Concessions in Heat Supply: Investment Instead of Subsidies

Abstract

The article discusses a wide range of heat supply problems in Russia and the Novosibirsk region. It explores opportunities and limitations associated with use of concessions as a tool to improve efficiency and reliability of heat supply, especially in those localities that are not attractive to large energy companies. The study of heat supply concessions in the Novosibirsk region as well as interviews with participants and initiators of projects allow drawing conclusions from initial practical results and related issues. Modernization projects of district heating systems in Maslyanino and Ob’ were selected as cases for consideration. The first results of these projects showed that small-scale investment from federal and regional budgets made it possible to eliminate subsidies to local heat supply organizations. However, the possibilities of reproducing this experience are limited for a number of institutional and economic reasons. The greatest risks for potential concessionaires arise from the practice of tariff regulation based on “economically reasonable costs” and high transaction costs of transferring private enterprises to operation of centralized heating systems previously served by municipal unitary enterprises. The authors suggest new financing tools for concessions that can increase the attractiveness of such projects for private investors and significantly reduce the need for continuous grants from regional and local budgets to support loss-making municipal enterprises.