infrastructure project facility technical assistance window (ipf ta) option report_final.pdf ·...

Infrastructure Project Facility Technical Assistance Window (IPF TA) EuropeAid/128073/C/SER/MULTI

Sub project: WB4-MNE-ENV-12B: Management models and options for cost recovery for the future construction and op-eration of regional landfills in Montenegro (Case Study for Nikšić)

Procurement Options Report (Activity 3)

25 July 2012

The European Union's 2008 IPA Programme for Albania,

Bosnia and Herzegovina, Croatia, the Former Yugoslav Re-

public of Macedonia, Montenegro, Serbia, Kosovo*, Turkey

and Iceland

Infrastructure Projects Facility

Technical Assistance Window (IPF TA)

EuropeAid/128073/C/SER/MULTI

Sub project:

WB4-MNE-ENV-12B Management models and options for cost recovery for the future construction and operation of regional landfills in Montenegro (Case study for Nikšić)

Procurement Options Report (Activity 3)

25 July 2012

Document no. WB4-MNE-ENV-12B_TECH_Activity 3 Report

Version 2

Date of issue 25.07.2012

Prepared Ashot Baghdasaryan, Rasmus Dilling, Ayse Cigdem Arslancan, David

Toft, Zdenka Ivanovic, Srna Sudar

Checked Dr Merih Kerestecioğlu

Approved Dr Merih Kerestecioğlu

Infrastructure Projects Facility – Technical Assistance Window

Sub project: WB4-MNE-ENV-12B: Management Models and Options for Cost Recovery for the Future Construction and

Operation of Regional Landfills in Montenegro

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Table of Contents

1 Executive Summary 6

2 Purpose and Content of Report 12

3 Key Aspects of the Nikšić Regional Landfill Project 14

3.1 Characteristics of the Service Area 14

3.2 Characteristics of the investment 15

3.3 Analysis of municipal financial situation 16

3.4 Analysis of municipal PUCs 23

3.5 Municipal capacity to manage PPP 25

3.6 Budoš 26

3.7 Support from PROCON 26

3.8 Macro-affordability and willingness to pay 26

4 Overview of legal and institutional environment concerning landfill construction and operation 28

4.1 Purpose 28

4.2 Structure of the chapter 28

4.3 Key stakeholders 29

4.4 PPP contract management 30

4.5 Different options for contracting 31

4.6 Role and responsibilities of private and public sector 35

4.7 Legal and institutional considerations - capacity 40

4.8 Conclusions and recommendations 42

5 Risk in landfill construction and operation 48

5.1 Introduction 48

5.2 Methodological approach 48

5.3 Nikšić landfill project 51




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6 Available models for landfill construction and management 67

6.1 Introduction 67

6.2 PPP models and characteristics 68

6.3 PPP process 76

6.4 Recommendation for Nikšić Regional Landfill Case 80

7 Case study of private sector participation in landfill operation 94

7.1 Arges Landfill Facility PPP 94

7.2 Lessons learned 98

7.3 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




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List of Tables

Table 1 Comparative review of traditional and PPP options for Nikšić

regional landfill ........................................................................................... 9 Table 2 Waste generation forecast, 2013-2030 ........................................ 15 Table 3 Budget revenue of Nikšić municipality, thousand EUR ............. 17 Table 4 Local self-government funding sources of Nikšić Municipality,

thousand EUR ........................................................................................... 18 Table 5 Annual expenditures of Nikšić Municipality, thousand EUR .... 18 Table 6 Budget Revenue of the Plužine Municipality, thousand EUR .... 19 Table 7 Local self-government funding sources of Plužine Municipality,

thousand EUR ........................................................................................... 20 Table 8 Annual expenditures of Plužine Municipality, thousand EUR ... 21 Table 9 Budget Revenue of Šavnik Municipality, thousand EUR .......... 22 Table 10 Annual expenditures of Šavnik Municipality, thousand EUR .... 23 Table 11 Nikšić PUC Profit and Loss Statement, thousand EUR ............. 24 Table 12 Nikšić PUC Assets & Liabilities 2005-2010, thousand EUR ..... 25 Table 13 Steps in the process of project Risk Matrix development........... 50 Table 14 Global Risk Matrix listing for Nikšić landfill project –

construction/investment period risk .......................................................... 52 Table 15 Global Risk Matrix listing for Nikšić landfill project – operating

period risk ................................................................................................. 53 Table 16 Global Risk Matrix listing for Nikšić landfill project – operating

period risk, waste supply risk .................................................................... 55 Table 17 Global Risk Matrix listing for Nikšić landfill project –

construction period risk ............................................................................. 56 Table 18 Global Risk Matrix listing for Nikšić landfill project – operating

period risk ................................................................................................. 58 Table 19 Global Risk Matrix listing for Nikšić landfill project – operating

period risk, waste supply ........................................................................... 60 Table 20 Reduced Risk Matrix for Nikšić Landfill Project ....................... 62 Table 21 Quantified Risk Matrix for the Nikšić Regional Landfill Project65 Table 22 Modalities of PPP ....................................................................... 69 Table 23 Comparison of various PPP modalities for landfill facility ........ 76 Table 24 Main characteristics of Nikšić regional landfill vs. PPP options 81 Table 25 Risk Matrix for the Operating Contract PPP Modality, Nikšić

regional landfill ......................................................................................... 85 Table 26 Risk Matrix 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




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List of Figures

Figure 1 Current and Total Revenues of Nikšić Municipality, thousand

EUR 17 Figure 2 Current and Capital Expenses of Nikšić Municipality, thousand

EUR 19 Figure 3 Current and Total Revenues of Plužine Municipality, thousand

EUR 20 Figure 4 Current and Capital Expenses of Plužine Municipality, thousand

EUR 21 Figure 5 Current and Total Revenues of Šavnik Municipality, thousand

EUR 22 Figure 6 Current and Capital Expenses of Šavnik Municipality, thousand

EUR 23 Figure 7 Model 1, Budoš and PPP Company ............................................ 31 Figure 8 Model 2, Municipalities as contract signatories and PPP company

32 Figure 9 Model 3, Municipalities as three contract signatories with Budoš

33 Figure 10 Model 4, Municipalities as three contract signatories and existing

PUCs (public service benchmarking) ....................................................... 34 Figure 11 Model 1, Chain of responsibilities, contract parties: Budoš and

PPP company ............................................................................................ 36 Figure 12 Model 2, Chain of responsibilities, contract parties: municipalities

and PPP company ..................................................................................... 37 Figure 13 Model 3, Chain of responsibilities, contract parties: municipalities

and Budoš PPP .......................................................................................... 38 Figure 14 Model 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 Matrix 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 Mapping 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




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List of Abbreviations

BOOT Build-own-operate-transfer

BOT Build-operate-transfer

Budoš Inter-municipal company established and designated to operate

the regional landfill

DBFO Design, Build, Operate and Finance

DBFOT Design, Build, Operate, Finance and Transfer

DBO Design, Build and Operate

DBOO Design, Build, Own, Operate

EBRD European Bank for Reconstruction and Development

EIA Environmental Impact Assessment

EIB European Investment Bank

EPA Environmental Protection Agency

EU European Union

EUR Euro

IFIs International Financing Institutions

IPA Instrument for Pre-accession Assistance

IPF Infrastructure Projects Facility

IPPC Integrated Pollution Prevention and Control

IRR Financial internal rate of return

ITT Form of the Invitation to Tender

LTP Leachate Treatment Plant

MNE Montenegro

MONSTAT Montenegro Statistics

MoSDT Ministry of Sustainable Development and Tourism

NPV Net present value

O&M Operation and maintenance

OC Operating Contract

PIU Project Implementation Unit

PPP Public Private Partnership

PROCON National Project Implementation Unit in the Field of Commu-

nal Services and Environment

PSB Public sector benchmark

PUC Public Utility Company

SEA Strategic Environmental Assessment

SWOT Strengths, Weaknesses, Opportunities, and Threats

TA Technical Assistance

ToR Terms of Reference




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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 Procure-

ment Options Report – and entails an analysis of different options for the con-

struction and operation of the proposed regional landfill for the Municipalities

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 re-

lationship with potential private sector participation. This analysis builds on the

feasibility study from 2008 for construction of the regional landfill. The con-

clusion 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 ex-

pensive landfill to construct and operate will be theoretically affordable to cus-

tomers. 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 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 ad-

vantages and disadvantages of each approach are discussed.

The legal environment prevailing in Montenegro 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




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legal analysis explores options for contracting between the inter-municipal Bu-

doš 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 opera-

tions themselves, as an own operation, utilising the existing PUCs (or establish-

ing 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 re-

sponsibilities.

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 sup-

port 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 recom-

mended 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 gener-

ally more time and resource intensive than arbitration or institutionalised me-

diation. Further, the many competent authorities involved the planning, con-

struction 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. 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 Self-

government?

In terms of contract management, the problems relate to the capacity of imple-

menting 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 ar-

rangement. In such a period, both contract parties may gain valuable knowledge




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and understanding of the needs for contract management based upon perform-

ance and management standards.

In terms of institutional coordination, there is a significant legal and institu-

tional challenge related to the coordination of approvals and licensing required

for all stages of the PPP arrangement - related to the pre-construction (conces-

sion approval, EIA and SEA), construction and operation. Therefore, it is rec-

ommended 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 re-

ferred to in the PPP-contract reflecting the overall policy and legal require-

ments 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 identifi-

cation of risk elements and factoring risk analysis into the waste management

project preparation process. Thus, the five steps of risk analysis in the consid-

eration of PPPs are presented and discussed, including 1) development of a

global risk matrix (constituting a long list of potential risks); 2) assigning quali-

tative 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 ma-

trix, 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 occur-

rence 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 land-

fill). The chapter can be used as a general guideline for the risk analysis of pro-

jects, 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 manage-

ment 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 own-

ership to the municipality after a pre-defined period and an operating contract




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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 se-

lected for analysis – the public sector benchmark (PSB), a build-operate-

transfer 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 mo-

dality 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) PSB,

traditional method

BOT Operating Contract

Government Cash-outflow

Construction Period Costs - Nominal 5.8 5.8 5.8

Operating period O&M Costs - Nominal 61.1 61.1 61.1

Recycling revenues -24.5 -24.5 -24.5

Pre risk cash-outflow 42.4 42.4 42.4

Project Risks

Construction period risks 1.7 1.5 1.7

Operating period (O&M) risks 7.2 8.8 8.8

Total Risks 8.9 10.3 10.5

Risk adjusted Cash-outflow 51.3 52.7 52.9

NPV/ tonne of accepted waste at Nikšić (EURO) 23 23.4 23.6

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 op-

tions compared to the traditional public sector procurement method. This indi-

cator 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. Assum-

ing that services received are equivalent in each option, the lower NPV in a

PPP option would indicate a better Value for Money. 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 re-

sult of various elements:

better cost management by private operator

better risk allocation and risk mitigation by private operator

higher efficiency in facility operation.




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Having understood the implications of the NPV/tonne figure, the results pre-

sented 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 cumu-

lative 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&M 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 ap-

proximately 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 as-

sociated with waste availability, quantity, and generated revenues (both

from the gate fees and from recyclables).

More 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.




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A more gradual approach is recommended, however, since it can deliver

substantially better value for money. Such an approach, as already men-

tioned above, can be implemented in the following steps:

- Public Authority (with national and international contributions) con-

structs 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 invest-

ment 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) ex-

plore 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 ten-

dered. This approach enables the public sector (municipalities) to tender a

known quantity – a landfill operation with few uncertainties surrounding in par-

ticular the amount of waste delivered to the landfill and the size of the recycling

market.




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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 Procure-

ment Options Report – and entails an analysis of different options for the con-

struction and operation of the proposed regional landfill for the Municipalities

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 analy-

sis 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 Montene-

gro 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 re-

gional 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 Bu-

doš as an independent PPP company; 4) municipalities undertake waste opera-

tions themselves, as an own operation, utilising the existing PUCs (so-called

public service benchmarking). The advantages and disadvantages of each ap-

proach 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-




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.

cation of risk elements and factoring risk analysis into the waste management

project preparation process. Thus, the five steps of risk analysis in the consid-

eration of PPPs are presented and discussed, including 1) development of a

global risk matrix (constituting a long list of potential risks); 2) assigning quali-

tative 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 ma-

trix, 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 occur-

rence 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 land-

fill). The chapter can be used as a general guideline for the risk analysis of pro-

jects, 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 manage-

ment 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 own-

ership 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 deter-

mine which modality is worth exploring further.

Chapter 7 presents a case study from Arges, Romania related to the construc-

tion 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.




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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.

3.1 Characteristics of the Service Area

The service area for the proposed regional landfill comprises three municipali-

ties: Nikšić, Plužine, and Šavnik.

Service area The Municipality of Nikšić is the largest Montenegrin municipality in terms of

surface area (2,065 km²) and has 72,443 inhabitants in 21,683 households (ac-

cording 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

Municipality 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 Municipality 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 responsi-

bility has been delegated to multi-purpose utility companies in each municipal-

ity. 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 com-

munal 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 depos-

ited in the landfill.




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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 to-

tal population for project area is 77,759. In accordance with "The demographic

trends in Montenegro since the mid-20th century and prospects to 2050"

(MONSTAT 2008), the population in Montenegro 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 2013-2017 may be expected. Over the period 2018-2022 the esti-

mated demographic growth will be +0.81%.

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, 2013-2030

Period Generated Recycled Uncollected Disposed

2013-2017 113,525 14,758 19,300 79,467

2018-2022 120,336 27,677 12,034 80,625

2023-2030 207,936 79,015 14,557 114,364

2013-2030 441,797 121,450 45,891 274,456

Source: Consultant's assessment based on changing population growth data

3.2 Characteristics of the investment

The following information on the investment characteristics are based on the

main design for the regional landfill of March 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 re-

gional landfill was used as a reference1. It has to be emphasised that the pur-

pose 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 bot-

tom surface area of 23,000 square metres. The second stage has a capacity of

197,684 cubic metres (for a total of 516,737 m3) and the landfill body area is

14,000 square meters (for a total of 37,000 m2).

Investment cost The investment costs for the landfill, Phase I, were assumed to be just over 14

million EUR, including 1.5 million EUR for supervision. The Phase II costs are

4.2 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, Decem-

ber 2008.




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 con-

struction and the financing of the construction. The steep slopes are expected to

require successive construction of the bottom lining and leachate collection sys-

tem, 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 es-

timated 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 Montenegro 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 ad-

visable. 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 ac-

cepted at the landfill, which is the quantitative indicator used to determine the

best future course of action.

3.3 Analysis of municipal financial situation

The feasibility study analysed the financial situation of the three project mu-

nicipalities in detail, including revenues, expenditures, and borrowing capacity.

The tables from the feasibility study are updated as below.

3.3.1 Nikšić

Budget revenues 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 fi-

nances, as in 2009 budget revenues collapsed to less than half of the year previ-

ous. 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.




17

.

Table 3 Budget revenue of Nikšić municipality, thousand EUR

No. 2005 2006 2007 2008 2009 2010 2011

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 1,212 844 1,166

2 Property transfer tax 85 91 303 294 288 248 282

3 Municipal tax 2,733 2,859 3,569 4,416 4,826 4,930 5,864

4 Other Taxes 581 1,125 685 509 391 358 343

5 Compensations 2,738 2,339 10,847 14,652 3,012 2,305 2,014

6 Other revenues 154 103 264 255 154 344 265

Current revenues 7,463 7,576 17,275 22,228 9,883 9,028 9,934

7 Gain on disposal of intangible assets 7 - - - 47 603 2

8 Gain on disposal of tangible assets - - - - - - -

9 Short term financial investments - - - - 164 84 0

10 Donations 18 222 248 3,532 529 106 465

11 Transfers 896 813 894 835 1,865 1,996 3,893

12 Loans and credits 892 3,360 5,327 10,462 4,141 4,017 5,163

13 Assets from previous year - - 2 - - - -

Other income 1,813 4,395 6,472 14,829 6,747 6,806 9,522

Source: 2005-2008 data taken from the Feasibility Study and, 2009-2010-2011 from Mu-

nicipality. 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 Municipality, thousand EUR

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

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2006 2007 2008 2009 2010 2011

Current revenues Other income




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 Municipality,

thousand EUR

Type of revenue 2007 2008 2009 2010 2011

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 - - 47 603 2

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 2 0 164 84 0



are not available.

Expenditures On the expenditure side (Table 5), the Municipality of Nikšić has current

expenditures in excess of 21 million EUR in every year after 2008. This is sig-

nificant, since it indicates that the Municipality of Nikšić is likely running an

operating deficit, which sheds doubt on the purpose of the loans and credits ap-

pearing on the revenue side, as they may be used to finance operating expendi-

tures, which technically should not be permitted.

Table 5 Annual expenditures of Nikšić Municipality, thousand EUR

Expenditure 2005 2006 2007 2008 2009 2010 2011

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 Municipal Affairs, transport and water 0 0 0 0 2,210 2,292 2,489

Environmental Protection Service 57 91 93 147 180 210 145

Public Utility Company 480 650 819 2,160 0 0 0

Others 7,967 9,805 22,038 18,872 19,338 19,868 20,349

Capital expenses 770 6,741 780 15,877 2,177 3,309 4,025



are not available.

The following figure shows the budget expenditures from 2005-2011. 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)




19

.

Figure 2 Current and Capital Expenses of Nikšić Municipality, thousand EUR

The conclusion is that the Municipality of Nikšić appears to be running operat-

ing 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 Municipality of Nikšić will not be able to co-

finance any significant amount of the regional landfill and its accompanying

facilities.

3.3.2 Plužine

Budget revenues The same analysis has been conducted for the Municipality 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 substan-

tial part of the budget.

Table 6 Budget Revenue of the Plužine Municipality, thousand EUR

No. 2006 2007 2008 2009 2010 2011

Total budget revenue 1,122 1,871 1,380 2,503 3,324 2,789

1 Personal income tax 85 70 70 75 53 65

2 Property transfer tax 342 213 287 185 1,423 1,205

3 Municipal tax 124 94 105 113 81 78

4 Other Taxes 162 164 198 80 8 19

5 Compensations 222 586 492 395 358 345

6 Other revenues 18 28 48 35 55 -

Current revenues 952 1,154 1,200 883 1,979 1,712

7 Gain on disposal of intangible assets - - - - - -

8 Gain on disposal of tangible assets - - - - - -

9 Short term financial investments - 0.2 0.2 1,140 3.4 205

10 Donations - 55 - - 45 742

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2006 2007 2008 2009 2010 2011

Current expenses Capital expenses




20

.

No. 2006 2007 2008 2009 2010 2011

11 Transfers 160 110 170 350 364 -

12 Loans and credits 10 510 10 130 932 130

13 Assets from previous year - 42 - - - -

Other income 170 717 180 1,620 1,345 1,077


nicipality. 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 Municipality, thousand EUR

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 com-

ponent.

Table 7 Local self-government funding sources of Plužine Municipality,

thousand EUR

Type of revenue 2007 2008 2009 2010 2011

Total budget revenue 1,829 1,380 1,363 3,321 2,584

Own funding sources 811 523 513 370 298

Common revenue 343 677 370 1,609 1,414

Gains on disposal of assets - - - - -

Grants from Republic budget 165 170 350 409 742

Loans, credits, investments 510 10 130 932 130

Other capital revenues 42 413 1,140 3 205



0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011





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 Municipality, thousand EUR

2006 2007 2008 2009 2010 2011

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 278 675 510 2,850 1,752 1,754



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 Municipality, thousand EUR

The conclusion is that the Municipality 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 gen-

eration, it is assumed that the Municipality of Plužine will not be able to co-

finance any significant amount of the regional landfill and its accompanying

facilities.

3.3.3 Šavnik

Budget revenues The same analysis has been conducted for the Municipality 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. Munici-

pal taxes are the main source of own revenues. Transfers also make up a sub-

stantial part of the budget. The municipality is not incurring new debt.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2006 2007 2008 2009 2010 2011





22

.

Table 9 Budget Revenue of Šavnik Municipality, thousand EUR

2006 2007 2008 2009 2010

Total budget revenue 833.7 1,034.4 1,220.5 1,153.1 1,093.4

Personal income tax - - 27.3 25.4 22.7

Property transfer tax 72.5 90.2 7.0 7.5 1.0

Municipal tax 0.0 0.0 75.2 63.5 102.5

Other Taxes 100.7 86.6 226.0 8.6 24.2

Compensations 16.5 27.3 68.0 30.7 43.0

Other revenues 22.9 20.3 15.0 29.9 26.0

Current revenues 212.6 224.4 418.5 165.6 219.4

Gain on disposal of intangible assets - - - 1.7 0.5

Gain on disposal of tangible assets - - - - -

Short term financial investments - - - 184.8 149.5

Donations - - 100.0 131.0 124.0

Transfers 599.8 388.7 260.0 670.0 600.0

Loans and credits 14.9 321.5 - - -

Assets from previous year 6.5 99.8 442.0 - -

Other income 621.1 810.0 802.0 987.5 874.0


nicipality. For 2009 and 2010 the balanced budget values are used.

This is depicted in the following figure, in which it is seen that external reve-

nues (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 Municipality, thousand EUR

0

200

400

600

800

1,000

1,200

1,400

2006 2007 2008 2009 2010





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 Municipality, thousand EUR

2008 2009 2010

Total expenses 1,108 1,153 1,093

Current expenses 468 917 976

Capital expenses 640 236 117



Figure 6 Current and Capital Expenses of Šavnik Municipality, thousand EUR

The conclusion is that the Municipality 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 Municipality of

Šavnik will not be able to co-finance any significant amount of the regional

landfill and its accompanying facilities.

3.4 Analysis of municipal PUCs

Profit and loss 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.

0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010





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 analy-

sis; as pointed out in the feasibility study, however, the revenues and expendi-

tures of the Plužine and Šavnik PUCs are mere fractions of the Nikšić PUC.

Table 11 Nikšić PUC Profit and Loss Statement, thousand EUR

2009 2010

20

11

TO

TA

L

Wa

ste

Ma

nag

em

en

t

Oth

er

se

rvic

es

Ad

min

istr

ation

20

09

TO

TA

L

Wa

ste

Ma

nag

em

en

t

Oth

er

se

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es

Roa

ds

Ad

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ation

20

10

TO

TA

L

Revenues

Revenues from municipality waste services

1,092.0 531.9 5.4 1,629.2 1,144.5 674.5 149.6 19.3 1,629.2 2,139.0

Grants and donations 17.9 143.0 0.1 161.0 431.1 258.5 86.0

161.0 -65.6

Other Revenues 832.2 701.5 0.2 1,733.3 0.0 -65.6 0.0 2.2 -63.4 141.9

Total revenues 1,942.0 1,376.4 5.7 3,615.4 1,575.5 867.3 235.6 21.5 2,700.0 2,215.4

Expenditures

Raw materials 299.6 178.9 20.7 499.2 310.6 122.1 19.9 19.1 451.8 451.8

Salaries 693.4 620.5 566.1 1,879.9 844.4 560.1 71.0 329.7 1,734.2 1,917.4

Depreciation and maintenance 37.5 14.2 8.2 60.0 35.5 13.5 1.7 8.3 57.4 57.4

Other operating expenditures 511.4 536.2 94.7 1,142.3 306.4 306.5 118.2 74.8 687.7 86.6

Interest 2.3 2.1

4.4 4.1 5.7 5.0

9.9 13.0

Total expenditures 1,544.3 1,351.9 689.7 3,585.9 1,501.0 1,008.0 215.8 431.8 2,940.8 2,526.2

PROFIT - LOSS 397.7 24.6 -684.1 -261.8 74.5 -140.6 19.8 -410.3 -476.4 -310.8

Transfers for administration expenditure plan

-496.4 -187.6 684.1

-264.6 -174.7 -39.6 410.3

-165.2

NET PROFIT - LOSS -98.7 -163.0 0.0 -261.8 -190.1 -315.3 -19.7

-476.4 -476.0

Source: Nikšić Public Utility Company. For 2011 values are taken from temporary results.




25

.

Table 12 Nikšić PUC Assets & Liabilities 2005-2010, thousand EUR

2005 2006 2007 2008 2009 2010

ASSETS

Fixed assets 626.9 645.6 727.7 675.8 622.4 569.9

Intangible assets 0.3 1.9 5.2 6.0

Buildings, plants and equipment 615.8 634.5 716.3 662.8 606.1 549.6

Long-term financial placements 11.1 11.1 11.1 11.1 11.1 14.3

Current assets 695.9 999.5 1,746.7 1,638.8 2,170.7 2,098.1

Inventories 47.3 66.2 77.8 139.9 221.2 156.5

Trade receivables 633.6 925.9 1,657.3 1,493.9 1,942.8 1,931.1

Cash and cash equivalent 14.9 7.4 11.5 5.0 6.7 10.5

Total assets 1,322.8 1,645.1 2,474.4 2,314.6 2,793.1 2,668.0

2005 2006 2007 2008 2009 2010

LIABILITIES

Capital and provisions -584.5 -616.0 -816.0 -769.8 -1,031.5 -1,507.6

Subscribed capital-paid 528.4 528.4 248.0 249.0 249.0 249.0

Revaluation reserve 0.9 0.9 0.9 0.9 0.9 0.9

Retained earnings-loss -1,113.8

-1,145.3

-1,064.9

-1,019.7

-1,281.5

-1,757.5

Long-term liabilities 164.2 149.7 132.1 382.0 336.2 293.4

Deferred taxes 21.2 22.7 30.7 296.6 269.5 242.3

Deferred revenues 143.1 127.0 101.5 85.4 66.8 51.1

Short-term liabilities 1,743.1 2,111.3 2,871.0 2,702.3 3,488.4 3,882.2

Short-term operating liabilities 664.9 567.1 782.2 418.3 702.1 504.9

Short-term financial liabilities 13.5 12.0

Present part of long-term credits 0.0 0.0 12.0 12.0 14.9 22.3

Taxes 1,060.1 1,532.3 2,076.4 2,272.1 2,770.9 3,350.9

Calculated liabilities 4.5 0.4 0.5 4.2

Total liabilities 1,322.8 1,645.1 2,187.1 2,314.6 2,793.1 2,668.0

Total assets 1,322.8 1,645.1 2,474.4 2,314.6 2,793.1 2,668.0

Source: 2005-2008 data taken from the Feasibility Study and 2009-2010 from Municipality.

3.5 Municipal 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 recom-

mended that municipalities amend their local decisions on establishment of

public utility companies (PUCs) to introduce performance contracting as a pre-

cursor to the introduction of public private partnerships.




26

.

3.6 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 Bu-

doš was established on 5 March 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 Organization2. Currently, the Company has one employee – the Ex-

ecutive 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 meas-

uring quality of air, water, etc.

Capital The founding capital of the Company is 100,000 EUR, set as follows:

Municipality Nikšić: 97,000 EUR (97%)

Municipality Plužine: 2,000 EUR (2%)

Municipality 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.

3.7 Support from PROCON

The National Project Implementation Unit for Communal Services and Envi-

ronment (PROCON) will provide capacity development and function as the

Project Implementation Unit (PIU). This will significantly reduce the risk re-

lated to project management during the contracting of the landfill construction

and operation. PROCON will need to bolster its capacity in the analysis of pub-

lic private partnership arrangements, including in particular quantitative analy-

sis of risk.

3.8 Macro-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

2Official Gazette No. 60/02 and 17/07




27

.

to be very high (approximately between 70-90 EUR per tonne of waste col-

lected, depending on the actual amount of waste), the unit operating cost of the

regional landfill was expected to be about 9.5 EUR per tonne of waste received,

and the unit total cost of 54 EUR per tonne (operating plus investment cost) of

the regional landfill3, 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.




28

.

4 Overview of legal and institutional environment concerning landfill construction and operation

4.1 Purpose

Building on the Activity 2 Report, the purpose of this section is to provide indi-

cations of how the legal and institutional environment in Montenegro affects

the potential landfill construction and operation options. In other words, if pri-

vate-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 con-

tract 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 Montenegrin legal and institutional framework related to PPP solutions.

Such overall review and conclusions, as the conformity with the EU waste leg-

islation, have already been addressed by Activity 24. It follows from the analy-

ses of Activity 2 that the basics of the Montenegrin 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 sec-

tion takes the current legal, institutional and organisational set-up into account

and addresses the legal risks and challenges involved.

4.2 Structure of the chapter

The first section (4.3) reviews the roles and responsibilities of key stakeholders

in solid waste management.

4 See also: "Public-Private Partnerships in Montenegro Accountability, transparency and

efficiency" (Institut Alternativa, 2010). The report presents a legal and institutional review

with recommendations.




29

.

In the second and third sections (4.4 and.4.5), PPP contract management and

different PPP options for contracting are presented.

In the fourth section (4.6), the PPP contract options are presented in the context

of the line of responsibilities involved from the government level to the indi-

vidual private PPP operator. A PPP contract can only delegate operational and

financial responsibilities; the political responsibility remains with the govern-

ment and the municipalities and cannot be delegated.

The fifth section (4.7) addresses the considerations related to the legal and insti-

tutional capacity and to specific aspects of the legal and institutional frame-

work.

Finally, section 4.8 ends with conclusions and recommendations.

4.3 Key stakeholders

This section reviews the roles and responsibilities of key stakeholders in solid

waste management.

MoSDT The Ministry of Sustainable Development and Tourism (MoSDT) is the line

ministry responsible for the environment and solid waste management, in par-

ticular 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 Management 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 man-

agement with other ministries and institutions and is responsible for the man-

agement and coordination of waste projects funded from national and interna-

tional resources. It issues licenses to facilities for waste treatment, including

recycling and provides for inspection and control of ecological parameters.

Within the MoSDT, the Sector for Waste Management and Communal De-

velopment 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 frame-

work to improve relations in the field of waste management other utility ser-

vices, 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 responsi-

ble for environmental inspection and monitoring, issues permits, and imple-

ments strategic environmental assessment (SEA) and environmental impact

assessment (EIA) procedures, as well as is responsible for integrated pollution




30

.

prevention and control (IPPC) permitting, with which all landfills in Montene-

gro must comply. The Agency’s role also includes collecting data and prepar-

ing reports on conditions in the field of waste management in Montenegro for

the relevant international organizations and institutions, such as the European

Union.

The Directorate of Public Works is involved in the preparation, implementa-

tion and monitoring of public works projects

PROCON The National Project Implementation Unit for Communal Services and

Environment (PROCON) is the national project implementation unit estab-

lished by the Government of Montenegro at the end of 2008 to manage and co-

ordinate projects in the area of communal services and environmental protec-

tion. 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 Montenegro and international

financial institutions (i.e., the European Investment Bank (EIB) and various

IFIs) and they encompass: project financing; project analyses to assess feasibil-

ity, sustainability and harmonization with strategic planning documents; prepa-

ration 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 per-

forming 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.

Municipalities The municipalities of Montenegro 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.

PUCs The PUCs provide solid waste (and other services, as they are typically multi-

sector utilities) collection and treatment services at the delegation of the mu-

nicipality. PUCs can be involved in the collection, transport, treatment and dis-

posal of waste, as well as construction and operate a landfill.

4.4 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 inte-

grated and safeguarded at the time of designing the PPP models and also during

the contract period. The public interest cannot yield to private commercial in-

terest.

Directorate of Public

Works




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.

4.5 Different options for contracting

The PPP arrangement may be entered by contract parties following four op-

tions:

Four options for PPP contracting

1. Inter-municipal Budoš - PPP company

2. Municipalities - PPP company

3. Municipalities - Budoš (as an independent PPP company)

In addition, as public service benchmarking (PSB):

4. Municipalities undertake the waste operations themselves, as an own

operation, utilising the existing PUCs.

Figure 7 Model 1, Budoš and PPP Company

This model establishes Budoš, on behalf of the municipalities, as the independ-

ent contract manager towards the PPP Company. It is assumed that Budoš as an

independent legal entity with limited liability may be equipped with such pow-

ers and responsibilities.

Pros:

Separation of responsibilities between the political level (municipali-

ties) and the management/operational level (Budoš)

Practical contract management with only two parties (the inter-

municipal Budoš and the PPP company)

As both parties are operating on commercial terms, this model may

have potential to attract private investments.

BudošPPP

Company




32

.

Cons:

The current capacity of Budoš is insufficient to enter into and manage

such a contract

Municipalities need to provide clear instructions for Budoš reflecting

the overall responsibilities and objectives of the municipalities them-

selves

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 Model 2, Municipalities as contract signatories and PPP company

This model leaves Budoš aside and establishes a direct contractual relationship

between the municipalities (as three individual signatories to the same PPP con-

tract) and the private PPP operator.

Pros:

No need to transfer capacity to Budoš

Direct control and management of the PPP company reflecting the pub-

lic 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:

Nikšid

Šavnik

Plužine

PPP Company




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 ad-

ministration/managing of contract

Need for establishing an inter-municipal coordination unit - alterna-

tively an inter-municipal agreement - in order to coordinate manage-

ment and administration.

Figure 9 Model 3, Municipalities as three contract signatories with Budoš

In this model, Budoš will, as an independent legal entity, undertake the con-

struction and operation of the landfill. It is assumed that Budoš as an independ-

ent 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 un-

dertake commercial activity

Separation of responsibilities between the political level (municipali-

ties) and the operational level (Budoš).

Cons:

The current capacity of Budoš is insufficient to enter into and imple-

ment such a contract

Nikšid

Šavnik

Plužine

Budoš




34

.

Requires total separation of municipal influence and control over Budoš

in order to establish a credible independent Budoš

Limited potential for private investment

Municipalities 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 Model 4, Municipalities as three contract signatories and existing

PUCs (public service benchmarking)

This model concerns public service benchmarking (PSB). In this model, the

municipalities undertake themselves the construction and operation of the land-

fills 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

Municipalities can meet/secure policy objectives and responsibilities

through own operations.

Cons:

The current capacity of PUCs is insufficient

Nikšid

Šavnik

Plužine

PUC (one inter-municipal PUC

or three seperate PUCs

for each municiplaity)




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 in-

vestment.

4.6 Role and responsibilities of private and public sector

4.6.1 Delegation - risks and responsibilities

The PPP contract options must be presented in the context of the line of respon-

sibilities involved from the government level to the individual private PPP op-

erator.

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 Municipality or the Government of

Montenegro 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 rela-

tionship with the PPP operator (for instance, in the case in which Budoš enters

the contract with the private PPP operator, Model 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 Municipality). 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.




36

.

Figure 11 Model 1, Chain of responsibilities, contract parties: Budoš and PPP

company

Government

•Approval/ licensing of activities

•Responsible for Market regulation / antitrust

•Overall responsible for waste management in Montenegro

•Responsible for taxation

•Concession regulation/ supervision

•Supervising/ monitoring of municipalities in waste management, including PPP performance

•Responsible for meeting national and EU objectives

Municipalities of Nikšid, Plužine and Šavnik

•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

Budoš Ltd

•Current a "shell" company - no activities and one employee

•Separate Inter-municipal 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

PPP Company

•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




37

.

Figure 12 Model 2, Chain of responsibilities, contract parties: municipalities and

PPP company

Government






•Supervising/ monitoring of municipalities in waste management, including PPP performance.



•Contract part to PPP contract (with private operator)

•Responsable for tender/procurement process


•Responsible for waste management in the municipalities

•Responsible for the performance of the PPP company (construction and operation standards, performance demands and other requirements)


•Responsible toward the government for fulfilling waste management objectives

PPP Company

•Public or private company

•Contract party to PPP contract (with municipalities)



•Responsible towards municipalities (contract party)





38

.


Budoš PPP

Government






•Supervising/ monitoring of municipalities in waste management, including PPP performance



•Contract part to PPP contract (with Budoš)

•Responsable for tender/procurement process


•Responsible for waste management in the municipalities

•Responsible for the performance of Budoš (construction and operation standards, performance demands and other requirements)



•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 Inter-municipal 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







39

.


PUCs (public service benchmarking)

Government






•Supervising/ monitoring of municipalities in waste management, including PPP performance.




•Responsible for waste mangement in the municipalities

•Responsible for the performance of PUC (construction and operation standards, performance demands and other requirements)


•Revise the statute for PUC responding to the needs in relation to the construction and operation standards, performance demands and other requirements


PUC

•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





40

.

4.7 Legal and institutional considerations - capacity

The legal problem is typically rather of an indirect legal significance, as legisla-

tion has been enacted and thus, the wording of Montenegrin 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 co-

ordination 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

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, i.e., waste manage-

ment, environmental management, health and sanitary management, con-

struction management, planning management, etc.

Legislation generally for public administration, such as delineation of gov-

ernmental and municipal competencies, inter-governmental/municipal or-

ganisation, administrative law, involvement of the public, etc.

General contract law governing the conclusion and management of con-

tracts.

Procurement ContractingManagement

of ContractTermination of contract




41

.

Planning instruments and provisions, i.e. 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 envi-

ronmental 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, i.e., 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, espe-

cially 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 Bu-

doš). 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 man-

agement 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 na-

tional and/or EU policy and legal requirements. It follows from the conclu-

sions of Activity 2 that Montenegro is still in the process of implementing

EU waste legislation.

There is a significant legal and institutional challenge related to the coordi-

nation of approvals and licensing required for all stages of the PPP ar-

rangement - 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.




42

.

- Mitigate consequences for project, construction and operation in case of

non-performance of responsible government agency or municipality.

4.8 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 op-

tions for contracting, legal framework in support of PPP, contract management,

institutional coordination, and regulatory authorities, delegation and responsi-

bilities.

4.8.1 PPP-options for contracting

The PPP arrangement may be entered into by contract parties following four

options:

1. Inter-municipal Budoš - PPP company

2. Municipalities directly - PPP company

3. Municipalities directly - Budoš (as an independent PPP company)

In addition, as public service benchmarking:

4. Municipalities 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 re-

sponsibilities.

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.

4.8.2 Legal framework in support of PPP

It follows from the analyses in Activity 2, that the basics of the Montenegrin

legal and institutional framework support the implementation of most PPP op-

tions.




43

.

The remaining legal shortcomings mentioned in the Activity 2 Report shall be

addressed in future legal reforms; the overall conclusion remains, however, that

Montenegro today has a rather developed legal framework in support of im-

plementing 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 pro-

vided by the Chamber of Commerce shall also in its composition, its stat-

utes 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 in-

dicate a risk that such private interests may influence the outcome and pro-

ceedings 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 regu-

lated 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 (i.e. the PPP operator) may apply one - or a few - appli-

cation process(es) for obtaining all needed permits.

Non-resident companies are allowed to invest in Montenegrin waste man-

agement 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




44

.

Foreign Investment Article 13 allows only for Build-operate-transfer ar-

rangement (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, i.e. Law on Private Sector Participation in

Delivery of Public Services. Typically a BOT only includes limited owner-

ship. 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 con-

cerns (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 corre-

spond to the right of private ownership in general in Montenegro, it is rec-

ommended 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 Self-

government. 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 Ser-

vices Article 8 specifies that tariff-setting in a concession agreement shall

be controlled by the Regulatory Body (municipality). Therefore, the Regu-

latory 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 pri-

vate 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.

4.8.3 Contract management

The legal problem is typically rather of indirect legal significance, as legislation

has been enacted and thus, the wording of Montenegrin legislation is more or

less in place.




45

.

The problems relate to the capacity of implementing the legislation, to the co-

ordination of the institutional responsibilities and to the ability and capacity in

contract management. The latter is important, as such contract management of-

ten 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 con-

tracts. 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 man-

agement 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 li-

cense conditions. But the risk of malperformance or non-performance and

uncertainty increase when the conditions imposed are unclear, uncoordi-

nated and perhaps even in contradiction with each other.

4.8.4 Institutional coordination

There is a significant legal and institutional challenge related to the coordina-

tion of approvals and licensing required for all stages of the PPP arrangement -

related to the pre-construction (concession approval, EIA and SEA), construc-

tion and operation:

Timely and coordinated responses in order not to halt the planning, con-

struction and operation periods.

Mitigate 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 pro-

cedures. 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.




46

.

4.8.5 Regulatory authorities, delegation and responsibilities

According to the Law on Waste Management and the Law on Local Self-

government, waste management operation, including waste collection and

waste disposal lies within the responsibilities and competencies of the munici-

palities. Commercialisation and delegation of operational responsibilities is di-

rected at the municipal level by the Law on Private Sector Participation in Deliv-

ery 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 delega-

tion, the municipalities and the government of Montenegro remains overall re-

sponsible 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 con-

trol 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 munici-

palities 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 li-

able 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 fur-

ther 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 compe-

tent authority cannot delegate political and legal responsibilities. The PPP-

contract 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.




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).




48

.

5 Risk in landfill construction and operation

5.1 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 implementa-

tion.

On a strategic level, qualitative risk evaluation is used to supplement the plan-

ning 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 assess-

ment 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-private-

partnership 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 Money 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 prepa-

ration process. This will be done by describing a general methodological ap-

proach, 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.

5.2 Methodological approach

The basic tool for development of any risk analysis and strategy is a Risk Ma-

trix, which identifies, categorises, and allocates risk factors associated with the




49

.

project. While risks common to any project implementation process can be de-

scribed, 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 cate-

gories:

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, de-

lays 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 re-

lated 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 re-

lated to environmental standards and regulations that cannot be met and re-

sult in either service interruptions or costs in the form of fines and penal-

ties

Institutional/political risks - risk factors ranging from discriminatory

change in law, approvals, taxation variations to the extreme cases of pay-

ment failures, project termination or even nationalisation

Market related risks - economic and financial factors that directly or indi-

rectly impact project investment and O&M costs, such as inflation fluctua-

tions, 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 par-

ticular 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.




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 Matrix development

# STEP DESCRIPTION METHOD

1 Global Risk Matrix At this stage, all possible risk factors directly and indi-rectly 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 Matrix with qualitative risk assessment

Using the developed Global Risk Matrix 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, M=medium, and H=high.

Extended risk workshop with participation of as many as possible project stakeholders

3 Risk Impact Chart and Risk Manage-ment Strategy

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 Management 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.

Project Risk evaluation team based on the results of extended risk workshop.

4 Reduced Risk Matrix for quantification

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 Matrix for con-sequent quantification of their material impact on the pro-ject.

In most cases, risk elements from the group for mitigation are included into Reduced Risk Matrix.

Project Risk evaluation team using Risk Impact Chart.

5 Quantified Risk Matrix This step is the most time consuming, as it involves at-taching actual quantitative probability and impact values to each risk element in the Reduced Risk Matrix.

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 per-centage 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 ex-perts, familiar with the pro-ject and its environment, and having substantial pre-vious experience in similar projects in the country and abroad.

A summary of the methodological approach for project Risk Matrix develop-

ment is shown in the figure below:




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Figure 16 Project Risk Matrix development flow

The reduced risk matrix is used for further analysis and calculation of cost im-

pact 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 public-

private-partnership arrangement.

The Reduced Matrix also serves as basis for risk allocation to most suitable

party in the PPP transaction, based on the ability of transaction side (public au-

thority or PPP partner) to address and mitigate the risk in the most efficient

way.

5.3 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

Matrix with quantification of relevant risk factors to be further used in analysis

of project costs in traditional and PPP procurement cases.

5.3.1 Global Risk Matrix

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.

1• Global Risk Matrix development

• Extended workshop

2• Global Risk Matrix with qualitative probabilities and impact

• Extended workshop

3• Risk Impact Chart and Strategy analysis

• Project team

4• Reduced Risk Matrix development

• Project team

5• Reduced risk matrix with quantitative probabilities and impact

• Specialist Risk Workshop




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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 opera-

tional 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 Matrix listing for Nikšić landfill project – construc-

tion/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 dis-bursement

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, contamina-tion, or archaeology

CR12 Weather Delays due to adverse weather conditions

CR13 Authority Variation Delays and time over-runs due to Contracting Authority variation of the ini-tially approved documentation during construction phase

CR14 Contractor variation Delays and time over-runs due to Contractors variation of the initially ap-proved documentation during construction phase

CR15 Statutory bodies variation 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




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Construction/ Investment period risks

CR19 Works Risk of insolvency, failure to perform, poor standards by the contracted con-struction companies

CR20 Commissioning Failure to perform according to required standards during commissioning

CR21 Legislative compli-ance/Licences

Failure to obtain required licences and permits for construction works/Compliance with all the legislative framework applicable in the con-struction period

CR22 Specific/Discriminatory Change in Law

General legislative or regulatory changes giving rise to new or increased capital costs.

CR23 Receivership Cost of delays in any construction work and in provision of the regular ser-vices in case when one or more members of the consortium (if any) becomes insolvent

CR24 Force Majeure 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 Interest rates Interest rates fluctuations resulting in additional financial costs during con-struction

CR28 Insurance availability 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 Mid-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 Matrix listing for Nikšić landfill project – operating period

risk


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 Performance Delivery, timing, and quality of the provided services falls below the required standards

OR6 Raw material Risk of poor availability of raw material required for operation of facilities (gas, water, etc.)

OR7 Staff shortages Shortage of skilled staff




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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 com-motion; 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 oper-ating costs.

OR14 Compliance Failure to comply with current and future standards related to environment

OR15 Contamination Contamination of the environment arising from the operation of the Landfill Facility, related works, giving rise to operating and/or service interruptions

OR16 Claims Cost of any claims and legal procedures related to the contamination of the environment during the contract period

OR17 Waste management targets Failure to comply with commitments on waste management targets defined within Montenegro and EU policy documents

OR18 Legislative compliance Compliance with all the legislative framework applicable during the contract period, such as multiple licenses

OR19 Voluntary Termination Financial consequences resulting from voluntary termination caused by the Contracting Authority

OR20 Contractor default Financial consequences resulting from default of the Contractor

OR21 Force Majeure 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 Macroeconomic 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




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risk, waste supply risk


Waste supply risk

WR1 Waste quantity from the authorised collectors

Risk that the quantity of waste from the authorised waste collector falls below annual forecasted amount

WR2 Capacity Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities

WR3 Market entry Financial risk related with market entry of the similar service provider author-ised by the Contracting Authority

WR4 Inspection risk 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

5.3.2 Global Risk Matrix 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 com-

mission the facility, landfill's ability to accept waste, landfill management

company's financial sustainability, etc.

Medium = M - risk factors are likely to occur and will have notable im-

pact on projects technical, financial, environmental sustainability; meas-

ures need to be taken to mitigate such risks and investment and operating

costs need to be risk-adjusted to provide adequate contingency to the pro-

ject

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 imple-

mentation, measures need to be taken to mitigate risks, as well as high lev-

els of risk-adjusted contingencies need to be provided; project may pro-

ceed 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.




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Based on the Global Matrix listing above, a qualitative evaluation of risk fac-

tors in long list was conducted and results are presented below for the public

sector baseline case (more detailed comments underpinning assignment of

Low, Medium, and High values are presented in Annex 1).

Table 17 Global Risk Matrix listing for Nikšić landfill project – construction pe-

riod risk

#

RISK CATEGORY DESCRIPTION PROBABILITY IMPACT

Construction/Investment period risk

L=low, M=medium,

H=high

L=low, M=medium,

H=high

CR1 Late design approvals Late design approvals M M

CR2 Quality of design Poor quality of design work causing delay M M

CR3 PIU risk Delays in establishment of PIU L L

CR4 Capacity of PIU risk Limited capacity of PIU team, resulting in higher costs

M L

CR5 Financing Non-availability of municipal or external co-financing during construction

L H

CR6 Procedural risks Poor financial planning, monitoring, reporting - may result in delays in disbursement

M L

CR7 Claims risk Contractor asks for more time and money M M

CR8 Procurement risk - time and cost

Tendering and procurement process takes longer and cost more

M M

CR9 Construction cost risk Higher construction costs than projected M M

CR10 Corruption risk Risk of fraud or corruption in implementation process

L M

CR11 Land ground condition Unforeseen delays in construction due to poor ground condition, contamination, or archaeology

L M

CR12 Weather Delays due to adverse weather conditions L M

CR13 Authority Variation Delays and time over-runs due to Contracting Au-thority variation of the initially approved documen-tation during construction phase

M M

CR14 Contractor variation Delays and time over-runs due to Contractors variation of the initially approved documentation during construction phase

M M

CR15 Statutory bodies variation Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase

M M

CR16 Safety Risk of accidents and resulting delays during con-struction

L L

CR17 Poor workmanship Cost and time over-runs due to poor workmanship L M

CR18 Resources Delays due to lack of adequate labour during con-struction

L L

CR19 Works Risk of insolvency, failure to perform, poor stan-dards by the contracted construction companies

L H

CR20 Commissioning Failure to perform according to required standards during commissioning

L M




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#

RISK CATEGORY DESCRIPTION PROBABILITY IMPACT


L=low, M=medium,

H=high

L=low, M=medium,

H=high

CR21 Legislative compli-ance/Licences

Failure to obtain required licences and permits for construction works/Compliance with all the legisla-tive framework applicable in the construction pe-riod

M H

CR22 Specific/Discriminatory Change in Law


M M

CR23 Receivership

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) be-comes insolvent

L M

CR24 Force Majeure Uninsurable risks related to force majeure events during construction

L H

CR25 Reduced Financial Capa-bility

Risk of Contractor becoming insolvent, or the pro-vision of services requires a larger financial re-sources than estimated by the Contractor

L H

CR26 Unavailable Financing Risk related with ability to secure financial re-sources for the project

L H

CR27 Interest rates Interest rates fluctuations resulting in additional financial costs during construction

M M

CR28 Insurance availability Insurance is not available or more costly than ex-pected during construction period

M M

CR29 Non-insurance risk Non-insured damage during construction L M

CR30 Financial commitments Contracting Authority is unable to meet the finan-cial commitments when they are due, construction period

L M

CR31 Protestor risk Cost and delay in construction caused by protes-tors

L L

CR32 Strike risk Delays in construction and additional cost due to workers strike

L L

CR33 Site risk Mid-construction need for alternative site L H

CR34 Tax risk Cost related to various taxes variation during con-struction

M M

CR35 Inflation risk Additional cost due to variation in inflation M M




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risk

# RISK CATEGORY DESCRIPTION PROBABILITY IMPACT

Operational risks

L=low, M=medium,

H=high

L=low, M=medium,

H=high

OR1 Cost overrun Operating and maintenance costs are generally higher than expected

M M

OR2 Contract duration The Public Authority is changing the duration re-quirements after the contract’s signing

L L

OR3 Inadequate technical solu-tion

Inadequate technical solution results in higher maintenance costs

L M

OR4 Availability Availability of the provided services falls below the required standards

M L

OR5 Performance Delivery, timing, and quality of the provided ser-vices falls below the required standards

M L

OR6 Raw material Risk of poor availability of raw material required for operation of facilities (gas, water, etc.)

L L

OR7 Staff shortages Shortage of skilled staff M L

OR8 Latent defects Unforeseen costs arise due to latent defects aris-ing after liability period

M M

OR9 Interruption

Delays and additional costs arising due to: fire, explosion, flood, or civil commotion; official or un-official industrial action; accidental damage to ser-vice roads; blockade other than force majeure.

L M

OR10 Public relations Poor public relations resulting in additional reme-diation costs

M L

OR11 Damage Risk of vandalism, major damage, or destruction of facilities (other than force majeure)

L L

OR12 Tariff risk Tariffs/Gate Fees do not increase as planned H M

OR13 Specific/Discriminatory Change in Law

General legislative or regulatory changes giving rise to new or increased operating costs.

M M

OR14 Compliance Failure to comply with current and future stan-dards related to environment

M M

OR15 Contamination

Contamination of the environment arising from the operation of the Landfill Facility, related works, giving rise to operating and/or service interrup-tions

L H

OR16 Claims Cost of any claims and legal procedures related to the contamination of the environment during the contract period

L H

OR17 Waste management tar-gets

Failure to comply with commitments on waste management targets defined within Montenegro and EU policy documents

M L

OR18 Legislative compliance Compliance with all the legislative framework ap-plicable during the contract period, such as multi-ple licenses

H H

OR19 Voluntary Termination Financial consequences resulting from voluntary termination caused by the Contracting Authority

L H




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Operational risks

L=low, M=medium,

H=high

L=low, M=medium,

H=high

OR20 Contractor default Financial consequences resulting from default of the Contractor

M H

OR21 Force Majeure Uninsurable risks related to force majeure events during operation

L H

OR22 Additional financing Additional financing for reconstruction, modifica-tion, re-equipment, etc., due to modification of legislation, policy or other kinds of modifications

L M

OR23 Inflation Operating costs are higher than anticipated due to inflation

M M

OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation

M M

OR25 Insurance availability Insurance is not available or more costly than ex-pected during operation period

M L

OR26 Financial commitments Contracting Authority is unable to meet the finan-cial commitments when they are due, operating period

L M

OR27 Macroeconomic changes Risk of reducing the demand for the contracting services

M M

OR28 Demographic changes Demographic or social-economic changes affect the demand for the contracted service

L M

OR29 Obsolescence risk Risk of early obsolescence of structures and equipment

M M

OR30 Tax risk Cost related to various taxes variation during op-eration

M M

OR31 Waste tax Risk of new waste specific tax M M

OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected

M H

OR33 End market Ability to secure end markets for sellable outputs M H

OR34 Waste to landfill uncertain-ties

Reliability of waste streams to landfill

M H




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risk, waste supply


Waste supply risk

L=low, M=medium,

H=high

L=low, M=medium,

H=high

WR1 Waste quantity from the authorised collectors


M H

WR2 Capacity Risk that the waste delivered to the Landfill Facili-ties by authorised collectors exceeds the planned capacity of facilities

M M

WR3 Market entry Financial risk related with market entry of the simi-lar service provider authorised by the Contracting Authority

L M

WR4 Inspection risk Risk of inadequate inspection of waste entering Landfill Facilities resulting in damage to facilities and equipment

L M

WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns

H M

WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns

M M

5.3.3 Risk Impact Chart and Strategy

Using the aggregate risk matrix and assigned probability and impact values, a

Risk Impact Chart and related Risk Management Strategy have been developed.

The chart allows for quick and relative comparison of risk factors, and devel-

opment of Risk Management Strategy vis-a-vis each risk element. The Strategy

comprises four distinct approaches, each addressing project risk acceptance

level and associated action:

MITIGATE - 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 meas-

ures fail and risk actually occurs.

CONTROL - this category includes risks that are unlikely to occur (prob-

ability L), however, would have significant impact on the project if hap-

pened (impact M or H). Since the probability of these risks is low, limited




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actions in controlling factors of risk occurrence might be effective in pre-

venting risk from happening at all.

MONITOR – these are categories of risks that are likely to happen during

the project lifetime (probability M or H), however, the impact on the pro-

ject is not significant (impact is L). Most such risks are, frequently, exter-

nal 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 pro-

ject, 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 pre-

sented below.

Figure 17 Risk Impact Chart and associated risk management strategy/actions




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5.3.4 Reduced Risk Matrix

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 Matrix, thereby arriving

at the Reduced Risk Matrix.

The Reduced Risk Matrix is shown in the table below. A total of fourteen con-

struction period risk factors, thirteen operation period risk elements, and four

waste supply and quantity related risk factors are retained in Reduced Risk ma-

trix from the original long list.

Table 20 Reduced Risk Matrix for Nikšić Landfill Project

Short list

number

Long list

number RISK CATEGORY DESCRIPTION

RISK ANALYSIS

IMPACT

Construction/Investment period risk L=low, M=medium,

H=high

CR1 CR1 Late design approvals Late design approvals M M

CR2 CR2 Quality of design Poor quality of design work causing delay M M

CR3 CR7 Claims risk Contractor asks for more time and money M M

CR4 CR8 Procurement risk - time and cost

Tendering and procurement process takes longer and cost more

M M

CR5 CR9 Construction cost risk Higher construction costs than projected M M

CR6 CR13 Authority Variation

Delays and time over-runs due to Contract-ing Authority variation of the initially ap-proved documentation during construction phase

M M

CR7 CR14 Contractor variation Delays and time over-runs due to Contrac-tors variation of the initially approved docu-mentation during construction phase

M M

CR8 CR15 Statutory bodies variation Delays and time over-runs due to Statutory bodies variation of the initially approved documentation during construction phase

M M

CR9 CR21 Legislative compli-ance/Licences

Failure to obtain required licences and per-mits for construction works/Compliance with all the legislative framework applicable in the construction period

M H

CR10 CR22 Specific/Discriminatory Change in Law


M M

CR11 CR27 Interest rates Interest rates fluctuations resulting in addi-tional financial costs during construction

M M

CR12 CR28 Insurance availability Insurance is not available or more costly than expected during construction period

M M

CR13 CR34 Tax risk Cost related to various taxes variation during construction

M M




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CR14 CR35 Inflation risk Additional cost due to variation in inflation M M

Operational risks

OR1 OR1 Cost overrun Operating and maintenance costs are gen-erally higher than expected

M M

OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability period

M M

OR3 OR12 Tariff risk Tariffs/Gate Fees do not increase as planned

H M

OR4 OR13 Specific/Discriminatory Change in Law


M M

OR5 OR14 Compliance Failure to comply with current and future standards related to environment

M M

OR6 OR18 Legislative compliance Compliance with all the legislative framework applicable during the contract period, such as multiple licenses

H H

OR7 OR20 Contractor default Financial consequences resulting from de-fault of the Contractor

M H

OR8 OR23 Inflation Operating costs are higher than anticipated due to inflation

M M

OR9 OR24 Interest rates Interest rates fluctuations resulting in addi-tional financial costs during operation

M M

OR10 OR27 Macroeconomic changes Risk of reducing the demand for the con-tracting services

M M

OR11 OR29 Obsolescence risk Risk of early obsolescence of structures and equipment

M M

OR12 OR30 Tax risk Cost related to various taxes variation during operation

M M

OR13 OR31 Waste tax Risk of new waste specific tax M M

OR14 OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than ex-pected

M H

OR15 OR33 End market Ability to secure end markets for sellable outputs

M H

OR16 OR34 Waste to landfill uncertain-ties

Reliability of waste streams to landfill M H

Waste supply risk

WR1 WR1 Waste quantity from the authorised collectors


M H

WR2 WR2 Capacity Risk that the waste delivered to the Landfill Facilities by authorised collectors exceeds the planned capacity of facilities

M M

WR3 WR5 Planned shutdown Unable to accept or treat waste due to planned shutdowns

H M

WR4 WR6 Un-planned shutdown Unable to accept or treat waste due to un-planned shutdowns

M M




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5.3.5 Quantification of Reduced Risk Matrix

The final step in preparing Risk Matrix for Nikšić Landfill project for further

analysis in the financial model is to use critical risk factors in the Reduced Risk

Matrix and replace previously assigned notional values of Medium 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 opera-

tion, 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

Monetary 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 1.005 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 con-

sidered and assigned on the basis of consensus.

Using the above Reduced Risk Matrix, the quantification of all risk factors has

been prepared and is presented in the table below. It will be used in further pro-

ject analysis as the Risk Matrix for calculation of Public Sector Benchmark

(PSB). In this respect, risk levels will be treated as those relevant to the tradi-

tional procurement method.


Sub project: WB4-MNE-ENV-12B: Management Models and Options for Cost Recovery for the Future Construction and Operation of Regional Landfills in Montenegro

65

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Table 21 Quantified Risk Matrix for the Nikšić Regional Landfill Project

SL # LL # RISK CATEGORY DESCRIPTION PROBABILITY IMPACT COST BASIS


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


CR8 CR15 Statutory bodies varia-tion

Delays and time over-runs due to Statutory bodies variation of the ini-tially 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

15% 30% %of Procurement and Supervision Cost


General legislative or regulatory changes giving rise to new or in-creased capital costs.


CR11 CR27 Interest rates Interest rates fluctuations resulting in additional financial costs during construction


CR12 CR28 Insurance availability Insurance is not available or more costly than expected during con-struction period


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&M 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&M Costs

OR4 OR13 Specific/Discriminatory General legislative or regulatory changes giving rise to new or in- 5% 10% % of Total O&M Costs



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Change in Law creased operating costs.

OR5 OR14 Compliance Failure to comply with current and future standards related to envi-ronment

10% 15% % of Total O&M Costs



OR7 OR20 Contractor default Financial consequences resulting from default of the Contractor 5% 30% % of Total O&M Costs

OR8 OR23 Inflation Operating costs are higher than anticipated due to inflation 20% 15% % of Total O&M Costs

OR9 OR24 Interest rates Interest rates fluctuations resulting in additional financial costs during operation


OR10 OR27 Macroeconomic changes Risk of reducing the demand for the contracting services 5% 10% % of Total O&M Costs

OR11 OR29 Obsolescence risk Risk of early obsolescence of structures and equipment 5% 10% % of Total O&M Costs

OR12 OR30 Tax risk Cost related to various taxes variation during operation 5% 5% % of Total O&M Costs

OR13 OR31 Waste tax Risk of new waste specific tax 10% 5% % of Total O&M Costs

OR14 OR32 Price of sellable output Risk that price of the marketable outputs from the Landfill Facility is lower than expected


OR15 OR33 End market Ability to secure end markets for sellable outputs 15% 25% % of Total O&M Costs

OR16 OR34 Waste to landfill uncer-tainties

Reliability of waste streams to landfill 15% 25% % of Total O&M Costs

Waste supply risk



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


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




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6 Available models for landfill construction and management

6.1 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 de-

pends on a sufficient transfer of risk to the private partner and the “value for

money” achieved. Regardless of manner and extent of private sector involve-

ment, it is essential to stress that the overall responsibility for compliance with

waste management standards and legal requirements rests with the public sec-

tor.

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, inno-

vative technologies, better risk allocation, etc.)

Potential and scope exists to optimise lifecycle costs of facility operation

(Capex & Opex).




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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.

6.2 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.




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Table 22 Modalities of PPP

Involvement of the private sector in tra-ditionally procured

projects

PPP with increased risk transfer to the private sector

Full private, merchant based provision of ser-

vices

Modalities of PPP

Service contracts

Operating and management con-tracts

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 character-istics

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 combina-tion of external and its own funding.

Operation is typically fee-based, however, in some cases, private operator might be al-lowed directly to define and charge service payments (tariffs) to customers.

Service provision on fully merchant basis and charg-ing own defined market price for services to cus-tomers.

In some cases (for exam-ple DBOO, or BOO) ability to set any service charge could be limited during predefined period

Payment Mechanism

Payment Mechanism is annual Fee payment by Public Authority covering cost of pro-vided services. Fees are not linked to tariff to customers.

Payment Mechanism is, typically, an annual Fee payment by Public Authority covering O&M 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 Mechanism is market based price of ser-vice.

6.2.1 Service, Operations, Management 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:

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




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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 regu-

lar O&M 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 specifi-

cations 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 op-

erator 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 op-

erator, 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 opera-

tion periods are developed under different methods and with different con-

tractors

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 operat-

ing contracts




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No investment obligations are passed to private operator (including in-

vestment obligations during operating period, which remain the responsi-

bility 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 pri-

vate 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

6.2.2 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 solu-

tions

Client (Public Authority)




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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 usu-

ally rather simple and involves regular payments from the public authority

to the PPP Operator to cover the cost of operation only (similar to O&M

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 re-

investments in operating period, sometimes out of its own operating mar-

gin.

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 special-

purpose 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 con-

struction period

Contracts are typically more complex, due to significantly larger risk fac-

tors, 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).




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The following figure shows the typical relationships between various contrac-

tual parties in a DBO contract type of PPP arrangement.

Figure 19 Typical structure of DBO contract and its variations

6.2.3 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 fi-

nancing 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

- Market risk

- Interest rate and exchange rate risks

- Procurement risk

- Technology risks

- Inflation risk

- Permitting and licensing risk.

Client (Public Authority)




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Investment obligations with majority of associated risks are fully trans-

ferred 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 re-

quires permanent, dedicated public authority staff over the entire lifetime

of the contract

Public authority typically has an opportunity to change the scope of ser-

vices to be provided via introduction of different variations (since the life-

time 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 pri-

vate operator

Requires expensive technical, financial and legal advisers

Complex tender documents and need for highly experienced public author-

ity 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 contract5

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 rea-

sons 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.




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Figure 20 Typical structure of DBFO contract and its variations

6.2.4 Concession

Concessions are variations of DBO and DBFO contracts whereby a private op-

erator 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 pre-

viously described forms of contracts, the concession also transfers the risk of

non-collection of payments to the private operator.

6.2.5 Lease contracts

Lease contracts are very similar to concessions, with two main differences be-

ing 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).




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6.2.6 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

6.3 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




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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 Benchmark6” is prepared and

Value for Money 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 avail-

able 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 sec-

tor were to conduct all of the investment and operations of the landfill; in other words, no

private sector involvement.




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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 pri-

vate sector in the O&M phase?

Competition during the tendering of a PPP is a key prerequisite for obtaining

Value for Money 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 Montenegrin and selected inter-

national private sector operators to participate in a given PPP project

get feedback on the technical aspects of the project, such as types of ser-

vices 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 Montenegro.

Public Sector Benchmark (sometimes referred to as Public Sector Comparator)

needs to be developed at this stage and Value for Money assessment methodol-

ogy prepared. Value for Money 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 ap-

proach of decision-making as depicted in the figure below.




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Figure 22 Quantitative evaluation of the impacts of risk transfer

Phase 2 of preparation involves development of complete tender documenta-

tion 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 (i.e., shareholders agree-

ments, etc.), if necessary

Sale and purchase of leasing agreements, if necessary

Possible contracts with other municipalities

Other legal documents required under Montenegrin 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.

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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 facili-

ties 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 docu-

mentation.

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 Money is evalu-

ated.

If sufficient Value for Money is established, the contract is signed and the pro-

ject effective date and operational commencement date are set in the contract.

6.4 Recommendation for Nikšić Regional Landfill Case

Having reviewed modalities for private sector involvement in landfill manage-

ment, 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, le-

gal, institutional, and environmental points of view and result in better value for

money in the private operator option compared to traditional procurement

methods.




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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 vari-

ous PPP options and traditional procurement methods.

The following table summarises the characteristics of the Nikšić regional land-

fill project, and relates them to the main requirements of the various PPP mod-

els 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 (indi-

cated using “no”); instead, the project could start as OC PPP modality (indi-

cated 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 Main 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

Medium requirements from public authority staff in tender preparation

Yes Yes Yes

Technical specifications and standards of services can be clearly spelled-out

Medium requirements from public authority staff in project monitoring

Yes Yes Yes

Contract will be held by three municipalities or their representa-tive body

High coordination and public authority complica-tions risk from the point of view of PPP operator

Yes No No

Uncertainty with regard to amount of waste

Requires regular weighing to establish (hence PPP company will not assume waste risk and will de-mand fixed payment independent of volume of waste – this may be too costly to public authority if waste volumes are low)

Yes (use short term

Service Contract)

No No

Market competition Availability of other landfills (Podgorica) within rea-sonable transportation distance could reduce reli-ability of waste flows and revenues

Yes No No




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Project characteristics Comment PPP modality implication

OC DBO DBFO

Recycling capabilities and mar-kets are unclear

High risk of revenue shortage Yes Yes No

Financial commitment, construc-tion period

Risk of budget funds delay for construction is high Yes No No

Financial commitment, operating period

Municipal budgets are weak, hence risk of inability to provide guarantees

Yes No No

Revenue risk Tariffs for collection already high, with additional cost of landfill facility - affordability pressure and risk of non-payment

Yes Yes No

Statutory risks No precedent of PPP in waste sector, imposing high risks of statutory approvals, licensing both in construction and operation periods

Yes No No

Ownership Ownership will remain with public authority at all times

Yes Yes Yes

Scale of capital cost risk Investment requirements are high given expected revenues. Difficult to attract private investors to the project.

Yes Yes No

Stability of service demand risk

Service demand is un-mapped and based on calcu-lations rather than actually recorded data. Imposes high degree of uncertainty both on costs and reve-nues

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.

Municipal 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 at-

taching a high risk premium to proposed O&M payment or financial inter-

nal rate of return (IRR) in case of financing.

Inter-municipal coordination for municipal services provision is a new

concept in Montenegro, and reliable experience has not been established.




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Legal and institutional enforcement and compliance risk are likely to bring

additional risk elements and be factored into the bid price by private opera-

tors.

These project characteristics suggest taking a cautious course of action in in-

volving 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 infor-

mational asymmetry between the public authority and the private entities - po-

tentially 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 re-

gional landfill

6.4.1 Nikšić Landfill Risk Matrix and Value for Money calculations

Based on the risk assessment methodology described in this report and qualita-

tive assessment of risks identified in analysis of Nikšić regional landfill project,

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

Medium term operating management contract, 5-10 years

• Based on the successes or failures of Service Contract, tender a 10 year operational management contract

• Management 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 Montenegro

Long-term concession contract with inwestment obligations, 10-15 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 Medium Term Operating Contract, prepare and tender long-term (10-15 year) Concession contract with investment obligations




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it is possible to derive a Project Risk Matrix using as a basis the PSB Risk Ma-

trix developed earlier7.

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 environ-

mental 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 com-

pared on like-for-like basis.

No financial costs of DBFO option have been included in the matrix.

Using these assumptions and PSB Risk Matrix, 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.



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Table 25 Risk Matrix for the Operating Contract PPP Modality, Nikšić regional landfill






CR4 CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more 30% 10% %of Procurement and Supervision Cost




















Operational risks


OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability 5% 15% % of Total Investment Costs



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period




















OR16 OR34 Waste to landfill uncertainties Reliability of waste streams to landfill 15% 30% % of Total O&M Costs

Waste supply risk


Risk that the quantity of waste from the authorised waste collec-tor falls below annual forecasted amount


WR2 WR2 Capacity Risk that the waste delivered to the Landfill Facilities by author-ised collectors exceeds the planned capacity of facilities






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Table 26 Risk Matrix for BOT PPP modality, Nikšić regional landfill






CR4 CR8 Procurement risk - time and cost Tendering and procurement process takes longer and cost more 30% 10% %of Procurement and Supervision Cost




















Operational risks


OR2 OR8 Latent defects Unforeseen costs arise due to latent defects arising after liability 5% 15% % of Total Investment Costs



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period




















OR16 OR34 Waste to landfill uncertainties Reliability of waste streams to landfill 15% 30% % of Total O&M Costs

Waste supply risk


Risk that the quantity of waste from the authorised waste collec-tor falls below annual forecasted amount


WR2 WR2 Capacity Risk that the waste delivered to the Landfill Facilities by author-ised collectors exceeds the planned capacity of facilities







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6.4.2 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 Oper-

ating 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 pro-

curement 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 Matrix (emulating traditional procurement and

operation approach) – risk- adjusted investment and operating cash

outflows and inflows in the project financial model for the 30-year pe-

riod

- Discount9 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 ac-

cepted 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 Matrices 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.




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- Apply key assumption that private operator will charge to public bod-

ies (budget money or tariff payments from customers) the amount suf-

ficient 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 pri-

vate 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 Matrixes for both PPP contract types – the

risk- adjusted cash outflows in the financial model for the 30-year pe-

riod

- Discount10 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 Matrices (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 risk-

adjusted 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 Matrices.

Table 27 Comparative review of traditional and PPP options for Nikšić regional

landfill


traditional method


Government Cash-outflow

Construction Period Costs - Nominal 5.8 5.8 5.8

10

As indicated above, a discount rate of 10% was used for this study.




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traditional method


Operating period O&M Costs - Nominal 61.1 61.1 61.1

Recycling revenues -24.5 -24.5 -24.5

Pre risk cash-outflow 42.4 42.4 42.4

Project Risks

Construction period risks 1.7 1.5 1.7

Operating period (O&M) risks 7.2 8.8 8.8

Total Risks 8.9 10.3 10.5

Risk adjusted Cash-outflow 51.3 52.7 52.9

NPV/ tonne of accepted waste at Nikšić (EURO) 23 23.4 23.6

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 op-

tions compared to the traditional public sector procurement method. This indi-

cator 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. Assum-

ing that services received are equivalent in each option, the lower NPV in a

PPP option would indicate a better Value for Money. 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 re-

sult 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 pre-

sented 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.




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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 cumu-

lative 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 signifi-

cant uncertainties on the markets and revenues into its future O&M

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 ap-

proximately 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 as-

sociated with waste availability, quantity, and generated revenues (both

from the gate fees and from recyclables).

More 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 men-

tioned above, can be implemented in the following steps:

- Public Authority (with national and international contributions) con-

structs 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.




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- Once such uncertainties have been eliminated after 3-5 years of the

Service Contract, s longer period Operating Contract (with no invest-

ment 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.




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7 Case study of private sector participation in landfill operation

7.1 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 in-

habitants 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 in-

frastructure in the county's waste sector for preserving, protecting and improv-

ing 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 infra-

structure in rural areas.

The project involves a component for private sector participation in the opera-

tion of the integrated waste management system. The process of decision-

making comprises the following main steps:

1 Detailed mapping of existing services was carried out and extensive data-

base 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. Sub-

stantial parts of rural communities did not receive regular waste manage-

ment services. The existing landfill essentially was unregulated dumpsites

and posed significant threats to the environment. Operating practices were

poor and cost-inefficient.




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Figure 24 Mapping 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 contribu-

tions 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 con-

tracts covering most of the Arges County (figure below).

Figure 25 Integrated waste management system in Arges County




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5 Various methods for procuring and operating proposed integrated system

have been evaluated. At this stage, full PSB development and Value for

Money evaluation was carried out in the framework of "A PPP Option Jus-

tification Study".

6 As a result of detailed evaluation, it was suggested that a concession con-

tract 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 inter-

national 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 arrange-

ments 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 par-

ticular, the Landfill Facility Concession contract attracted substantial inter-

est 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 (recy-

cling, composting, other waste valorification)




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- 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 Author-

ity 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.




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13 To monitor the concession contract, the Public Authority established a spe-

cialised entity within Arges County called SERVSAL. Staff hired by

SERVSAL was trained by an international adviser in the process of under-

standing, regulating, monitoring the PPP contracts.

7.2 Lessons learned

The following lessons can be drawn from the process of implementing PPP

transaction in Arges County:

1 Clear view about the services to be tendered as PPP, including accurate

knowledge of service area, demand base, waste quantities, capacity for

payment, helped to reduce final cost of PPP transaction for public

2 Good governance, transparency, and cooperation between parties involved

(PIU, PPP Unit, local bodies, consultant) was key

3 Local communes need to be involved closely - otherwise strong political

and social resistance might be present

4 Careful with already existing contracts (can result in substantial compensa-

tion payments for Authority if ignored)

5 Tendency for too much detail in service requirement - PPP operator need

to have scope for efficiency improvements

6 Tendency to shift too much risk to PPP operator - PPP means "partnership"

7 Well written contract and clear risk sharing pattern eliminates many future

disputes

8 Procurement procedure requires that Value of the Concession Contract is

shown explicitly and established ex-ante on the basis of PSB and Value for

Money analysis.

7.3 Summary of key characteristics of Arges Landfill Concession PPP

Case Arges Landfill Concession Contract

Contractual parties Arges County Council, IRIDEX Group

Services provided Management of entire landfill facility - pre-treatment, sorting, recy-cling, composting, LTP operation, wastewater treatment, crushing plant operation, final disposal

Funding structure for construction

EU grant - 53%, EBRD loan - 18%, Government - 29%

First operating cell 750,000 m3

Gate Fee 11.5 EUR/tonne

Start date May 2010




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8 Conclusions and proposed optimal method

This report has explored the pros and cons of various methods for procurement

of the construction and operation of a regional landfill in Nikšić Service Area

(comprising Nikšić, Plužine, and Šavnik). It was seen that the local financial

capacity is low, meaning that external financing, in particular from the national

government, EU grants, EIB loans, and also the private sector, will be required

in order to construct the landfill. The analysis of the financial condition of the

stakeholders at the local level indicates that the municipalities and PUCs would

not be able to co-finance a regional landfill. In addition, the high costs of the

landfill, as well as the uncertainties involved in its construction and operation –

in particular the amount of waste that will go to the landfill – make a build-

operate-transfer arrangement a doubtful enterprise.

The legal environment prevailing in Montenegro 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

legal analysis explored options for contracting between the inter-municipal Bu-

doš 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 opera-

tions themselves, as an own operation, utilising the existing PUCs (or establish-

ing a PUC to operate the landfill).

A risk analysis was conducted in order to obtain risk-adjusted figures for con-

struction and operating costs, which were then analysed according to the net

present value (NPV) per tonne of waste accepted to the Nikšić regional landfill;

this is an important indicator of benefits offered by PPP options compared to

the traditional public sector procurement method. The analysis showed that de-

spite 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).




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A more complex PPP, such as BOT can be used in the case of the Nikšić re-

gional landfill, since the net effects are relatively even in comparison with tra-

ditional procurement method. A more gradual approach is recommended, how-

ever, since it can deliver substantially better value for money.

In conclusion, it is recommended that the tariff models report (Activity 4) ex-

plore 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 ten-

dered. This approach enables the public sector (municipalities) to tender a

known quantity – a landfill operation with few uncertainties surrounding in par-

ticular the amount of waste delivered to the landfill and the size of the recycling

market. This section summarises the prioritization detailed above and recom-

mends the optimal method for further development in the tariff models report

(Activity 4).




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Annex 1 Description of Risk Factors

This annex section presents a short description of all the identified risks, broken

down into three types: construction and investment period risks; operational

period risk; and waste supply risk. After a brief description, the probability that

the risk will occur and the impact of the risk in the event that it does occur are

briefly assessed. Both factors are assessed on a scale of low, medium, high. In

the description below, the risk factors are assessed from the point of view of the

PSB (public sector baseline) case. For other landfill construction and operation

modalities, the assessments of probability and impact may differ.

CR1 – Late design approvals – If the approval of the landfill design is de-

layed significantly (as is the case in Nikšić), investment delays will result. De-

pending on the economic situation when the design is finally approved, the

winning bid for investments can be higher or lower than the original design cost

estimates. Other parameters may have changed slightly from the assumptions in

the design, including population growth, income growth, solid waste generation

rates, etc. In addition, the environmental impact analysis may need to be re-

peated or construction permits renewed if design approvals are delayed. The

lateness of the design approval may also be due to the quality of the design (see

CR2). The late design approval is considered to be a medium risk with medium

impact on the investment period (manifested in potential cost overruns).

CR2 – Quality of design – While it is possible that the design quality may be

the cause of late approval of the design, there is also the risk that a design of

poor quality is approved and serves as the basis for investment. Such a case

could result in cost overruns in general, as well as significant contractor claims.

While the risk associated with the quality of design is often expected to have a

low probability of occurrence, the risk of design quality is assessed as a me-

dium risk in the case of the Nikšić regional landfill given the history of the de-

sign (rejection of the previous design, delays in approval with the current de-

sign). The impact is also considered medium, as poor design quality can be

manifested even in significant cost overruns.

CR3 – PIU risk – Delays in the establishment of a Project Implementation

Unit (PIU) can be a cause of significant investment period risk as the lack of

proper oversight can result in delays and unjustified claims. The lack of a PIU

could also cause contractual risk with the funding institution in that reporting

deadlines will be missed and the quality of reports decline. Delays in estab-

lishment of a PIU will also mean that the Contracting Authority’s needs and

requirements will be neglected until the PIU is constituted. The probability of

occurrence of this risk is deemed to be low (regardless of the situation in mu-

nicipalities involved, PROCON can function as the project PIU) and thus the

impact of this risk is also evaluated as low.

CR4 – Capacity of PIU – The technical capacity of the PIU can also result in

the same cost overruns and impacts as the risk related to delays in the estab-

lishment of a PIU (see risk CR3). The probability of occurrence of this risk is

deemed to be medium (although PROCON can function as the project PIU, it

Construction and

investment period

risk




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does not have experience monitoring the construction of landfill), while the im-

pact of this risk is also evaluated as low.

CR5 – Financing – This risk is associated with the lack of sufficient national

(local government or national government) financing or external financing dur-

ing the construction period, since the financing of the construction of the re-

gional landfill in Nikšić will have to be done through a combination of local,

national, and external financing. The lack of financing capacity, or availability

of financing, will result in construction delays and cost overruns for many rea-

sons, including due to the need to re-mobilise contractor or other assets to com-

plete the construction once financing has been re-secured. Lack of financing

from local and national sources may also mean that private financing of the

construction will withdraw from the project (if such financing sources are at-

tracted to the project). Given the project’s strategic importance to the Republic

of Montenegro and the project municipalities of Nikšić, Šavnik and Plužine,

this probability of occurrence of this risk is deemed to be low. On the other

hand, the impact of this risk on the construction of the regional landfill is high,

as the lack of financing could cause significant project delays and cost over-

runs.

CR6 – Procedural risks – Even if a PIU or monitoring arrangement has been

duly established and in a timely manner, poor financial planning, monitoring

and reporting can result in delays in disbursement of financing and ultimately

to cost overruns as resources are not used efficiently. Given the relative lack of

experience with landfill construction in Montenegro, the probability of this risk

occurring is assessed as medium. On the other hand, the impact of this risk on

the construction of the regional landfill is low, as delays in disbursement (if not

excessive) do not typically result in high cost overruns.

CR7 – Claims risk – Contractor claims – involving requests for additional

time and/or money – not only impact the construction of the landfill with cost

overruns and late completion of the investment, but also can absorb the capac-

ity of the PIU and the consulting engineer to review and process. Justifiable

claims are often inversely proportion to the quality of the landfill design – the

poorer the design, the higher the frequency and magnitude of justifiable claims

are that can be expected. Frivolous claims – in which a contractor wins the con-

struction bid with a significantly lower price with the intent to cover costs and

even generate a profit through claims – may also occur. Claims, in particular

justifiable ones, are a common occurrence in any investment undertaking;

therefore, the probability of this risk occurring is assessed as medium. The im-

pact of this risk on the costs of construction of the regional landfill is high, both

from the standpoint of additional expenditures as well as possible delays and

cost overruns associated with claims that are subject to dispute and even arbi-

tration.

CR8 – Procurement risk, time and cost – this risk involves delays in the ten-

dering and procurement process, resulting in higher costs of the tendering pro-

cedure itself, as well as possibly in construction costs if significant delays occur

and potential bidders are engaged in other projects and their marginal costs of

adding another project increases. The probability of this risk occurring is as-




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sessed as medium and the impact on the construction implementation is also

assessed as medium.

CR9 – Construction cost risk – this is the typical risk that is expected during

the construction phase: that costs will exceed the amount budgeted for any rea-

son. Both the probability of occurrence and the impact of this risk are assessed

as medium.

CR10 – Corruption risk – fraud and corruption can occur during the project

implementation process and escalate the investment costs. Fraud and corruption

can take on many forms, including approval of unjustifiable claims for mone-

tary compensation, overstating costs, submitting invoices for work not-

performed, providing unemployment, etc. The probability of this risk occurring

is assessed as low, since it is assumed that the contract(s) between the parties

will reduce the probability of the most typical forms of corruption (as well as

those kinds of corruption that would have the most impact on cost). On the

other hand, the impact of this risk on the costs of construction of the regional

landfill is medium.

CR11 – Ground condition of land – This risk involves unforeseen delays in

construction due to poor ground conditions, contamination, archaeological

finds, etc. These delays may result it legitimate claims from the contractor and

claims that result in prolonged disputes. Delays may also occur if claims are

disputed as to whether it was “reasonable to expect” that a professional contrac-

tor could have anticipated and accounted for the site condition in the winning

bid. If construction works need to be suspended in order for site investigations

to be conducted and adjustments to the landfill design to be made, not only will

this increase costs of the construction itself, but may also involve the costs of

re-mobilisation of the contractor. The probability of this risk occurring is as-

sessed as low, since the site condition risks are well-known and it is assumed

that these risks will have been mitigated through increased costs at the design

stage to secure the surrounding karstic area from the effects of the landfill.

Were it to occur, however, the impact of this risk is evaluated as medium. (see

also CR13 and CR 14 on authority and contractor variations)

CR12 – Weather – Adverse weather conditions can result in construction de-

lays and associated cost overruns. The probability of this risk occurring is as-

sessed as low, whilst the impact of this risk on the construction period and

overall construction costs is evaluated as medium.

CR13 – Authority variation – The Contracting Authority may make changes

in the initially approved documentation during the construction phase of the

project. This can result in delays in contract performance – for example, due to

disputed claims – as well as cost overruns from accepted claims. The probabil-

ity of this risk occurring is assessed as medium, in particular due to the delays

in the approval of the landfill design and the lingering questions as to its qual-

ity. The impact of this risk is assessed as medium, since authority variations

will in most cases inevitably lead to higher costs.




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CR14 – Contractor variation – The contractor(s) may experience delays and

time overruns compared to approved planning documentation. While the Con-

tracting Authority will have instruments to discipline the contractor that is

missing its deadlines, time delays may result in cost overruns that exceed the

value of the penalties that might be passed on to the contractor committing the

violations. For example, significant delays in the landfill completion will mean

the municipalities will have to continue to dispose of solid waste in municipal

dumps, thereby potentially increasing the costs of closure and rehabilitation of

the dumpsite. The probability of this risk occurring is assessed as medium,

whilst the impact of this risk is assessed as medium, since contractor variations

will in most cases inevitably lead to higher costs.

CR15 – Statutory body's variation – Analogous to variations from the Con-

tracting Authority or contractors, variations due to statutory bodies changing

the “rules of the game” during the construction phase will result in time over-

runs, and almost certainly in cost overruns. The probability of this risk occur-

ring is assessed as medium, whilst the impact of this risk is assessed as me-

dium, since time overruns will almost certainly result in cost overruns.

CR16 – Safety – Accidents can cause delays and higher costs during construc-

tion. While accidents can occur at any construction site, it is assumed that the

hiring of a qualified contractor will reduce the risks of accidents. Furthermore,

a duly incorporated and licenced contractor will carry accident insurance. For

these reasons, both the probability of this risk occurring and the impact of this

risk are assessed as low.

CR17 – Poor workmanship – Unfortunately, even a duly incorporated and

licenced contractor can produce poor workmanship for a variety of reasons.

These will need to be remedied, either by the contractor itself, or by engaging

another contractor, either at the expense of the first contractor or the Contract-

ing Authority. Claims for compensation by the Contracting Authority may also

be disputed by the contractor, resulting in time delays and cost overruns. The

probability of this risk occurring is assessed as low, as it is assumed that quali-

fied contractors will most likely perform work of acceptable quality, whilst the

impact of this risk is assessed as medium, since poor workmanship can result in

significant cost overruns and time delays due to the need to remedy the faults,

as well as to adjudicate claims if they are disputed.

CR18 – Resources – Delays can occur due to a lack of human resources to per-

form the work. Such delays have been commonplace in new EU Member States

requiring massive levels of investment to comply with EU directives. In Po-

land, for example, contractors on road construction projects had several pro-

jects at the same time, but a limited amount of personnel to perform the works.

Construction sites sat idle for days at a time while deadlines were being met at

other construction sites. Thus, simultaneous, intensive investment programmes

in several sectors can put significant strains on the available human resources

of a country, resulting in time delays. These labour shortages will also manifest

themselves in higher bids for works to be performed. The probability of this

risk occurring is assessed as low, as it is assumed that there is currently ade-

quate labour in the country to perform the work (as well as sufficiently mobile




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labour from neighbouring countries, if this becomes necessary), whilst the im-

pact of this risk is assessed as low, since typically a lack of human resources is

manifested in higher bids, which means that the opportunity cost is already

taken into account in the construction costs.

CR19 – Works – The contractors can become insolvent during the construction

period, resulting in the need to cease construction and seek another company to

perform the work (for example, either by requesting a confirmation of a bid

from the second most favourable bidder or by re-tendering the contract), which

would result in time delays, as well as potential cost overruns. The contractor

may also fail to perform works, or perform them to low standards, which may

result in Contracting Authority claims, disputes, and the need to replace the

contractor (see also CR17). The probability of this risk occurring is assessed as

low, as it is assumed that the contractor selected in a competitive bidding proc-

ess will have sufficient financial resources to initiate and continue the works,

whilst the impact of this risk is assessed as high, since remedies for defective

work, or the need to replace a contractor due to insolvency or gross negligence

and incompetence can result is significant time and cost overruns.

CR20 – Commissioning – The commissioning stage, at the end of construc-

tion, also requires performance according to accepted standards. Failure to per-

form according to these standards can result in time and cost overruns. The

probability of this risk occurring is assessed as low, as it is assumed that the

contractor selected in a competitive bidding process will have sufficient knowl-

edge of the standards in place for the commissioning phase, whilst the impact

of this risk is assessed as medium, as for example delays at this stage can result

in failure to meet contractual obligations to the landfill operator, resulting in

claims and cost overruns.

CR21 – Legislative compliance/licenses – Failure to obtain require licenses

and permits for construction works or to comply with all applicable laws during

the construction period will result in significant time delays and cost overruns.

The probability of this risk occurring is assessed as medium, in particular since

the legislative framework in the solid waste management field is undergoing

significant changes. The impact of this risk is assessed as high, as lack of com-

pliance will result in time delays, as well as penalties and cost overruns. In ad-

dition, the “high” assessment takes into account the case in which the Republic

of Montenegro fails overall to comply with solid waste management targets it

has agreed with the European Union as part of its eventual accession agree-

ment. This can result in significant penalties, for which the country as a whole

is responsible. Thus, while the potential impact of such a risk is high, the risk

itself cannot be allocated to the contractor.

CR22 – Specific/discriminatory change in law – Both foreseeable and unan-

ticipated changes in the legislative and regulatory framework can give rise to

new or increased capital costs. The probability of this risk occurring is assessed

as medium, in particular since the legislative framework in the solid waste

management field is undergoing significant changes. The impact of this risk is

assessed as medium.




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CR23 – Receivership – If one or more of the members of the consortium be-

comes insolvent and goes into receivership, delays and costs overruns are inevi-

table. Construction would need to cease and another company to perform the

work sought (see also CR19). The probability of this risk occurring is assessed

as low, as it is assumed that the contractor selected in a competitive bidding

process will have sufficient financial resources to initiate and continue the

works, whilst the impact of this risk is assessed as medium.

CR24 – Force Majeure – Unforeseen and uninsurable risks during the con-

struction period can result in significant time delays and costs overruns. The

probability of this risk occurring is assessed as low, whilst the impact is as-

sessed as high, since by definition the risk is uninsurable and the full costs have

to be borne by the parties to the construction contract.

CR25 – Reduced financial capacity – If one or more of the members of the

consortium become insolvent and goes into receivership, delays and costs over-

runs are inevitable. Construction would need to cease and another company to

perform the work sought. In addition, the contractor may determine that larger

financial resources than estimated are required to provide the services. This will

result in claims and disputes, and ultimately, to time delays and cost overruns

(see also CR17, CR19 and CR23). The probability of this risk occurring is as-

sessed as low, as it is assumed that the contractor selected in a competitive bid-

ding process will have sufficient financial resources to initiate and continue the

works, whilst the impact of this risk is assessed as high, since the need to re-

place a contractor due to insolvency or claims for additional compensation due

to under-estimating costs can result is significant time and cost overruns.

CR26 – Unavailable financing – If financial resources for project implementa-

tion become unavailable, or cannot be secured in the first place, the costs will

have to be covered by the contracting authority (such as the municipality),

which may not be possible due to budget constraints. This can also occur in

situations in which a feasibility study and proposed financing mechanism have

been approved and level of financing agreed. Next, however, if from the time

of approval of the financing mechanism to the tendering procedure the market

situation changes from one with significant surplus capacity to implement pro-

jects (i.e., idle workforce) to one with little surplus capacity (i.e., large number

of simultaneous investments), the tendering procedure may result in bids that

exceed the total budgeted amounts for the investment. Since the investor cannot

immediately expect (at least without making re-applying for financing) addi-

tional financial support, it would have to cover the balance, resulting in higher

costs, or re-tender the contract, resulting in significant time delays in addition

to the higher costs. The probability of this risk occurring is assessed as low, as

it is assumed that under the current situation Montenegro has sufficient slack in

its workforce so that costs will be more or less as budgeted. Further, due to its

high costs, it is assumed that the project will not proceed before all of the fi-

nancing is secured. In contrast, the impact of this risk is assessed as high, since

the unavailability of financing would certainly lead to significant delays and

cost overruns.




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CR27 – Interest rates – Interest rates can fluctuate during the construction pe-

riod, resulting in higher financing costs. The probability of this risk occurring is

assessed as medium, as variable interest rate loan contracts are commonplace.

The impact of this risk is medium, since it is assumed that the financing costs

of the project will not be excessively large due to the presumed mix of national

government and international grant financing.

CR28 – Insurance availability – If during the construction period insurance is

not available, or if it turns out to be most costly than expected, cost overruns

will be inevitable. In addition, if insurance is not available, or is prohibitively

expensive, the risk will have to be assigned to, and any associated financial

consequences absorbed by, at least one of the contract parties. The probability

of this risk occurring is assessed as medium, whilst the impact on the project in

terms of delays and increased costs, is assessed as medium.

CR29 – Non-insurance risk – If damages occur during the construction period

that are not covered, costs will increase, both to remedy the damages as well as

reinstate construction works thereafter. The probability of this risk occurring is

assessed as low, whilst the impact is evaluated as medium.

CR30 – Financial commitments – When during the construction period the

Contracting Authority is unable to meet its financial commitments when they

are due, contractual penalties may result, leading to cost overruns and even

suspension of the project. The probability of this risk occurring is assessed as

low, as it is assumed that the project will commence with a clear financing

mechanism in place and sovereign guarantees for any external loans from inter-

national financing institutions. In contrast, the impact of this risk is assessed as

medium, since the inability to meet financial commitments would certainly lead

to significant delays and cost overruns.

CR31 – Protestor risk – Protests may cause significant delays in project im-

plementation as well as costs, in particular if the investment has to be relocated.

Since the project is of strategic importance to Montenegro, as well as the mu-

nicipalities that will supply solid waste to the regional landfill, both the prob-

ability that this risk will occur, as well as the impact of this risk, are deemed as

low.

CR32 – Strike risk – Worker strikes will result in time delays during construc-

tion and additional costs. The probability that this risk will occur, as well as the

impact of this risk, are deemed as low.

CR33 – Site risk – If at the mid-way point of the construction phase (or at

some other point during the construction period) the site is deemed inappropri-

ate or not feasible, it will need to be changed. In addition to the already sunk

costs of the current site, the investment process would essentially have to be

restarted from the beginning (pre-investment studies, feasibility study, design,

environmental impact assessment, tender documentation, etc.). The probability

of this risk occurring is assessed as low, as it is assumed that the site has been

thoroughly vetted and that alternative sites have been deemed less acceptable.

In contrast, the impact of this risk is assessed as high, since the need to relocate




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the landfill during the construction phase would result in massive time delays

and cost overruns.

CR34 – Tax risk – The rates of various taxes may differ during the construc-

tion phase, resulting in higher costs. Both the probability of this risk occurring

and its impact are evaluated as medium.

CR35 – Inflation risk – Additional costs due to changes in inflation (prices of

inputs) can occur during the construction phase. Both the probability of this risk

occurring and its impact are evaluated as medium.

OR1 – Cost overrun risk – During the operational phase of the landfill, oper-

ating and maintenance costs may be higher than expected, resulting in cost

overruns. The operator of this landfill will then either need to cover these costs

through an increased gate fee, or from its own cash surplus if the gate fee can-

not be increased. The probability of this risk occurring is assessed as medium,

since operating cost estimates are subject to uncertainty. Likewise, the impact

of this risk is assessed as medium, since operating and maintenance cost over-

runs will eventually result in a higher gate fee, which will ultimately be passed

on the customer through the tariff.

OR2 – Contract duration – Once the contract for operation of the landfill has

been signed, the Contracting Authority may decide to change the duration of

the contract, which would completely change the conditions for the return the

operator would expect from the previous contract duration and conditions. The

probability of this risk occurring is assessed as low, as it is assumed that the

Contracting Authority will have done its due diligence to optimise the contract

duration. The impact is also assessed as low.

OR3 – Inadequate technical solution – The technical solution implemented at

the landfill may seem appropriate during the design and construction stages, but

ultimately prove inadequate during the operational phase. This will result in

higher operating and maintenance costs, which will need be covered from a

higher gate fee, from the operator’s cash reserves, or by some other means

(such as municipal subsidies), depending on the operating model. The probabil-

ity of this risk occurring is assessed as low, as it is assumed that the inadequacy

of the technical solution, if any, will become transparent during the construc-

tion phase. In contrast, the impact of this risk is assessed as medium, since op-

erating cost overruns can affect the operator’s financial bottom-line.

OR4 – Availability – The availability of the provided services falls below the

required standards, resulting in claims against the operator and possible dis-

putes that might impact the operating and maintenance costs. Examples of in-

adequate service availability include if certain types of waste are not accepted

that were supposed to be accepted and if treatment facilities (composting, sort-

ing, recycling, etc.) are not operating according to contractual specifications

(which may or may not affect the operator, depending on whether it was also

involved in construction). The probability of this risk occurring is assessed as

medium, while the impact is assessed as low, since it is assumed that the oper-

Operational phase

risk




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ating contract will contain sufficient remedies for cases in which required ser-

vice levels are not met.

OR5 – Performance – The delivery, timing, and quality of provided services

falls below the required standards, resulting in claims against the operator and

possible disputes that might impact the operating and maintenance costs (see

also OR4). The probability of this risk occurring is assessed as medium, while

the impact is assessed as low, since it is assumed that the operating contract

will contain sufficient remedies for cases in which required service levels are

not met.

OR6 – Raw material – The low availability of raw materials of landfill opera-

tion will result in failure to meet service level targets (see OR4 and OR5), and

ultimately in higher operating costs due to the need to pay more for resources.

The probability of occurrence of this risk and its impact are both assessed as

low.

OR7 – Staff shortages – Skilled staff for the operation of a regional landfill

and associated facilities is in short supply in Montenegro, for the simple fact

that as of May 2012 only one sanitary landfill exists in the country. This could

result in lower service levels and poor landfill management. This probability

that this risk will occur is assessed as medium – given the lack of experience

with landfills in the country – whilst the impact of the risk is assessed as low.

OR8 – Latent defects – Unforeseen costs may arise due to latent defects that

arise after the expiration of the liability period. While neither the operator nor

the Contracting Authority may be liable for the defect, it still will impact the

operating and maintenance costs, as well as affect the operator’s ability to meet

service standards. These unforeseen costs will have to be absorbed by one or

more of the contract parties and possibly passed on to the customer. Both the

probability of this risk occurring and the impact of this risk are assessed as me-

dium.

OR9 – Interruption – Various events other than force majeure – such as fire,

explosion, civil disorder, official or unofficial industrial action, accidental dam-

age to service roads, and blockages of the service roads by civil actions or acci-

dents – can cause interruptions in the delivery of service and result in additional

costs. The probability of this risk occurring is assessed as low, while the impact

is assessed as medium, since such interruptions would certainly have an impact

on the landfill operating costs.

OR10 – Public relations – Poor public relations can result in additional costs,

such as the cost of remediation if the impacts of the solid waste landfill are not

properly communicated to the populace. The probability of this risk occurring

is assessed as medium, since public relations with respect to the operation of

landfills and associated facilities is difficult, not only due to the fact that Mon-

tenegro has limited experience with landfill operation and proper public rela-

tions. The impact is assessed as low, since regardless of the perception, solid

waste will still need to be treated at the landfill site.




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OR11 – Damage – Various events other than force majeure – such as vandal-

ism and major damage associated with destruction of facilities – can result in

significant reinstatement costs in order to return the landfill and its facilities to

the proper working procedures. Yet, the probability of this risk occurring is as-

sessed as low, since the regional landfill has the general acceptance of the

population served and the presence of the landfill should not impact the quality

of life on nearby population since it is situated well away from the city limits.

The impact is also assessed as low.

OR12 – Tariff risk – If tariffs / gate fees are not increased as agreed or in line

with the principles of cost recovery, the operating company may become insol-

vent and close. The municipality would then have to bail out the company or

make other arrangements for the service provision. Given that the municipality

is the regulator of solid waste services in Montenegro and approves tariffs for

utility services, the support of the municipality – based on an agreed tariff cal-

culation, review and approval process – is essential. Yet, the probability of this

risk occurring is assessed as high, since currently local tariffs for solid waste

services do not reflect the costs of providing services and collection rates from

residential customers are low. The impact of the tariff risk is evaluated as me-

dium.

OR13 – Specific / discriminatory change in law – Both foreseeable and unan-

ticipated changes in the legislative and regulatory framework can give rise to

new or increased operating costs. The probability of this risk occurring is as-

sessed as medium, in particular since the legislative framework in the solid

waste management field is undergoing significant changes. The impact of this

risk is also assessed as medium (see also CR22 for the related construction cost

risk).

OR14 – Compliance – Failure to comply with current and future standards re-

lated to environmental protection during the operating period will result in cost

escalation (for example, due to fines and penalties), as well as loss of customer

support. The probability of occurrence of this risk occurring is assessed as me-

dium. The impact is assessed as medium, as lack of compliance will result in

time delays, as well as penalties and cost overruns (see also CR21 for legisla-

tive compliance risk during the construction phase).

OR15 – Contamination – Contamination of the environment arising from the

operation of the landfill facility and related works, giving rise to operating

and/or service interruptions landfill and its facilities to the proper working pro-

cedures constitutes an important risk during the operating phase. The probabil-

ity of this risk occurring is assessed as low, while the impact of the risk is

deemed to be high, since environmental contamination would result in service

interruptions and loss of customer support.

OR16 – Claims – This risk is associated with the cost of any claims and legal

procedures related to the contamination of the environment during the contract

period. The probability of occurrence of this risk is assess as low, since it is as-

sumed that the regional landfill will operate according to design specifications




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and given that the site will not accept hazardous waste. The impact of such

claims on the operation of the landfill, however, is evaluated as high.

OR17 – Waste management targets – This risk involves the failure to comply

with commitments on waste management targets defined within Montenegro

and EU policy documents. The probability of occurrence is evaluated as me-

dium, which the overall impact of the risk is assessed as low given that the need

to comply with such targets is far into the future.

OR18 – Legislative compliance – This risk involves compliance with the en-

tire legislative framework applicable during the contract period, such as multi-

ple licenses. The probability of this risk occurring is assessed as high, since not

much experience exists with legislative compliance in the solid waste field in

Montenegro. Likewise the impact of this risk is assessed as high.

OR19 – Voluntary termination – The operating situation, in particular com-

pliance and service failures of the contract may motivate the Contracting Au-

thority to terminate the agreement voluntarily and unilaterally for landfill con-

struction and/or operation. Therefore, this risk involves the financial conse-

quences resulting from voluntary termination of the agreement by the Contract-

ing Authority. The probability of occurrence of this risk is assessed as low,

since it is assumed that a properly constructed agreement will be possible. In

contrast, however, the impact of this termination is assessed as high.

OR20 –Contractor default – The demands of the operating situation many

result in contractor default. Therefore, this risk involves the financial conse-

quences resulting from the contractor defaulting on the terms of the agreement.

The probability of occurrence of this risk is assessed as medium, since it is as-

sumed that a properly constructed agreement will be possible, whilst the impact

of this termination is assessed as high.

OR21 – Force Majeure – Unforeseen and uninsurable risks during the operat-

ing period can result in significant costs needed to reinstate the conditions ex-

isting before the force majeure event. The probability of this risk occurring is

assessed as low, whilst the impact is assessed as high, since by definition the

risk is uninsurable and the full costs have to be borne by the parties to the oper-

ating contract (see also CR24).

OR22 – Additional financing – During the operating phase, additional financ-

ing may be required for reconstruction, modification, re-equipping, etc. due to

changes in legislation, policies, international agreements, or other kinds of

modifications. Since it has been well-established in Montenegro that the legis-

lation complies, or nearly complies with, EU directives and that strategic waste

management policies have been agreed and approved, it is expected that the

probability of this risk occurring is low, whilst the impact is medium.

OR23 – Inflation – Additional costs due to changes in inflation (prices of in-

puts) can occur during the operations phase. Both the probability of this risk

occurring and its impact are evaluated as medium (see also CR35).




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OR24 – Interest rates – Interest rates can fluctuate during the operating pe-

riod, resulting in higher financing costs. The probability of this risk occurring is

assessed as medium, as variable interest rate loan contracts are commonplace.

The impact of this risk is medium, since it is assumed that the financing costs

will not be excessively due to the fact that typically loans will not be required

during the operating phase, except for expansion investments during the operat-

ing phase aimed at extending the lifetime of the landfill and introducing more

services (see also CR27).

OR25 – Insurance availability – If during the operating period insurance is

not available, or if it turns out to be most costly than expected, cost overruns

will be inevitable. In addition, if insurance is not available, or is prohibitively

expensive, the risk will have to be assigned to, and any associated financial

consequences absorbed by, at least one of the contract parties, and passed on to

the consumer, thereby raising tariffs. The probability of this risk occurring is

assessed as medium, whilst the impact on the project in terms of delays and in-

creased costs, is assessed as low since the uninsured events during the operating

phase are deemed not to be too expensive.

OR26 – Financial commitments – When during the operating period the Con-

tracting Authority is unable to meet its financial commitments when they are

due, contractual penalties may result, leading even suspension of services, with

untoward consequences for customers. The probability of this risk occurring is

assessed as low, as it is assumed that the operations will commence with a clear

financing mechanism in place and local municipal guarantees for payment for

services. In contrast, the impact of this risk is assessed as medium, since the

inability to meet financial commitments would certainly lead to deterioration of

service levels (see also CR30).

OR27 – Macroeconomic changes – Changes in the economy that affect both

household incomes as well as result in out-migration of residents from the area

served by the proposed regional landfill would result in a reduction in demand

for solid waste landfilling services. A reduction in demand for services can

have serious consequences to the maintenance of the contract of landfill opera-

tion and even result in the municipalities covering the difference between a

guaranteed payment to the landfill operator and the falling actual revenues from

gate fees. The probability of this risk occurring is assessed as medium, as up-

heavals can occur in today’s macroeconomic climate. The impact of this risk is

also evaluated as medium, as a drop in demand for the contracted services can

mean that the municipalities are forced to pay for services that are not required

for the duration of the macroeconomic changes.

OR28 – Demographic changes – Demographic or socio-economic changes –

either due to macroeconomic changes, customer preferences and habits, or for

other reasons – can result in a reduction in demand for solid waste landfilling

services. A reduction in demand for services can have serious consequences to

the maintenance of the contract of landfill operation and even result in the mu-

nicipalities covering the difference between a guaranteed payment to the land-

fill operator and the falling actual revenues from gate fees. The probability of

this risk occurring is assessed as medium, as demographic changes can occur




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for a variety of reasons. The impact of this risk is also evaluated as medium, as

a drop in demand for the contracted services can mean that the municipalities

are forced to pay for services that are not required for the duration of the demo-

graphic changes. (see also OR29).

OR29 – Obsolescence risk – Advances in technology may result in the early

obsolescence of the structures and equipment used in the landfill operations.

This may then require re-investment or shutting down facilities that are no

longer useful and thereby bringing into sharp relief the misallocation of scarce

financial resources during the construction phase. This may be perceived as

misuse of funds and hurt the reputation of the operating company, as well as the

municipalities as contracting authorities. The probability of this risk occurring

is assessed as medium, as solid waste technologies are constantly being devel-

oped and improved and the approach to solid waste management modified

(source reduction, treatment practices, etc.). The impact of this risk is also as-

sessed as medium, obsolescence could result in misallocation of funds and the

inability to recover investment costs.

OR30 – Tax risk – The rates of various taxes may differ during the operating

phase, resulting in higher costs that may be passed on to the customers. Both

the probability of this risk occurring and its impact are evaluated as medium

(see also CR34).

OR31 – Waste tax – A waste tax may be introduced in the future (as it is prac-

ticed in other countries with varying degrees of success. A waste tax would

present new administrative challenges, as well as may necessitate the re-

negotiation of the service/operating contract. Further, the waste tax will have to

be calibrated to cover both the costs of waste collection, as well as landfilling

and then these revenues divided between the solid waste collection companies

and the landfill operator. This will result in new contractual challenges as well

as potential resistance from residents. Both the probability of this risk occurring

and its impact are evaluated as medium.

OR32 – Price of sellable output – The facilities at the landfill (i.e., recycling

centre) will generate marketable outputs that can be sold at the market price. If

this market declines for any reason, for example due to low prices of substitutes

or supply of recyclables in excess of market demand, the price of these outputs

may decline to a level that is lower than expected. This is an important factor in

determining the optimal modality for the landfill operation, since the market-

able outputs constitute a revenue stream for the landfill operator. Further, the

sale of marketable outputs can impact the gate fee: if revenues from marketable

outputs cover a portion of the overall landfill operating costs, the gate fee can

be reduced and this savings passed on to customers. If the price of sellable out-

put drops, the consequences may be more than a drop in revenues for the land-

fill operator. If the price drops sufficiently low, the operator may suspend recy-

cling operations altogether and the stream of landfilled waste may increase. If

this situation continues for a long period, the landfill useful life will be affected.

These consequences may even impact Montenegro’s achievement of national

targets for recycling. Therefore, the probability that this risk may occur is as-




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sessed as medium, whilst the impact of this risk is assessed as high, among oth-

ers for reasons detailed above.

OR33 – End market – Related to the price of sellable outputs, it is important

to secure end markets for these outputs. Without these markets, the recycling of

certain waste streams will cease and the fraction going to the landfill will in-

crease, with all accompanying consequences for the landfill lifetime. Therefore,

the probability that this risk may occur is assessed as medium, whilst the im-

pact of this risk is assessed as high, among others for reasons detailed above

(see also OR32).

Waste supply risk WR1 – Waste quantity from authorised collectors – The landfill will be

supplied with waste from authorised waste collectors (currently, the municipal

PUCs). It may occur that another regional landfill has lower operating costs and

can offer lower gate fees to the waste collectors, enabling said collectors to re-

alise savings, which they may then pass on, or not, to customers. A reduced

waste stream also means a reduced revenue stream for the landfill operator.

Whilst a public company that is operating the landfill may be able to restructure

to reduce its cost and attract waste flows again, a private operator may have

contractual guarantees for waste quantity or the equivalent monetary payment.

The probability of this risk occurring is assessed as medium, since while nearby

landfills (such as the one in Podgorica) may be competitive on price, these

landfill operators may not wish to accept waste from other jurisdictions as it

would effectively shorten the projected landfill lifetime. In contrast, the impact

of this risk is assessed as high, since a decrease in waste quantities would have

serious consequences for the landfill operator (see also CR30).

WR2 – Capacity – In contrast to WR1, authorised waste collectors (currently,

the municipal PUCs) may supply more waste then forecasted and contracted.

The amount of waste may exceed the capacity of the landfill facilities to proc-

ess on an on-going basis as well as accelerate the reinvestments to expand the

landfill size and the inevitable closure of the landfill. While the landfill operator

may be able to recover its investment more rapidly in such a case, long periods

in which waste deliveries exceed assumed levels will result in the need to find

another landfill site sooner than planned. The probability of this risk occurring

is assessed as medium, since there are clear uncertainties as to the actual total

amount of waste generated in the service area of the proposed regional landfill.

The impact of this risk is assessed as medium, since on the one had increased

revenues from gate fees will provide short-term returns, while on the other hand

investments in expanding the existing, as well as locating a new landfill site,

will need to be done sooner than originally planned (see also WR1).

WR3 – Market entry – Even once the landfill operator has been selected and

is authorised by the Contracting Authority to provide services, the Contracting

Authority may still authorise another service provider (such as a nearby land-

fill) that may compete with the local landfill on price and service levels. The

probability of this risk occurring is assessed as low for several reasons, includ-

ing that the Government of Montenegro has prepared a master plan in which

the number of regional landfills is specified and that while Podgorica has a

landfill that may be competitive on price and services, its operator will not want




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to accept additional waste that would only serve to shorten the landfill’s useful

life. In contrast, the impact of this risk is assessed as medium, since the entry

on to the market of a viable competitor for landfill services would have a sig-

nificant, negative impact on the bottom line of the operator of the regional land-

fill in the Nikšić service area.

WR4 – Inspection risk – Inadequate inspection of the waste entering the land-

fill could result in damage to the facilities and equipment since the landfill and

the associated treatment facilities are designed to accommodate normal com-

munal waste streams. The probability of this risk occurring is assessed as low,

as the waste streams entering the landfill should be relatively easy to control.

The impact of this risk is assessed as medium, however, given that damage to

facilities and equipment will entail repair and replacement costs.

WR5 – Planned shutdown – When planned shutdowns occur, such as when it

is necessary to conduct maintenance of facilities, waste streams may not be ac-

cepted for treatment. The probability of this risk occurring is assessed as high,

since planned shutdowns are a normal occurrence in landfill operations. The

impact of such shutdowns is deemed to be medium, since many shutdowns can

be planned for times when waste streams are not expected (weekends and holi-

days).

WR6 – Unplanned shutdown – In contrast to the planned shutdown, un-

planned shutdowns may occur at any time, including during peak operation

times, resulting in additional operating costs to accommodate waste until it can

be properly treated. Both the probability of this risk occurring and its impact

are assessed as medium (see also WR5).




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Annex 2 SWOT Analysis

A well-known and reliable technique, the purpose of the SWOT analysis – cov-

ering the Strengths, Weaknesses, Opportunities, and Threats of the implementa-

tion of a modality to construct and manage a regional landfill in the Nikšić Ser-

vice Area – is to provide guidance as to which of these modalities is most likely

to achieve the objective of providing the best value for money.

Typically, a SWOT Analysis is used by an organisation to direct its strategic

activities in order to meet its mission and vision, as well as objectives. In the

case of construction and operation of a regional landfill, the objectives clearly

revolve around providing waste management services that comply with national

laws and regulations and EU directives on solid waste management in particu-

lar and the environment as a whole.

This SWOT analysis is focused on the possibility of private sector participation

in the construction and operation of the regional landfill in Nikšić. Therefore,

the SWOT analysis involves finding answers to these four fundamental ques-

tions:

What are the strengths of the current set-up in the Nikšić Service Area to

implement PPP in the construction and operation of the regional landfill?

What are the weaknesses of the current set-up in the Nikšić Service Area to

implement PPP in the construction and operation of the regional landfill?

What opportunities are present for the Nikšić Service Area to implement

PPP in the construction and operation of the regional landfill?

What threats are there to the achievement of the objective of providing

waste management services at the lowest possible costs, in the form of a

PPP or some other form?

The strengths are those that the current set-up can do well or that are assets to

the implementation of a less traditional approach to landfill construction and

operation. Weaknesses, on the other hand, represent areas in which improve-

ments are necessary in order to be able to achieve the objective of providing

low-cost waste management services, including construction and operation of

the regional landfill. Changes in the regulatory and business environment – for

example in the market size (population growth and other opportunities) and leg-

islative changes, etc. – may represent opportunities for the development of

waste management services in the Nikšić Service Area. Conversely, threats can

be viewed as changes that may potentially hinder the development of waste

management services in the Nikšić Service Area.

Strengths and weakness are internal attributes that can be addressed within the

institutional set-up in the Nikšić Service Area (such as local capacity, proce-

dures, and practices). Opportunities and threats, however, are external to the

institutional set-up in the Nikšić Service Area. Threats must be either must be

mitigated against – for example, by taking advantage of strengths – or avoided




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if possible. For best effect, opportunities should be sought that maximize the

strengths. This is conceptualized in the table below.

Table 28 Conceptual overview of SWOT Analysis

Can help in achieving the objective of cost-effective waste manage-ment services, with landfill con-struction and operation

Can hinder the achievement of cost-effective waste management services, with landfill construction and operation

Internal to the institutional set-up in the Nikšić Service Area

Strengths Weaknesses

External to the institutional set-up in the Nikšić Service Area

Opportunities Threats

The SWOT Analysis is intended to help ascertain to what extent the stake-

holders should consider various PPP options for the construction and operation

of the regional landfill in Nikšić. This SWOT analysis is presented from the

perspective of a construction and/or operating company (which could also be

the municipality).

Strengths (Internal)

PUC is calculating full costs of providing collection services (but are not

reflected in tariffs, see weaknesses)

Proposed landfill site is located close to main source of solid waste genera-

tion (low collection costs, high incentive to bring waste to site)

Macro-affordability analysis in the feasibility study revealed that projected

future tariffs do not exceed the maximum affordable tariffs for solid waste

collection.

Municipality has contracted with citizens/owners of the land needed for

construction of the proposed regional landfill. Money has been allocated

for purchase. “Public interest” can be used to force sale.

Urban plan of municipality Nikšić includes landfill site.

Weaknesses (Internal)

Low financing capacity of municipality (creditworthiness)

Nikšić municipal budget has had operating deficits in the past

Weak collection practices (low or no penalties for non-payment; low exe-

cution of non-payment)

Collection rate does not show real situation (includes from previous pe-

riod)




118

.

Municipality is the regulator of public services, but the experience in en-

suring high level of services is low

No experience with commercial relationship for public services

Currently, the relationship between the PUC and the municipality is based

on a decision from 1990

Poor customer database

Tariffs not adjusted each year to cover changes in operating costs (last cal-

culation of costs was in December 2005)

Tariffs have not been changed in X years

Initiatives to improve solid waste management have all come from the top

(Government). The municipality has not been active in addressing this is-

sue

Operating company has been established and it is the presumptive operator

for the landfill; however, the company does not have experience in con-

structing or operating landfill and essentially exists only on paper.

The amount of waste generated and collected is not known.

Very high unit costs of the current solid waste collection system (239

E/ton, according to the feasibility study for the regional landfill in Nikšić).

These data seem to include total expenditures of the PUC, however, and

were based on collection of about 16,000 tons per year.

Opportunities (External)

Government has been active in establishing the policy framework for solid

waste management, including development and updating of the Solid

Waste Master Plan for the country, harmonizing the legislative framework

with the European Union, and supporting cost recovery in the provision of

solid waste management services

Harmonisation of solid waste laws with EU directives is nearing comple-

tion

Law permits private sector participation in the operation of the landfill

Government is supporting investments in solid waste management (re-

gional landfills) as a national priority

External financing from IFIs and the EU




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.

PROCON has been established, among others, to provide support (techni-

cal assistance) to municipalities (project management, contract manage-

ment, tariff calculation, etc.)

Public awareness campaigns

Operating costs of the proposed landfill have been estimated in the feasi-

bility study, and amount to about 19 EUR per ton collected (according to

the waste collection in the feasibility study), which is a reasonable amount.

Threats (External)

Low public awareness of the environment in general, and solid waste man-

agement in particular

Low public awareness of the need for public services to be self-financing –

the public does not need to pay since no one cuts them off from services –

low willingness to pay

No national regulator for utility services, including solid waste manage-

ment

Legal framework does not support the quick collection on bills. No firm

mechanisms exist for PUCs to collect payments. No small claims proce-

dures. Customers can pay for partial amounts of their bills. For example,

the customers can pay for the current bill, but not the past 4 bills, without

consequences.

Claim made on a portion of the land that is to be purchased for the con-

struction of the landfill; thus, the final purchase of the land is in dispute

and under a court procedure. The potential for delay exist.

Because of karst area at the landfill site (and prevalent in Montenegro in

general), enhanced measures are need to protect groundwater.

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