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PPP projects in the energy sector becoming operational

Following recent amendments to the primary PPP legislation in Serbia back in December 2016 (where the CMS Belgrade office provided significant contributions via ongoing cases), more and more PPP projects in the energy sector are now up and running. 

Although a few energy performance contracting (EnPC) projects have been awarded to private investors in the area of public lighting (examples being the awarding of PPP projects in the municipalities of Ada and Žabalj) and a couple of bigger ones have been awarded and are in the preparation phase in large cities (Belgrade and Novi Sad), the market has yet to see successful cooperation between public and private sectors in the area of public buildings. 

The energy supply contracting (ESC) project has also started recently, with public sector’s assets such as schools and hospitals being the main point of interest. Unlike EnPC, ESC arrangements are not currently governed by any specific by-law, nor is there a prescribed model available. The most notable difference between ESC and EnPC is that EnPC means the project is backed by guaranteed savings, unlike the ESC, which is focused on rearranging the energy supply so that the private partner guarantees the continuous provision of a certain minimum amount of energy. It is expected that much-needed certainty will be brought to the sector once the ESC model is also regulated, which will in turn allow for successful cooperation between public and private sectors. 

It should also be stated that PPP projects on a larger scale in some related sectors are expected to become fully operational in the nearest future, with the waste-for-energy PPP project in Belgrade (Vinča) being the primary example. 

The challenges for further regulatory and market developments, especially with regards to energy performance contracting, also include the need to reduce subsidies, which keep energy prices at an artificially low level, and instead introduce further sector-specific incentives for energy efficiency projects into the relevant legislation (notably, in real estate legislation and in tax-related areas). Further challenges include gradually raising financiers’ awareness of the practical feasibility of ESCO and related projects and increasing the energy tariff to a cost-reflective level. Consistent practices are also required so that projects are prepared according to the relevant ESCO by-law and the applicable PPP legislation. 

As for energy supply contracting projects, existing ambiguities in practice would be removed if the model contract were adopted by the relevant authorities (i.e. Ministry of Mining and Energy). This would also make it easier to tackle projects involving both public and private sector. At present, the novelty of this specific market means the public sector is still overly careful in considering prospective projects, while the authorities still lack understanding of the very concept and its practical implementation. It is encouraging in this regard that the Ministry of Mining and Energy is currently considering whether to prepare a model ESC contract, thus make projects on the market more transparent and feasible. 

The following steps certainly ought to be taken with regards to both EnPC and ESC arrangements: 

  • Further improve the capacities of the PPP Commission (including better understanding of EnPC and ESC projects’ specifics). Further amendments to the PPP legislation means these amendments are expected to be adopted in the first half of 2018.
  • Further strengthen and support the sharing of knowledge and existing know-how among various public entities (this is particularly the case with minor Serbian municipalities).
  • Improve the practical implementation of the rules relevant for determining the project value for PPP specific projects. The capacities of the public sector also need to be strengthened to fully delineate such projects from purely public procurement projects.
  • Knowledge-sharing and capacity-building on the basis of best international practice would be highly welcome, as new rules on the subsequent adaption of PPP contracts at the request of funders have yet to be fully tested in practice. 

The relevant stakeholders are now keenly anticipating the upcoming further revision of both the primary and secondary PPP legislation, which should bring Serbia’s legislation closer to the relevant EU acquis governing the PPP sector. As mentioned, this ‘big revision’ (as is sometimes called by the market participants) should finally occur in the first half of 2018 and will, hopefully, further improve the PPP and energy market in Serbia.

Authors

Picture of Djordje Popovic
Đorđe Popović