Infrastructure Project Facility Technical Assistance Window (IPF TA)

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1 Infrastructure Project Facility Technical Assistance Window (IPF TA) EuropeAid/128073/C/SER/ULTI Sub project: WB4-NE-ENV-12B: anagement models and options for cost recovery for the future construction and operation of regional landfills in ontenegro (Case Study for Nikšić) Procurement Options Report (Activity 3) 25 July 2012

2 The European Union's 2008 IPA Programme for Albania, Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of acedonia, ontenegro, Serbia, Kosovo*, Turkey and Iceland Infrastructure Projects Facility Technical Assistance Window (IPF TA) EuropeAid/128073/C/SER/ULTI Sub project: WB4-NE-ENV-12B anagement models and options for cost recovery for the future construction and operation of regional landfills in ontenegro (Case study for Nikšić) Procurement Options Report (Activity 3) 25 July 2012 Document no WB4-NE-ENV-12B_TECH_Activity 3 Report Version 2 Date of issue Prepared Ashot Baghdasaryan, Rasmus Dilling, Ayse Cigdem Arslancan, David Toft, Zdenka Ivanovic, Srna Sudar Checked Dr erih Kerestecioğlu Approved Dr erih Kerestecioğlu

3 1 Table of Contents 1 Executive Summary 6 2 Purpose and Content of Report 12 3 Key Aspects of the Nikšić Regional Landfill Project Characteristics of the Service Area Characteristics of the investment Analysis of municipal financial situation Analysis of municipal PUCs unicipal capacity to manage PPP Budoš Support from PROCON acro-affordability and willingness to pay 26 4 Overview of legal and institutional environment concerning landfill construction and operation Purpose Structure of the chapter Key stakeholders PPP contract management Different options for contracting Role and responsibilities of private and public sector Legal and institutional considerations - capacity Conclusions and recommendations 42 5 Risk in landfill construction and operation Introduction ethodological approach Nikšić landfill project 51

4 2 6 Available models for landfill construction and management Introduction PPP models and characteristics PPP process Recommendation for Nikšić Regional Landfill Case 80 7 Case study of private sector participation in landfill operation Arges Landfill Facility PPP Lessons learned Summary of key characteristics of Arges Landfill Concession PPP 98 8 Conclusions and proposed optimal method 99 Table of Annexes Annex 1 Description of Risk Factors 101 Annex 1 Description of Risk Factors 101 Annex 2 SWOT Analysis 116

5 3 List of Tables Table 1 Comparative review of traditional and PPP options for Nikšić regional landfill 9 Table 2 Waste generation forecast, Table 3 Budget revenue of Nikšić municipality, thousand EUR 17 Table 4 Local self-government funding sources of Nikšić unicipality, thousand EUR 18 Table 5 Annual expenditures of Nikšić unicipality, thousand EUR 18 Table 6 Budget Revenue of the Plužine unicipality, thousand EUR 19 Table 7 Local self-government funding sources of Plužine unicipality, thousand EUR 20 Table 8 Annual expenditures of Plužine unicipality, thousand EUR 21 Table 9 Budget Revenue of Šavnik unicipality, thousand EUR 22 Table 10 Annual expenditures of Šavnik unicipality, thousand EUR 23 Table 11 Nikšić PUC Profit and Loss Statement, thousand EUR 24 Table 12 Nikšić PUC Assets & Liabilities , thousand EUR 25 Table 13 Steps in the process of project Risk atrix development 50 Table 14 Global Risk atrix listing for Nikšić landfill project construction/investment period risk 52 Table 15 Global Risk atrix listing for Nikšić landfill project operating period risk 53 Table 16 Global Risk atrix listing for Nikšić landfill project operating period risk, waste supply risk 55 Table 17 Global Risk atrix listing for Nikšić landfill project construction period risk 56 Table 18 Global Risk atrix listing for Nikšić landfill project operating period risk 58 Table 19 Global Risk atrix listing for Nikšić landfill project operating period risk, waste supply 60 Table 20 Reduced Risk atrix for Nikšić Landfill Project 62 Table 21 Quantified Risk atrix for the Nikšić Regional Landfill Project65 Table 22 odalities of PPP 69 Table 23 Comparison of various PPP modalities for landfill facility 76 Table 24 ain characteristics of Nikšić regional landfill vs PPP options 81 Table 25 Risk atrix for the Operating Contract PPP odality, Nikšić regional landfill 85 Table 26 Risk atrix for BOT PPP modality, Nikšić regional landfill 87 Table 27 Comparative review of traditional and PPP options for Nikšić regional landfill 90 Table 28 Conceptual overview of SWOT Analysis 117

6 4 List of Figures Figure 1 Current and Total Revenues of Nikšić unicipality, thousand EUR 17 Figure 2 Current and Capital Expenses of Nikšić unicipality, thousand EUR 19 Figure 3 Current and Total Revenues of Plužine unicipality, thousand EUR 20 Figure 4 Current and Capital Expenses of Plužine unicipality, thousand EUR 21 Figure 5 Current and Total Revenues of Šavnik unicipality, thousand EUR 22 Figure 6 Current and Capital Expenses of Šavnik unicipality, thousand EUR 23 Figure 7 odel 1, Budoš and PPP Company 31 Figure 8 odel 2, unicipalities as contract signatories and PPP company 32 Figure 9 odel 3, unicipalities as three contract signatories with Budoš 33 Figure 10 odel 4, unicipalities as three contract signatories and existing PUCs (public service benchmarking) 34 Figure 11 odel 1, Chain of responsibilities, contract parties: Budoš and PPP company 36 Figure 12 odel 2, Chain of responsibilities, contract parties: municipalities and PPP company 37 Figure 13 odel 3, Chain of responsibilities, contract parties: municipalities and Budoš PPP 38 Figure 14 odel 4, Chain of responsibilities, contract parties: municipalities and PUCs (public service benchmarking) 39 Figure 15 Legal processes of PPP, any model 40 Figure 16 Project Risk atrix development flow 51 Figure 17 Risk Impact Chart and associated risk management strategy/actions 61 Figure 18 Typical structure of operating contract and its variations 71 Figure 19 Typical structure of DBO contract and its variations 73 Figure 20 Typical structure of DBFO contract and its variations 75 Figure 21 PPP process and steps 76 Figure 22 Quantitative evaluation of the impacts of risk transfer 79 Figure 23 Proposed course of action for private sector participation in Nikšić regional landfill 83 Figure 24 apping of waste management services provision in Arges County 95 Figure 25 Integrated waste management system in Arges County 95 Figure 26 Structure of PPP contracts in Arges County, Romania 96 Figure 27 Payment mechanism for Arges Landfill Facility Concession 97

7 5 List of Abbreviations BOOT BOT Budoš DBFO DBFOT DBO DBOO EBRD EIA EIB EPA EU EUR IFIs IPA IPF IPPC IRR ITT LTP NE ONSTAT osdt NPV O& OC PIU PPP PROCON PSB PUC SEA SWOT TA ToR Build-own-operate-transfer Build-operate-transfer Inter-municipal company established and designated to operate the regional landfill Design, Build, Operate and Finance Design, Build, Operate, Finance and Transfer Design, Build and Operate Design, Build, Own, Operate European Bank for Reconstruction and Development Environmental Impact Assessment European Investment Bank Environmental Protection Agency European Union Euro International Financing Institutions Instrument for Pre-accession Assistance Infrastructure Projects Facility Integrated Pollution Prevention and Control Financial internal rate of return Form of the Invitation to Tender Leachate Treatment Plant ontenegro ontenegro Statistics inistry of Sustainable Development and Tourism Net present value Operation and maintenance Operating Contract Project Implementation Unit Public Private Partnership National Project Implementation Unit in the Field of Communal Services and Environment Public sector benchmark Public Utility Company Strategic Environmental Assessment Strengths, Weaknesses, Opportunities, and Threats Technical Assistance Terms of Reference

8 6 1 Executive Summary This report constitutes the output of Activity 3 Analyse the possible options for the construction and operation of landfills, with the short title of Procurement Options Report and entails an analysis of different options for the construction and operation of the proposed regional landfill for the unicipalities of Nikšić, Šavnik, and Plužine The report provides recommendations on the preferred method of construction and operation of the regional landfill While this analysis is mainly specific to the case of the Nikšić regional landfill, it also contains implications for future regional landfills as well This report is divided eight chapters and two annexes Chapter 3 reviews the local financial and institutional capacities of the main stakeholders in the Nikšić Service Area the three municipalities, the three public utility companies (PUCs), and the regional landfill company Budoš to construct and operate a regional landfill, as well as to manage a contractual relationship with potential private sector participation This analysis builds on the feasibility study from 2008 for construction of the regional landfill The conclusion of this chapter is that neither the municipalities, nor the PUCs are able to contribute financially in any meaningful amount to the construction of the regional landfill On the other hand, the chapter also concludes that even an expensive landfill to construct and operate will be theoretically affordable to customers Collection rates on bills, however, will need to be improved Chapter 4 is devoted to an overview of the legal and institutional framework for landfill construction and operation The chapter considers four set-ups for construction and operation of the regional landfill: 1) Budoš acts as an intermunicipal company and represents the municipalities in relations with the PPP company; 2) the three municipalities deal directly with the PPP company; 3) the three municipalities deal with Budoš as an independent PPP company; 4) municipalities undertake waste operations themselves, as an own operation, utilising the existing PUCs (so-called public service benchmarking) The advantages and disadvantages of each approach are discussed The legal environment prevailing in ontenegro allows for all kinds of private sector participation in the construction and operation of a regional landfill As the analysis of the legal and institutional set-up for potential introduction of PPP in the construction and operation of proposed regional landfill in Nikšić demonstrated, however, the letter of the law is not the only consideration The

9 7 legal analysis explores options for contracting between the inter-municipal Budoš and a PPP company, the municipalities directly with the PPP company, the municipalities directly with Budoš (as an independent PPP company), and the public service benchmarking: of the municipalities undertaking waste operations themselves, as an own operation, utilising the existing PUCs (or establishing a PUC to operate the landfill) Based upon the Consultant s reading of the current statute, Budoš is a separate legal entity with limited liability and responsibilities In order to involve Budoš in the aforementioned models, the statute of Budoš and the contract with Budoš must be adjusted allowing Budoš full commercial powers, activities and responsibilities The choice of contract partner in a PPP arrangement - and thus, also the choice of the contract party that signs on behalf of the public sector party - depends upon political considerations, legal possibilities, and the potential best options for attracting private investments Chapter 4 provides recommendations in the area of the legal framework in support of PPP, contract management, institutional coordination, and regulatory authorities, delegation and responsibilities In terms of the legal framework, arbitration and/or institutionalised mediation appear not to be regulated by law If so, a general law on arbitration is recommended in order to facilitate dispute resolution in any complex contract, such as PPP In case no arbitration law exists, the contract parties need to agree on such measures in detail in the individual contract, or to address potential conflicts directly in the courts The latter is cumbersome, as court proceedings are generally more time and resource intensive than arbitration or institutionalised mediation Further, the many competent authorities involved the planning, construction and operation of landfills (such as waste authorities, environmental authorities, health authorities, planning authorities, concession commissions, etc) indicate a need for an integrated regulatory approach Such intergovernmental coordination could be regulated by legislation or governmental decree It is also unclear whether the tariff setting authority - currently assigned to the municipality can be delegated to a private legal entity For instance, can such authority be delegated to Budoš as an independent legal entity according to Law on Local Self-Government Financing and Law on Local Selfgovernment? In terms of contract management, the problems relate to the capacity of implementing the legislation, to the coordination of the institutional responsibilities and to the ability and capacity in contract management The latter is important, as such contract management often rely not only on contract law, but also of the skills of both contract parties The recommendations in this area are to apply a learning period based upon performance and management contracts It may be considered to apply a learning-period before entering into a long-term PPP arrangement In such a period, both contract parties may gain valuable knowledge

10 8 and understanding of the needs for contract management based upon performance and management standards In terms of institutional coordination, there is a significant legal and institutional challenge related to the coordination of approvals and licensing required for all stages of the PPP arrangement - related to the pre-construction (concession approval, EIA and SEA), construction and operation Therefore, it is recommended that integrated permitting should be organised, not only in the sense of IPPC approach but also as inter-governmental/municipal coordination and procedures Finally, in terms of regulatory authorities, delegation and responsibilities, the main recommendations are to ensure tasks and responsibilities are directly referred to in the PPP-contract reflecting the overall policy and legal requirements and to apply performance and management standards in ensuring and monitoring responsibility in the chain of responsibilities Chapter 5 presents the concept of risk in the construction and operation of a regional landfill The chapter describes the recommended approach for identification of risk elements and factoring risk analysis into the waste management project preparation process Thus, the five steps of risk analysis in the consideration of PPPs are presented and discussed, including 1) development of a global risk matrix (constituting a long list of potential risks); 2) assigning qualitative probabilities of occurrence and magnitude of impact to the individual risk components that comprise the global risk matrix; 3) preparing a risk impact chart, in which it is determined which risks need to be mitigated, monitored, or controlled, as well as those that can be ignored; 4) preparing a reduced risk matrix, in which the main elements of risk (those that most need to be addressed due to their high probability of occurrence and/or high impact if they do occur); prepare reduced risk matrix with quantitative estimates of probability of occurrence and expected impact for each risk element The general methodological approach is then applied to the Nikšić regional landfill project for the baseline case (public construction and operation of landfill) The chapter can be used as a general guideline for the risk analysis of projects, whether implemented via traditional or PPP procurement methods It can also be utilised as a practical set of steps for risk quantification for assessment of the possible material impact on the baseline investment and operating costs of a project Chapter 6 presents the available models for landfill construction and management and in particular explores the main PPP models and characteristics The chapter then revisits the reduced risk matrix and quantitative probabilities and impacts are assigned to each risk element Finally, the chapter concludes with a comparison of the public sector benchmark (PSB), which is the traditional method of procuring the construction and operation of a landfill (that is, fully within the government structure), a build-operate-transfer arrangement in which a private company constructs and operates the landfill and then transfers ownership to the municipality after a pre-defined period and an operating contract

11 9 arrangement, in which a private party is not involved in the construction and ownership of the landfill, but operates it on behalf of the public authority Chapter 6 concludes with a summary comparison of the three modalities selected for analysis the public sector benchmark (PSB), a build-operatetransfer arrangement and an operating contract arrangement in terms of net present value (NPV) in EUR per tonne of accepted waste at the Nikšić landfill These figures are used as relative magnitudes in order to determine which modality is worth exploring further The results are depicted in the following table Table 1 Comparative review of traditional and PPP options for Nikšić regional landfill NPVs (mln EURO) Government Cash-outflow PSB, traditional method BOT Operating Contract Construction Period Costs - Nominal Operating period O& Costs - Nominal Recycling revenues Pre risk cash-outflow Project Risks Construction period risks Operating period (O&) risks Total Risks Risk adjusted Cash-outflow NPV/ tonne of accepted waste at Nikšić (EURO) The calculated net present value (NPV) per tonne of waste accepted to the Nikšić regional landfill is an important indicator of benefits offered by PPP options compared to the traditional public sector procurement method This indicator is an aggregate figure, reflecting the cost of each option to the public budget in terms of money paid out (cash outflows) per tonne of waste going to the landfill In other words, for each option the NPV/tonne indicator shows what the public authority receives in terms of services in exchange for each EUR paid Assuming that services received are equivalent in each option, the lower NPV in a PPP option would indicate a better Value for oney Further, the extent of quantitative difference in NPV between PSB and PPP options would also communicate the extent of efficiency of private management of the contract as compared to public management of the contract Such efficiency can be the result of various elements: better cost management by private operator better risk allocation and risk mitigation by private operator higher efficiency in facility operation

12 10 Having understood the implications of the NPV/tonne figure, the results presented in the foregoing table can now be analysed: The baseline project costs and recycling revenues are the same for all three options The construction period quantification of risks suggests that the lowest cost impact is expected in the BOT scenario - that is, when an experienced PPP contractor is chosen to construct the facility (along with later operation) This allows to minimise cost implications during construction due to the PPP operator s capacity for better management and to mitigate risks In terms of the impact of the operating period risk on the costs, both PPP options imply higher costs than that of the traditional procurement method A detailed analysis of individual risk elements suggests that this is a cumulative effect comprising two parts: - Risk-adjustment cost reduction due to ability of PPP operator better to mitigate some of the operating period costs that are under its control, and - Risk-adjustment cost increase due to PPP operator factoring significant uncertainties on the markets and revenues into its future O& price to Public Authority - The net result of these two parts is that the factoring in of uncertainties overweighs the cost-efficiency of a private operator; hence, the total trend is higher risk-adjusted costs As a result, the NPV per tonne for all three options analysed are on approximately the same level, with the PPP options running slightly higher Hence, the NPV/tonne of waste accepted at the landfill is slightly higher for the Operating Contract, due to the inability of the Operating Contract PPP counterpart to minimise the cost implications of construction period risks The analysis suggests a rather interesting, but logical case: Despite the fact that PPP options offer valuable construction and operating period cost reduction as a result of operating efficiency and better risk management, such positive gains are entirely outweighed by high risks associated with waste availability, quantity, and generated revenues (both from the gate fees and from recyclables) ore complex PPPs, such as BOT can be used in the case of the Nikšić regional landfill, since the net effects are relatively even in comparison with traditional procurement method

13 11 A more gradual approach is recommended, however, since it can deliver substantially better value for money Such an approach, as already mentioned above, can be implemented in the following steps: - Public Authority (with national and international contributions) constructs the landfill using the traditional procurement method - A simplified form of PPP Operating Contract (Service Contract) for a short period (3-5 years) is tendered with the objective to kick-start the operation of landfill facilities, in the process of which, to eliminate the main uncertainties related to the quality of construction work, actual waste amounts, market for recyclables, realistic operating costs, etc - Once such uncertainties have been eliminated after 3-5 years of the Service Contract, s longer period Operating Contract (with no investment obligations for further cell construction or renewal of assets), or a more complex Concession Contract (with investment obligations) can be contracted The value proposition of such a step-by-step approach is - once the key market and revenue uncertainties are eliminated that the PPP operators will not attach such high premiums to the main elements of risk Hence, the Public Authority will be able to take full advantage of the operational efficiencies of the private sector in the form of lower price of good quality services In conclusion, it is recommended that the tariff models report (Activity 4) explore the gradual introduction of a private sector operator (which could also be Budoš) by first tendering a management contract for the first 3-5 years of the landfill operations After that, a long-term operating contract should be tendered This approach enables the public sector (municipalities) to tender a known quantity a landfill operation with few uncertainties surrounding in particular the amount of waste delivered to the landfill and the size of the recycling market

14 12 2 Purpose and Content of Report This report constitutes the output of Activity 3 Analyse the possible options for the construction and operation of landfills, with the short title of Procurement Options Report and entails an analysis of different options for the construction and operation of the proposed regional landfill for the unicipalities of Nikšić, Šavnik, and Plužine The outcome of the report should be a recommendation on the preferred method of construction and operation of the regional landfill While this analysis is mainly specific to the case of the Nikšić regional landfill, it also contains implications for future regional landfills as well This report is divided into the following chapters Chapter 3 presents a brief review of the financial and institutional capacities of the main stakeholders in the Nikšić Service Area the three municipalities, the three public utility companies (PUCs), and the regional landfill company Budoš to construct and operate a regional landfill, as well as to manage a contractual relationship with potential private sector participation Chapter 4 is devoted to an overview of the legal and institutional framework for landfill construction and operation Building on the Institutional Review Report (Activity 2 Report), it includes a review of the main stakeholders in terms of their responsibilities in solid waste management and is intended to provide indications of how the legal and institutional environment in ontenegro affects the potential landfill construction and operation options In other words, if private-sector participation is involved, to what extent is this possible under the law? The chapter considers four set-ups for construction and operation of the regional landfill: 1) Budoš acts as an inter-municipal company and represents the municipalities in relations with the PPP company; 2) the three municipalities deal directly with the PPP company; 3) the three municipalities deal with Budoš as an independent PPP company; 4) municipalities undertake waste operations themselves, as an own operation, utilising the existing PUCs (so-called public service benchmarking) The advantages and disadvantages of each approach are discussed Chapter 5 presents the concept of risk in the construction and operation of a regional landfill The chapter describes the recommended approach for identifi-

15 13 cation of risk elements and factoring risk analysis into the waste management project preparation process Thus, the five steps of risk analysis in the consideration of PPPs are presented and discussed, including 1) development of a global risk matrix (constituting a long list of potential risks); 2) assigning qualitative probabilities of occurrence and magnitude of impact to the individual risk components that comprise the global risk matrix; 3) preparing a risk impact chart, in which it is determined which risks need to be mitigated, monitored, or controlled, as well as those that can be ignored; 4) preparing a reduced risk matrix, in which the main elements of risk (those that most need to be addressed due to their high probability of occurrence and/or high impact if they do occur); prepare reduced risk matrix with quantitative estimates of probability of occurrence and expected impact for each risk element The general methodological approach is then applied to the Nikšić regional landfill project for the baseline case (public construction and operation of landfill) The chapter can be used as a general guideline for the risk analysis of projects, whether implemented via traditional or PPP procurement methods It can also be utilised as a practical set of steps for risk quantification for assessment of the possible material impact on the baseline investment and operating costs of a project Chapter 6 presents the available models for landfill construction and management and in particular explores the main PPP models and characteristics The chapter then revisits the reduced risk matrix and quantitative probabilities and impacts are assigned to each risk element Finally, the chapter concludes with a comparison of the public sector benchmark (PSB), which is the traditional method of procuring the construction and operation of a landfill (that is, fully within the government structure), a build-operate-transfer arrangement in which a private company constructs and operates the landfill and then transfers ownership to the municipality after a pre-defined period and an operating contract arrangement, in which a private party is not involved in the construction and ownership of the landfill, but operates it on behalf of the public authority The chapter concludes with a summary comparison of the three modalities in terms of net present value (NPV) in EUR per tonne of accepted waste at the Nikšić landfill These figures are used as relative magnitudes in order to determine which modality is worth exploring further Chapter 7 presents a case study from Arges, Romania related to the construction and operation of a regional landfill based on PPP This case is instructive for the current considerations for PPP in the construction and operation of the Nikšić regional landfill Finally, Chapter 8 presents the conclusions and recommendations The two annexes present a description of risk factors and a SWOT analysis for use of PPP in the construction and operation of a regional landfill

16 14 3 Key Aspects of the Nikšić Regional Landfill Project This chapter contains a review of the situation in the Nikšić Service Area (Nikšić, Plužine, Šavnik) and of the investment itself 31 Characteristics of the Service Area The service area for the proposed regional landfill comprises three municipalities: Nikšić, Plužine, and Šavnik Service area The unicipality of Nikšić is the largest ontenegrin municipality in terms of surface area (2,065 km²) and has 72,443 inhabitants in 21,683 households (according to the latest census from 2011) There are 59,670 inhabitants living in the city itself, with the balance located in rural areas of the municipality The unicipality of Plužine covers a territory of 858 km² According to the Census 2011, 3,246 citizens live in Plužine, with the majority living in the relatively low land area of the municipality Only 1,341 live in the main town, whilst the balance lives in the rural areas The unicipality of Šavnik covers an area of 553 km² and is home to 2,070 persons Only 472 live in the main town, with the balance living in the rural areas of the municipality According to the law, the municipalities are responsible for providing utility services including collection and disposal of solid waste and this responsibility has been delegated to multi-purpose utility companies in each municipality Thus, these public utility companies (PUC) collect waste from the urban areas in the municipalities Nikšić PUC The Nikšić PUC, in its services for the collection and disposal of waste, submitted information about collection of more than 40,000 tons waste per year This assumption is based on the volume of solid waste transport trucks and the number of trips to the current dump; it is not based on measurements from a waste scale The PUC also confirms that this amount includes waste from illegal dumps, construction and demolition waste, green waste and communal waste without any selection and recycling In the future, only communal waste will be brought to the landfill; green waste, construction and demolition waste, and other waste that will be recycled and composted will not be deposited in the landfill

17 15 Following the calculation from the Activity 2 Report, the waste generation in 2011 is estimated at 22,000 tonnes/year According to the 2011 Census, the total population for project area is 77,759 In accordance with "The demographic trends in ontenegro since the mid-20th century and prospects to 2050" (ONSTAT 2008), the population in ontenegro in 2050 is expected to be higher than for the starting year 2005 The results of the projection confirm the process of depopulation, which in the northern region will probably continue at least until 2015 For this reason, waste generation of 22,000 tonnes/year over the period may be expected Over the period the estimated demographic growth will be +081% Waste generation In accordance with the above assumptions, the forecast of waste generation used in this report is as shown in the following table Table 2 Waste generation forecast, Period Generated Recycled Uncollected Disposed ,525 14,758 19,300 79, ,336 27,677 12,034 80, ,936 79,015 14, , , ,450 45, ,456 Source: Consultant's assessment based on changing population growth data 32 Characteristics of the investment The following information on the investment characteristics are based on the main design for the regional landfill of arch 2012, which is under review and has not been approved Thus, these figures could undergo revision Where data were not available from the draft main design, the feasibility study for the regional landfill was used as a reference 1 It has to be emphasised that the purpose of the present report is not to audit the feasibility study or the main design, or to repeat any of the activities of those works Capacity The landfill is expected to operate for a period of 20 years The landfill capacity for the first stage of operations (12 years) is 319,053 cubic metres, with a bottom surface area of 23,000 square metres The second stage has a capacity of 197,684 cubic metres (for a total of 516,737 m 3 ) and the landfill body area is 14,000 square meters (for a total of 37,000 m 2 ) Investment cost The investment costs for the landfill, Phase I, were assumed to be just over 14 million EUR, including 15 million EUR for supervision The Phase II costs are 42 million EUR (454 thousand EUR for supervision) A recycling centre is also included in these investment costs 1 Feasibility Study for Niksic Solid Waste Landfill, Final Feasibility Study Report, December 2008

18 16 The high investment costs are due, among others, to the proposed steep slopes of the landfill This approach, however, has important implications for the construction and the financing of the construction The steep slopes are expected to require successive construction of the bottom lining and leachate collection system, which could be difficult in a conventional implementation approach In terms of financing, a successive construction approach would require either that lining materials are stockpiled for successive phases, or are purchased as needed Either way, such expenditures would be considered ineligible costs with respect to co-financing from the European Union Operating costs Operating costs were estimated based on the feasibility study, as well as on changes in the costs of key inputs since the study was completed, in particular salaries and fuel costs Total annual operating and maintenances costs were estimated at approximately 533 thousand EUR (including aftercare costs, annual monitoring, etc) for the landfill and all facilities (sorting facility) This is a higher figure than in the feasibility study due to changes in the average wages in ontenegro and assumptions on maintenance The main purpose of using these figures, however, is to explore the relative implications for various PPP options; changes in the investment and operating and maintenance costs will not likely change the conclusions in the analysis of which options is most advisable The operating costs also include those of the recycling centre A financial model was constructed to plan the investment and operating and maintenance costs over time in order to calculate the risk-adjusted investment and operating costs and arrive at the net present value per tonne of waste accepted at the landfill, which is the quantitative indicator used to determine the best future course of action 33 Analysis of municipal financial situation The feasibility study analysed the financial situation of the three project municipalities in detail, including revenues, expenditures, and borrowing capacity The tables from the feasibility study are updated as below Budget revenues 331 Nikšić Table 3 presents the budget revenues of Nikšić It is evident that 2008 (the last year analysed in the feasibility study) was a banner year for the municipality, in which hard won reforms apparently paid off in massive increases in budget revenues The financial crisis, however, seems to have crushed municipal finances, as in 2009 budget revenues collapsed to less than half of the year previous Compensations dropped by the largest amount, but declines were also seen in proceeds from income tax The municipality also took out less debt, as its previous investment programmes utilised existing creditworthiness Revenues fell again in 2010 and then grew considerably in 2011

19 17 Table 3 Budget revenue of Nikšić municipality, thousand EUR No Total budget revenue 9,276 11,971 23,747 37,057 16,629 15,835 19,457 1 Personal income tax 1,172 1,058 1,608 2,102 1, ,166 2 Property transfer tax unicipal tax 2,733 2,859 3,569 4,416 4,826 4,930 5,864 4 Other Taxes 581 1, Compensations 2,738 2,339 10,847 14,652 3,012 2,305 2,014 6 Other revenues Current revenues 7,463 7,576 17,275 22,228 9,883 9,028 9,934 7 Gain on disposal of intangible assets Gain on disposal of tangible assets Short term financial investments Donations , Transfers ,865 1,996 3, Loans and credits 892 3,360 5,327 10,462 4,141 4,017 5, Assets from previous year Other income 1,813 4,395 6,472 14,829 6,747 6,806 9,522 Source: data taken from the Feasibility Study and, from unicipality For 2011, the balanced budget values are used since the actual values are not available This dynamic is even more evident in the following figure Figure 1 Current and Total Revenues of Nikšić unicipality, thousand EUR 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Current revenues Other income Funding sources Table 4 shows various funding sources of the municipality, the largest component of which are own funds, followed by grants from the Republic budget and loans and credits (ostensibly for investments) The values for loans and credits should be viewed with caution, however, as they do not appear to be indicative of investment capacity or creditworthiness While in each year loans

20 18 and credits do not appear to account for more than about 25 per cent of budget revenues, the cumulative debt indicates that the municipality is exhausting its creditworthiness Table 4 Local self-government funding sources of Nikšić unicipality, thousand EUR Type of revenue Total budget revenue 23,747 37,057 16,629 15,835 19,457 Own funding sources 15,257 19,751 8,330 7,889 8,363 Common revenue 2,018 2,477 1,553 1,139 1,572 Gains on disposal of assets Grants from Republic budget 1,143 4,367 2,394 2,102 4,357 Loans, credits, investments 5,327 10,462 4,141 4,017 5,163 Other capital revenues Source: data taken from the Feasibility Study and, from unicipality For 2011, the balanced budget values are used since the actual values are not available Expenditures On the expenditure side (Table 5), the unicipality of Nikšić has current expenditures in excess of 21 million EUR in every year after 2008 This is significant, since it indicates that the unicipality of Nikšić is likely running an operating deficit, which sheds doubt on the purpose of the loans and credits appearing on the revenue side, as they may be used to finance operating expenditures, which technically should not be permitted Table 5 Annual expenditures of Nikšić unicipality, thousand EUR Expenditure Total expenses 9,274 17,288 23,730 37,057 23,905 25,679 27,008 Current expenses 8,504 10,546 22,950 21,179 21,728 22,370 22,983 Secretariat for unicipal Affairs, transport and water ,210 2,292 2,489 Environmental Protection Service Public Utility Company , Others 7,967 9,805 22,038 18,872 19,338 19,868 20,349 Capital expenses 770 6, ,877 2,177 3,309 4,025 Source: data taken from the Feasibility Study and, from unicipality For 2011, the balanced budget values are used since the actual values are not available The following figure shows the budget expenditures from While current expenditures have been at a similar level since 2007, investments spiked in 2008 and fell again thereafter In 2011, capital expenditures were about 4 million EUR (which includes repayment of debt)

21 19 Figure 2 Current and Capital Expenses of Nikšić unicipality, thousand EUR 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Current expenses Capital expenses The conclusion is that the unicipality of Nikšić appears to be running operating deficits and while it appears that capital expenditures are around 4 million per year, much of this is debt repayment Thus, it should be assumed for the purposes of this analysis, that the unicipality of Nikšić will not be able to cofinance any significant amount of the regional landfill and its accompanying facilities Budget revenues 332 Plužine The same analysis has been conducted for the unicipality of Plužine The budget revenues are presented in Table 6 Budget revenues have increased in Plužine in every year since 2006, with the exception of 2011 Property tax is the main source of own revenues Loans and transfers also make up a substantial part of the budget Table 6 Budget Revenue of the Plužine unicipality, thousand EUR No Total budget revenue 1,122 1,871 1,380 2,503 3,324 2,789 1 Personal income tax Property transfer tax ,423 1,205 3 unicipal tax Other Taxes Compensations Other revenues Current revenues 952 1,154 1, ,979 1,712 7 Gain on disposal of intangible assets Gain on disposal of tangible assets Short term financial investments , Donations

22 20 No Transfers Loans and credits Assets from previous year Other income ,620 1,345 1,077 Source: data taken from the Feasibility Study and, from unicipality For 2009 and 2011, the balanced budget values are used The changes in budget revenues are also depicted in the following figure Figure 3 Current and Total Revenues of Plužine unicipality, thousand EUR 3,500 3,000 2,500 2,000 1,500 1, Current revenues Other income Funding sources Next, the funding sources of Plužine are examined in the following table, in which it is seen that grants from the Republic budget is the single largest component Table 7 Local self-government funding sources of Plužine unicipality, thousand EUR Type of revenue Total budget revenue 1,829 1,380 1,363 3,321 2,584 Own funding sources Common revenue ,609 1,414 Gains on disposal of assets Grants from Republic budget Loans, credits, investments Other capital revenues , Source: data taken from the Feasibility Study and, from unicipality For 2009 and 2011, the balanced budget values are used

23 21 Expenditures The budget expenditures of Plužine are presented in Table 8 Comparing this information to the budget revenues shows that Plužine is consistently running budget deficits, albeit it does not appear that these are operating deficits, which are the most dangerous to a municipality s financial health Table 8 Annual expenditures of Plužine unicipality, thousand EUR Total expenses 1,130 1,871 1,793 4,220 3,236 3,455 Current expenses 852 1,196 1,283 1,370 1,484 1,702 Capital expenses ,850 1,752 1,754 Source: data taken from the Feasibility Study and, from unicipality For 2009 and 2011, the balanced budget values are used Expenditures are also depicted in the following graph, in which it is seen that capital expenses are the largest component of budget expenditures Figure 4 Current and Capital Expenses of Plužine unicipality, thousand EUR 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Current expenses Capital expenses The conclusion is that the unicipality of Plužine is running budget deficits as well as is conducting investments and paying off and servicing existing debt Due to its small budget, as well as relatively small contribution to waste generation, it is assumed that the unicipality of Plužine will not be able to cofinance any significant amount of the regional landfill and its accompanying facilities Budget revenues 333 Šavnik The same analysis has been conducted for the unicipality of Šavnik The budget revenues are presented in Table 9 Budget revenues have increased in Šavnik in every year since 2006, with the exception of 2010 and 2011 unicipal taxes are the main source of own revenues Transfers also make up a substantial part of the budget The municipality is not incurring new debt

24 22 Table 9 Budget Revenue of Šavnik unicipality, thousand EUR Total budget revenue ,0344 1,2205 1,1531 1,0934 Personal income tax Property transfer tax unicipal tax Other Taxes Compensations Other revenues Current revenues Gain on disposal of intangible assets Gain on disposal of tangible assets Short term financial investments Donations Transfers Loans and credits Assets from previous year Other income Source: data taken from the Feasibility Study and, from unicipality For 2009 and 2010 the balanced budget values are used This is depicted in the following figure, in which it is seen that external revenues (grants and donations) are the main component of total budget revenues In 2011, grants and transfers accounted for about 70 per cent of total budget revenues Figure 5 Current and Total Revenues of Šavnik unicipality, thousand EUR 1,400 1,200 1, Current revenues Other income

25 23 Expenditures The budget expenditures of Šavnik are presented in Table 10 Comparing this information to the budget revenues shows that Šavnik is operating a balance budget Figure 6 shows this is graph form, in which it is also evident that the municipality has not recently been engaging in investment activity Table 10 Annual expenditures of Šavnik unicipality, thousand EUR Total expenses 1,108 1,153 1,093 Current expenses Capital expenses Source: data taken from the Feasibility Study and, from unicipality For 2009 and 2010, the balanced budget values are used Figure 6 Current and Capital Expenses of Šavnik unicipality, thousand EUR 1,400 1,200 1, Current expenses Capital expenses The conclusion is that the unicipality of Šavnik is running a balanced budget Due to its small budget and its low number of investments, as well as relatively small contribution to waste generation, it is assumed that the unicipality of Šavnik will not be able to co-finance any significant amount of the regional landfill and its accompanying facilities Profit and loss 34 Analysis of municipal PUCs The following tables present the profit and loss statement, as well as the balance sheet of the Nikšić PUC The main source of revenues for the PUC is solid waste collection services, while salaries constitute the main expenditure In 2010, the PUC made losses of nearly 500 thousand EUR, while in 2011 this figure dropped to 311 thousand EUR If only waste management is considered, however, a small profit of 75 thousand EUR was made in 2010

26 Waste anagement Other services Administration 2009 TOTAL Waste anagement Other services Roads Administration 2010 TOTAL 2011 TOTAL Infrastructure Projects Facility Technical Assistance Window 24 The feasibility study for the regional landfill included a detailed analysis of the Nikšić PUC, in which it was concluded that obviously on a stand-alone basis the PUC is technically bankrupt and that on a short term basis, it does not appear possible for the PUCs to play a positive role in the financing of the Landfill project The second statement remains true, while the first statement is also accurate, albeit the financial situation has improved slightly since the feasibility study was prepared in December 2008 The other two PUCs do not possess data in sufficient detail to make an analysis; as pointed out in the feasibility study, however, the revenues and expenditures of the Plužine and Šavnik PUCs are mere fractions of the Nikšić PUC Table 11 Nikšić PUC Profit and Loss Statement, thousand EUR Revenues Revenues from municipality waste services 1, ,6292 1, ,6292 2,1390 Grants and donations Other Revenues , Total revenues 1,9420 1, ,6154 1, ,7000 2,2154 Expenditures Raw materials Salaries , ,7342 1,9174 Depreciation and maintenance Other operating expenditures , Interest Total expenditures 1,5443 1, ,5859 1,5010 1, ,9408 2,5262 PROFIT - LOSS Transfers for administration expenditure plan NET PROFIT - LOSS Source: Nikšić Public Utility Company For 2011 values are taken from temporary results

27 25 Table 12 Nikšić PUC Assets & Liabilities , thousand EUR ASSETS Fixed assets Intangible assets Buildings, plants and equipment Long-term financial placements Current assets ,7467 1,6388 2,1707 2,0981 Inventories Trade receivables ,6573 1,4939 1,9428 1,9311 Cash and cash equivalent Total assets 1,3228 1,6451 2,4744 2,3146 2,7931 2, LIABILITIES Capital and provisions ,0315-1,5076 Subscribed capital-paid Revaluation reserve Retained earnings-loss - 1,1138-1,1453-1,0649-1,0197-1,2815-1,7575 Long-term liabilities Deferred taxes Deferred revenues Short-term liabilities 1,7431 2,1113 2,8710 2,7023 3,4884 3,8822 Short-term operating liabilities Short-term financial liabilities Present part of long-term credits Taxes 1,0601 1,5323 2,0764 2,2721 2,7709 3,3509 Calculated liabilities Total liabilities 1,3228 1,6451 2,1871 2,3146 2,7931 2,6680 Total assets 1,3228 1,6451 2,4744 2,3146 2,7931 2,6680 Source: data taken from the Feasibility Study and from unicipality 35 unicipal capacity to manage PPP The project municipalities are responsible under the law for regulation of utility services, including solid waste management The municipalities are untested, however, in the workings of a public private partnership transaction, which would put them at a significant disadvantage during negotiations It is recommended that municipalities amend their local decisions on establishment of public utility companies (PUCs) to introduce performance contracting as a precursor to the introduction of public private partnerships

28 26 36 Budoš For the purpose of the operation and management of the regional landfill for the municipalities of Nikšić, Šavnik and Plužine, the limited liability company Budoš was established on 5 arch 2009 Together with the Decision to establish joint company to service the landfill, the Statute of the Company was adopted, which prescribed the business of the Company in accordance with the Law on Business Organization 2 Currently, the Company has one employee the Executive Director and is waiting for the construction of the landfill in order to expand and strengthen its capacities Responsibilities The Company business activities are envisioned as: removal of debris and waste, including the management and operation of sanitary landfill recycling of metal waste and residue recycling of non-metal waste and residue(including collecting, sorting, conditioning and sale) technical testing and analysis of potential pollution from waste and measuring quality of air, water, etc Capital The founding capital of the Company is 100,000 EUR, set as follows: unicipality Nikšić: 97,000 EUR (97%) unicipality Plužine: 2,000 EUR (2%) unicipality Šavnik: 1,000 EUR (1%) The management bodies of the Company are: the Board of Directors and the Executive Director Recommendations on bolstering the capacity of Budoš are made in Chapter 4 37 Support from PROCON The National Project Implementation Unit for Communal Services and Environment (PROCON) will provide capacity development and function as the Project Implementation Unit (PIU) This will significantly reduce the risk related to project management during the contracting of the landfill construction and operation PROCON will need to bolster its capacity in the analysis of public private partnership arrangements, including in particular quantitative analysis of risk 38 acro-affordability and willingness to pay The feasibility study analysed the total operating costs of the three PUCs, the forecasted operating costs of the regional landfill, and household incomes Whilst the unit operating costs of the then current collection system were found 2 Official Gazette No 60/02 and 17/07

29 27 to be very high (approximately between EUR per tonne of waste collected, depending on the actual amount of waste), the unit operating cost of the regional landfill was expected to be about 95 EUR per tonne of waste received, and the unit total cost of 54 EUR per tonne (operating plus investment cost) of the regional landfill 3, the estimated maximum affordable tariffs were not reached Thus, the theoretical, maximum affordable tariffs are well above the forecasted total costs of the regional landfill On the other hand, the observed willingness of customers to pay for solid waste services is low, as collection rates on bills is typically in the range of 60 per cent While efforts are needed to improve billing practices and collection rates, low collection rates negatively affect the financial health of PUCs If a private sector party were engaged to operate the landfill and the municipalities and their PUCs would have trouble collecting from customers, the municipalities would essentially have to finance the gate fee paid to the private operator The entire risk of collections would remain with the municipalities 3 According to dynamic prime cost

30 28 4 Overview of legal and institutional environment concerning landfill construction and operation 41 Purpose Building on the Activity 2 Report, the purpose of this section is to provide indications of how the legal and institutional environment in ontenegro affects the potential landfill construction and operation options In other words, if private-sector participation is involved, to what extent is this possible under the law? The outcome of this section should be conclusions as to what models and contract options for construction and operation of landfills are available under the current law and institutional framework This output will also be used in the qualitative evaluation of which method is recommended This legal review addresses specifically the PPP-case study for Nikšić, Šavnik and Plužine Therefore, the focus of this study is not to provide a legal review of the ontenegrin legal and institutional framework related to PPP solutions Such overall review and conclusions, as the conformity with the EU waste legislation, have already been addressed by Activity 2 4 It follows from the analyses of Activity 2 that the basics of the ontenegrin legal and institutional framework support the implementation of most PPP options Rather, the review focuses on the current case of Nikšić, Šavnik and Plužine Based upon the possible PPP options for Nikšić, Šavnik and Plužine, this section takes the current legal, institutional and organisational set-up into account and addresses the legal risks and challenges involved 42 Structure of the chapter The first section (43) reviews the roles and responsibilities of key stakeholders in solid waste management 4 See also: "Public-Private Partnerships in ontenegro Accountability, transparency and efficiency" (Institut Alternativa, 2010) The report presents a legal and institutional review with recommendations

31 29 In the second and third sections (44 and45), PPP contract management and different PPP options for contracting are presented In the fourth section (46), the PPP contract options are presented in the context of the line of responsibilities involved from the government level to the individual private PPP operator A PPP contract can only delegate operational and financial responsibilities; the political responsibility remains with the government and the municipalities and cannot be delegated The fifth section (47) addresses the considerations related to the legal and institutional capacity and to specific aspects of the legal and institutional framework Finally, section 48 ends with conclusions and recommendations 43 Key stakeholders This section reviews the roles and responsibilities of key stakeholders in solid waste management osdt The inistry of Sustainable Development and Tourism (osdt) is the line ministry responsible for the environment and solid waste management, in particular the preparation and implementation of policies and strategies and the legislative framework in the field waste management It is responsible for preparation of the National Waste anagement Plan and other programmes and plans, as well as the establishment of standards for waste treatment, permitting, and technical standards for waste treatment facilities It coordinates waste management with other ministries and institutions and is responsible for the management and coordination of waste projects funded from national and international resources It issues licenses to facilities for waste treatment, including recycling and provides for inspection and control of ecological parameters Within the osdt, the Sector for Waste anagement and Communal Development carries out tasks related to policies, strategies, development plans, drafting laws, monitoring the process of legislation in its area of competence with the legislation of the European Union, developing the institutional framework to improve relations in the field of waste management other utility services, cooperating with local governments in communal services, as well as cooperation with state and communal public companies or private companies and entrepreneurs who perform certain services, and defining guidelines for the provision of communal services and analysing and assessing the situation in communal services, including solid waste management, to ensure compliance with international standards EPA The Environmental Protection Agency is an independent body that deals with the implementation of laws related to environmental protection It is responsible for environmental inspection and monitoring, issues permits, and implements strategic environmental assessment (SEA) and environmental impact assessment (EIA) procedures, as well as is responsible for integrated pollution

32 30 prevention and control (IPPC) permitting, with which all landfills in ontenegro must comply The Agency s role also includes collecting data and preparing reports on conditions in the field of waste management in ontenegro for the relevant international organizations and institutions, such as the European Union Directorate of Public Works PROCON unicipalities PUCs The Directorate of Public Works is involved in the preparation, implementation and monitoring of public works projects The National Project Implementation Unit for Communal Services and Environment (PROCON) is the national project implementation unit established by the Government of ontenegro at the end of 2008 to manage and coordinate projects in the area of communal services and environmental protection For solid waste and other infrastructure projects, it effectively operates as the Project Implementation Unit (PIU) The services of PROCON are based on contractual relations between the Government of ontenegro and international financial institutions (ie, the European Investment Bank (EIB) and various IFIs) and they encompass: project financing; project analyses to assess feasibility, sustainability and harmonization with strategic planning documents; preparation of ToRs for feasibility studies, studies on the estimate of environmental influence (EIA) and accompanying project documentation; organisation and implementation of tender procedures, as well as tender evaluation; and performing of other activities as stipulated by the contracts on utility-sector and environmental protection project financing The main activity of the company is consulting and management The municipalities of ontenegro are responsible for provision of utility services to their citizens, including solid waste management They can delegate the responsibility for solid waste collection to a public utility company (PUC) or a private company The municipalities also function as the regulator of solid waste services, including approval of PUC work plans and financial statements, approval of tariffs (based on proposals of the PUC), and approving concessions of up to 30 years in duration The PUCs provide solid waste (and other services, as they are typically multisector utilities) collection and treatment services at the delegation of the municipality PUCs can be involved in the collection, transport, treatment and disposal of waste, as well as construction and operate a landfill 44 PPP contract management As the following describes, the problems involved the legal and institutional setting relate primarily to the legal and institutional capacity in managing PPP contracts Such management must ensure that the public interests are well integrated and safeguarded at the time of designing the PPP models and also during the contract period The public interest cannot yield to private commercial interest

33 31 The complexity involved the management of the PPP contract (as any private legal instrument) should not be understated It requires significant legal skills and capacity of the municipality 45 Different options for contracting The PPP arrangement may be entered by contract parties following four options: Four options for PPP contracting 1 Inter-municipal Budoš - PPP company 2 unicipalities - PPP company 3 unicipalities - Budoš (as an independent PPP company) In addition, as public service benchmarking (PSB): 4 unicipalities undertake the waste operations themselves, as an own operation, utilising the existing PUCs Figure 7 odel 1, Budoš and PPP Company Budoš PPP Company This model establishes Budoš, on behalf of the municipalities, as the independent contract manager towards the PPP Company It is assumed that Budoš as an independent legal entity with limited liability may be equipped with such powers and responsibilities Pros: Separation of responsibilities between the political level (municipalities) and the management/operational level (Budoš) Practical contract management with only two parties (the intermunicipal Budoš and the PPP company) As both parties are operating on commercial terms, this model may have potential to attract private investments

34 32 Cons: The current capacity of Budoš is insufficient to enter into and manage such a contract unicipalities need to provide clear instructions for Budoš reflecting the overall responsibilities and objectives of the municipalities themselves Requires significant institutional and legal revision of the current Budoš structure, allowing for the management the PPP contract based upon performance and management standards Figure 8 odel 2, unicipalities as contract signatories and PPP company Nikšid Šavnik PPP Company Plužine This model leaves Budoš aside and establishes a direct contractual relationship between the municipalities (as three individual signatories to the same PPP contract) and the private PPP operator Pros: No need to transfer capacity to Budoš Direct control and management of the PPP company reflecting the public responsibilities of the municipalities - eliminating the risk involved establishing and controlling the independent Budoš Eliminating a bureaucratic level Potential for private investments as the PPP Company operates on commercial terms Cons:

35 33 The current capacities of the municipalities are insufficient to enter into and manage such a contract Four contract parties - may give cause for uncertainty Interference of policy objectives into the daily management of the commercial PPP contract Additional resources needed at municipality levels for on-going administration/managing of contract Need for establishing an inter-municipal coordination unit - alternatively an inter-municipal agreement - in order to coordinate management and administration Figure 9 odel 3, unicipalities as three contract signatories with Budoš Nikšid Šavnik Budoš Plužine In this model, Budoš will, as an independent legal entity, undertake the construction and operation of the landfill It is assumed that Budoš as an independent legal entity with limited liability may be equipped with such powers and responsibilities Pros: Budoš is already established as an independent legal entity able to undertake commercial activity Separation of responsibilities between the political level (municipalities) and the operational level (Budoš) Cons: The current capacity of Budoš is insufficient to enter into and implement such a contract

36 34 Requires total separation of municipal influence and control over Budoš in order to establish a credible independent Budoš Limited potential for private investment unicipalities need to ensure clear instructions for Budoš reflecting the overall responsibilities and objectives of the municipalities themselves This must be based on performance and management standards Budoš can only obtain the PPP assignment as the commercial winner of the prior tender process Thus, Budoš must already in the tender process prove it possesses the necessary capacity Figure 10 odel 4, unicipalities as three contract signatories and existing PUCs (public service benchmarking) Nikšid Šavnik PUC (one intermunicipal PUC or three seperate PUCs for each municiplaity) Plužine This model concerns public service benchmarking (PSB) In this model, the municipalities undertake themselves the construction and operation of the landfills involving the existing PUCs This can be done with either the three exiting PUCs in each municipality, or to one single inter-municipal PUC, which would have to be established Pros: The PUCs are already established and operate in the waste management sector No need for signing contract with independent legal entity unicipalities can meet/secure policy objectives and responsibilities through own operations Cons: The current capacity of PUCs is insufficient

37 35 No separation of policy interest and operation if current PUCs used to build and operate the landfill No separation of waste collection and landfill operation if current PUCs used to operate the landfill No private involvement, which means little incentives for private investment 46 Role and responsibilities of private and public sector 461 Delegation - risks and responsibilities The PPP contract options must be presented in the context of the line of responsibilities involved from the government level to the individual private PPP operator Responsibilities A PPP contract can only delegate operational and financial responsibilities to a private party; the political responsibility remains with the government and the municipalities and cannot be delegated While the PPP operator may be liable financially and in operational terms, the unicipality or the Government of ontenegro remains politically responsible This may have implications for meeting national and European Union objectives and targets This indicates that the government and municipalities have a direct interest in the management and conduct of the individual private PPP operator - even also where the government and the municipality have no directly contractual relationship with the PPP operator (for instance, in the case in which Budoš enters the contract with the private PPP operator, odel 1) Therefore, any PPP option must take this chain of responsibilities into account, which must in turn be reflected in the contractual framework (for instance, in the PPP contract, in the statute of Budoš, and in the contract between Budoš and the unicipality) It is important for the government and the municipality to ensure that each responsible level in the chain fulfils its obligations This may be achieved by inserting management and performance criteria into the contracts The four PPP contract models presented above may be linked to the chain of delegation, as shown in the following figures

38 36 Figure 11 odel 1, Chain of responsibilities, contract parties: Budoš and PPP company Government unicipalities of Nikšid, Plužine and Šavnik Budoš Ltd PPP Company Approval/ licensing of activities Responsible for arket regulation / antitrust Overall responsible for waste management in ontenegro Responsible for taxation Concession regulation/ supervision Supervising/ monitoring of municipalities in waste management, including PPP performance Responsible for meeting national and EU objectives Setting tariff structure for waste management (gate fees and cost for collection) Responsible for waste management in the municipalities, including PPP performance Responsible for the performance of Budoš/ responsible toward the government for fulfilling waste management objectives Responsible for revising the statute for Budoš responding to the needs in relation to the PPP (construction and operation standards, performance demands and other requirements) Resposible for taxation according to Law on Local Self- Government Financing Delegate and monitor contract authority to Budoš to enter into PPP contract with private operator Current a "shell" company - no activities and one employee Separate Intermunicipal company with limited liability Contract part to PPP contract (with private operator) Statute revised to reflect independent commercial powers, as entering into contracts as a legal person equipped with adequate rights and responsibilities Status and/or contract with municipalities must be revised to address/respond to responsibilities and monitoring needs of municipalities based upon performance standards Responsible for PPP performance/ responsible towards municipality Responsible for tender/procurement process Public or private company Contract party to PPP contract (with Budoš) Responsible for construction and operation and management Obtains gate fee according to PPP contract Responsible towards Budoš (contract party) Responsible for PPP performance

39 37 Figure 12 odel 2, Chain of responsibilities, contract parties: municipalities and PPP company Government Approval/ licensing of activities Responsible for arket regulation / antitrust Overall responsible for waste management in ontenegro Responsible for taxation Concession regulation/ supervision Supervising/ monitoring of municipalities in waste management, including PPP performance Responsible for meeting national and EU objectives unicipalities of Nikšid, Plužine and Šavnik Contract part to PPP contract (with private operator) Responsable for tender/procurement process Setting tariff structure for waste management (gate fees and cost for collection) Responsible for waste management in the municipalities Responsible for the performance of the PPP company (construction and operation standards, performance demands and other requirements) Resposible for taxation according to Law on Local Self-Government Financing Responsible toward the government for fulfilling waste management objectives PPP Company Public or private company Contract party to PPP contract (with municipalities) Responsible for construction and operation and management Obtains gate fee according to PPP contract Responsible towards municipalities (contract party) Responsible for PPP performance/ responsible towards municipality

40 38 Figure 13 odel 3, Chain of responsibilities, contract parties: municipalities and Budoš PPP Government Approval/ licensing of activities Responsible for arket regulation / antitrust Overall responsible for waste management in ontenegro Responsible for taxation Concession regulation/ supervision Supervising/ monitoring of municipalities in waste management, including PPP performance Responsible for meeting national and EU objectives unicipalities of Nikšid, Plužine and Šavnik Contract part to PPP contract (with Budoš) Responsable for tender/procurement process Setting tariff structure for waste management (gate fees and cost for collection) Responsible for waste management in the municipalities Responsible for the performance of Budoš (construction and operation standards, performance demands and other requirements) Responsible toward the government for fulfilling waste management objectives Resposible for taxation according to Law on Local Self- Government Financing Revise the statute for Budoš responding to the needs in relation to the PPP Budoš Ltd (PPP Company) Current a "shell" company - no activities and one employee Separate Intermunicipal company with limited liability Contract party to PPP contract (with municipalities) Statute revised to reflect independent commercial powers, as entering into contracts as a legal person equipped with adequate rights and responsibilities Status and/or contract with municipalities must be revised to address/respond to responsibilities and monitoring needs of municipalities based upon performance standards Responsible for PPP performance/ responsible towards municipality Responsible for construction and operation and management Obtains gate fee according to PPP contract

41 39 Figure 14 odel 4, Chain of responsibilities, contract parties: municipalities and PUCs (public service benchmarking) Government unicipalities of Nikšid, Plužine and Šavnik PUC Approval/ licensing of activities Responsible for arket regulation / antitrust Overall responsible for waste management in ontenegro Responsible for taxation Concession regulation/ supervision Supervising/ monitoring of municipalities in waste management, including PPP performance Responsible for meeting national and EU objectives Setting tariff structure for waste management (gate fees and cost for collection) Responsible for waste mangement in the municipalities Responsible for the performance of PUC (construction and operation standards, performance demands and other requirements) Responsible toward the government for fulfilling waste management objectives Revise the statute for PUC responding to the needs in relation to the construction and operation standards, performance demands and other requirements Resposible for taxation according to Law on Local Self- Government Financing Currently a municipal waste management entity in each municipality Statute revised to reflect such powers, as entering into contracts as a legal person equipped with adeqaute rights and responsabilities Status must be revised to address/respond to responsabilites of municipalities Responsible for performance/ responsible towards municipality Responsible for construction and operation and management

42 40 47 Legal and institutional considerations - capacity The legal problem is typically rather of an indirect legal significance, as legislation has been enacted and thus, the wording of ontenegrin legislation is more or less in place For instance, the recommendations on applying performance and management standards are already required by the Law on Participation of Private Sector in the Delivery of Public Services The problems relate to the capacity of implementing the legislation, to the coordination of the institutional responsibilities, and to the ability and capacity in contract management The latter is important; as such contract management often relies not only on contract law but also on the skills of the both contract parties The legal and institutional capacity needs relate to all stages involved in the PPP process (see following figure) Figure 15 Legal processes of PPP, any model Procurement Contracting anagement of Contract Termination of contract Thus, the legal and institutional capacity relates to the management of: Procurement legislation The public must ensure that the procurement process - of a PPP-model of any kind - is based upon fair and unbiased competition among qualified bidders and potential constructors/operators The tender documents shall present a PPP arrangement and PPP contract that provides a proportional relationship between technical and operational requirements, costs and investments involved and duration of the contract that represents a reasonable exclusivity for earning and profit-making Legislation related to the regulation of the subject matter involved, which involves a variety of competent regulatory authorities, ie, waste management, environmental management, health and sanitary management, construction management, planning management, etc Legislation generally for public administration, such as delineation of governmental and municipal competencies, inter-governmental/municipal organisation, administrative law, involvement of the public, etc General contract law governing the conclusion and management of contracts

43 41 Planning instruments and provisions, ie national, regional and local waste management plans and public involvement in the planning, design and formulation of the project Legislation on environmental impact assessment (EIA) and strategic environmental assessment (SEA) The legal skills and resources in general of the public administration, the PUC and the inter-municipal entity (Budoš) acting as the PPP contract part The legal skills and resources of the judiciary (also of arbitration courts and mediators involved) in resolving conflicts between the PPP contract parties The legal skills and resources of the market regulators, ie, competition and antitrust law PPP contracts allow the private contractor a significant market position and thus, market exclusivity over many years The market regulators must be able to intervene when the market behaviours exceed the PPP contract and the underpinning assumptions The legal skills and resources of the public administration in general, especially where the: - municipality itself enters into a PPP contract as a contract party, or - municipality delegates the authority to enter into a PPP contract to a separate independent public or inter-municipality entity (such as Budoš) It is important to note that the municipality cannot delegate its public responsibility Hence, the municipality will maintain the overall responsibility for the well-functioning and achievement of waste management objectives, as set out in the legislation and waste management plans Therefore, the municipality needs adequate skills and resources in controlling and monitoring the performance of such a public entity Evaluations and adjustments to the PPP contract reflecting changes in national and/or EU policy and legal requirements It follows from the conclusions of Activity 2 that ontenegro is still in the process of implementing EU waste legislation There is a significant legal and institutional challenge related to the coordination of approvals and licensing required for all stages of the PPP arrangement - related to the pre-construction (concession approval, EIA and SEA), construction and operation: - Timely and coordinated responses in order not to halt the planning, construction and operation periods

44 42 - itigate consequences for project, construction and operation in case of non-performance of responsible government agency or municipality 48 Conclusions and recommendations The following conclusions and recommendations for the legal and institutional set-up for the potential introduction of PPP in the construction and operation of the proposed regional landfill in Nikšić are provided in the areas of: PPP options for contracting, legal framework in support of PPP, contract management, institutional coordination, and regulatory authorities, delegation and responsibilities 481 PPP-options for contracting The PPP arrangement may be entered into by contract parties following four options: 1 Inter-municipal Budoš - PPP company 2 unicipalities directly - PPP company 3 unicipalities directly - Budoš (as an independent PPP company) In addition, as public service benchmarking: 4 unicipalities undertake the waste operations themselves, as an own operation, utilising the existing PUCs (or establishing a PUC to operate the landfill) Based upon the Consultant s reading of the current statute, Budoš is a separate legal entity with limited liability and responsibilities In order to involve Budoš in the aforementioned models, the statute of Budoš and the contract with Budoš must be adjusted allowing Budoš full commercial powers, activities and responsibilities The choice of contract partner in a PPP arrangement - and thus, also the choice of the contract party that signs on behalf of the public sector party - depends upon political considerations, legal possibilities, and the potential best options for attracting private investments The specific PPP models are briefly presented and discussed below in Chapter 6 For all models, the basic legal aspects are the same 482 Legal framework in support of PPP It follows from the analyses in Activity 2, that the basics of the ontenegrin legal and institutional framework support the implementation of most PPP options

45 43 The remaining legal shortcomings mentioned in the Activity 2 Report shall be addressed in future legal reforms; the overall conclusion remains, however, that ontenegro today has a rather developed legal framework in support of implementing PPP solutions The legal framework equally supports the involvement of foreign, non-resident investment The exact scope and implications of such involvement, however, would need to be clarified in more detail, although at this stage of development of potential involvement of PPP, it does not appear necessary Recommendations: Arbitration and/or institutionalised mediation is provided by the Chamber of Commerce In general, the use of arbitration is recommended in order to facilitate dispute resolution in any complex contract, such as PPP In case the contract does not refer to the arbitration provided by the Chamber of Commerce, the contract parties need to agree on such measures in detail in the individual contract, or to address potential conflicts directly in the courts The latter is cumbersome, as court proceedings are generally more time and resource intensive than arbitration or institutionalised mediation Besides comprehensive procedures and mechanisms, the arbitration provided by the Chamber of Commerce shall also in its composition, its statutes and by its practises ensure the adequate inclusion of the public interest in PPP arrangements A chamber of commerce is typically an organisation representing private interests Experience from other parts of the world indicate a risk that such private interests may influence the outcome and proceedings of arbitration Thus, it is recommended frequently to evaluate the legal and institutional framework of arbitration and to consider enacting a law on arbitration Coordination and an integrated approach The many competent authorities involved the planning, construction and operation of landfills (such as waste authorities, environmental authorities, health authorities, planning authorities, concession commissions, etc) indicate a need for an integrated regulatory approach Such inter-governmental coordination could be regulated by legislation or governmental decree The coordinated and integrated approach concerns a variety of regulatory aspects, such as licensing and issuing of licensing conditions, monitoring, control, enforcement, etc It is not only a matter of coordinating permitting; it could also be considered to apply an "one-stop-shop" approach, meaning that the applicant (ie the PPP operator) may apply one - or a few - application process(es) for obtaining all needed permits Non-resident companies are allowed to invest in ontenegrin waste management according to the Law on Foreign Investments However, it is not possible for such foreign entities to own infrastructure, for instance, as part of a Build-own-operate-transfer (BOOT) PPP arrangement The Law on

46 44 Foreign Investment Article 13 allows only for Build-operate-transfer arrangement (BOT) and concession In case, foreign ownership is desirable, the Law on Foreign Investments should be revised accordingly Likewise foreign investors, also domestic investors, may only be allowed PPP ownership related to BOT, ie Law on Private Sector Participation in Delivery of Public Services Typically a BOT only includes limited ownership This is in contrast to BOOT, which is not part of the law The Law on Private Sector Participation in Delivery of Public Services law only concerns (Article 2): - Leasing and management contracts - Concessions - Build-operate-transfer arrangements (BOT) In case the full availability of PPP options is desirable, as it would correspond to the right of private ownership in general in ontenegro, it is recommended to revise the Law on Private Sector Participation in Delivery of Public Services accordingly The law should include also the possibility of BOOT Tariff setting authority, which is assigned to the municipality, cannot be delegated to a private legal entity Such delegation is not provided by the Law on Local Self-Government Financing and Law on Local Selfgovernment This means that such authority cannot be delegated to Budoš as an independent legal entity The Law on Participation of Private Sector in the Delivery of Public Services Article 8 specifies that tariff-setting in a concession agreement shall be controlled by the Regulatory Body (municipality) Therefore, the Regulatory Body may in a PPP contract set the framework for tariff-setting and allow the private operator minor rights related to collection and pre-fixed adjustment within the framework, etc Changes to the framework itself, however, are subject to approval by the Regulatory Body In case specific aspects of tariff-setting are desired to be delegated to a private party, such delegation must be specifically regulated by law Tariff setting authority is typically considered as part of tax/fiscal competences, which requires mandate by law 483 Contract management The legal problem is typically rather of indirect legal significance, as legislation has been enacted and thus, the wording of ontenegrin legislation is more or less in place

47 45 The problems relate to the capacity of implementing the legislation, to the coordination of the institutional responsibilities and to the ability and capacity in contract management The latter is important, as such contract management often rely not only on contract law, but also of the skills of both contract parties Recommendations Applying a learning period based upon performance and management contracts It may be considered to apply a learning-period before entering into a long-term PPP arrangement In such a period, both contract parties may gain valuable knowledge and understanding of the needs for contract management based upon performance and management standards Institutional coordination As described above, coordination among the regulatory authorities is essential in order to enable the operator efficiently to provide waste management services Naturally, the private operator is fully responsible for obtaining all licenses and in meeting all imposed license conditions But the risk of malperformance or non-performance and uncertainty increase when the conditions imposed are unclear, uncoordinated and perhaps even in contradiction with each other 484 Institutional coordination There is a significant legal and institutional challenge related to the coordination of approvals and licensing required for all stages of the PPP arrangement - related to the pre-construction (concession approval, EIA and SEA), construction and operation: Timely and coordinated responses in order not to halt the planning, construction and operation periods itigate consequences for project, construction and operation in case of non-performance of responsible government agency or municipality Recommendations Integrated permitting should be organised, not only in the sense of IPPC approach but also as inter-governmental/municipal coordination and procedures The overall aim would be a "one-stop-shop" approach, where the competent government agencies coordinate and align licenses and license conditions, monitoring, enforcement and other regulatory tasks In order not to halt vital parts of the waste management project, the PPP contract, and also the municipality, shall take into account how to secure effective waste management services in case of delay or lack of necessary approvals

48 Regulatory authorities, delegation and responsibilities According to the Law on Waste anagement and the Law on Local Selfgovernment, waste management operation, including waste collection and waste disposal lies within the responsibilities and competencies of the municipalities Commercialisation and delegation of operational responsibilities is directed at the municipal level by the Law on Private Sector Participation in Delivery of Public Services and the Law on Communal Services These laws address and allow the delegation of waste management services to public and private companies Political responsibility, however, cannot be delegated Regardless of delegation, the municipalities and the government of ontenegro remains overall responsible for the fulfilment of policy objectives and legal tasks as stipulated by legislation, waste management plans and policy objectives This implies that the government and the municipalities must ensure and control that the private PPP operator undertakes the construction and operation of the landfill in accordance with the legal and policy objectives The government and the municipalities must also ensure measure of intervention in case the PPP-operator fails in meeting the objectives The government and the municipalities cannot accept mal-performance in waste management with negative consequences for the municipal waste management service and the citizens The municipality may hold the PPP-operator operationally and financially liable according to the PPP-contract, but the municipality is directly responsible towards the public Therefore, the chain of delegations and responsibilities must be observed when establishing the PPP model It is important that the municipality ensures that all actors involved respond to the responsibilities involved For instance, if Budoš as an independent entity is signing the PPP contract with a private operator, the municipalities must ensure instructions and control over Budoš This is done by revising the inter-municipal contract establishing Budoš supplemented by a further performance and management agreement between the municipalities and Budoš stating clear goals and performance Recommendations Ensure tasks and responsibilities directly in the PPP-contract reflecting the overall policy and legal requirements When establishing the PPP-contract, keep in mind that the public competent authority cannot delegate political and legal responsibilities The PPPcontract is strictly a private legal instrument between the signatories The PPP-contract can only address the financial and operational responsibility Secure and monitor the fulfilment of policy and legal requirement by chain of delegations and responsibility

49 47 Apply performance and management standards in ensuring and monitoring responsibility in the chain of responsibilities If relevant, adjust accordingly the statute of Budoš (and/or also of the PUCs), and the contract and/or instructions between the municipalities and the Budoš (and/or the PUCs)

50 48 5 Risk in landfill construction and operation 51 Introduction Risk is an event that will alter a process from its desirable course of action It is commonly described by likelihood and potential impact on the process Risks are an integral part of construction and operation of a regional landfill and need to be included into any discussion on the selection of method of implementation On a strategic level, qualitative risk evaluation is used to supplement the planning and strategy development process by including elements of uncertainty and their mitigation measures into the decision-making process On a more practical level, for a specific waste facility, quantitative risk assessment is a necessary tool for ensuring that realistic investment and operating costs are taken into account, hence, adequately addressing possible delays and cost overruns during implementation and operation periods Quantitative risk assessment and strategy is even more important when public-privatepartnership arrangements are considered for construction and/or operation of a waste management facility, since such an assessment is a key element in the process of determining the Value for oney in a PPP transaction This chapter will describe the recommended approach for identification of risk elements and factoring risk analysis into the waste management project preparation process This will be done by describing a general methodological approach, as well as by demonstrating this approach with practical calculations on the case of the Nikšić regional landfill project The outcome of this chapter could be used as general guidelines for the risk analysis of projects, whether implemented via traditional or PPP procurement methods It can also be utilised as a practical set of steps for risk quantification for assessment of the possible material impact on the baseline investment and operating costs of the project 52 ethodological approach The basic tool for development of any risk analysis and strategy is a Risk atrix, which identifies, categorises, and allocates risk factors associated with the

51 49 project While risks common to any project implementation process can be described, most risk elements are project specific and reflect the institutional, technical, financial, and legal environment within which the project is being developed All the risks included in the risk matrix can be divided into the following categories: Project preparation and design risks - factors causing delay in project procurement and design, quality of design works, capacity of project team, availability of relevant data, etc Construction period risks - possibility of construction cost overruns, delays in funding construction works and related costs, low availability of material, inadequate capacity of contractor, public authority, contractors, or statutory body variations during construction, etc Operation period risks - possibility of construction cost overruns, staff capability problems, planned and unplanned service interruptions and related cost, construction related defects that impact operation period costs, etc Legal enforcement and compliance risks - various issues related with permitting, licences, other legal compliance required for the project during construction as well as operating phases Environmental enforcement and compliance risks - various issues related to environmental standards and regulations that cannot be met and result in either service interruptions or costs in the form of fines and penalties Institutional/political risks - risk factors ranging from discriminatory change in law, approvals, taxation variations to the extreme cases of payment failures, project termination or even nationalisation arket related risks - economic and financial factors that directly or indirectly impact project investment and O& costs, such as inflation fluctuations, interest and exchange risk variations above expectations, financial market risks affecting project funding, etc Revenue risks - one of the most critical risk factors for any project, in particular waste management projects, are those that result in substantial variations in expected project revenues (other than expected waste flows, inability to get required tariffs approved, reduction in the customer base, unexpected completion from other companies reducing revenue base, etc) Force major risks

52 50 From the methodological point of view, risk analysis and risk management strategy development will comprise the steps depicted in Table 13 Table 13 Steps in the process of project Risk atrix development # STEP DESCRIPTION ETHOD 1 Global Risk atrix At this stage, all possible risk factors directly and indirectly affecting the project preparation, implementation, and operation phase are identified and listed Expected likelihood and impact of individual risk factor at this stage does not matter, as the objective is to provide as comprehensive as possible listing of all elements of project uncertainty Risks have to be grouped into project relevant phases Extended risk workshop with participation of as many as possible project stakeholders 2 Global Risk atrix with qualitative risk assessment 3 Risk Impact Chart and Risk anagement Strategy 4 Reduced Risk atrix for quantification Using the developed Global Risk atrix listing, probability and impact indicators are attached to each risk element on qualitative level The qualitative level implies that both the likelihood of the risk factor materialising and its time or cost related impact on the project are assigned values of L=low, =medium, and H=high Based on allocated "likelihood-impact" pair values, all risks are classified into Risk Impact Chart Based on the Risk Impact Chart and the level of project tolerance to various "likelihood-impact" pair values, Risk anagement Strategy is developed by separating all risks into four major groups - risks for mitigation, risks for monitoring, risks to be controlled, and risk factors to be ignored Depending on the level of tolerance defined for specific project, risks factors from one or the other group defined at the Step 3 are listed in a reduced Risk atrix for consequent quantification of their material impact on the project In most cases, risk elements from the group for mitigation are included into Reduced Risk atrix Extended risk workshop with participation of as many as possible project stakeholders Project Risk evaluation team based on the results of extended risk workshop Project Risk evaluation team using Risk Impact Chart 5 Quantified Risk atrix This step is the most time consuming, as it involves attaching actual quantitative probability and impact values to each risk element in the Reduced Risk atrix For each risk element, probability of its occurrence during preparation, construction, or operating period is assigned value of 0-100%, and possible impact in terms of percentage of Base Costs is assigned to same risk element from the range of 0-100% The process involves high degree of subjectivity It is managed via specialist workshop with participation of engineers, economist, legal and institutional experts, familiar with the project and its environment, and having substantial previous experience in similar projects in the country and abroad A summary of the methodological approach for project Risk atrix development is shown in the figure below:

53 51 Figure 16 Project Risk atrix development flow Global Risk atrix development Extended workshop Global Risk atrix with qualitative probabilities and impact Extended workshop Risk Impact Chart and Strategy analysis Project team Reduced Risk atrix development Project team Reduced risk matrix with quantitative probabilities and impact Specialist Risk Workshop The reduced risk matrix is used for further analysis and calculation of cost impact in the financial model Such analysis should be carried out irrespective of whether the project is procured in the traditional method or any form of publicprivate-partnership arrangement The Reduced atrix also serves as basis for risk allocation to most suitable party in the PPP transaction, based on the ability of transaction side (public authority or PPP partner) to address and mitigate the risk in the most efficient way 53 Nikšić landfill project This chapter applies the methodology described for risk analysis of the Nikšić landfill project The objective of the chapter is to derive the final Reduced Risk atrix with quantification of relevant risk factors to be further used in analysis of project costs in traditional and PPP procurement cases 531 Global Risk atrix The process of landfill facility project preparation is lengthy and involves a number of potential obstacles on the way It can, generally, be split into three main phases: 1 Project identification, development, and preparation - at this stage, the conceptual project idea is drawn up, preliminary discussions with potential beneficiaries and stakeholders are held, and a detailed feasibility study for project technical, financial, and environmental sustainability is prepared This stage has been completed

54 52 2 Project implementation - this phase includes project related design and construction Due to the nature of multiple coordination and construction related activities, this phase is considered to be the one most fraught with risk The final main design is in the review phase 3 Operating period - period of landfill facility accepting waste for disposal in exchange for fixed payment for provided services The major risk elements in this period are related to market and revenue risks, as well as to operational inefficiencies of the landfill management company At the first step of the risk analysis for the Nikšić landfill project, a detailed mapping of all direct and indirect risk elements has been made The following table provides a listing of such risk elements Since the project preparation phase has already been largely completed, the following three tables include identified risks for implementation/construction and operation phases only Table 14 Global Risk atrix listing for Nikšić landfill project construction/investment period risk # RISK CATEGORY DESCRIPTION Construction/ Investment period risks CR1 Late design approvals Late design approvals CR2 Quality of design Poor quality of design work causing delay CR3 PIU risk Delays in establishment of PIU CR4 Capacity of PIU risk Limited capacity of PIU team, resulting in higher costs CR5 Financing Non-availability of municipal or external co-financing during construction CR6 Procedural risks Poor financial planning, monitoring, reporting - may result in delays in disbursement CR7 Claims risk Contractor asks for more time and money CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more CR9 Construction cost risk Higher construction costs than projected CR10 Corruption risk Risk of fraud or corruption in implementation process CR11 Land ground condition Unforeseen delays in construction due to poor ground condition, contamination, or archaeology CR12 Weather Delays due to adverse weather conditions CR13 CR14 CR15 Authority Variation Contractor variation Statutory bodies variation Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase CR16 Safety Risk of accidents and resulting delays during construction CR17 Poor workmanship Cost and time over-runs due to poor workmanship CR18 Resources Delays due to lack of adequate labour during construction

55 53 # RISK CATEGORY DESCRIPTION CR19 Construction/ Investment period risks Works Risk of insolvency, failure to perform, poor standards by the contracted construction companies CR20 Commissioning Failure to perform according to required standards during commissioning CR21 CR22 CR23 Legislative compliance/licences Specific/Discriminatory Change in Law Receivership Failure to obtain required licences and permits for construction works/compliance with all the legislative framework applicable in the construction period General legislative or regulatory changes giving rise to new or increased capital costs Cost of delays in any construction work and in provision of the regular services in case when one or more members of the consortium (if any) becomes insolvent CR24 Force ajeure Uninsurable risks related to force majeure events during construction CR25 Reduced Financial Capability Risk of Contractor becoming insolvent, or the provision of services requires a larger financial resources than estimated by the Contractor CR26 Unavailable Financing Risk related with ability to secure financial resources for the project CR27 CR28 Interest rates Insurance availability Interest rates fluctuations resulting in additional financial costs during construction Insurance is not available or more costly than expected during construction period CR29 Non-insurance risk Non-insured damage during construction CR30 Financial commitments Contracting Authority is unable to meet the financial commitments when they are due, construction period CR31 Protestor risk Cost and delay in construction caused by protestors CR32 Strike risk Delays in construction and additional cost due to workers strike CR33 Site risk id-construction need for alternative site CR34 Tax risk Cost related to various taxes variation during construction CR35 Inflation risk Additional cost due to variation in inflation Table 15 Global Risk atrix listing for Nikšić landfill project operating period risk # RISK CATEGORY DESCRIPTION Operating period risks OR1 Cost overrun Operating and maintenance costs are generally higher than expected OR2 Contract duration The Public Authority is changing the duration requirements after the contract s signing OR3 Inadequate technical solution Inadequate technical solution results in higher maintenance costs OR4 Availability Availability of the provided services falls below the required standards OR5 OR6 Performance Raw material OR7 Staff shortages Shortage of skilled staff Delivery, timing, and quality of the provided services falls below the required standards Risk of poor availability of raw material required for operation of facilities (gas, water, etc)

56 54 # RISK CATEGORY DESCRIPTION Operating period risks OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability period OR9 Interruption Delays and additional costs arising due to: fire, explosion, flood, or civil commotion; official or unofficial industrial action; accidental damage to service roads; blockade other than force majeure OR10 Public relations Poor public relations resulting in additional remediation costs OR11 Damage Risk of vandalism, major damage, or destruction of facilities (other than force majeure) OR12 Tariff risk Tariffs/Gate Fees do not increase as planned OR13 Specific/Discriminatory Change in Law General legislative or regulatory changes giving rise to new or increased operating costs OR14 Compliance Failure to comply with current and future standards related to environment OR15 OR16 OR17 OR18 OR19 Contamination Claims Waste management targets Legislative compliance Voluntary Termination Contamination of the environment arising from the operation of the Landfill Facility, related works, giving rise to operating and/or service interruptions Cost of any claims and legal procedures related to the contamination of the environment during the contract period Failure to comply with commitments on waste management targets defined within ontenegro and EU policy documents Compliance with all the legislative framework applicable during the contract period, such as multiple licenses Financial consequences resulting from voluntary termination caused by the Contracting Authority OR20 Contractor default Financial consequences resulting from default of the Contractor OR21 Force ajeure Uninsurable risks related to force majeure events during operation OR22 Additional financing Additional financing for reconstruction, modification, re-equipment, etc, due to modification of legislation, policy or other kinds of modifications OR23 Inflation Operating costs are higher than anticipated due to inflation OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation OR25 Insurance availability Insurance is not available or more costly than expected during operation period OR26 Financial commitments Contracting Authority is unable to meet the financial commitments when they are due, operating period OR27 acroeconomic changes Risk of reducing the demand for the contracting services OR28 Demographic changes Demographic or social-economic changes affect the demand for the contracted service OR29 Obsolescence risk Risk of early obsolescence of structures and equipment OR30 Tax risk Cost related to various taxes variation during operation OR31 Waste tax Risk of new waste specific tax OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected OR33 End market Ability to secure end markets for sellable outputs OR34 Waste to landfill uncertainties Reliability of waste streams to landfill

57 55 Table 16 Global Risk atrix listing for Nikšić landfill project operating period risk, waste supply risk # RISK CATEGORY DESCRIPTION WR1 WR2 WR3 WR4 Waste supply risk Waste quantity from the authorised collectors Capacity arket entry Inspection risk Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities Financial risk related with market entry of the similar service provider authorised by the Contracting Authority Risk of inadequate inspection of waste entering Landfill Facilities resulting in damage to facilities and equipment WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns 532 Global Risk atrix with qualitative assessment Using the long list of all risk factors, the probability of occurrence and impact for each factor have been evaluated using a qualitative approach This implies assigning to each risk factor value of: Low = L - probability of risk occurrence or its impact on the project is immaterial; will not have consequences for ability to construct and commission the facility, landfill's ability to accept waste, landfill management company's financial sustainability, etc edium = - risk factors are likely to occur and will have notable impact on projects technical, financial, environmental sustainability; measures need to be taken to mitigate such risks and investment and operating costs need to be risk-adjusted to provide adequate contingency to the project High = H - risk factors will occur with near certainty, and the impact on projects technical, financial, environmental sustainability will be severe; in some cases, if number and combination of such risks is excessively high, project might be abandoned; if decision is taken to continue with implementation, measures need to be taken to mitigate risks, as well as high levels of risk-adjusted contingencies need to be provided; project may proceed only if, after risk-adjustment of costs, the project is still financially viable Qualitative assessment at this stage requires involvement of wide spectrum of experts from every field relevant to the project Since qualitative assessment involves subjectivity, an extended stakeholder workshop is useful to narrow down individual evaluations of stakeholders to commonly agreed consensus values attached to each risk factor

58 56 Based on the Global atrix listing above, a qualitative evaluation of risk factors in long list was conducted and results are presented below for the public sector baseline case (more detailed comments underpinning assignment of Low, edium, and High values are presented in Annex 1) Table 17 Global Risk atrix listing for Nikšić landfill project construction period risk # RISK CATEGORY DESCRIPTION PROBABILITY IPACT Construction/Investment period risk L=low, =medium, H=high L=low, =medium, H=high CR1 Late design approvals Late design approvals CR2 Quality of design Poor quality of design work causing delay CR3 PIU risk Delays in establishment of PIU L L CR4 CR5 CR6 Capacity of PIU risk Financing Procedural risks Limited capacity of PIU team, resulting in higher costs Non-availability of municipal or external cofinancing during construction Poor financial planning, monitoring, reporting - may result in delays in disbursement CR7 Claims risk Contractor asks for more time and money CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more CR9 Construction cost risk Higher construction costs than projected CR10 Corruption risk CR11 Land ground condition Risk of fraud or corruption in implementation process Unforeseen delays in construction due to poor ground condition, contamination, or archaeology CR12 Weather Delays due to adverse weather conditions L CR13 Authority Variation CR14 Contractor variation CR15 Statutory bodies variation CR16 Safety Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase Risk of accidents and resulting delays during construction CR17 Poor workmanship Cost and time over-runs due to poor workmanship L CR18 Resources CR19 Works CR20 Commissioning Delays due to lack of adequate labour during construction Risk of insolvency, failure to perform, poor standards by the contracted construction companies Failure to perform according to required standards during commissioning L L L L L L L L H L L L H

59 57 # RISK CATEGORY DESCRIPTION PROBABILITY IPACT CR21 CR22 Construction/Investment period risk Legislative compliance/licences Specific/Discriminatory Change in Law CR23 Receivership CR24 Force ajeure CR25 Reduced Financial Capability CR26 Unavailable Financing CR27 Interest rates CR28 Insurance availability Failure to obtain required licences and permits for construction works/compliance with all the legislative framework applicable in the construction period General legislative or regulatory changes giving rise to new or increased capital costs Cost of delays in any construction work and in provision of the regular services in case when one or more members of the consortium (if any) becomes insolvent Uninsurable risks related to force majeure events during construction Risk of Contractor becoming insolvent, or the provision of services requires a larger financial resources than estimated by the Contractor Risk related with ability to secure financial resources for the project Interest rates fluctuations resulting in additional financial costs during construction Insurance is not available or more costly than expected during construction period L=low, =medium, H=high L L L L=low, =medium, H=high CR29 Non-insurance risk Non-insured damage during construction L CR30 Financial commitments CR31 Protestor risk CR32 Strike risk Contracting Authority is unable to meet the financial commitments when they are due, construction period Cost and delay in construction caused by protestors Delays in construction and additional cost due to workers strike CR33 Site risk id-construction need for alternative site L H CR34 Tax risk Cost related to various taxes variation during construction CR35 Inflation risk Additional cost due to variation in inflation L L L L H H H H L L

60 58 Table 18 Global Risk atrix listing for Nikšić landfill project operating period risk # RISK CATEGORY DESCRIPTION PROBABILITY IPACT OR1 OR2 OR3 OR4 OR5 OR6 Operational risks Cost overrun Contract duration Inadequate technical solution Availability Performance Raw material Operating and maintenance costs are generally higher than expected The Public Authority is changing the duration requirements after the contract s signing Inadequate technical solution results in higher maintenance costs Availability of the provided services falls below the required standards Delivery, timing, and quality of the provided services falls below the required standards Risk of poor availability of raw material required for operation of facilities (gas, water, etc) L=low, =medium, H=high L L L=low, =medium, H=high OR7 Staff shortages Shortage of skilled staff L OR8 OR9 Latent defects Interruption OR10 Public relations OR11 Damage Unforeseen costs arise due to latent defects arising after liability period Delays and additional costs arising due to: fire, explosion, flood, or civil commotion; official or unofficial industrial action; accidental damage to service roads; blockade other than force majeure Poor public relations resulting in additional remediation costs Risk of vandalism, major damage, or destruction of facilities (other than force majeure) OR12 Tariff risk Tariffs/Gate Fees do not increase as planned H OR13 Specific/Discriminatory Change in Law OR14 Compliance OR15 Contamination OR16 Claims OR17 Waste management targets OR18 Legislative compliance OR19 Voluntary Termination General legislative or regulatory changes giving rise to new or increased operating costs Failure to comply with current and future standards related to environment Contamination of the environment arising from the operation of the Landfill Facility, related works, giving rise to operating and/or service interruptions Cost of any claims and legal procedures related to the contamination of the environment during the contract period Failure to comply with commitments on waste management targets defined within ontenegro and EU policy documents Compliance with all the legislative framework applicable during the contract period, such as multiple licenses Financial consequences resulting from voluntary termination caused by the Contracting Authority L L L L L H L L L L L L L H H L H H

61 59 # RISK CATEGORY DESCRIPTION PROBABILITY IPACT Operational risks OR20 Contractor default OR21 Force ajeure OR22 Additional financing OR23 Inflation OR24 Interest rates OR25 Insurance availability OR26 Financial commitments OR27 acroeconomic changes OR28 Demographic changes OR29 Obsolescence risk OR30 Tax risk Financial consequences resulting from default of the Contractor Uninsurable risks related to force majeure events during operation Additional financing for reconstruction, modification, re-equipment, etc, due to modification of legislation, policy or other kinds of modifications Operating costs are higher than anticipated due to inflation Interest rates fluctuations resulting in additional financial costs during operation Insurance is not available or more costly than expected during operation period Contracting Authority is unable to meet the financial commitments when they are due, operating period Risk of reducing the demand for the contracting services Demographic or social-economic changes affect the demand for the contracted service Risk of early obsolescence of structures and equipment Cost related to various taxes variation during operation L=low, =medium, H=high L L L L=low, =medium, H=high OR31 Waste tax Risk of new waste specific tax OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected OR33 End market Ability to secure end markets for sellable outputs H OR34 Waste to landfill uncertainties Reliability of waste streams to landfill L H H L H H

62 60 Table 19 Global Risk atrix listing for Nikšić landfill project operating period risk, waste supply # RISK CATEGORY DESCRIPTION PROBABILITY IPACT Waste supply risk L=low, =medium, H=high L=low, =medium, H=high WR1 Waste quantity from the authorised collectors Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount H WR2 Capacity Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities WR3 arket entry Financial risk related with market entry of the similar service provider authorised by the Contracting Authority L WR4 Inspection risk Risk of inadequate inspection of waste entering Landfill Facilities resulting in damage to facilities and equipment L WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns H WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns 533 Risk Impact Chart and Strategy Using the aggregate risk matrix and assigned probability and impact values, a Risk Impact Chart and related Risk anagement Strategy have been developed The chart allows for quick and relative comparison of risk factors, and development of Risk anagement Strategy vis-a-vis each risk element The Strategy comprises four distinct approaches, each addressing project risk acceptance level and associated action: ITIGATE - this category includes risks that are not acceptable for the project, and should they occur, they would have significant time and cost related impact on the project In some cases, the occurrence of such risks would render the entire project impossible to implement For each such risk factor, a mitigation measure needs to be put in place in order either to eliminate it entirely or to have a clear strategy of how to address it when it happens A risk-adjusted cost contingency should also be included into calculation of investment and operating costs, should the mitigation measures fail and risk actually occurs CONTROL - this category includes risks that are unlikely to occur (probability L), however, would have significant impact on the project if happened (impact or H) Since the probability of these risks is low, limited

63 61 actions in controlling factors of risk occurrence might be effective in preventing risk from happening at all ONITOR these are categories of risks that are likely to happen during the project lifetime (probability or H), however, the impact on the project is not significant (impact is L) ost such risks are, frequently, external and cannot be effectively prevented by the project team Therefore, the Strategy with regards to such risk factors is to keep them under constant watch and monitoring and decide on the course of actions when they occur, depending on the expected impact on project IGNORE - these risks are with low likelihood and low impact on the project, hence, in most cases, can be ignored without any consequences for the project Risk Impact Chart for Nikšić landfill project has been developed and is presented below Figure 17 Risk Impact Chart and associated risk management strategy/actions

64 Reduced Risk atrix To successfully implement the waste management project, the key focus of risk mitigation should be on mid- to high-level risks An alternative approach can result in too high transaction cost of risk mitigation and management Therefore, risks in the range of medium-high for both probability and impact are selected for mitigation and risk-adjustment contingency provisions All other risk elements are removed from the Global Risk atrix, thereby arriving at the Reduced Risk atrix The Reduced Risk atrix is shown in the table below A total of fourteen construction period risk factors, thirteen operation period risk elements, and four waste supply and quantity related risk factors are retained in Reduced Risk matrix from the original long list Table 20 Reduced Risk atrix for Nikšić Landfill Project Short list number Long list number RISK CATEGORY Construction/Investment period risk DESCRIPTION RISK ANALYSIS IPACT L=low, =medium, H=high CR1 CR1 Late design approvals Late design approvals CR2 CR2 Quality of design Poor quality of design work causing delay CR3 CR7 Claims risk Contractor asks for more time and money CR4 CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more CR5 CR9 Construction cost risk Higher construction costs than projected CR6 CR13 Authority Variation CR7 CR14 Contractor variation CR8 CR15 Statutory bodies variation CR9 CR10 CR21 CR22 Legislative compliance/licences Specific/Discriminatory Change in Law CR11 CR27 Interest rates CR12 CR28 Insurance availability CR13 CR34 Tax risk Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase Failure to obtain required licences and permits for construction works/compliance with all the legislative framework applicable in the construction period General legislative or regulatory changes giving rise to new or increased capital costs Interest rates fluctuations resulting in additional financial costs during construction Insurance is not available or more costly than expected during construction period Cost related to various taxes variation during construction H

65 63 CR14 CR35 Inflation risk Additional cost due to variation in inflation Operational risks OR1 OR1 Cost overrun OR2 OR8 Latent defects OR3 OR12 Tariff risk OR4 OR13 Specific/Discriminatory Change in Law OR5 OR14 Compliance OR6 OR18 Legislative compliance OR7 OR20 Contractor default OR8 OR23 Inflation OR9 OR24 Interest rates OR10 OR27 acroeconomic changes OR11 OR29 Obsolescence risk OR12 OR30 Tax risk Operating and maintenance costs are generally higher than expected Unforeseen costs arise due to latent defects arising after liability period Tariffs/Gate Fees do not increase as planned General legislative or regulatory changes giving rise to new or increased operating costs Failure to comply with current and future standards related to environment Compliance with all the legislative framework applicable during the contract period, such as multiple licenses Financial consequences resulting from default of the Contractor Operating costs are higher than anticipated due to inflation Interest rates fluctuations resulting in additional financial costs during operation Risk of reducing the demand for the contracting services Risk of early obsolescence of structures and equipment Cost related to various taxes variation during operation OR13 OR31 Waste tax Risk of new waste specific tax OR14 OR32 Price of sellable output OR15 OR33 End market OR16 OR34 Waste supply risk WR1 WR1 WR2 WR2 Capacity Waste to landfill uncertainties Waste quantity from the authorised collectors WR3 WR5 Planned shutdown WR4 WR6 Un-planned shutdown Risk that price of the marketable outputs from the Landfill Facility is lower than expected Ability to secure end markets for sellable outputs Reliability of waste streams to landfill H Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities Unable to accept or treat waste due to planned shutdowns Unable to accept or treat waste due to unplanned shutdowns H H H H H H H H

66 Quantification of Reduced Risk atrix The final step in preparing Risk atrix for Nikšić Landfill project for further analysis in the financial model is to use critical risk factors in the Reduced Risk atrix and replace previously assigned notional values of edium and High, with actual numeric values In other words: Probability - value of up to 100% needs to be assigned to each risk factor in Reduced Risk matrix Impact - value of up to 100% needs to be assigned to each risk factor in Reduced Risk matrix as percentage of the Base Cost Value in the financial model The Base Cost Value is the underlying estimated cost of investment or operation, which is non-risk adjusted For example: If the Probability of risk CR5 is set at 10%, and Impact of risk CR5 is set at 5% of Total Investment Costs (Base Cost), and Total Investment Cost is 1 million EUR, then onetary value of risk CR5 will be calculated using product of 10% x 5% x 1 million =5,000 EUR, or Risk adjusted Total Investment Cost to be used in the financial model will be equal to 1005 million EUR The process of quantification of risks is subjective and based on specialist knowledge of local conditions, sector specifics, project circumstances, and level of project readiness Therefore, the quantification is typically carried out during managed specialist Risk Workshop, where various risk likelihoods and potential impacts are considered and assigned on the basis of consensus Using the above Reduced Risk atrix, the quantification of all risk factors has been prepared and is presented in the table below It will be used in further project analysis as the Risk atrix for calculation of Public Sector Benchmark (PSB) In this respect, risk levels will be treated as those relevant to the traditional procurement method

67 65 Table 21 Quantified Risk atrix for the Nikšić Regional Landfill Project SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IPACT COST BASIS Construction/Investment period risk CR1 CR1 Late design approvals Late design approvals 15% 5% %of Procurement and Supervision Cost CR2 CR2 Quality of design Poor quality of design work causing delay 10% 2% %of Procurement and Supervision Cost CR3 CR7 Claims risk Contractor asks for more time and money 20% 5% % of Total Capital Investment Costs CR4 CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more 30% 10% %of Procurement and Supervision Cost CR5 CR9 Construction cost risk Higher construction costs than projected 15% 5% % of Total Capital Investment Costs CR6 CR13 Authority Variation Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase 10% 10% % of Total Capital Investment Costs CR7 CR14 Contractor variation Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase 10% 10% % of Total Capital Investment Costs CR8 CR15 Statutory bodies variatiotially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the ini- 15% 10% % of Total Capital Investment Costs CR9 CR21 Failure to obtain required licences and permits for construction Legislative compliance/licences works/compliance with all the legislative framework applicable in the construction period 15% 30% %of Procurement and Supervision Cost CR10 CR22 Specific/Discriminatory General legislative or regulatory changes giving rise to new or increased capital costs Change in Law 5% 15% % of Total Capital Investment Costs CR11 CR27 Interest rates Interest rates fluctuations resulting in additional financial costs during construction 15% 10% % of Total Capital Investment Costs CR12 CR28 Insurance availability Insurance is not available or more costly than expected during construction period 10% 10% % of Total Capital Investment Costs CR13 CR34 Tax risk Cost related to various taxes variation during construction 10% 5% % of Total Capital Investment Costs CR14 CR35 Inflation risk Additional cost due to variation in inflation 20% 15% % of Total Capital Investment Costs Operational risks OR1 OR1 Cost overrun Operating and maintenance costs are generally higher than expected 20% 10% % of Total O& Costs OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability period 5% 15% % of Total Investment Costs OR3 OR12 Tariff risk Tariffs/Gate Fees do not increase as planned 20% 15% % of Total O& Costs OR4 OR13 Specific/Discriminatory General legislative or regulatory changes giving rise to new or in- 5% 10% % of Total O& Costs

68 66 Change in Law creased operating costs OR5 OR14 Compliance Failure to comply with current and future standards related to environment 10% 15% % of Total O& Costs OR6 OR18 Legislative compliance Compliance with all the legislative framework applicable during the contract period, such as multiple licenses 15% 10% % of Total O& Costs OR7 OR20 Contractor default Financial consequences resulting from default of the Contractor 5% 30% % of Total O& Costs OR8 OR23 Inflation Operating costs are higher than anticipated due to inflation 20% 15% % of Total O& Costs OR9 OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation 10% 5% % of Total O& Costs OR10 OR27 acroeconomic changes Risk of reducing the demand for the contracting services 5% 10% % of Total O& Costs OR11 OR29 Obsolescence risk Risk of early obsolescence of structures and equipment 5% 10% % of Total O& Costs OR12 OR30 Tax risk Cost related to various taxes variation during operation 5% 5% % of Total O& Costs OR13 OR31 Waste tax Risk of new waste specific tax 10% 5% % of Total O& Costs OR14 OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected 15% 25% % of Total O& Costs OR15 OR33 End market Ability to secure end markets for sellable outputs 15% 25% % of Total O& Costs OR16 OR34 Waste to landfill uncertainties Reliability of waste streams to landfill 15% 25% % of Total O& Costs Waste supply risk WR1 WR1 Waste quantity from the Risk that the quantity of waste from the authorised waste collector authorised collectors falls below annual forecasted amount 25% 20% % of Annual waste projection tonnage WR2 WR2 Capacity Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities 10% 10% % of Annual waste projection tonnage WR3 WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns 50% 5% % of Annual waste projection tonnage WR4 WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns 10% 10% % of Annual waste projection tonnage

69 67 6 Available models for landfill construction and management 61 Introduction No standard, commonly agreed definition of a Public-Private-Partnership (PPP) arrangement exists In the most typically accepted form, a PPP is defined as a contractual agreement between the public and the private sector whereby the private party provides services traditionally delivered by a public sector actor In relative terms, PPP transactions combine elements of traditional and fully private (merchant based) service provision: The transfer of service delivery to the private sector may take place in a number of forms In each individual case, the effectiveness of a PPP arrangement depends on a sufficient transfer of risk to the private partner and the value for money achieved Regardless of manner and extent of private sector involvement, it is essential to stress that the overall responsibility for compliance with waste management standards and legal requirements rests with the public sector A PPP transaction should not be considered as its own objective and should only be considered if it delivers benefits that would otherwise not be possible to derive within a public service management arrangement Accordingly, the key reasons for using PPP are: Need to mobilize additional financial resources Requirement to promote operational efficiency not possible to be achieved within a public service management arrangement (design efficiency, innovative technologies, better risk allocation, etc) Potential and scope exists to optimise lifecycle costs of facility operation (Capex & Opex)

70 68 When implementing a PPP transaction, however, it must be remembered that it comes at additional cost to public authorities: Transaction costs of preparing, procuring, contracting, and monitoring the private operator Potential current and future costs related with partial loss of flexibility and control over the sector 62 PPP models and characteristics In the order of increasing degree of transfer of responsibility and, hence, risk to the private sector, the main types of PPP contracts applicable in waste management can be summarized as in the table below

71 69 Table 22 odalities of PPP PPP with increased risk transfer to the private sector Full private, merchant based provision of services Involvement of the private sector in traditionally procured projects Involvement of the private sector in traditionally procured projects PPP with increased risk transfer to the private sector Full private, merchant based provision of services odalities of PPP Service contracts Operating and management contracts Simple leasing Design, Build and Operate (DBO/BOT) Design, Build, Operate and Finance (DBFO/DBFOT) Concession contracts Complex lease Privatisation Divestiture of public assets Design, Build, Own, Operate (DBOO) Key characteristics Service provision against a fee and often with remuneration linked to performance, no investments Private party designs, builds, and operates the assets with external, its own, or combination of external and its own funding Operation is typically fee-based, however, in some cases, private operator might be allowed directly to define and charge service payments (tariffs) to customers Service provision on fully merchant basis and charging own defined market price for services to customers In some cases (for example DBOO, or BOO) ability to set any service charge could be limited during predefined period Payment echanism Payment echanism is annual Fee payment by Public Authority covering cost of provided services Fees are not linked to tariff to customers Payment echanism is, typically, an annual Fee payment by Public Authority covering O& costs and provide reasonable profit margin Fees are usually not linked to tariff to customers However, in number of variations of these types of contracts (for example Concession type of contracts) PPP operator receives right to directly charge and collect tariff payment from customers Payment echanism is market based price of service 621 Service, Operations, anagement contract These types of PPP contracts are widely used in the waste management sector The public sector designs and builds the facility in a traditional procurement procedure and further outsources it for operation to the private sector Key benefits include:

72 70 Substantial improvement in service levels Service specifications and standards are easy to define/describe/monitor Payment mechanism (in most cases) is simple and takes the form of regular O& payment from public authorities, and provides sufficient and clear incentive to private party Cost of services and required payment are predictable and do not involve high degree of uncertainty Contracts are not complex and provide well-defined performance specifications and output requirements Potential to transfer significant operating period risk to the private sector Public sector can benefit from transfer of experience from the private operator during the contract period These types of contracts are easily scalable and can include more than one waste management facility operation, thereby providing increased scope for cost efficiency and economy of scale Service contract variant allows the allocation of some risks to the PPP operator, hence it also allows flexibility on the part of the public authority - for example, linking annual payment to the amount of waste arriving to the facility Yet, an operating contract is not without its pitfalls and requires that certain conditions are met Key issues: Operating contracts and their variations, require detailed planning and modelling of services to be outsourced the public authority needs clearly to understand what it is outsourcing and which minimum standards it wants to be met Frequent tendering process is required as contracting periods are short No life-cycle costing optimisation is possible, as construction and operation periods are developed under different methods and with different contractors Qualified and well-prepared staff on the part of public authority is required to provide effective monitoring of the contract Strong regulatory framework is needed for effective regulation of operating contracts

73 71 No investment obligations are passed to private operator (including investment obligations during operating period, which remain the responsibility of the public body) No transfer of design and construction risks is possible Possibility to renegotiate scope of services is reduced Short-term operating contracts do not provide sufficient incentives for private operator to optimise costs in the long term When service or operating contracts are used for one facility (landfill) it might reduce possible cost-efficiency and shift some of the key risks back to the public authority (for example, waste supply risk) The figure below shows the typical relationships between various contractual parties in an operating contract type of PPP arrangement Figure 18 Typical structure of operating contract and its variations Client (Public Authority) 622 Design Build Operate contract (DBO) Key benefits include: The most important benefit is the possibility of life-cycle costing, which allows the notable reduction or optimisation of overall costs of the facility over the medium to long term As the design and operation are carried out by the same private party, this set-up offers strong incentives for utilising innovative technological solutions

74 72 Contracts are typically medium to long term, which eliminates the need for multiple tendering procedures and related costs for the public authority Wider scope of risks - design, construction, and operations - are transferred to private sector If the payment mechanism is not linked to consumer tariffs, then it is usually rather simple and involves regular payments from the public authority to the PPP Operator to cover the cost of operation only (similar to O& payment) Furthermore, the public authority maintains control over the payments from users Due to length of contract, it is typically easy to negotiate a provision that allows the public authority to change the scope of services to be provided Private sector typically undertakes additional obligations for reinvestments in operating period, sometimes out of its own operating margin Key issues: The public authority and its advisors need to provide relatively complex and detailed specifications for both construction and operating phases Due to longer term of contracts and higher risks involved, more rigorous monitoring is required, sometimes requiring establishment of specialpurpose monitoring body within the public authority Higher demands for skilled public authority staff both in the construction and operation period As in the case of operating contract, thorough local planning of services is a pre-condition Initial construction cost obligations remain with public authority, and, typically, no financing risk is transferred to the private sector in the construction period Contracts are typically more complex, due to significantly larger risk factors, construction and operating obligations, monitoring and oversight functions, etc Due to complexity of contracts, termination is less likely and more costly, even if PPP operator performs below set standards Public authority typically bears the waste supply risk, either in the form of waste quantity guarantee or revenue guarantee (put-or-pay guarantee)

75 73 The following figure shows the typical relationships between various contractual parties in a DBO contract type of PPP arrangement Figure 19 Typical structure of DBO contract and its variations Client (Public Authority) 623 Design Build Finance Operate contract (DBFO) DBFO, is the same as DBO contracts, with the private sector also providing funding for the project Hence, DBFO contracts shift a substantial part of financing risk from the public authority to the private sector This risk transfer is not without costs, however, as the private cost of financing is more expensive and the PPP Operator will also require additional guarantees from the public authority in order to ensure it will recover its investment Key benefits include (in addition to DBO contract benefits): DBFO is a PPP option that shifts the majority of risks to private party, such as: - Risk of delays - arket risk - Interest rate and exchange rate risks - Procurement risk - Technology risks - Inflation risk - Permitting and licensing risk

76 74 Investment obligations with majority of associated risks are fully transferred to private sector Once the contract is signed, the obligations of public authority are limited to monitoring, although such monitoring can be rather complex and requires permanent, dedicated public authority staff over the entire lifetime of the contract Public authority typically has an opportunity to change the scope of services to be provided via introduction of different variations (since the lifetime of the contract is long, such variations can be accommodated by the private contractor) Key issues: Complex and long tender process with extensive negotiation to select private operator Requires expensive technical, financial and legal advisers Complex tender documents and need for highly experienced public authority staff to carry out the entire process Detailed local planning of services is a pre-condition for entering into DBFO contract with private operator Higher risk of service disruptions compared to DBO contract 5 Significant financial guarantees from public authority required 5 Service disruptions could occur for a number of reasons, among which interruptions caused by disputes/arbitration between the Public Authority and PPP contractor When the PPP contractor also finances investments of the project in DBFO, additional possible reasons for disputes/arbitration appear related to financing or recovery of investments Hence, the likelihood for disruptions/interruptions of service increase in DBFO compared to DBO

77 75 Figure 20 Typical structure of DBFO contract and its variations 624 Concession Concessions are variations of DBO and DBFO contracts whereby a private operator receives the full right over operation of all assets, sometimes with and sometimes without investment obligations The key difference is that a concession-type contract allocates to the private operator the right to charge and collect tariff payments from customers A PPP operator recovers all of its costs from collected tariffs and frequently also pays a pre-defined concession fee to the public authority Thus, in addition to all the other risks transferred to the private party in all previously described forms of contracts, the concession also transfers the risk of non-collection of payments to the private operator 625 Lease contracts Lease contracts are very similar to concessions, with two main differences being that lease PPP operator pays to the public authority an annual lease payment for asset lease from collected user charges, and the lease PPP operator typically does not have investment obligations (that is, it operates on the basis of contract similar to an operating contract)

78 Summary comparison of PPP modalities in waste sector In the table below, the key characteristics and requirements of PPP modalities in waste management sector are compared Table 23 Comparison of various PPP modalities for landfill facility 63 PPP process Given that the decision has been taken to consider PPP as a possible means to provide municipal services, a number of standard steps need to be undertaken in the process of determining which PPP form, if any, is appropriate to the given situation In a simplified, relatively generic way, the entire process can be divided into three main phases; these are depicted in the following figure Figure 21 PPP process and steps

79 77 During Phase 1, the key concept of services to be provided via PPP is defined and a detailed feasibility assessment is prepared, including technical, financial, legal, and environmental feasibility of the project During the same stage, a so-called Public Sector Benchmark 6 is prepared and Value for oney assessment methodology is developed Key questions to ask during Phase 1, among others, are: What are the key drivers for proposing this project as a PPP? Which services are planned to be outsourced to PPP operator? What are the proposed roles of public and private parties? Is the technology proven and commercially available? Are there significant environmental impacts that have not been mitigated? Are there significant social impacts that have not been mitigated? Is the cost-benefit of the proposed solution acceptable compared to available alternatives disregarding possible grants? Is it clear from where the money that will ultimately pay for the project will come? Is the project ownership well defined? Is the project sponsor committed to the project? Is the project sponsor capable of implementing the project? Are the project boundaries well-defined and tasks for various components distributed between project partners? Are links to other projects clear? Are there any legal limitations on the proposed project scope? Are there financial arguments for using PPP? Are there possibilities for risk transfer to the private sector? Is it possible to specify output based objectives? 6 In essence, this is the cost of the investment/operating costs plus the risk if the public sector were to conduct all of the investment and operations of the landfill; in other words, no private sector involvement

80 78 Will it be possible for the private sector operator to introduce innovative solutions that optimize project life cycle costs? Is the project sponsor ready to transfer key design decisions to the private sector? Is the project sponsor ready to transfer management autonomy to the private sector in the O& phase? Competition during the tendering of a PPP is a key prerequisite for obtaining Value for oney for the public sector Competition requires that the tender is sufficiently attractive so that several experienced private sector operators will bid To facilitate this, during Phase 1 a mini market sounding of selected local and regional private sector operators may be performed to: assess whether there is real interest among ontenegrin and selected international private sector operators to participate in a given PPP project get feedback on the technical aspects of the project, such as types of services that the private sector operators would be interested in and capable of providing get feedback on the necessary framework conditions (legal, contractual, institutional and commercial) for attracting private sector participation in the specific sector or project in ontenegro Public Sector Benchmark (sometimes referred to as Public Sector Comparator) needs to be developed at this stage and Value for oney assessment methodology prepared Value for oney will typically consist of two key factors to be evaluated: Competitive tendering process, ensuring price completion Quantitative evaluation of the impact of risk transfer (using general approach of decision-making as depicted in the figure below

81 Basic estimate of costs Quantification of risk Public sector comperator Transaction costs Higher financing costs Optimisation of life cycle costs Focus of efficiency Better risk allocation Costs of PPP solution Infrastructure Projects Facility Technical Assistance Window 79 Figure 22 Quantitative evaluation of the impacts of risk transfer Phase 2 of preparation involves development of complete tender documentation for the project In a typical waste management this would comprise: Prequalification Notice Form of the Invitation to Tender (ITT) Draft Public Private Partnership agreements (contract) Draft operations agreements Draft lease agreements Articles of Association and related documents (ie, shareholders agreements, etc), if necessary Sale and purchase of leasing agreements, if necessary Possible contracts with other municipalities Other legal documents required under ontenegrin law for the purposes of the relevant tender Upon approval of tender dossier package, the PPP tender will be formally launched in the local Official Gazette, an electronic tendering system, or other means in accordance with the law

82 80 Phase 3 of the PPP process beings when the tender is announced It normally includes various processes before bids are received, such as: Arranging pre-bid meetings Creating and managing a data room in which all relevant electronic and documentary information will be available to all bidders Arranging visits to the various sites to enable bidders to inspect the facilities that will constitute the project Preparing answers and responding to technical, financial and legal queries Ensuring that information is provided equally to all bidders Seeking feedback from bidders and making necessary adjustment to bid documentation Once the bids have been received, an evaluation process is started by appointed Evaluation Committee members Depending on the type of tender used (open tender, negotiated tender, etc), the first stage of evaluation process may or may not be concluded by appointment of the Preferred Bidder - a bidder with lowest price for services, but pending negotiation of final risk allocation between parties on the basis of a preliminary risk allocation proposal included in the tender dossier On the basis of negotiations with the Preferred Bidder, a final risk matrix and allocation for the given PPP option is defined and Value for oney is evaluated If sufficient Value for oney is established, the contract is signed and the project effective date and operational commencement date are set in the contract 64 Recommendation for Nikšić Regional Landfill Case Having reviewed modalities for private sector involvement in landfill management, the Nikšić regional landfill is further analysed with a view of assessing the most suitable option for its construction and operation The chosen modality for PPP should make sense from financial, technical, legal, institutional, and environmental points of view and result in better value for money in the private operator option compared to traditional procurement methods

83 81 Value for money, in a general sense, reflects the ability of public and private parties efficiently to share project risks, thereby reducing costs over the entire project life-cycle That, in turn, requires that project risks are well-known and can be quantified, as well as that cost implications are comparable across various PPP options and traditional procurement methods The following table summarises the characteristics of the Nikšić regional landfill project, and relates them to the main requirements of the various PPP models under consideration The table is intended to list specific project characteristics and analyse (using Yes or No) which of the PPP modalities are suitable for implementation at the current stage For example, "Statutory Risk" is included as one of the project characteristics in the table below The statutory risks are larger for DBO and DBFO - hence the table suggests that DBO and DBFO should not be used at this stage (indicated using no ); instead, the project could start as OC PPP modality (indicated as yes ) In another example, "Landfill site is well defined" the table indicates yes for all three modalities, meaning that this particular characteristic of the project does not preclude any of the modalities to be used in Nikšić The recommended course of action is suggested based on a qualitative analysis in the table That is, the OC modality has the most yes responses, indicating its higher suitability compared to the other modalities at the current stage of development of the Nikšić regional landfill project Table 24 ain characteristics of Nikšić regional landfill vs PPP options Project characteristics Comment PPP modality implication OC DBO DBFO Landfill site is well defined Low contamination risk, site risk Yes Yes Yes Complex of facilities and services to be provided are clear Technical specifications and standards of services can be clearly spelled-out Contract will be held by three municipalities or their representative body Uncertainty with regard to amount of waste arket competition edium requirements from public authority staff in tender preparation edium requirements from public authority staff in project monitoring High coordination and public authority complications risk from the point of view of PPP operator Requires regular weighing to establish (hence PPP company will not assume waste risk and will demand fixed payment independent of volume of waste this may be too costly to public authority if waste volumes are low) Availability of other landfills (Podgorica) within reasonable transportation distance could reduce reliability of waste flows and revenues Yes Yes Yes Yes Yes Yes Yes No No Yes (use short term Service Contract) No No Yes No No

84 82 Project characteristics Recycling capabilities and markets are unclear Financial commitment, construction period Financial commitment, operating period Revenue risk Statutory risks Ownership Scale of capital cost risk Stability of service demand risk Comment PPP modality implication OC DBO DBFO High risk of revenue shortage Yes Yes No Risk of budget funds delay for construction is high Yes No No unicipal budgets are weak, hence risk of inability to provide guarantees Tariffs for collection already high, with additional cost of landfill facility - affordability pressure and risk of non-payment No precedent of PPP in waste sector, imposing high risks of statutory approvals, licensing both in construction and operation periods Ownership will remain with public authority at all times Investment requirements are high given expected revenues Difficult to attract private investors to the project Service demand is un-mapped and based on calculations rather than actually recorded data Imposes high degree of uncertainty both on costs and revenues Yes No No Yes Yes No Yes No No Yes Yes Yes Yes Yes No Yes Yes No The main conclusions from the analysis of project characteristics are: Nikšić regional landfill is a simple facility with basic sorting and disposal facilities Hence, degree of applicable innovative technology or know-how in the process of its construction and operation is limited Technologies proposed for use at the landfill are well-known and proven, and it is possible to prepare detailed specifications for service standards for purposes of performance monitoring There is very high degree of revenue and waste flow uncertainty in all three municipalities, exposing both parties of potential contract to high risks unicipal budgets are weak, rendering provision of medium to long-term revenue guarantees (put or pay guarantees) impossible Private sector is most likely to view project as a risky venture, hence attaching a high risk premium to proposed O& payment or financial internal rate of return (IRR) in case of financing Inter-municipal coordination for municipal services provision is a new concept in ontenegro, and reliable experience has not been established

85 83 Legal and institutional enforcement and compliance risk are likely to bring additional risk elements and be factored into the bid price by private operators These project characteristics suggest taking a cautious course of action in involving the private sector into Nikšić regional landfill project at this stage There are many unknowns in the equation of the project, and, therefore, there is a high likelihood of the PPP contract being negotiated under significant informational asymmetry between the public authority and the private entities - potentially leading to higher price of the contract Based on these aspects, the recommended approach is to move the process ahead one step at a time, eliminating on the way the main uncertainties and thereby optimising public cost exposure to the project over the project lifetime The proposed sequence of actions is shown on the figure below Figure 23 Proposed course of action for private sector participation in Nikšić regional landfill Short term Service contract: 3-5 years Design and build facility using traditional procurement method In the construction period, tender PPP Service contract During the Service Contract key performance indicators are - facility operation according to pre-defined performance standards, establishment of reliable record base of waste and revenue flows from facility operation Clarification of Contractual, Statutory and Institutional issues Developement of municipal staff capacity for monitoring PPP projects edium term operating management contract, 5-10 years Based on the successes or failures of Service Contract, tender a 10 year operational management contract anagement contract should reflect refined waste amounts as well as adopted new recycling and biowaste diversion targets that will be in force at that time in ontenegro Long-term concession contract with inwestment obligations, years Depending on the results of Service Contract phase, and if in the process need for additional invetsments arise to meet waste management targets or Facility expansion, instead of edium Term Operating Contract, prepare and tender longterm (10-15 year) Concession contract with investment obligations 641 Nikšić Landfill Risk atrix and Value for oney calculations Based on the risk assessment methodology described in this report and qualitative assessment of risks identified in analysis of Nikšić regional landfill project,

86 84 it is possible to derive a Project Risk atrix using as a basis the PSB Risk atrix developed earlier 7 In doing so, the following assumptions have been used: Types of risk factors in traditional and PPP procurement methods are the same and differ only by the variations in each risk assessment by the public authority and the private operator Private operators are better positioned and more experienced in managing similar facilities and hence would be able to operate the Nikšić regional landfill with lower operating costs (risk of operating cost overruns would be lower in PPP cases) Private operators will be better positioned to mitigate various environmental and other risks that are directly or indirectly under their control (hence, risk probabilities and impacts related with such factors would be lower weighted in cases of PPP) Private operators, however, would be more conservative in terms of risks that are not under their control, and would attach higher risk premium to them (especially, if it concerns such key risk factors as waste availability, revenue guarantee, and financial commitments) No transaction cost of PPP process has been included into the risk matrix analysis and quantification - hence the PSB and PPP options will be compared on like-for-like basis No financial costs of DBFO option have been included in the matrix Using these assumptions and PSB Risk atrix, probability and impact matrixes for BOT and Operating Contract types of modalities have been developed and are presented below 7 This exercise is indicative and included primarily to demonstrate both the methodological approach as well as the expected magnitude of risk and value for money for the case of the Nikšić regional landfill A higher level of accuracy can be obtained with detailed input from all stakeholders in order to understand all possible risks and their magnitudes

87 85 Table 25 Risk atrix for the Operating Contract PPP odality, Nikšić regional landfill SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IPACT COST BASIS Construction/Investment period risk CR1 CR1 Late design approvals Late design approvals 15% 5% %of Procurement and Supervision Cost CR2 CR2 Quality of design Poor quality of design work causing delay 10% 2% %of Procurement and Supervision Cost CR3 CR7 Claims risk Contractor asks for more time and money 20% 5% % of Total Capital Investment Costs CR4 CR8 Procurement risk - time and cos Tendering and procurement process takes longer and cost more 30% 10% %of Procurement and Supervision Cost CR5 CR9 Construction cost risk Higher construction costs than projected 15% 5% % of Total Capital Investment Costs CR6 CR7 CR8 CR9 CR13 Authority Variation CR14 Contractor variation CR15 Statutory bodies variation CR21 Legislative compliance/licences CR10 CR22 Specific/Discriminatory Change in Law CR11 CR27 Interest rates CR12 CR28 Insurance availability Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase Failure to obtain required licences and permits for construction works/compliance with all the legislative framework applicable in the construction period General legislative or regulatory changes giving rise to new or increased capital costs Interest rates fluctuations resulting in additional financial costs during construction Insurance is not available or more costly than expected during construction period 10% 10% % of Total Capital Investment Costs 10% 10% % of Total Capital Investment Costs 15% 10% % of Total Capital Investment Costs 15% 30% %of Procurement and Supervision Cost 5% 15% % of Total Capital Investment Costs 15% 10% % of Total Capital Investment Costs 10% 10% % of Total Capital Investment Costs CR13 CR34 Tax risk Cost related to various taxes variation during construction 10% 5% % of Total Capital Investment Costs CR14 CR35 Inflation risk Additional cost due to variation in inflation 20% 15% % of Total Capital Investment Costs Operational risks OR1 OR1 Cost overrun Operating and maintenance costs are generally higher than expect 15% 5% % of Total O& Costs OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability 5% 15% % of Total Investment Costs

88 86 SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IPACT COST BASIS period OR3 OR12 Tariff risk Tariffs/Gate Fees do not increase as planned 25% 25% % of Total O& Costs OR4 OR5 OR6 OR13 Specific/Discriminatory Change in Law OR14 Compliance OR18 Legislative compliance General legislative or regulatory changes giving rise to new or increased operating costs Failure to comply with current and future standards related to environment Compliance with all the legislative framework applicable during the contract period, such as multiple licenses 5% 15% % of Total O& Costs 5% 5% % of Total O& Costs 15% 25% % of Total O& Costs OR7 OR20 Contractor default Financial consequences resulting from default of the Contractor 5% 30% % of Total O& Costs OR8 OR23 Inflation Operating costs are higher than anticipated due to inflation 20% 10% % of Total O& Costs OR9 OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation 0% 0% % of Total O& Costs OR10 OR27 acroeconomic changes Risk of reducing the demand for the contracting services 5% 5% % of Total O& Costs OR11 OR29 Obsolescence risk Risk of early obsolescence of structures and equipment 0% 0% % of Total O& Costs OR12 OR30 Tax risk Cost related to various taxes variation during operation 5% 2% % of Total O& Costs OR13 OR31 Waste tax Risk of new waste specific tax 10% 3% % of Total O& Costs OR14 OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected 20% 30% % of Total O& Costs OR15 OR33 End market Ability to secure end markets for sellable outputs 20% 30% % of Total O& Costs OR16 OR34 Waste to landfill uncertainties Reliability of waste streams to landfill 15% 30% % of Total O& Costs Waste supply risk WR1 WR2 WR1 Waste quantity from the authorised collectors WR2 Capacity Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities 25% 30% % of Annual waste projection tonnage 0% 0% % of Annual waste projection tonnage WR3 WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns 50% 5% % of Annual waste projection tonnage WR4 WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns 0% 0% % of Annual waste projection tonnage

89 87 Table 26 Risk atrix for BOT PPP modality, Nikšić regional landfill SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IPACT COST BASIS Construction/Investment period risk CR1 CR1 Late design approvals Late design approvals 15% 5% %of Procurement and Supervision Cost CR2 CR2 Quality of design Poor quality of design work causing delay 10% 2% %of Procurement and Supervision Cost CR3 CR7 Claims risk Contractor asks for more time and money 15% 2% % of Total Capital Investment Costs CR4 CR8 Procurement risk - time and cos Tendering and procurement process takes longer and cost more 30% 10% %of Procurement and Supervision Cost CR5 CR9 Construction cost risk Higher construction costs than projected 8% 5% % of Total Capital Investment Costs CR6 CR7 CR8 CR9 CR13 Authority Variation CR14 Contractor variation CR15 Statutory bodies variation CR21 Legislative compliance/licences CR10 CR22 Specific/Discriminatory Change in Law CR11 CR27 Interest rates CR12 CR28 Insurance availability Delays and time over-runs due to Contracting Authority variation of the initially approved documentation during construction phase Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase Failure to obtain required licences and permits for construction works/compliance with all the legislative framework applicable in the construction period General legislative or regulatory changes giving rise to new or increased capital costs Interest rates fluctuations resulting in additional financial costs during construction Insurance is not available or more costly than expected during construction period 10% 10% % of Total Capital Investment Costs 20% 15% % of Total Capital Investment Costs 15% 10% % of Total Capital Investment Costs 15% 20% %of Procurement and Supervision Cost 5% 10% % of Total Capital Investment Costs 15% 5% % of Total Capital Investment Costs 10% 10% % of Total Capital Investment Costs CR13 CR34 Tax risk Cost related to various taxes variation during construction 10% 5% % of Total Capital Investment Costs CR14 CR35 Inflation risk Additional cost due to variation in inflation 20% 10% % of Total Capital Investment Costs Operational risks OR1 OR1 Cost overrun Operating and maintenance costs are generally higher than expect 15% 5% % of Total O& Costs OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability 5% 15% % of Total Investment Costs

90 88 SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IPACT COST BASIS period OR3 OR12 Tariff risk Tariffs/Gate Fees do not increase as planned 25% 25% % of Total O& Costs OR4 OR5 OR6 OR13 Specific/Discriminatory Change in Law OR14 Compliance OR18 Legislative compliance General legislative or regulatory changes giving rise to new or increased operating costs Failure to comply with current and future standards related to environment Compliance with all the legislative framework applicable during the contract period, such as multiple licenses 5% 15% % of Total O& Costs 5% 5% % of Total O& Costs 15% 25% % of Total O& Costs OR7 OR20 Contractor default Financial consequences resulting from default of the Contractor 5% 30% % of Total O& Costs OR8 OR23 Inflation Operating costs are higher than anticipated due to inflation 20% 10% % of Total O& Costs OR9 OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation 0% 0% % of Total O& Costs OR10 OR27 acroeconomic changes Risk of reducing the demand for the contracting services 5% 5% % of Total O& Costs OR11 OR29 Obsolescence risk Risk of early obsolescence of structures and equipment 0% 0% % of Total O& Costs OR12 OR30 Tax risk Cost related to various taxes variation during operation 5% 2% % of Total O& Costs OR13 OR31 Waste tax Risk of new waste specific tax 10% 3% % of Total O& Costs OR14 OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected 20% 30% % of Total O& Costs OR15 OR33 End market Ability to secure end markets for sellable outputs 20% 30% % of Total O& Costs OR16 OR34 Waste to landfill uncertainties Reliability of waste streams to landfill 15% 30% % of Total O& Costs Waste supply risk WR1 WR2 WR1 Waste quantity from the authorised collectors WR2 Capacity Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities 25% 30% % of Annual waste projection tonnage 0% 0% % of Annual waste projection tonnage WR3 WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns 50% 5% % of Annual waste projection tonnage WR4 WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns 0% 0% % of Annual waste projection tonnage

91 Analysis of traditional procurement method and PPP options In this section, the results of preparatory work in previous sections are used to provide a quantitative comparison of traditional procurement, BOT, and Operating Contract options in terms of price to be charged by the operator of the landfill facility The methodological steps in preparing this analysis are as follows: STEP 1: - Calculate net cash outflow8 from public budget in traditional procurement and operation method over 30-year period - Assume that in the traditional procurement and operation method, all operating costs are budget cost and share of investment costs paid by government or municipality are also budget costs - Calculate using PSB atrix (emulating traditional procurement and operation approach) risk- adjusted investment and operating cash outflows and inflows in the project financial model for the 30-year period - Discount 9 total risk-adjusted cash outflows and inflows to evaluate NPV - Calculate risk-adjusted waste volumes accepted to the landfill, using projected waste streams in the financial model and risk factors in the PSB matrix (waste supply risks) - Calculate net present value (NPV) per tonne of waste accepted to the landfill, by dividing NPV of cash outflows by risk-adjusted waste accepted to landfill; this number is the estimate of the price the public authority pays per tonne of waste (gate fee) STEP 2: - Carry out same procedure as for traditional procurement; in this case, however, the Risk atrices pertaining to each PPP option (BOT and Operating Contract) are used 8 Net cash outflows are calculated by summing up all costs paid from the budget for project construction and operation minus any revenue proceed that come into the budget from the project (for example, recyclables revenues) 9 A discount rate of 10% was used for this study

92 90 - Apply key assumption that private operator will charge to public bodies (budget money or tariff payments from customers) the amount sufficient to recover all costs without any profit margin - Note that the public cash outflow in the case of PPP contract is equal to investment share from the budget and payment to recover the full direct and indirect operating costs of the PPP operator - Note also that in the PPP option, recycling revenues accrue to the private party; hence, they are not included as cash inflows to the budget - Calculate cash outflows from public budget in BOT and Operating Contract methods over 30-year period - Calculate using the Risk atrixes for both PPP contract types the risk- adjusted cash outflows in the financial model for the 30-year period - Discount 10 the total risk-adjusted cash outflows to evaluate the NPV - Calculate risk-adjusted waste volumes accepted to the landfill, using project waste streams in the financial model and risk factors in the BOT and Operating Contracts Risk atrices (waste supply risk) - Calculate net present value (NPV) per tonne of waste accepted to the landfill in PPP options, by dividing NPV of cash outflows by riskadjusted waste accepted to landfill; this number is the estimate of the price the public authority pays per tonne of waste in PPP contracts (gate fee) STEP 3: - Present all calculated data in a single table and conduct comparative analysis of various methods The following table displays the results of these calculations using the financial model developed to analyse the Nikšić regional landfill, as well as the prepared Risk atrices Table 27 Comparative review of traditional and PPP options for Nikšić regional landfill NPVs (mln EURO) PSB, traditional method BOT Operating Contract Government Cash-outflow Construction Period Costs - Nominal As indicated above, a discount rate of 10% was used for this study

93 91 NPVs (mln EURO) PSB, traditional method BOT Operating Contract Operating period O& Costs - Nominal Recycling revenues Pre risk cash-outflow Project Risks Construction period risks Operating period (O&) risks Total Risks Risk adjusted Cash-outflow NPV/ tonne of accepted waste at Nikšić (EURO) The calculated net present value (NPV) per tonne of waste accepted to the Nikšić regional landfill is an important indicator of benefits offered by PPP options compared to the traditional public sector procurement method This indicator is an aggregate figure, reflecting the cost of each option to the public budget in terms of money paid out (cash outflows) per tonne of waste going to the landfill In other words, for each option the NPV/tonne indicator shows what the public authority receives in terms of services in exchange for each EUR paid Assuming that services received are equivalent in each option, the lower NPV in a PPP option would indicate a better Value for oney Further, the extent of quantitative difference in NPV between PSB and PPP options would also communicate the extent of efficiency of private management of the contract as compared to public management of the contract Such efficiency can be the result of various elements: better cost management by private operator better risk allocation and risk mitigation by private operator higher efficiency in facility operation Having understood the implications of the NPV/tonne figure, the results presented in the foregoing table can now be analysed: The baseline project costs and recycling revenues are the same for all three options The construction period quantification of risks suggests that the lowest cost impact is expected in the BOT scenario - that is, when an experienced PPP contractor is chosen to construct the facility (along with later operation) This allows to minimise cost implications during construction due to the PPP operator s capacity for better management and to mitigate risks

94 92 In terms of the impact of the operating period risk on the costs, both PPP options imply higher costs than that of the traditional procurement method A detailed analysis of individual risk elements suggests that this is a cumulative effect comprising two parts: - Risk-adjustment cost reduction due to ability of PPP operator better to mitigate some of the operating period costs that are under its control, and - Risk-adjustment cost increase due to PPP operator factoring significant uncertainties on the markets and revenues into its future O& price to Public Authority - The net result of these two parts is that the factoring in of uncertainties overweighs the cost-efficiency of a private operator; hence, the total trend is higher risk-adjusted costs As a result, the NPV per tonne for all three options analysed are on approximately the same level, with the PPP options running slightly higher Hence, the NPV/tonne of waste accepted at the landfill is slightly higher for the Operating Contract, due to the inability of the Operating Contract PPP counterpart to minimise the cost implications of construction period risks The analysis suggests a rather interesting, but logical case: Despite the fact that PPP options offer valuable construction and operating period cost reduction as a result of operating efficiency and better risk management, such positive gains are entirely outweighed by high risks associated with waste availability, quantity, and generated revenues (both from the gate fees and from recyclables) ore complex PPPs, such as BOT can be used in the case of the Nikšić regional landfill, since the net effects are relatively even in comparison with traditional procurement method A more gradual approach is recommended, however, since it can deliver substantially better value for money Such an approach, as already mentioned above, can be implemented in the following steps: - Public Authority (with national and international contributions) constructs the landfill using the traditional procurement method - A simplified form of PPP Operating Contract (Service Contract) for a short period (3-5 years) is tendered with the objective to kick-start the operation of landfill facilities, in the process of which, to eliminate the main uncertainties related to the quality of construction work, actual waste amounts, market for recyclables, realistic operating costs, etc

95 93 - Once such uncertainties have been eliminated after 3-5 years of the Service Contract, s longer period Operating Contract (with no investment obligations for further cell construction or renewal of assets), or a more complex Concession Contract (with investment obligations) can be contracted The value proposition of such s step-by-step approach is - once the key market and revenue uncertainties are eliminated that the PPP operators will not attach such high premiums to the main elements of risk Hence, the Public Authority will be able to take full advantage of the operational efficiencies of the private sector in the form of lower price of good quality services

96 94 7 Case study of private sector participation in landfill operation 71 Arges Landfill Facility PPP The project is located in Arges County of Romania, situated in the central-south part of Romania, covering an area of 682,631 ha The County has 644,590 inhabitants and comprises three municipalities, four towns and 95 communes In accordance with Romania's environmental strategy, Arges County is targeted for an environmentally sustainable, cost-effective and affordable integrated waste management system for the county The waste management system was defined to comply with both the requirements of national legislation as well as relevant EU regulations The overall aim of the project was to develop the infrastructure in the county's waste sector for preserving, protecting and improving the environmental quality in Arges County The proposed infrastructure included a Regional Landfill Facility for the entire county with a sorting plant and composting plant, a transfer station in the northern part of the County to reduce the costs of transportation, rehabilitation of collection infrastructure in urban areas, and extension of collection infrastructure in rural areas The project involves a component for private sector participation in the operation of the integrated waste management system The process of decisionmaking comprises the following main steps: 1 Detailed mapping of existing services was carried out and extensive database of information on all components of waste management (generation, collection, treatment, and disposal) was developed The objective of this stage was fully to understand waste flows, quantities, tariffs and payment flows, existing subsidy arrangements, affordability constraints, etc The key purpose in doing this exercise was to eliminate as much as possible uncertainly related with project data and information in order to minimise risk premium that potential PPP operators would attach to the project 2 The analysis indicated that the existing system is highly fragmented Substantial parts of rural communities did not receive regular waste management services The existing landfill essentially was unregulated dumpsites and posed significant threats to the environment Operating practices were poor and cost-inefficient

97 95 Figure 24 apping of waste management services provision in Arges County 3 Feasibility study for different components has been prepared and various options of integrated waste management system evaluated The feasibility study demonstrated that the capacity to attracting external financing from the private sector on more expensive terms is low Alternative financing package comprising an EBRD Loan, EU grant, and local budget contributions was proposed and evaluated 4 Structure of future integrated waste management system was devised and approved This consisted of a Regional Landfill and four collection contracts covering most of the Arges County (figure below) Figure 25 Integrated waste management system in Arges County

98 96 5 Various methods for procuring and operating proposed integrated system have been evaluated At this stage, full PSB development and Value for oney evaluation was carried out in the framework of "A PPP Option Justification Study" 6 As a result of detailed evaluation, it was suggested that a concession contract with limited investment obligations was the most value adding option from all available options 7 Preparatory work for tendering was initiated with involvement of an international consultancy consortium The development of a full tender dossier was carried out in close cooperation with Romanian PPP Unit, EBRD, EU representation in Romania, and, naturally, with all local municipalities and communities 8 Tender documentation was prepared with a view of future PPP arrangements within the following institutional structure: Figure 26 Structure of PPP contracts in Arges County, Romania 9 Tendering process demonstrated substantial interest in all contracts In particular, the Landfill Facility Concession contract attracted substantial interest from local and international waste management companies 10 Key characteristics of Landfill Concession Contract include: - 20 years contracting period with exclusivity - Guarantee of no licensing of other operators for similar services - Right to charge Waste Tipping Fees (Gate fees) - Right to utilize existing facilities to derive secondary revenues (recycling, composting, other waste valorification)

99 97 - Right to attract waste from outside county with prior agreement of Contracting Authority - Payment of Concession Fee to Contracting Authority - Loan component of financing to repay EBRD Loan - Service fee for contract monitoring - Open tender procedure with no pre-qualification - Obligations for investment required for proper operation - Free of charge asset return at the end of period 11 Payment mechanism was developed to ensure adequate coverage of all Landfill Facility operating costs and provision of adequate funds for cover and aftercare (see figure below) Figure 27 Payment mechanism for Arges Landfill Facility Concession 12 Substantial risk was transferred to the private operator and Public Authority primarily remained responsible for the following risk factors: 1 Discriminatory Changes in Law 2 Authority variations of contract terms 3 Waste supply risk 4 Liability period construction defects 5 Licensing and approvals