Concessions in the SWM Sector Applicability and Experience Warsaw, 4 November 2009 Jonas Byström

2  Access to and flexibility for innovation/know how transfer  Whole-life costing approach  Risk sharing  Access to private capital and funding sources  Increased budget/time schedule certainty  Viability/bankability check Why? The rationale

3  Bankable project - feasible/viable/justified, appropriate project size/ contract period, predictable revenue stream (waste flow control?), clear project structure, enabling legal/regulatory set-up (State Aid?)  Efficiency and performance - through incentives, benchmarking and effective monitoring/enforcement  Value for money – usually assessed in a Public Sector Comparator  Contract flexibility - “pain and gain” clauses regulating e.g. unforeseeable changes in waste quantities/composition, legislative requirements and excess revenues/profits  Flexibility to and acceptance of: - likely increased overall project cost and implementation time - reduced public/political control When? The requirements

4  Optimal risk allocation: to the party best positioned to take on the risk. Focus on demand and energy off-take risks for WtE under PPP  Competitive tension: Should be maintained as long as possible in the procurement stage to ensure VFM  Relationship management: Build a partnership environment based on mutual trust and respect as basis for long-term commitment  Attention to Preparation, Prices and Performance When? Success factors

5 How? Project structure for WtE project Key requirements: - Eligibility - Feasi-/viability - Sustainability - Justification Key requirements: Bankable project, i.e.: - Site and permits - Proven technology - Secure demand (PoP) - Secure off-take (PPA) Financial flows in a WtE project under DBFO/Concession and EU grant

6  1083/2006 Article 2.4: Private companies may be beneficiaries if initiating the project (rarely the case). Beneficiary is municipality or public SPV  Article 55: Revenues in FGC in projects are direct user charges (e.g. gate fees) and energy revenues (not availability/unitary charges/service payments) State aid projects are not subject to Article 55/funding gap.  Article 56: EU fund eligibility up to end of 2015 (disbursement risk) points at simple structures such as DBO rather than complex such as DBFO  Cost benefit analysis (WD 4, CBA Guide 2008): - Under PPP financial discount rate may be increased to reflect a higher opportunity cost of capital to the private investor - A consolidated analysis required when owner is different from operator - Financial sustainability needs to be measured from the point of view of the operator and the municipality, separately How? Grant blending - EU regulations

7 Possible Interfacing of PPP procurement and EU grant application processes How? Procurement/application process Issues affecting the choice:  Time available (eligibility of grant)  Acceptance of risk in outstanding EU grant decision  Requirement of commercial terms before final grant application

8 Selection of economically most advantageous tender considering e.g.:  Cost/efficiency related parameter  Level/terms of private financing and profit margin  Implementation schedule/contract period  Technical/functional/environmental parameters  Acceptance of risk  Exceptions to ToR/specifications Complicating factor: The grant rate is based on estimated cash flow and project NPV, which are finally determined by bidders and therefore unknown at time of submission to EC How? Tender criteria under grant blending I

9 How? Tender criteria under grant blending II A possible financing situation for a revenue generating project (e.g. WtE facility) under grant blending conditions

10 Possible approach A: 1. Calculate project cost and O&M 2. Fix the gate fee (polluters pay principle/affordability), calculate grant rate 3. Evaluate tenders based on private contribution to CAPEX 4. Ensure that LA is able to cover remaining non-grant CAPEX Possible approach B: 1. Fix the gate fee and grant rate as in Approach A 2. Determine the requested private contribution to CAPEX 3. Evaluate tenders based on requested unitary treatment charge 4. LA collects gate fee used in grant calculation Possible approach C: 1. Fix the gate fee/grant as in A and private CAPEX contribution as in B 2. Evaluate tenders based on requested contract period How? Tender criteria under grant blending III

11 Grant disbursement: 1. If grant is disbursed as a major CAPEX contribution, the “no service no payment principle” would be distorted and performance incentive of private entity reduced 2. In Approach B the grant and local contribution could be paid to an Escrow account in the name of the contractor and drawn down during the course of the project (as part of unitary payments) Possible need for grant refunding: If the "funding-gap" was not established correctly and/or the conditions of implementation of the project has changed significantly 1) Grants should be matched to real needs/overcompensation avoided – Feasibility study assumptions must be realistic 1) COCOF guidance Note on Article 55 of Council Regulation (EC) No 1083/2006: Revenue-generating Projects How? Potential issues

12 Where? Dublin WtE Project, Ireland  Scope: ,000 t/y WtE facility with power and probably heat recovery  Contract type: 25 years DBFO following negotiated procedure  Financing: Initially corporate finance by project sponsors  Payment mechanism: Unitary payment with partial PoP guarantee  Risk allocation: Demand risk split (~60% public PoP)  Implementation schedule: Ca 10 years from start of procurement (Completion expected 2010/2011)  Comments: 60% recycling target. PoP price competitive cf. total LF fee

13 Where? Manchester SWM Project, UK  Scope: 12 SWM treatment facilities (MRF, IVC, MBT, RDF WtE) for 1.4 m t/y MSWM generated by 2.2 m residents in Greater Manchester area  Contract entities: Two SPVs: 1) Concessionaire (responsible for treatment facilities except RDF WtE) with operation Sub contractor, and 2) separate SPV2 responsible for RDF WtE facility under DBFO contract with concessionaire  Contract type: 25 year DBFO/PFI following negotiated procedure  Financing: PFI grant, EIB loan, project financing  Payment mechanism: Unitary monthly payment to concessionaire with performance related adjustments. Availability payment with PoP guarantee to RDF WtE company  Risk allocation: Heat/electricity price fixed during concession period by. Construction risk by EPC contractor. Operation risk by operator and SPV2  Implementation schedule: Procurement took 3 years from OJEU publication to FC. Completion of all project facilities originally expected in  Comments: Largest waste PPP in Europe