#1G ED ЕВРАЗИЙСКИЙ Water and Wastewater Development Programme of Rostov-on-Don as one of the most efficient PPP Contracts in Russia Dmitry PUZANOV Deputy CEO, Evraziyskiy JSC UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE WORLD BANK GROUP Water の European Bank for Reconstruction and Development فى التنمية لبنك الإسلام OPMENT BANK BANQUE IS MOLE DE DEVEL#2EA ЕВРАЗИЙСКИЙ Evraziyskiy JSC 10 years Experience in Water Sector 2004 2005 2007 First contract in Water Sector (Omsk 1M, sold in 2008) Lease & investment contract in Rostov-on-Don (< 1M) Lease contract in Sochi (<400K) 2010 2011 Concession contract in Krasnodar Region (1,5M) Short-term lease contracts in Novorossiysk, Eysk, Taman and other small cities (<450K) Berdiansk Бердинськ Mariupol Маріуполь < 4M < 7K Population coverage by Evraziyskiy in season peaks. Employees in all subsidiaries ch Slavyansk-na-Kubani Славянск-на-Кубани $1430M Total CAPEX programme $ 1000M Investment arranged by Evraziyskiy $ 105M $ 22M Loan from Vnesheconombank (2008 for 14 years) Loan from World Bank (2003 for 15 years) $ 180M Consolidated turnover Novorossiysk Новороссийск Shakhty Шахты Rostov-na-Donu Rostov -Ростов-на-Дону Ростовс Taganrog Таганрог Azov A30B Yeysk Encx Timashevsk Тимашевск Tikhoretsk Тихорецк Kropotkin Кропоткин Krasnodar Краснодар Maykop Labinsk Майкоп Лабинск Gelendzhik Геленджик Tuapse Tyance 23.10.2014 Sochi 2 Arn Apm#3EA Water and Wastewater in Rostov-on-Don ЕВРАЗИЙСКИЙ Overview of the Systems (2014) Water and Wastewater Utility Company of Rostov-on-Don is the largest water operator in the South of Russia: 1,3M Total population in service 474K 274K Drinking water production (m³/day) surface intake: river Don Wastewater plant capacity (m³/day) discharge: river Don H Султан-Салы Water pumping stations 2 694 Water network (km) 137 1 414 70 Wastewater network (km) Wastewater Stations Колузаево $ 110M Turnover 2,6K Employees Ленинакан WTP(3) Темерницкий Рассвет WTP2 Аксай Rostov-on-Don Ростов-на-Дону Aksay WTP1 WWTP Овощной Батайск Bataysk Ленина 23.10.2014 3#4N EA ЕВРАЗИЙСКИЙ Riga Riga Latvia Rostov-on-Don Long-Term Capital Assets Improvement Tver Тверь Yaroslav Ivanovo • Ярославль Иваново Vladimir Moscow Москва Владимир Nizhniy Novgorod Нижний Новгород Yoshkar-O Йошкар-Ол K Cheboksary Чебоксары K Saratov Саратов Klaipeda Klaipeda Vilnius Vilnius Vitebsk Витебск Smolensk Смоленск Ryazan Рязань Olsztyn Olsztyn W va C Minsk Мінск Belarus Mogilev Могилев Kaluga Калуга Tula Tyna 0 Saransk Саранск Ulyano Ульяно Bryansk Брянск Orel Penza Пенза Gomel Гомель Орел . Lipetsk Липецк Tambov Тамбов Chernihiv Kursk Курск Voronezh Воронеж Чернігів Lutsk Луцьк Rivne Рівне Kyiv Sumy Суми Київ zeszow Rzeszow Lviv Khmelnytskyi Львів Хмельницький Kharkiv Харків Cherkasy Черкаси Poltava sice sice . Chemivtsi a Чернівці Vinnytsia Вінниця Полтава Kirovohrad Кіровоград Luhansk Луганськ Volgograd Волгоград Ukraine Zaporizhia Donetsk Донецьк 0 apest best Oradea Oradea Запоріжжя Odesa Одеса Mykolaiv Миколаїв Timisoara Timisoara Sibiu Sibiu Bacau Bacau Belgrade Romania Београд Bucharest Bucuresti Constanta Craiova Constanta Serbia Craiova Sofia ntenegro София Varna pje Варна Rostov-na Donu Ростов-на-Дону Simferopol Симферополь Krasnodar Краснодар Maykop Майкоп Sukhum Elista Элиста ° Astrakha Астрахан Stavropol Ставрополь Grozny Грозный Makhachkals Махачкала Tskhinval Цхинвал :: Pre-conditions: ■ Deteriorated water system: shortage in water supply; worn out (by 80%) assets; high unaccounted for water (by 60%) Demand from developers for new water and wastewater infrastructure needed for building of 6M m² residential and 2M m² commercial property ■ Stable population (migration from Siberia and other regions of Russia) ■ International investors willing to place production in the region (PepsiCo, Coca-Cola, Carlsberg) Limited access to financing from budget (federal and local) 23.10.2014 4#5EA ЕВРАЗИЙСКИЙ Corporate Structure City Administration Evraziyskiy JSC of Rostov-on-Don 75% Water & Rostov-on-Don 25% Wastewater Utility $ 38,9M PPP: Contractual Model Participation of the Municipality in equity of the Project Company (non-productive assets): - Mitigation of political risks of the project Key decisions made in accordance with corporate governance Participation of Evraziyskiy JSC in equity of the Project Company (money): - - Funding of the immediate investment programme (2 years) New management Business processes to cut costs and win benefits 23.10.2014 5#6EA ЕВРАЗИЙСКИЙ PPP: Contractual Model PPP Structure City Administration Rostov-on-Don Long-Term Lease Contract of Assets Water & Wastewater Utility Rostov-on-Don Households, Commercial and other Customers Investment Agreement Long-term lease contract over operational assets of the Municipality (25 years): - - - Tender procedure Infrastructure built from private money belongs to Project Company Buy-out of private property on early termination Investment agreement to implement two long-term rehabilitation and construction programmes ($928,14M+$111,77M): - - - Meeting of standards for drinking water Significant improvement of assets condition Extension of networks; reduction of power consumption and losses; mitigation of load on environment Connection of new individual and collective customers 23.10.2014 60#7ED ЕВРАЗИЙСКИЙ Financing of CAPEX PPP: Contractual Model Investment Fund of Russia Subsidy $165,5M City Administration Subsidy Rostov-on-Don Regional Administration $107M Rostov-on-Don CAPEX $313,5M Investment New Customers Agreement Vnesheconom- bank Contribution from Private Partner: Arrangement of a loan provided by the State Corporation Vnesheconombank Reinvestment of operational profit Equity Collection of connection payments from new customers Other sources CAPEX $808,24M Connection Payments Water & Wastewater Utility Rostov-on-Don Loan Agreement $105M Contribution from Public Partner: - Application by Investment Fund of Russia to obtain support in the form of budget subsidy from federal and regional levels to the Municipality of Rostov Setting of connection tariffs for new customers covering needs of the Private Partner Subsidy to the Private Partner to cover a part of interest cost on loans 23.10.2014 7#8EA ЕВРАЗИЙСКИЙ Capital Investment Programme Overview 2004 - 2012: City $ 434,47M 2013 - 2018: City + Suburbs $ 192,02 M 2019 2023: - Rostov Agglomeration $ 301,64M The total amount of capital expenditures is over $ 1 039M, which is distributed as follows: 67% 27% 6% new construction and extension of existing facilities and networks to enable connection of new customers due to the growth of the service area reliability of operation improvement to ensure stable services meet quality standards for drinking water and wastewater discharged in Don river. operational efficiency enhancement to gain economical benefits. 23.10.2014 80#92.5 EA ЕВРАЗИЙСКИЙ Capital Investment Programme Economic Environment 0.5 0 1.5 2 2005 2006 CAPEX 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Incremental Growth of Tariffs 2023 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $- 2004-2012 significant tariff increases (+60%) have covered OPEX & CAPEX needs; cost savings have allowed to reinvest profit ($17M) 2013-2018 limitation of operational tariffs growth: CAPEX is financed from connection fees only, which include costs for reconstruction of existing facilities and construction of new infrastructure; significant drop of consumption (-20%) 23.10.2014 9#10EA ЕВРАЗИЙСКИЙ Capital Investment Programme Components Examples Reconstruction of the biggest WTP, replacement of free CI by NaCIO Building of new water Construction of 3 mains (41,7 km) ultraviolet units at WTP W Creation of a dispatch and control system Building of the hydraulic model for water network Reconstruction of 4 water PS 23.10.2014 10#11EA ЕВРАЗИЙСКИЙ Power Consumption -15,7% Plastic Pipes Increase 4% => 39% Capital Investment Programme Accident Rate in Network -17% Goals Achieved Power in the Cost Structure 37% => 25% Steel Pipes Decrease 52% => 37% 23.10.2014 11#12EA ЕВРАЗИЙСКИЙ Positive: Public-Private Partnership in Action ■ Flexible PPP contract structure allowed to fund money from banks and to receive support from the State Investment Fund ■ Close cooperation between stakeholders helped to adjust project parameters in line with economical environment Experience obtained during project preparation and implementation was used in other projects (Sochi, Krasnodar region) Negative: Lessons Learned Lack of supporting mechanisms from the public partner for loans security Change in tariffs policy at the federal level slowed down implementation of the project ■ Very difficult and expensive procedures of Vnesheconombank resulted in additional cost for the private partner 23.10.2014 12