|Using the Rating system to calculate the risk score relating to contract stipulations
The City of Zagreb, as the capital of the Republic of Croatia, is a separate, unitary, territorial and administrative unit with the organization regulated by the City of Zagreb Act. It is a local self-government unit, also functioning as a regional self-government unit or county. The City of Zagreb is a legal person represented by the Mayor.
The City of Zagreb is the largest city in Croatia, situated in the northwest part of the country, along the Sava river, covering an area of 641,35 km2. According to the last official census from 2021, the total population of its administrative area was 767 131. The wider Zagreb metropolitan area includes the City of Zagreb and the separate Zagreb County with a population of more than 300.000, bringing the total metropolitan area population over one million habitants. With its over one million habitants, metropolitan area of Zagreb constitutes more than one quarter of whole population of Croatia.
Zagreb’s favourable geographic position in the southwestern part of the Pannonian Basin, which extends to the Alpine, Dinaric, Adriatic and Pannonic regions, provides an excellent connection for traffic between Central Europe and the Adriatic Sea. The transport connections, concentration of industry, scientific and research institutions and industrial tradition underlie its leading economic position in Croatia. Zagreb is the seat of the central government, administrative bodies and almost all government ministries.
In 2018, Public sector client started the EPC project with aim to reconstruct and modernise its public lighting system. Purpose of the EPC project was to enhance energy efficiency of public lighting system by changing old sodium luminaires with new led luminaires on most of cities public lighting poles.
In scope of preparatory activities, Public sector client prepared Action plan of reconstruction and/or modernisation of public lighting system under which it has analysed different procurement models for project realisation. Traditional model, Public private partnership model as well as ESCO model were analysed, and City of Zagreb decided that ESCO model presented the most favourable model for realisation of the project at that time.
City of Zagreb prepared tender documentation for realisation of the project which included a draft of EPC contract that would be signed between EES provider and City of Zagreb. Tender was announced at the end of 2021. and was opened till June 2021. During that period, high inflation influenced the cost of realisation of project and the bids were higher than anticipated by tender documentation. Due to this reason, City of Zagreb decided to reject all bids and to revise the costs of project as well as model of realisation.
During analysis of project documentation, analysis of developed draft of EPC contract documentation was also conducted by REGEA in order to see if its suitable for refinancing using the concepts developed under REFINE. Rating system was used to determine the risk score of project and to see if some changes should or can be made to developed project documentation in order to lower the risks and make project more suitable for refinancing.
Since the project was in tendering stage and there was no EES provider selected, rating system was used to calculate the risk score relating to contract stipulations.
During the time of low interest rates, refinancing in general was not so attractive to EES providers. Initially contracted low interest rates made refinancing options not competitive while offer of different financial instruments and products for development of new projects was quite high on financial market. Generally, in Croatia EES projects tendered using EPC models were mostly interesting to public sector (counties and cities) since they could finance energy efficiency projects without further burdening their debt leaving them room to finance other projects for which private finance is not suitable using EPC or PPP models. Even in those circumstances, since there were a number of EU funded programmes and available grants for energy efficiency projects, EES projects funded using EPC model were not attractive. Lack of possibility to blend EU grants with private capital and low interest rates offered to public sector, combined with regulatory framework that didn’t put restrictions on level of debt for public sector bodies if they finance projects in energy efficiency made realisation of EES projects using EPC model less attractive in last few years.
During the testing of rating system on EPC project it was concluded that project wasn’t suited for refinancing concept developed under refine (risk rating of contract clauses was 2- high risk). The biggest problem was with “must have” clauses and respectively with the requirements under rating system that automatically rate project as risky for refinancing. This is especially related to requirement for fixed part of fee under EPC project were EES provider would guarantee energy efficiency with bank or other guarantees but client wouldn’t be able to reduce the contracted fee beyond fixed amount. In this concrete project, there is no fixed amount of fee that couldn’t be deducted if service was delivered under specified level of quality.
In EPC models where monitoring periods can be set up on monthly regime there is no need for EES provider to guarantee performance to client since client can make deductions on contracted fee that correspond to breach of guaranteed level of service (energy savings). In this cases, a performance guarantee can be set up for refinancing institution to cover the potential loss of payments (future deliverables) from client due to EES provider poor performance. In this case, there is no need to rate EPC project as high risk as future cashflows are guaranteed.
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