Bucharest Multi Sector – Public Private Partnership

1. Bucharest Multi Sector – Public Private Partnership PPP Recommendation Report – Bucharest District Heating Municipality of Bucharest – February 2006

2. 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. 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. 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. PPP - Project Structure and State Market Survey RADET: Internal Restructuring Plan CGMB approval  Phase I PPP Recommendation Report CGMB approval Phase II PPP tender / contract

6. 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. 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 operation • Tallinna Kute in Estonia – Concession, using a SPC • Fernwaerne 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. 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. Transform RADET into a profitable customer-oriented organisation Customer Customer management - new division in RADET Improve co-operation with existing customers Improve the image of RADET Develop the marketing activity C1 C3 C2 C4 Finance Productive and non-productive cost reduction Transform RADET into a profitable company F3 F5 Efficient mechanism for tariff set-up and approval Cost centers per operational processes Re-organise the Financial Department F2 F1 F4 Processes Management of External Thermal Energy Producers - new department in RADET Separation of operation and maintenance activities Relationship with Regulatory bodies and Municipality - new department in RADET Increase the role of Dispatching Unit P3 P7 P4 P6 Define and apply performance criteria per process Streamline the activity of RADET towards the needs of its customers Investment division - new division in RADET P2 P1 P5 Organisation Implement the Management Information System Define strategy (10 years) and Business Plan (4 years) Detail strategy and BP per divisions and departments O5 Externalise non-core support activities O9 O6 O10 Motivate and streamline the workforce Apply for an Integrated Quality - Environment - H&S Management System Clarify the status of assets forming the public domain Negotiation of operation contract with CGMB O2 Externalise DH activities in Buftea and Otopeni O1 O11 O8 O13 Lobby for separate tariff for thermal energy supply Define the future role of RADET Smart outsourcing of maintenance activities Certification of existing Quality Management System O7 O3 O4 O12 Balanced Restructuring Map

10. 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. Prerequisites for a successful PPP implementation (2) • 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 For a PPP success, the Municipality should continue its positive efforts to eliminate the negative external factors.

12. 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. 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. 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 Casa Presei The different analysed PPP models

15. Method of the Detailed Comparative Analysis SWOT analysis Risks assessment +

16. Risks assessment results The risks assessment 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. + Evaluation and repartition of their negative impact on the level of Public Service Quality

17. 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.