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Public–private partnership as instrument for ESCO projects in Serbia

May 28, 2015 | Comments: 0Author:

Public–private partnership as instrument for ESCO projects in Serbia

By Aleksandar Durković, Consultant, Duralex d.o.o. Beograd

Currently, the highest public interest of Serbia is to consolidate public finances in order for the state government and local self-governments to secure stable starting budget funds and balances necessary for establishing sustainable economical development within their responsibilities. Important element of sustainable economy and its green growth is for sure the efficient production of sufficient amounts of energy in environmentally acceptable way and the rational use of that energy in modern technical systems.

Budget expenditures for energy

One of the most significant budget lines of each government level is the balanced purchase of fuel and energy for providing quality services for public buildings heating and public lighting. Together with maintenance and costs of managing technical systems, which use those fuels and energy to provide requested (utility) service, budgets of different government levels may be reserved with more than 10% of total appropriations for that purpose.

Reduction of expenditures for purchase of fuel and energy and maintenance and management of technical systems, which use that energy, therefore constitute sound public interest, which can be achieved only with investments in improving quality of providing respective public service (if we do not also take into account the awareness raising and promotion of responsible and professional attitude towards assigned responsibilities, which practically need no additional costs).

Capex-neutral financing

In this case, new investments can be generated from the division of existing expenditures with no need for the public sector to borrow (Capex-neutral financing, without new capital expenses). Existing costs are defined throughout respective budgetary appropriations, planned on a yearly bases for the purchase of fuel and energy and maintenance and management of technical systems (which should also include the change of amortized equipment and devices after expiration of their economical cycle), as well as public administration costs (salaries and tax contributions for employees, including employees in public utilities and directorates in the public sector which are responsible for providing concrete public services).

Durkovic PPP_web_730px
Photo 1: Dividing existing costs for project financing
A photo by: HeSa Light Denmark  

Investments and savings

If so defined unavoidable existing annual expenses are extrapolated on presumed period between 10 and 20 years of providing the public service (which is an economically feasible lifetime of majority of technical systems) and summed up, total amount of the costs may represent expected investment for financing the particular project which could be of interest for some of potential and qualified private partners.

Hence, expenditures of the public sector could be transformed into the interested private partner’s possible investment by dividing those expenditures in a way that the public party repays the investment through fees which are equal at most or, more often, smaller than expenditures that would be planned in the budget for the same period (10 to 20 years, for example).

Legal framework

Contracting such a financing model is enabled by legal framework established by Law on Public–private Partnership and Concessions, while the selection of a contractor that would implement and finance the project is conducted through the procedure prescribed by Law on Public Procurement, for awarding the contract to the lowest qualified bidder for providing a particular service of public interest.

It should not be neglected that every cost reduction in fuel and energy purchase implicates less energy consumption (energy savings) which leads to proportional reduction in emission of harmful products of combustion in environment. Environment protection is with no doubt genuine public interest.

Energy savings

Energy savings per se do not represent public interest in the sense of Law on PPP (like utility services of providing heating and street lighting). However, the Law on Efficient use of Energy introduced energy services as a business activity provided by specialized companies through respective ESCO (energy service company) model of contracting. By the same law, public sector is obliged to conduct activities which lead to reduction of energy consumption, and in that sense it may contract energy services with companies registered for that kind of business activities (i. e. ESCO entities). By this law as well, and in accordance with respective by-laws and regulations (newly adopted model contract and methodology for evaluation of achieved energy savings in public buildings and street lighting), contracting of energy services is determined to be conveyed through legal framework of Law on PPP.

By this, PPP is definitely established as one and only instrument for implementation of ESCO projects in Serbia which are conducted with an aim of contracting energy savings in order to reduce operational costs of technical systems usage in public sector.

Essential task of PPP lays in untying captured budget funds which have been planned for years – not in a very rational way. ESCO helps it.