumers? • Better services definitely. Better prices – may be. A good portion of money from consumers goes to City budget and can be used for other purposes. I.e. city chose cash over customer tariffs to some extent. On the other hand tariffs have not increased significantly.

  16. Thank you! Risto Vahimets Tark & Co Roosikrantsi 2 Tallinn, 10119 Estonia Tel: +372 6 110 900 Fax: +372 6 110 911 www.tarkco.com Risto.Vahimets@tarkco.com

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