Concession Agreements and the Heat Supply System: Replacing Subsidies with Investment

ABSTRACT

This article considers a wide range of issues concerning the heat supply system in Novosibirsk Oblast and the Russian Federation as a whole. Concession agreements can be used as a tool to increase the efficiency and reliability of the heat supply, especially in population centers that are not attractive for large energy companies. Concession agreements also have their drawbacks. Based on a study of concessions in the Novosibirsk heat supply industry and interviews conducted with the initiators and participants of such projects, we describe the preliminary results and related problems of such concession agreements. In our study, we consider the use of concessions to modernize district heating systems in the urban type of settlement of Maslyanino and the town of Ob. The preliminary results of these projects showed that federal and regional budgetary investment made it possible to greatly reduce the subsidization of heat supply organizations. However, the possibility of replicating these results is limited due to a number of institutional and economic factors. The greatest risks for potential concessionaires are associated with tariff regulation based on “economically justified costs” and the high transaction cost of privatizing the district heating systems formerly operated by municipal unitary enterprises. We argue in favor of new mechanisms for financing concessions in the heat supply industry. These can significantly increase the attractiveness of such projects for private investors and reduce the need for regional and local budgets to subsidize unprofitable heat supply organizations.

KEYWORDS:

• concession agreement
• heat supply
• Maslyanino
• Novosibirsk Oblast
• Ob (town)
• project finance
• public–private partnership

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

^1. In January 2005, due to a failure of the heating system in the northern part of Rubtsovsk, the temperature in apartments and public institutions dropped to +5°C. Schools and clinics were forced to cease operations; some residents were forced to relocate to the houses of relatives and friends living in the southern part of the city. In a city with a population of 160,000 people, 70,000 people were affected by the accident. For details, see “Dolgaia doroga k al’ternativnoi kotel’noi,” Kommersant, November 21, 2018 (available at https://www.kommersant.ru/doc/3787080; accessed on February 10, 2019).

^2. N. Kobets, “Teploseti vyletaiut v trubu,” Ekspert-Sibir’, March 1, 2018 (available at http://expertsib.ru/article/5305; accessed on February 10, 2019).

^3. “Perspektivy kogeneratsii,” Energeticheskii biulleten’, April 2018 (available at http://ac.gov.ru/files/publication/a/16709.pdf; accessed on February 10, 2019).

^4. “Kto i kak voruet v kommunal’nom khoziaistve strany.” Komsomol’skaia pravda, November 16, 2011 (available at https://www.nsk.kp.ru/daily/25788/2770570/; accessed on February 10, 2019).

^5. Federal Law No. 190-FZ, “O teplosnabzhenii,” July 27, 2010 (available at http://docs.cntd.ru/document/902227764; accessed on February 10, 2019).

^6. The “alternative boiler plant” is the name of a new method for calculating heat prices in the thermal energy market. It is used to evaluate price relations between heat market participants. It does not refer to the building of physical boiler plants. In the literature, the method is also referred to as the “alternative boiler house.”—Trans.

^7. Federal Law No. 115-FZ, “O kontessionnykh soglasheniiakh,” July 21, 2005 (available at http://www.consultant.ru/document/cons_doc_LAW_54572/; accessed on February 10, 2019).

^8. According to a survey conducted by Concession Solutions LLC.

^9. Available at https://berdsk-online.ru/news/obshchestvo/mer-berdska-rastorgnul-koncessionnoe-soglashenie-s-firmoy-bagira-m.

^10. On similar terms, in 2015–2018, the Fund took part in financing 45 projects for the modernization of communal infrastructure systems in 22 federal subjects. Their total cost amounted to 10.42 billion rubles; the actual investment made to the Fund was 4.90 billion rubles. If we recognize that the total investment necessary to upgrade the heat supply system is estimated at 2–2.5 trillion rubles, these figures are not impressive. Rather, it was an experiment limited in time and territory, which was unfortunately completed too quickly. In 2018, the financing of new projects at the expense of the Fund was suspended. Today, the co-financing of projects can be as high as 50 percent, but can be implemented only at the expense of regional and municipal budgets, which drastically reduces their attractiveness for potential concessionaire investors.

^11. The term of the concession agreement is 25 years. Its facilities belong to the heat supply system, including the newly created facilities—future utilities infrastructure designed to produce, transmit, and distribute heat energy and hot water throughout Maslyanino. The concessionaire undertook the obligation to create, modernize (reconstruct), and put into operation the agreed-upon infrastructure. The public partner provided the concessionaire with the right to possess and use these facilities. The agreement specifies the size of the concessionaire’s planned expenses (45.7 million rubles) and the expenses of the public partner (183.1 million rubles, including contributions from the Fund, the regional budget, and the budget of municipality), which cannot be increased if the estimated cost of the project is exceeded. It is agreed that the concessionaire’s fee will be paid according to the individual stages of the creation and/or reconstruction (modernization) of the infrastructure specified in the agreement, as well as after this infrastructure is put into operation (available at https://investinfra.ru/novosti/opredelen-pobeditel-konkursa-na-modernizaciyu-obektov-teplosnabzheniya-i-goryachego-vodosnabzheniya-v-novosibirskoy-oblasti.html; accessed on February 18, 2019).

^12. To solve this problem, the concessionaire has created a special division to work with debtors.

^13. In practice, standard heat loss and the total consumption of consumers with metering devices are deducted from the volume of generated heat (determined by metering devices at the source). All remaining losses are attributed to consumers who do not have heat meters (i.e., mainly in the residential sector). Under this model, the greater the losses in the heat network, the higher the income of heat supply enterprises (available at https://vuzlit.ru/738566/razrabotka_metodiki_opredeleniya_fakticheskih_teplovyh_poter_teplovuyu_izolyatsiyu_truboprovodov_sistem_tsentralizovannogo; accessed on February 10, 2019).

^14. This method is called cogeneration or cogeneration-based district heating and is considered one of the most efficient means of production, especially for countries with cold climates where the fuel heat utilization factor can reach 90 percent or higher.

^15. Available at http://www.nso.ru/news/33838; accessed on February 10, 2019.

^16. According to EKO, the main owner of Sibeko, M. Abyzov, has been looking for buyers since the early 2010s. Reduced tariffs, which led to the company’s financial losses, could affect the price of the transaction (available at http://polit-center.org/page/v_novosibirske_novaya_volna_sluhov_o_prodazhe_sibeko.html; accessed on February 10, 2019).

^17. Available at http://www.n-s-k.net/fix/news/8884; accessed on February 10, 2019.

^18. “Temperatura v novosibirskikh kvartirakh upala do +13 °C” (available at https://sib.fm/news/2018/01/25/temperatura-v-novosibirskikh-kvartirakh-upala-do-13s; accessed on February 10, 2019).

^19. “Novosibirsk gotoviat k dvukratnomu rostu tarifov na teplo za 10 let,” Taiga. Info, December 12, 2018 (available at https://tayga.info/144082; accessed on February 10, 2019).

^20. The calculation is made according to the following formula: Payback period = net profit/investment volume (without discounting).

^21. “Gorodu Ob’ proschitali kontsessiiu v ZhKKh,” Rosteplo.ru (available at http://www.rosteplo.ru/soc/blog/ekonomik/2480.html; accessed on February 10, 2019).

^22. Federal Law No. 39-FZ, “O rynke tsennykh bumag,” April 22, 1996 (amended on December 27, 2018) (available at http://www.consultant.ru/document/cons_doc_LAW_10148; accessed on February 10, 2019).

^23. “Al’ternativa dlia Linevo: poselok pereveli v tsenovuiu zonu teplosnabzheniia,” Taiga. Info, February 13, 2018 (available at https://tayga.info/145000; accessed on February 14, 2019).

^24. Decree of the Government of the Russian Federation No. 108, “O predostavlenii finansovoi podderzhki sub’ektam Federatsii na modernizatsiiu sistem kommunal’noi infrastruktury,” February 11, 2019 (available at http://government.ru/docs/35692; accessed on February 12, 2019).

Additional information

Notes on contributors

V.I. Nefedkin

V.I. Nefedkin, candidate of economic sciences, is afflilated with the Research and Educational Center “Siberian Center for Study of Problems and Prospects of Public–Private Partnership,” Institute of Economics and Industrial Engineering, Siberian Branch of the Russian Academy of Sciences, Novosibirsk State University, Novosibirsk. E-mail: [email protected].

O.P. Fadeeva

O.P. Fadeeva, candidate of sociological sciences, is affiliated with the Institute of Economics and Industrial Engineering, Siberian Branch of the Russian Academy of Sciences, Novosibirsk State University, Novosibirsk. E-mail: [email protected].

D.R. Ginzburg

D.R. Ginzburg is the Director of Concession Solutions LLC, Novosibirsk. E-mail: [email protected].