Public-Private Partnership Stories Kosovo: Electricity Distribution Photo © Mark Chatterley/CC BY The government of Kosovo faced serious problems in its power sector. The lack of a reliable supply of electricity was causing hardship to its population and was a major stumbling block to investment and economic growth. The state-owned distribution company, Kosovo Electricity Distribution and Supply (KEDS), was losing over €20 mil- lion annually through technical losses and low collection rates. It was then that the government of Kosovo turned to IFC to privatize KEDS, which would allow a private investor to modernize its system. A Turkish consortium, Limak-Çalik, won the tender to purchase 100% of KEDS for €26.3 million in a transparent bidding process. The consortium has also committed to invest $390 million to modernize and operate KEDS. The transaction is expected to significantly reduce power outages and government subsidies. Ensuring better security of supply, this transaction paves the way for new generation capacities to be procured and improved access to power for Kosovo’s entire population of 1.7 million. The agreement was signed in October 2012. Limak-Çalik is expected to take over the company in May 2013. This series provides an overview of public-private partnership stories in various infrastructure sectors, The project was implemented with the financial support of DevCo, a multi-donor facility affiliated with the where IFC was the lead advisor. Private Infrastructure Development Group. DevCo provides critical financial support for important infra- IFC Advisory Services in structure transactions in the poorest countries, helping boost economic growth and combat poverty. DevCo Public-Private Partnerships is funded by the UK’s Department for International Development (DFID), the Austrian Development 2121 Pennsylvania Ave. NW Agency, the Dutch Ministry of Foreign Affairs, the Swedish International Development Agency, and IFC. Washington D.C. 20433 ifc.org/ppp BACKGROUND During the first stages of the transaction, IFC provided advice Kosovo, a newly-independent, post-conflict country in the on reforming the methodology used to calculate the retail tariff Balkans, suffered from serious technical, operational and financial on a full-cost recovery basis. In parallel, IFC provided input problems in its state-owned power sector. Outdated generation to a transaction model that broadly defined the allocation of and distribution infrastructure led to high technical losses, risks and responsibilities among stakeholders. These discussions unreliable electricity supply and a dependence on imports. In were complex due to the number of stakeholders, including the response, the government of Kosovo undertook a series of reforms European Commission and the World Bank. The main difficulty to develop its electricity market. These included the unbundling faced by IFC was managing expectations and interests to reach of its vertically integrated mining, generation, distribution and consensus on a deal structure attractive to investors. supply operations, where the distribution and supply divisions The agreements reached led to the drafting of contracts for would be spun off into a new corporation, the Kosovo Electricity regulating the sale of KEDS and future relationships between Distribution and Supply Company (KEDS). KEDS and the various stakeholders. These contracts require the However, with a small market of 400,000 customers, poor billing winning bidder to invest at least €300 million in KEDS to bring and collection practices, import subsidies, and an unstable distribution and supply systems to international standards, as political and investment climate, KEDS was losing over €20 well as improve metering, billing and collection. The winning million annually and was unable to supply electricity reliably, bidder is contractually obligated to meet clearly-defined targets to which held back the country’s economic development and made reduce technical and commercial losses, including a reduction by life more difficult for its citizens. To address these issues, the a minimum of 13.5 percent during the first five year regulatory government appointed IFC as lead advisor for the privatization of period. Employee rights are also contractually protected. KEDS, which would allow a private sector investor to modernize and operate the distribution network in line with international BIDDING standards. An international call for Expression of Interest was launched in June 2010. Five companies initially responded, of which four IFC’S ROLE fulfilled the pre-qualification technical and financial criteria. IFC was retained as lead advisor to the government of Kosovo to From these, the government received two fully compliant bids. execute a transparent and competitive bidding process to attract A Turkish consortium, Limak-Çalik, submitted the highest bid a private investor to acquire a majority stake and operate KEDS. and was selected through an open, transparent process. This involved: (i) structuring a transaction that would attract Contractual agreements regulating the sale of KEDS and all future private sector participation while maximizing the benefits for the relationships between KEDS and the various stakeholders were seller and the population; and (ii) undertaking the sale of KEDS. negotiated over a four-month period and signed in October 2012. The IFC team faced significant challenges attracting the investor community. This was mostly due to: (i) the overall European market and debt conditions and the resulting lack of interest EXPECTED POST - TENDER RESULTS of strategic investors to invest abroad; (ii) the small size of the • Improved access to electricity for 1.7 million people. market; (iii) a regulated tariff and tariff methodology; (iv) the level • A decrease in power outages will help stimulate of commercial losses and lack of confidence in law enforcement; and (v) government expectations related to the power off-take economic development and investment. agreement. • $390 million in private investment. • $34 million in fiscal benefits (including €26 TRANSACTION STRUCTURE million generated from the sale and yearly The transaction was implemented through a four-phase process: subsidies avoided). 1. Structuring the transaction and redesigning • Reduced technical and commercial energy losses. the electricity tariff methodology; • Reduced greenhouse gas emissions. 2. Allocating risks and rewards, and outreach to potential investors; 01/2013 3. Defining the criteria to be met by the buyer; 4. Managing the tender, selecting the winning bidder, and finalizing the sales contract.