Gas Distribution Network in North Macedonia

Home , Berovo, Bogdanci, Debar, Demir Hisar (town), Demir Kapija, Gevgelija

Gas distribution network in North

Macedonia

Update of Feasibility study

Final Report

April 2020

Submitted by:

North Macedonia Gas Distribution – FS Update

“This report has been prepared exclusively for EBRD and is provided for illustration purposes only. EBRD makes no representation or warranty, express or implied, as to the accuracy or completeness of the information set forth in this report. EBRD has not independently verified any of the information contained in the report and accepts no liability whatsoever for any information, misstatement or omission contained herein. The report remains the property of EBRD.”

North Macedonia Gas Distribution – FS Update

Contents Abbreviations ...... 7 Introduction ...... 9 1 Executive Summary ...... 11 1.1 Study Objective ...... 11 1.2 Legal basis and relevant recommendations ...... 12 1.3 Technical approach in the current feasibility study and differences in comparison to the 2014-FS ...... 13 1.4 Estimated value of the PPP contract and financial analysis ...... 16 1.5 Competitiveness of Natural Gas ...... 18 2 General part ...... 21 2.1 Legal basis for awarding concession / PPP ...... 21 2.2 Defining the type of the contract and model of PPP ...... 22 2.3 Estimated value of the PPP contract ...... 23 2.4 Recommendations based on the Law on Concessions and Public Private Partnerships ...... 27 2.5 Determining the object of PPP and its main characteristics, including its additions and improvements ...... 28 2.6 Public services subject of concession/PPP, conditions under which the service will be provided ...... 28 2.7 Defining the public good subject to concession ...... 28 2.8 Analysis of the conditions for management, maintenance and operation .. 28 2.9 Changes made to the previous analysis of the essential elements that are indicative of the nature of the contract and an explanation of the reasons for it ... 30 2.10 Project management issues ...... 36 2.11 Identification of weaknesses and their solution ...... 37 2.12 Political, social and other issues ...... 38 2.13 Issues related to the monitoring (supervision) of the project ...... 38 3 Technical analysis ...... 40 3.1 Description of the existing facilities of concession/PPP owned by the awarding authority / public partner ...... 40 3.2 Need for construction of new or reconstruction of existing facilities subject to concession / PPP and their description ...... 40 3.3 Technical requirements for designing and building of concession / PPP facility, needed to provide the public service / exploit the public good of general interest ...... 40

North Macedonia Gas Distribution – FS Update

3.4 Main technical and technological features of the concession / PPP facility based on: a) analysis of the concessionaire’s / public partner’s needs, b) identification of the public interest and c) identification of U planning documents necessary to construct the concession / PPP facility ...... 41 3.5 Need and type of preparatory work ...... 41 3.6 Necessary infrastructure to bring the facility into functional condition ...... 42 3.6.1 Medium pressure pipelines ...... 46 3.6.2 Pressure reduction stations ...... 46 3.6.3 Low pressure pipelines ...... 46 3.6.4 Service lines...... 48 3.6.5 Meters and risers ...... 48 3.6.6 Construction period ...... 49 3.7 Estimated value of investment for construction, costs for preparatory works, cost of management, maintenance and operation of concession / PPP facility .... 51 3.8 Equipment needed to perform the public service / exploit the public good of general interest ...... 52 3.9 Standards for performing the public service / exploit the public good of general interest ...... 52 3.10 Predictions for the level of demand of the public service vis-à-vis the investment and facilities considering the duration of the contract ...... 53 3.10.1 Natural gas demand ...... 53 3.10.2 Penetration rate ...... 57 3.10.3 Incentives to increase demand ...... 60 3.11 Benchmarking analysis ...... 61 3.11.1 Level of demand ...... 61 3.11.2 Level of investment ...... 65 4 Financial analysis ...... 69 4.1 Analysis of revenues and costs for each year of duration of the PPP project, including methodology for establishment of price for public service that end users shall pay ...... 69 4.2 Feasibility analysis of the operational revenues, operational costs, capital expenditures and cash flow analysis ...... 70 4.2.1 Investment Costs for the BASELINE Scenario ...... 70 4.2.2 Weighted Average Cost of Capital (WACC) ...... 72 4.2.3 Regulated Asset Base for the BASELINE scenario ...... 73 4.2.4 Operational Expenditures for the BASELINE Scenario ...... 75

North Macedonia Gas Distribution – FS Update

4.3 Transactional analysis based on projected cash flow and possibilities for financing the capital investment ...... 77 4.3.1 Financing Scheme for the BASELINE Scenario ...... 77 4.3.2 Revenues ...... 78 4.4 Analysis and conclusions for the efficiency of the concession / PPP from the concessionaire / public partner point of view based on IRR, NPV, break-even point and proposal for concession fee ...... 83 4.4.1 Baseline Scenario ...... 83 4.4.2 Sensitivity Analysis ...... 90 4.5 Elaborated proposal for the conditions for the concession / PPP based on the period needed for return of investment ...... 94 4.6 Risk assessment and proposal for risk mitigation ...... 94 4.6.1 Categories of risks during the preparation phase ...... 94 4.6.2 Categories of risk during the construction / development phase ...... 94 4.6.3 Categories of risk during the operation phase ...... 95 4.6.4 Categories of risk during any phase of the project ...... 95 4.7 Analysis of the domestic market and if needed the regional markets with emphasis on the risk of return of investment ...... 96 4.8 Value for money analysis ...... 96 4.8.1 Currently used energy sources...... 96 4.8.2 End-user price of natural gas ...... 98 4.8.3 Comparison of gas end-user prices in other countries in the region . 101 4.8.4 Estimates of avoided emissions ...... 102 4.9 Analysis of the availability and sustainability especially regarding the availability of basic projects, applicable for projects that need a support from public sector in any form or means ...... 109 4.10 Public sector comparative analysis - analysis of the project implementation profitability through PPP compared to the usual way of providing public service by public partner ...... 109 4.11 Quality standards and payment mechanisms for private financing initiatives 109 4.12 Risk matrix analysis ...... 109 4.12.1 Risk mitigations plan ...... 111 5 Legal analysis ...... 114 5.1 Analysis of the legal framework related to provision of public service or performing activities related to concession / PPP facility, especially the mandatory

North Macedonia Gas Distribution – FS Update

requirements and elements that should be considered by the contracting parties 114 5.2 Identification and analysis of the ownership regarding the subject of the PPP 119 5.3 Identification and qualification of the acquired rights over the object of PPP 122 5.4 Identification of rights the public partner will transfer to the concessionaire/private partner ...... 123 5.5 Summary of necessary documentation for construction of the concession / PPP facility or provision of public service, including the procedure for providing documentation, as well as the responsible authorities for issuing the documentation ...... 124 5.5.1 Preparation and adoption of U plan and U planning documentation . 124 5.5.2 Procedure for issuing construction permit ...... 125 5.5.3 Preparatory construction works ...... 127 5.5.4 Procedures and documents during the construction phase ...... 127 5.5.5 Issue of permit for use ...... 128 5.5.6 Usage, conversion, adaptation, reconstruction, maintenance and disposal of the facility ...... 129 5.5.7 Obtaining energy license ...... 129 5.6 Analysis and recommendations regarding the content of the PPP contract 129 6 General conclusions and recommendations ...... 136 6.1 Analysis of the legality and feasibility of the concession / PPP award, including the establishment of preventive measures of interest to the country's defence and security ...... 136 6.2 Recommendation on the procedure for selecting a concessionaire / private partner ...... 137 6.2.1 Preparatory work for awarding a PPP contract ...... 137 6.2.2 Type of procedure to be applied ...... 137 6.3 Draft decision on initiation of a concession / public-private partnership procedure ...... 139 6.4 Recommendation on the criteria for selection of candidates / bidders and evaluation of bids ...... 140 6.4.1 Obligations of the private partner of relevance for determining the selection / award criteria ...... 140 6.4.2 Criteria for selection of candidates/bidders ...... 140 6.4.3 Criteria for awarding the PPP contract ...... 141

North Macedonia Gas Distribution – FS Update

6.5 Tender documentation recommendations ...... 141 6.6 Recommendations for Draft Contract ...... 141 Annex I – Tables ...... 146

North Macedonia Gas Distribution – FS Update

Abbreviations

Abbreviation Description

AR Allowed Revenue BG Bulgaria CAPEX Capital Expenditure CEN European Committee for Standardisation CFADS Cash Flow Available for Debt Service Collective Residential Facility (This term is used in line CRF with 2014FS to describe a "Block of flats") DS Debt Service DSCR Debt Service Coverage Ratio DSO Distribution System Operator EAT Earnings After Taxes EBIT Earnings Before Interest and Taxes Earnings before interest, taxes, depreciation, and EBITDA amortization EBRD European Bank for Reconstruction and Development EBT Earnings Before Taxes EIB European Investment Bank Estimated Load Surface Unit (A typical unit used in ELSU calculations on the 2014FS) Energy And Water Services Regulatory Commission of ERC the Republic of North Macedonia ESMP Environmental and Social Management Plan FCF Free Cash Flow FCFF Free Cash Flow to the Firm FS Feasibility Study GT Grant Thornton IP Interconnection Point Individual Residential Facility (This term is used in line IRF with 2014FS to describe a "Detached house") IRR Internal Rate of Returm LCPPP Law on Concessions and Public Private Partnership LP Low Pressure MER National Energy Resources Skopje MK North Macedonia MMRS Metering and Regulating Station MP Medium Pressure MRP Market Risk Premium NBRSM National Bank of the Republic of North Macedonia NGCT Natural Gas Carbon Tax

North Macedonia Gas Distribution – FS Update

Abbreviation Description

NOPAT Net Operating Profit After Tax NPV Net Present Value Other Facility (This term is used in line with 2014FS to OF describe "Commercial and Industrial facilities") OPEX Operational Expenditures PM Particulate Matter PP Public Private Partnership PPL Public Procurement Law PV Present Value RAB Regulated Asset Base RES Renewable Energy Systems TIRZ Technological Industrial Development Zone TSO Transmission System Operator WACC Weighted Average Cost of Capital WBIF Western Balkans Investment Framework

North Macedonia Gas Distribution – FS Update

Introduction Grant Thornton Greece has been selected by the European Bank for Reconstruction and Development to perform a feasibility study regarding the development of distribution networks in North Macedonia. This report is the output of the study. Skopje and other major cities of the Republic of North Macedonia suffer from poor air quality, especially in the winter. To resolve the issue, authorities are now intensifying efforts to promote gasification of the entire country. The present report updates a 2014 feasibility study (herein after 2014-FS) mainly in terms of costs and assumptions. This update aims to support authorities towards the preparation of a competitive selection process for the award of a nationwide concession / public private partnership (PPP) for the construction and operation of distribution networks. The duration of the concession/PPP scheme is estimated of the order of 30 and 35 years. Note that currently, with the exception of three small gas distribution networks operating in the Municipalities of Strumica, Kumanovo and the industrial zone (TIRZ) in Skopje , there are no other distribution networks in North Macedonia. Figure 1 shows the transmission pipeline currently in operation as well as a number of transmission projects in various stages of development. The operating pipeline (comprising also one branch) connects North Macedonia to the system of Bulgartransgaz at the KYUSTENDIL (BG)/ZIDILOVO (MK) Interconnection Point (IP) of capacity of 27 GWh/day. About 170 km of the transmission system are still under construction, that is, the main gas pipeline section "Negotino (Kavadarci) - Bitola" (92 km), and section "Skopje - Tetovo - Gostivar" (76 km), the construction of which is to be completed in 2020.

North Macedonia Gas Distribution – FS Update

Figure 1 Map of current and future transmission system in North Macedonia The development of distribution networks is anticipated to follow the progress in transmission. For the purpose of this study it is assumed that development of distribution networks will be concluded in three phases shown in the figure. Annex I provides a larger view of the map of Figure 1 and a list of municipalities according to their location on the map. This report follows the structure defined in the Decree on the content of a feasibility study pursuant Article 16 paragraph 3 of the Law on Concessions and Public Private Partnership (Official Gazette no. 6/2012).

North Macedonia Gas Distribution – FS Update

1 Executive Summary North Macedonia is 100% reliant on gas imports through a single interconnection point from Bulgaria. An interconnection with Greece1, currently in design stage, which will be potentially operational before 2025 may diversify routes and enhance gas to gas competition. Other interconnections with Serbia, Albania and Kosovo have also been proposed. Currently, natural gas contributes to only 7% of the primary energy consumption2 and average annual utilisation of existing transmission system is low, ranging from 5-15% in the summer season to 50-80% in the winter3. Gas is mainly used for electricity production (79.26%), industry (18.44%) and commercial and public services. Only two municipalities, Kumanovo and Strumica have a distribution network, while there is another distribution system in the industrial zone of TIRZ, with only 12 industrial consumers. Air pollution, in the form of particulate matter (PM), mainly due to solid and oil fired space heating in households and commercial sector is increasing. Recent data4 for the period 2004 to 2017 show that during the entire period, population in larger cities has been exposed to PM concentrations in excess of limit values. To this end, the government of North Macedonia, assisted by international donors, has put forward an ambitious gasification plan since the early 2010s.

1.1 Study Objective This study, undertaken by Grant Thornton Greece aims to  Update the existing feasibility study of 2014 on the distribution network development and  Provide support to the authorities in their efforts to finalize the preparation of the competitive selection process The present document comprises the final study report. As this is a feasibility study, the structure adopted is in alignment with the 2012 Decree on the “Content of feasibility study justification of the concession for goods of general interest or of public private partnership – Content justification of the concession for goods of general interest or of public private partnership”.

1 To be financed by EIB and supported by EU with a 20% investment grant by WBIF 2 Source Eurostat 3 ERC Annual Report 2018 4 http://economy.gov.mk/Upload/Documents/Adopted%20Energy%20Development%20Strateg y_EN.pdf 11

North Macedonia Gas Distribution – FS Update

1.2 Legal basis and relevant recommendations The legal basis for the establishment of a PPP for natural gas distribution system development is given in the Law on Concessions and Public Private Partnership (LCPPP) and in the Energy Law. Distribution of natural gas is an energy activity of public interest. Energy networks such as the ones for transmission and distribution of natural gas are considered as line infrastructure objects. Construction permits would need to be obtained by municipality mayors. A distribution network maybe constructed by a public enterprise established by the municipality (as is the case with the existing networks in the municipalities of Strumica and Kumanovo) or the Government can award PPP contract or concession contract to a private partner or concessionary to construct, use and manage a new natural gas distribution network. The tendering process in the direction of the PPP is already underway. The Public Procurement Law, which has to be applied in order to select the private partner, stipulates several types of procedures for selecting the most favourable bidder (private partner). According to the legal analysis conducted in this study, which takes into account the complexity of this project, as well as the fact that the project considers an award of PPP contract in the energy sector, competitive dialogue procedure is identified as most suitable. The advantage of conducting a competitive dialogue as opposed to the restricted procedure is that it allows for flexibility, i.e. discussion and some sort of negotiation with the qualified candidates in order to come up with a solution that suits best needs and requirements. Yet, the experience of conducting this type of procedure in the country is very limited. The competitive dialogue procedure shall be conducted in three phases, namely: 1) A pre-selection phase, where any interested economic operator may submit a request to participate and if it meets the conditions related to legal, financial and technical capability will be invited to the dialogue; 2) Dialogue phase, where all aspects of the PPP could be discussed with the purpose of identifying and defining the means best suited to satisfying public partner’s needs; and 3) Phase for submitting a final bid, where upon completion of the dialogue, each participant will be invited to submit final bid, which may be additionally clarified provided that the essential elements of the bid or of the tender documentation are not changed. Furthermore, the public partner may negotiate with the bidder identified as having submitted the bid with best price-quality ratio (as only allowed criteria in this type of procedure) to confirm the financial commitments or other requirements, as long as the essential elements of the tender documentation are not modified and competition is not distorted.

North Macedonia Gas Distribution – FS Update

Analysis and recommendations regarding the contents of the concession/PPP contract are based on the Decree on the Content of the Public Private Partnership Contract and the Concession Contract for Goods or General Interest pursuant to Article 40 paragraph 6 of the Concessions and Public Private Partnerships Act. Some basic concepts are provided below:  The PPP Contract can be amended by signing an annex to the contract, if this possibility is expressly provided for in the tender documentation.  The PPP Contract can be transferred by written consent of the Public Partner, under conditions determined in the contract, without prejudice to the term of the contract, unless otherwise stipulated by a special law.  The PPP Contract can provide for the transfer of the rights and obligations under the Contract, from the Private Partner to the benefit of lenders, as a means of securing their claims against the Private Partner, provided that it does not jeopardize the continuity of operations and/or service provision.

1.3 Technical approach in the current feasibility study and differences in comparison to the 2014-FS All elements of a distribution network as shown in the figure below have been considered and separately modelled for each municipality.

Figure 2¨Main components of the gas distribution network All 80 municipalities of North Macedonia have been considered. The following input has been sourced from the 2014-FS:  Social and demographic characteristics 13

North Macedonia Gas Distribution – FS Update

 Technical maps / designs and pipeline routes  Lengths of mid and low-pressure pipelines per municipality  Type of customers considered in the study (IRF: Individual residential facility, CRF: Collective residential facility, OF: other facility)  The total load of each municipality for each consumer category  The typical load (kW) of each consumer category  The demand (i.e. gas consumption) per customer by consumer category  The Feasible/Non feasible classification of each municipality Main differences in input considerations between this study and the 2014-FS are as summarized in Table 1:

Table 1: Main differences in assumptions between 2014-FS and 2020-FS Topic 2014-FS 2020-FS (present study) Both distribution and supply of The study does not consider the supply natural gas are considered to activity. Costs, revenues and tariffs Supply activity be implemented by the computed refer solely to infrastructure concessionaire Duration of the 20 years Up to 35 years, according to the tender concession Included in the cost of the Not included in the cost of the Internal infrastructure and paid by the infrastructure. Their cost is not borne by installations concessionaire the concessionaire A calorific value of 33.862 A gross calorific value of 11.16 MJ/Nm3 (9.406 kWh/Nm3) is kWh/Nm3 is used; the value is typical for taken into account in Russian gas in the Balkan region and is Calorific value calculations in line with the acceptable range provided by the ERC5 (10.28 - 12.75 kWh/m3) Unit costs are not clearly Updated unit costs for all cost categories Cost indicated. have been considered based on the components Greek experience. Unit costs are shown in Table 14 The cost of risers has not been The cost of risers is included in the cost taken into consideration. One of metering equipment. meter is considered per Further, one metering device per IRF Meters and consumer. has been considered, while for CRF we risers have considered 1 meter per apartment building, with the assumption of 10 apartments (CRF) per building, i.e. 1 metering device per 10 CRFs Metering and Regulating MMRS are considered to be the TSO’s Stations (MMRS), reducing responsibility and, thus, their cost is not MMRS pressure from high to medium, included in the calculated CAPEX are considered to be part of the investment.

5 https://www.erc.org.mk/odluki/01.03.2019%20- %20PRAVILA%20ZA%20SNABDUVANJE%20SO%20PRIRODEN%20GAS.pdf 14

North Macedonia Gas Distribution – FS Update

Topic 2014-FS 2020-FS (present study) The cost of pressure reduction The cost of pressure reduction stations Pressure stations (from medium to low has been considered. Costs are reduction pressure) has not been included in Table 14 stations considered. All construction works are Medium pressure pipeline construction considered to be implemented ends in 4 years from initiation, according Construction within the first 4 years. to the phase, Table 2. Low pressure period pipelines are demand driven and completed gradually within the concession period Assumptions on penetration The penetration rate is based on rate are not clear. customer category, takes note of the Consumer municipality population and relates to penetration actual values observed in other rate countries. The penetration rate is described in Section 3.10.2 Other (commercial) facilities Other facilities are assumed to meet the are considered to reach 100% demand at a faster pace than residential penetration between years 14 consumers, reaching 100% of their and 25 of the concession. current potential at the 12th year from beginning of construction for each Demand by phase. From that point onwards, Other Facilities penetration of OF is assumed to (OF) increase by 1% every year to reflect the economic growth leading to more connections by commercial and industrial customers. Penetration rates for OFs are provided in Section 3.10.2 Assumptions on the Updated assumptions on operational operational expenses have expenditure are considered, using been made by component of international benchmarks as well as forecasted expenditure statistical data on salaries from the OPEX (salaries, insurance, Statistical Office of North Macedonia. maintenance, etc.). Figures A description is provided in Section provided are not justified, 4.2.4 therefore their reliability is doubted. No alternative scenarios are One baseline and 7 different scenarios considered. have been examined. Municipalities were grouped into (Polluted / Non Alternative polluted) and (Urban / Rural) according scenarios to the tender specifications. This grouping is used to evaluate alternative scenarios.

Construction is carried out in 3 Phases. Grouping of municipalities per phase depends on progress in the development of the transmission system. Construction of Phase 1 begins is Year 1 of the concession, Construction of Phase 2 in Year 2 and construction of Phase 3 in Year 5. All works related to the medium pressure pipelines are completed in 4 years.

North Macedonia Gas Distribution – FS Update

Table 2: Assumptions regarding construction period Assumptions regarding construction times Values Construction of medium pressure pipelines From Y1 to Y8 of the concession Construction of low-pressure pipelines From Y2 to Y19 of the concession Service lines, risers and meters connected to From Y3 to the end of the consumers concession

The above assumptions regarding construction periods, for each phase of the project are further detailed in the Gantt chart of Figure 3.

Figure 3: Construction timeline assumptions

1.4 Estimated value of the PPP contract and financial analysis Potential values of the Concession/PPP Contract were obtained in this work through a baseline and five alternative scenarios. Capital costs are estimated to be in the range from 241 to 745 mil € depending on the scenario considered. Two additional scenarios investigating the impact of increased WACC and bank loan repayments have been also examined. Table 3 below provides a summary of the assumptions by Scenario and the respective capital costs.

Table 3: Summary of scenarios considered Scenario Capital cost Assumptions [mil €] 0 BASELINE 745 All 80 municipalities and 100% of the network is built. This scenario may be used for a direct comparison with the 2014-FS as all municipalities are considered.

North Macedonia Gas Distribution – FS Update

1 CAPEX30 552 As in BASELINE but with a reduction in unit costs by 30%6. This scenario may be also used for a direct comparison with the 2014-FS as all municipalities are considered. 2 BA-FPOL 690 Networks are built only at the feasible municipalities of the 2014-FS and at non-feasible municipalities with a high level of airborne emissions. Unit costs are as in the baseline 3 BA_U50_R20 335 In Urban municipalities only 50% of the network is constructed (50% mid pressure and 50% low pressure network; 50% of demand is met). In rural municipalities only 20% of the network is constructed (20% mid pressure and 20% low pressure network;20% of demand is met). Unit costs are as in the baseline

4 BA-COMBO 323 Combination of Scenarios BA-FPOL and BA_U50_R20 5 CAPEX30-COMBO 241 Combination of Scenarios CAPEX-30, BA-FPOL and BA_U50_R20 6 BA_INCREASED_WACC 745 Baseline with increased WACC 7 BA_LIQUIDITY 745 Baseline but with loan repayments adjusted according to project liquidity. Grace period is 7 years and repayment period is set to 20 years

A summary of the financial results is provided below.

Table 4: Summary of financial results

(in mn €)

BO Baseline D_WACC D_WACC BA-FPOL CAPEX30 BA_COMBO BA_U50_R20 BA_LIQUIDITY BA_INCREASE CAPEX30_COM

6 Unit costs used are 181 €/m for mid pressure and 66 €/m for low pressure and service pipelines (as opposed to 259 €/m and 94 €/m respectively), see Section 3. 17

North Macedonia Gas Distribution – FS Update

(in mn €)

BO Baseline D_WACC BA-FPOL CAPEX30 BA_COMBO BA_U50_R20 BA_LIQUIDITY BA_INCREASE CAPEX30_COM

Tariff 9.30 6.91 8.61 9.04 8.80 6.57 10.38 9.30 (€/MWh) Total 2,142.88 1,608.65 1,987.67 960.34 928.45 700.52 2,383.10 2,142.88 Revenue Total 749.22 568.09 694.94 335.49 325.13 247.62 751.62 749.22 OPEX EBITDA 1,393.66 1,040.55 1,292.74 624.90 603.32 452.90 1,631.48 1,393.66 EBITDA 65.04% 64.69% 65.04% 65.07% 64.98% 64.5% 68.46% 65.04% margin % Project 804.07 599.19 746.12 359.57 346.85 259.81 1,018.21 804.07 FCF Project 87.64 73.69 83.73 39.67 38.76 32.85 182.84 87.64 NPV Project 5.13% 5.33% 5.18% 5.15% 5.17% 5.38% 6.30% 5.13% IRR DSCR avg 0,58 0,58 0,58 0,57 0,58 0,58 0.76 0,61 DSCR min -1,16 -1,09 -1,10 -1,17 -1,10 -1,03 -1,10 -1,47

As shown in Table 4, resulting distribution tariffs are of the order of 6.57 to 10.38 €/MWh (lowest tariff for scenario CAPEX30_COMBO, highest for BA_INCREASED_WACC). A funding gap is identified in all cases with the exception of the INCREASED_WACC and the LIQUIDITY scenarios.

1.5 Competitiveness of Natural Gas The results of the analysis performed to evaluate the competitiveness of natural gas compared to other fuels commonly used for heating purposes in North Macedonia, are presented in Figure 4.

North Macedonia Gas Distribution – FS Update

Figure 4: Comparison of the price of gas versus currently used fuels for heating The range of cost of natural gas has been computed from 0.0562 €/kWh to 0.0695 €/kWh, with an average at 0.0624 €/kWh. A number of incentives may be considered to trigger substitution of other energy sources by natural gas. Figure 4 includes as an example the case of zero VAT and the extreme of zero VAT and full subsidization of the heating equipment. Values shown correspond to the average of the cost range. Natural gas is one of the most environmentally friendly fossil fuels. Large scale penetration of natural gas at distribution level in North Macedonia is expected to displace old and inefficient boilers burning mainly gasoil and other petroleum products as well as solid fuels including solid biomass (wood). In principle, gas may also replace electric heaters under certain circumstances. In the Baseline, the total avoided NOx emissions over the 35-year concession period reach 8,621 tons, avoided SOx emissions reach 59,896 tons, while avoided PM10 emissions are360,875 tons. Overall, estimated total and per capita emissions saved are presented in Table 5.

Table 5: Total and per capita avoided emissions NOx SOx PM10 Total avoided emissions over the 35 year concession period (tons) 14,656 101,823 613,488 Annual avoided emissions per capita (gr) 120-204 835-1,420 5,032-8,554

North Macedonia Gas Distribution – FS Update

For the sake of comparison we note that total NOx, SO2 and PM10 emissions have been reported in 20147 as being equal to 31550 kt 83141 kt and 22258 kt respectively Assuming a population of 2,070,226 million (2015 data8) the , total per capita emissions in the country are estimated of the order of 15240 gr for NOx, 40160 for SO2and 10751 for PM10. A comparison between these figures and Table 5 shows that switching to natural gas shall decrease PM10 emissions by at least 50% resulting in a substantial improvement of air quality in the municipalities of North Macedonia. Effect on the remaining emissions is substantially lower, with SO2 emissions reduced by about 2%. Effect on nitrous oxides emissions is negligible as the formation of NOx, at the operation temperatures of household appliances for heating purposes is mostly due to combustion itself (thermal NOx) rather than fuel quality. Use of more advanced burners however can also have a significant effect to NOx emissions. .

Ministry of environment and physical planning – Republic of North Macedonia, Yearly report 2015 (latest available), http://air.moepp.gov.mk/?page_id=287&lang=en 8 http://www.stat.gov.mk/Publikacii/2.4.16.10.pdf 20

North Macedonia Gas Distribution – FS Update

2 General part

2.1 Legal basis for awarding concession / PPP The legal basis for the establishment of a PPP for natural gas distribution system development is given in the Law on Concessions and Public Private Partnership (LCPPP) and in the Energy Law. The concession/PPP may consist of design, financing, construction, maintenance, management and development of the natural gas distribution networks. The LCPPP defines the public-private partnership (PPP) models to be established, the manner to select the private partner, as well as the rights and obligations of the public and private partner during the contract implementation. In that respect, according to the provisions of this law, the private partner may be given an obligation to provide a public service to the end-users in areas of the public partner’s competence by:  financing, designing, constructing and / or reconstructing / renovating public infrastructure facility, operating and maintaining a new facility and/or a reconstructed / renovated facility on public infrastructure, and/or  using, managing and maintaining an existing public infrastructure facility The Public Procurement Law (PPL) applies because LCPPP makes a reference to the application of the rules and procedures set out in this law in order to select the private partner. In this regard, the preparation of the tender documentation and implementation of the procedure should be performed in line with the PPL (further elaborated in section 5 of this study). The Energy Law defines that construction and operation of natural gas networks is an activity of public interest. Furthermore, it sets out the conditions and manner of construction of new natural gas distribution networks, according to which the Government is entitled to award PPP contract or concession contract to a private partner or concessionary to construct, use and manage a new natural gas distribution network, while clearly stipulating that provisions of the LCPPP will be applicable. The Energy Law does not forbid a company to perform natural gas transmission and natural gas distribution activities at the same time. The content of the Laws listed above is further elaborated in Section 5. The fact that construction and operation of natural gas distribution network is an activity of public interest is also confirmed by provisions in the Construction law and Law on Construction Land reading as follows:  Article 2 point 16 of the former defines line infrastructure buildings as “public roads, bridges, railway infrastructure, transmission line, oil pipeline, product pipeline, gas pipeline, heating system, water supply, sewage, telecommunication lines and other facilities that can be over ground or underground and whose construction is of public interest stipulated by law”.  Article 2 point 7 of the latter defines infrastructure facility as “facility in the field of

North Macedonia Gas Distribution – FS Update

transport (inland, water and air), underground or overhead installation (transmission line) and electronic communication networks and facilities, with all their associated installations provided for by an infrastructure project.”

2.2 Defining the type of the contract and model of PPP Pursuant to Article 5 of the LCPPP, the PPP is a form of contractually regulated, long-term cooperation between the public partner and the private partner, in which: a) The private partner undertakes to provide public service to the end users in areas of competence of the public partner and/or the private partner undertakes to provide to the public partner the necessary preconditions for providing the public service to the end users and/or activities under its competence; b) The private partner undertakes to: o finance, design, construct and/or reconstruct/renovate public infrastructure facility, operate and maintain new facility and/or reconstruct/renovate public infrastructure facility; or o Use, manage and maintain an existing public infrastructure facility; or o Any combination of the above stated obligations as long as it is a combination of the obligations set forth in item a); When undertaking the obligation under a) and b) the private partner usually takes significant part of the risks related to the financing, construction, demand and/or availability and other such activities, management, maintenance and technical risks, depending on what has been agreed when establishing the public private partnership and it shall be determined from case to case; In exchange of the undertaken obligations the public partner can award to the private partner concession for public works or concession for public service, or to compensate by way of payment. The public private partnership can be established as:  Concession for public works, or  Concession for public service, or  Contract for public procurement of works, or  Contract for public procurement of service Taking into account the above indicated PPP models, the development of natural gas distribution system can be realized by establishing PPP in a form of “Concession for public works”, which according to Article 4 paragraph (2) point 1) of LCPPP is defined as: “contract of the same type as the contract for public procurement works, except for the fact that compensation for such works consist of a right to use such works or of such right along with payment”.

North Macedonia Gas Distribution – FS Update

2.3 Estimated value of the PPP contract Potential values of the Concession/PPP Contract were obtained in this work through a baseline and five alternative scenarios. Capital costs are estimated to be in the range from 241 to 745 mil € depending on the scenario considered, Table 6 and Figure 5. Number of connections range from 118-250 k in year 35 of the concession, Figure 6. Demand to be met is of the order of 4-9 TWh, Figure 7. Readers are referred to Section 3 and 4 for details in the assumptions and costs. Note that 2 more scenarios have been considered, these are described only in Section 4.4.2 as they do not affect the capital and operational costs but only project returns and financing.

Table 6 Estimated value of the PPP contract for the baseline and alternative scenarios Scenario Capital cost Assumptions [mil €] 0 BASELINE 745 All 80 municipalities and 100% of the network is built. This scenario may be used for a direct comparison with the 2014-FS as all municipalities are considered. 1 CAPEX30 552 As in BASELINE but with a reduction in unit costs by 30%9. This scenario may be used for a direct comparison with the 2014-FS as all municipalities are considered. 2 BA-FPOL 690 Networks are built only at the feasible municipalities of the 2014-FS and at non-feasible municipalities with a high level of airborne emissions. Unit costs are as in the baseline 3 BA_U50_R20 335 In Urban municipalities only 50% of the network is constructed (50% mid pressure and 50% low pressure network; 50% of demand is met). In rural municipalities only 20% of the network is constructed (20% mid pressure and 20% low pressure network;20% of demand is met). Unit costs are as in the baseline

4 BA-COMBO 323 Combination of Scenarios BA-FPOL and BA_U50_R20 5 CAPEX30- 241 Combination of Scenarios CAPEX30, BA-FPOL and COMBO BA_U50_R20

9 Unit costs used are 181 €/m for mid pressure and 66 €/m for low pressure and service pipelines (as opposed to 259 €/m and 94 €/m respectively), see Section 3. 23

North Macedonia Gas Distribution – FS Update

800 700

€] 600 500 400 745 690 300 552 200

Capital Costs [mil [mil Costs Capital 335 323 100 241 0

Figure 5 Estimated capital costs by scenario

300

250

200

150 249 249 243 100

119 118 118 Y35 [thousand] Y35 50

0 Maximum nuimber of connections in in connections of Maximum nuimber

Figure 6 Estimated number of connections in year 35 of the concession (Y35)

North Macedonia Gas Distribution – FS Update

10 9

8 9.11 7 9.11 6 8.85 5 4 3 4.15 4.20 2 4.15 1 0 maxumum demand in Y35 [TWh] Y35in demand maxumum

Figure 7 Maximum demand in year 35 (Y35) in the concession The full list of municipalities considered and their characterisation as urban, rural, feasible and polluted is shown in Error! Reference source not found.. For the sake of clarity, we have also included the feasibility characterisation of the 2014-FS. The 2014-FS feasibility characterisation has been also employed here in the context of scenarios BA-FPOL, BA-COMBO and CAPEX30_COMBO. Indicators under column A relate to the assumptions used in the scenarios BA_U50_R20 and the two COMBOs. Indicators under column B refer to BA-FPOL and the two COMBOs.

Table 7: List of municipalities 2014-FS - Urban/ Pollution (P) Feasibility index Municipality Phase Rural and Feasibility (feasible-Y, non- indicator (F) indices feasible-N) Aerodrom 1 Y U F Butel 1 Y U F Gazi Baba 1 Y U F Gjorche Petrov 1 Y U F Karposh 1 Y U F Kisela Voda 1 Y U F Saraj 1 N R P Centar 1 Y U F Chair 1 Y U F Shuto Orizari 1 N R P Arachinovo 1 N R P Zelenikovo 1 N R Ilinden 1 Y R F Petrovec 1 Y R F Sopishte 1 N R Studenichani 1 N R 25

North Macedonia Gas Distribution – FS Update

2014-FS - Urban/ Pollution (P) Feasibility index Municipality Phase Rural and Feasibility (feasible-Y, non- indicator (F) indices feasible-N) Chucher Sandevo 1 N R Berovo 3 N R Bogdanci 2 Y U F Bosilovo 3 N R Valandovo 2 Y U F Vasilevo 3 Y R F Veles 2 Y U F Vinica 3 Y U F Gevgelija 2 Y U F Gradsko 1 Y U F Delchevo 3 Y U F Demir Kapija 1 Y U F Dojran 2 Y U F Zrnovce 3 N R Kavadarci 1 Y U F Karbinci 3 N R Konche 3 N R Kochani 3 Y U F Kratovo 1 Y U F Kriva Palanka 1 Y U F Kumanovo 1 Y U F Lipkovo 1 N R Lozovo 2 N R Makedonska 3 N R Kamenica Negotino 1 Y U F Novo Selo 3 N R Pehcevo 3 N U Prilep 1 Y U F Probishtip 3 Y U F Radovish 3 Y U F Rankovce 3 N R Rosoman 3 Y R F Sveti Nikole 1 Y U F Staro Nagorichane 1 N R Strumica 3 Y U F Chashka 3 N R Cheshinovo 3 N R Obleshevo Shtip 1 Y U F Bitola 1 Y U F

North Macedonia Gas Distribution – FS Update

2014-FS - Urban/ Pollution (P) Feasibility index Municipality Phase Rural and Feasibility (feasible-Y, non- indicator (F) indices feasible-N) Bogovinje 1 N R P Brvenica 1 N R P Vevchani 3 Y R F Vrapchiste 1 N R P Gostivar 1 Y U F Debar 3 Y U F Debarca 3 N R Demir Hisar 3 Y R F Dolneni 3 N R Zhelino 1 N R P Jegunovce 1 N R P Kichevo 2 Y U F Krivogashtani 3 N R Krushevo 3 Y U F Mavrovo I Rostushe 3 N R Makedonski Brod 3 Y R F Mogila 1 N R P Novaci 1 N R P Ohrid 3 Y U F Plasnica 3 N R Resen 3 Y U F Struga 3 Y U F Tearce 1 N R P Tetovo 1 Y U F Centar Zhupa 3 N R

2.4 Recommendations based on the Law on Concessions and Public Private Partnerships See recommendation in last paragraph of section 2.2. “Taking into account the indicated PPP models, the development of natural gas distribution system can be realized by establishing PPP in a form of “Concession for public works”, which according to Article 4 paragraph (2) point 1) of LCPPP is defined as: “contract of the same type as the contract for public procurement works, except for the fact that compensation for such works consist of a right to use such works or of such right along with payment”.

North Macedonia Gas Distribution – FS Update

2.5 Determining the object of PPP and its main characteristics, including its additions and improvements As specified in the relevant call for proposals (published 10.02.2020 on www.economy.gov), the object of the PPP is the financing, design, construction, management, maintenance and development of the natural gas distribution system in the Republic of North Macedonia. The duration of the public-private partnership contract shall be a maximum of 35 years from the date of entry into force of the public-private partnership contract.

2.6 Public services subject of concession/PPP, conditions under which the service will be provided The concession/PPP shall be provided under the specific conditions to be agreed during the three-stage competitive dialogue procedure foreseen in the relevant call for proposals (published 10.02.2020 on www.economy.gov). The legal perimeter is specified in a series of laws and by-laws. An analysis is provided in Section 5.

2.7 Defining the public good subject to concession Not Applicable

2.8 Analysis of the conditions for management, maintenance and operation The terms and conditions, the manner and the parameters for managing the object of the concession/PPP are defined in the by-laws of the Concessions and PPP Act and the Energy Law, see Section 5.. According to Article 133 of the Energy Law, the concessionaire shall need to obtain a license for distribution of natural gas. Further, Article 133 transposes the flexibility provided by Directive 2009/73/EC (Article 26(4)), as adapted for Energy Community contracting parties by Ministerial Decision 2011/02/MC-EnC. This means that until 100,000 connections are reached, the concessionaire in addition to distribution, may also act as a natural gas supplier, a supplier with a public service obligation and a supplier of last resort. The concessionaire may also function as a combined natural gas transmission and distribution system operator, to which a license for natural gas transmission and distribution is issued. In such case however the concessionaire may not supply natural gas. The Energy Regulatory Commission on the basis of Article 28 of the Energy Law adopts rules for natural gas supply and distribution. Such rules define:  The terms and conditions, the manner and the period for the signature of the natural gas supply contract;

North Macedonia Gas Distribution – FS Update

 The manner of calculation, invoicing and payment collection for the delivered quantity of natural gas and the services for using the distribution networks as well as the level of guarantees to be provided by consumers and other users of the distribution network (if such users exist);  The terms and conditions and the manner of indemnification of a consumer in case of reduced supply or interruption;  The consumers for which the supply may not be interrupted;  The manner and the procedure for change of supplier at the consumer’s choice, the user’s right to change the supplier without compensation;  The quality of natural gas;  The quality of services provided by the distribution system operator and the supplier;  The minimum requirements and manner of organisational layout and technical equipment for ensuring communication between the distribution system operator and consumers, the distribution system operator and the transmission system operator and the DSO and suppliers for the purpose of ensuring the prescribed quality of services;  The terms and conditions and the procedure for disconnection of consumers from the distribution systems in case when the consumers failed to meet their obligations established under the law, regulation or under a contract;  The manner, form and periods for submitting reports to the Energy Regulatory Commission;  The necessary information which needs to be provided to consumers and suppliers. In case that the DSO is also a supplier (when operating below the 100,000 limit of connections) then the DSO may also: - Import or purchase with the Republic of North Macedonia, natural gas for the purpose of sale to consumers, dealers, other suppliers, producers of electric and thermal power. The DSO, acting as supplier may also sell natural gas to the TSO subject to relevant conditions imposed upon the TSO for balancing of the transmission system. - Inject natural gas in the distribution networks. - On the basis of the measurements performed by the respective network operator, to invoice the consumers it has signed supply contract with, for the supplied natural gas against the agreed price and for the compensations for using the transmission and/or the distribution system. The terms and conditions of supply shall be further specified by the Energy Regulatory Commission in case the concessionaire also becomes a gas supplier.

North Macedonia Gas Distribution – FS Update

2.9 Changes made to the previous analysis of the essential elements that are indicative of the nature of the contract and an explanation of the reasons for it The present work aims to update a previous feasibility study (i.e. the 2014 feasibility study, hereinafter “2014-FS”). The study considered the development of 3 separate distribution networks so that the feasibility assessment looked into three separate companies, while here, the assessment focuses into establishing a single gas distribution company in the country. Moreover, in the 2014-FS the concessionaire performed the distribution and supply of natural gas, while in the updated FS the private entity only acts as the distribution company. Further, the previous study assumed a concession duration of 25 years (including 4 years of construction), while here we assume 35 years (including 4 years of construction of mid-pressure pipelines). The distribution network is developed in three phases as shown in Figure 1 with Phase 1 starting in Year 1 of the concession, Phase 2 in Year 2 and Phase 3 in Year 5. As described in detail in Section 3, this study uses the assumptions of the 2014-FS regarding:  Social and demographic characteristics  Technical maps / designs and pipeline routes  The lengths of mid and low-pressure pipelines per municipality  The type of customers considered in the study (IRF: Individual residential facility, CRF: Collective residential facility, OF: other facility)  The total load of each municipality for each consumer category  The typical load (kW) of each consumer category  The demand (i.e. gas consumption) per customer by consumer category  The Feasible/Non feasible classification of each municipality The main differences from the 2014-FS are summarised in Table 8 below:

Table 8: Main differences in assumptions between 2014-FS and 2020-FS Topic 2014-FS 2020-FS (present study) Both distribution and supply of The study does not consider the supply natural gas are considered to activity. Costs, revenues and tariffs Supply activity be implemented by the computed refer solely to infrastructure concessionaire Duration of the 20 years Up to 35 years, according to the tender concession Included in the cost of the Not included in the cost of the Internal infrastructure and paid by the infrastructure. Their cost is not borne by installations concessionaire the concessionaire A calorific value of 33.862 A gross calorific value of 11.16 Calorific value MJ/Nm3 (9.406 kWh/Nm3) is kWh/Nm3 is used; the value is typical for Russian gas in the Balkan region and is 30

North Macedonia Gas Distribution – FS Update

Topic 2014-FS 2020-FS (present study) taken into account in in line with the acceptable range calculations provided by the ERC10 (10.28 - 12.75 kWh/m3) Unit costs are not clearly Updated unit costs for all cost categories Cost indicated. have been considered based on the components Greek experience. Unit costs are shown in Table 14 The cost of risers has not been The cost of risers is included in the cost taken into consideration. One of metering equipment. meter is considered per Further, one metering device per IRF Meters and consumer. has been considered, while for CRF we risers have considered 1 meter per apartment building, with the assumption of 10 apartments (CRF) per building, i.e. 1 metering device per 10 CRFs Metering and Regulating MMRS are considered to be the TSO’s Stations (MMRS), reducing responsibility and, thus, their cost is not MMRS pressure from high to medium, included in the calculated CAPEX are considered to be part of the investment. The cost of pressure reduction The cost of pressure reduction stations Pressure stations (from medium to low has been considered. Costs are reduction pressure) has not been included in Table 14 stations considered. All construction works are Medium pressure pipeline construction considered to be implemented ends in 4 years from initiation, according Construction within the first 4 years. to the phase, Table 2. Low pressure period pipelines are demand driven and completed gradually within the concession period Assumptions on penetration The penetration rate is based on rate are not clear. customer category, takes note of the Consumer municipality population and relates to penetration actual values observed in other rate countries. The penetration rate is described in Section 3.10.2 Other (commercial) facilities Other facilities are assumed to meet the are considered to reach 100% demand at a faster pace than residential penetration between years 14 consumers, reaching 100% of their and 25 of the concession. current potential at the 12th year from beginning of construction for each Demand by phase. From that point onwards, Other Facilities penetration of OF is assumed to (OF) increase by 1% every year to reflect the economic growth leading to more connections by commercial and industrial customers. Penetration rates for OFs are provided in Section 3.10.2 Assumptions on the Updated assumptions on operational operational expenses have expenditure are considered, using OPEX been made by component of international benchmarks as well as forecasted expenditure

10 https://www.erc.org.mk/odluki/01.03.2019%20- %20PRAVILA%20ZA%20SNABDUVANJE%20SO%20PRIRODEN%20GAS.pdf 31

North Macedonia Gas Distribution – FS Update

Topic 2014-FS 2020-FS (present study) (salaries, insurance, statistical data on salaries from the maintenance, etc.). Figures Statistical Office of North Macedonia. provided are not justified, A description is provided in Section therefore their reliability is 4.2.4 doubted. No alternative scenarios are One baseline and 7 different scenarios considered. have been examined. Municipalities were grouped into (Polluted / Non Alternative polluted) and (Urban / Rural) according scenarios to the tender specifications. This grouping is used to evaluate alternative scenarios.

Readers are referred to Section 3 for more information. In Table 9 a comparison of key parameters between the 2014-FS and 2020-FS Baseline scenario is made for the municipality of Veles, as a case study.

Table 9: Comparison of key parameters between the 2014-FS and the present update for the municipality of Veles 2020-FS (present 2014-FS Comments study)

Types of IRF, CRF, OF As in 2014-FS same customers categories

IRF consumers in 3,000 2,972 In the 2014-FS, the number of consumers is not year 25 stated. Only values in Load terms per municipality are provided. We have estimated the customer number by doing thorough reverse engineering (dividing unitary loads per consumer category).

CRF consumers 9,479 7,511 as above in year 25

OF consumers in 285 323 as above year 25

IRF consumers in N/A 3,283 Corresponds to 87% of the potential consumers. year 35

CRF consumers N/A 8,296 Corresponds to 87% of the potential consumers. in year 35

OF consumers in N/A 357 Corresponds to 124% of the potential consumers, year 35 meaning that new OF facilities are also considered.

IRF load in year 101 100 Since different penetration rates are assumed in 25 (MW) the two Feasibility Studies, the similar values here are coincidental.

CRF load in year 91 72 Different penetration rates are assumed in the two 25 (MW) Feasibility Studies.

North Macedonia Gas Distribution – FS Update

2020-FS (present 2014-FS Comments study)

OF load in year 94 107 Different penetration rates are assumed in the two 25 (MW) Feasibility Studies.

IRF load in year N/A 110 as above 35 (MW)

CRF load in year N/A 80 as above 35 (MW)

OF load in year N/A 118 as above 35 (MW)

MP length (m) 12,966 12,966 The same value as the 2014-FS is used.

LP length (m) 81,000 81,000 The same value as the 2014-FS is used. The calculation is made by multiplying the number of ELSUs mentioned for Veles with the total LP pipeline length for the typical ELSU [54 ELSUs * 1500m/ELSU]

MP network 991,569 € 3,358,194 € CAPEX

MP CAPEX/ 76 € 259 € meter

LP network 904,570 € 7,614,000 € In 2014-FS, the LP network Capex includes LP CAPEX Construction, Mechanical works and Service lines. As shown below, service lines in 2020-FS are considered to be a separate cost item.

LP CAPEX/ meter 11 € 94 € This difference in LP network unit cost between the two studies is the major factor influencing differences in total CAPEX. As explained in the following sections, unit costs taken into consideration derive from international benchmarks.

Service lines N/A (Not 9,332,914 € We have assumed that there are 10 apartments in CAPEX provided a block of flats. This means that for every 10 separately. CRFs only one service line is needed. The cost is included in LP network CAPEX in each municipality)

Service lines N/A 94 € This is the cost per meter (length) of a typical CAPEX / meter service line for IRF and CRF consumers (IRF&CRF)

Service lines N/A 150 € This is the cost per meter (length) of a typical CAPEX / meter service line for OF consumers. [Considering that (OF) 11% of the OF facilities are industrial and the rest

North Macedonia Gas Distribution – FS Update

2020-FS (present 2014-FS Comments study)

non-industrial. 11% was sourced from publicly available data]

Meters & Risers N/A (not 4,462,730 € Unitary values from Greek companies (per CAPEX provided per consumer category) * number of consumers per municipality) category

Pressure N/A (not 90,000 € No. of pressure reduction stations / meter of LP reduction station included) network was used from the Greek companies, and Capex multiplied by the unitary cost of a station.

Total demand in 329,627,604 318,159,480 Total demand in 2014-FS is only mentioned up to year 25 of the year 20, in 1000'm3. The value stated here is analysis (kWh) calculated using the same methodology used in the 2020-FS.

Total demand in 29,536,524 28,508,914 Calculated with the suggested calorific value used year 25 of the in the 2020-FS analysis (Nm3)

Total demand in N/A 351,446,001 as above year 35 of the analysis (kWh)

Total demand in N/A 31,491,577 as above year 35 of the analysis (Nm3)

MP Construction Constructed in Constructed in a rate the first 4 period of 4 years, years. The since the construction annual rate is has started. The first not available year of construction depends on the Phase of each municipality. Rates are as follows: Y1: 20% of the MP network is constructed, Y2: 30% is constructed, Y3: 30% is constructed , Y4: 20% is constructed

LP Construction Constructed in Construction starts Constructing the LP network over a period of 14 rate the first 4 one year after the MP years (and not over 4 years), is considered a more years. The construction has realistic approach, based on international annual rate is started. Actual years experience. This has a positive impact to the not available depend on each project's financial indicators and improves the municipality's Phase. project's attractiveness towards financing Construction is institutions and investors realised over a period of 14 years. During

North Macedonia Gas Distribution – FS Update

2020-FS (present 2014-FS Comments study)

the first 4 years of construction, 40% of the total LP network has been constructed.

OPEX As stated in For Fixed OPEX the Salary was based on data from N.Macedonia's methodology pg. 151 Book Annual Gross Salary / statistical authority, while % for variable costs from A1 employee considered benchmarking with Greece was 7,500€. The The construction rate of LP network was number of employees calculated based on actual values from EPA needed was Thessalonikis. calculated by benchmarking the Greek gas distribution companies, and by using an "Employees/meter of LP network" index.

For Variable OPEX a % of the net asset value was considered.

Cumulative Fixed 2,160,000 € 1,376,791 € This is the sum of the Fixed Opex of all the years OPEX Y25 up to year 25 (non discounted)

Cumulative 5,773,211 € 13,948,080 € This is the sum of the Variable Opex of all the Variable OPEX years up to year 25 (non discounted). Y25 Since the total Capex in the 2020-FS is significantly higher, it is reasonable to assume a higher Variable Opex (% of the net asset value) compared to the 2014-FS.

Cumulative Fixed N/A 2,139,834 € This is the sum of the Fixed Opex of all the years OPEX Y35 up to year 35 (non discounted).

Cumulative N/A 21,122,230 € This is the sum of the Variable Opex of all the Variable OPEX years up to year 35 (non discounted). Y35

Penetration rate As stated in Based on actual Based on our benchmarking, after the 10th year of pg. 136 Book values from EPA gas penetration and for the following years, the B2 (in Load Thessalonikis for penetration rate was considered constant and units only) IRF&CRF and OF equal to 1%. consumer categories

North Macedonia Gas Distribution – FS Update

2020-FS (present 2014-FS Comments study)

Demand As stated in Calculated from the Depending on a population threshold of 30,000 pg. 136 Book load provided for inhabitants, (big or small municipality) an B2 (in each municipality (pg. increased or decreased penetration rate (as a % 1000m3) 62 Book A1) and the of the potential consumers) was used for each typical unitary load of municipality. The threshold used was determined each consumer type based on a critical overview of N.Macedonia's (pg. 138 Book A1) municipalities' demographic characteristics.

So, if the population of a specific municipality is >30,000, then the load is assumed to reach 70% of the potential load/consumers for IRF and CRF consumers and 100% for OF consumers in the 10th year of operation (GT estimation based on examples from other distribution networks).

If the population of a specific municipality is <30,000, then the load is assumed to reach 45% of the potential load/consumers for IRF and CRF consumers and 100% for OF consumers in the 10th year of operation (GT estimation based on examples from other distribution networks).

The penetration rate for the first 10 years for each consumer category was derived using the relevant functions derived from data sourced from the distribution company of Thessaloniki.

2.10 Project management issues Issues related to project management comprise two aspects:  The former relates to the management of the project by the concessionaire regarding its relations with the Contracting Authority. It is understood that timescales and milestones would need to be agreed during the negotiation process.  The latter relates to the actual project management i.e. the elementary actions to be undertaken by the concessionaire for the realisation of the project. Figure 8 shows indicative elementary elements that would need to be considered by the potential concessionaire during project preparation, design and execution. It is expected that the concessionaire would be providing a more detailed plan.

North Macedonia Gas Distribution – FS Update

Figure 8 Indicative list of items to be considered The 2014-FS also took into account the existing pipelines in the municipalities of Kumanovo and Strumica and how would these need to be treated under the new concession regime. Specifically, it is assumed that no new pipelines are to be built in Strumica. Currently, the natural gas distribution systems are established by the local self- governments in Kumanovo and Strumica. Their role in the context of one country wide single gas distribution company would need to be defined. Options from the legal perspective are provided in Section 5.

2.11 Identification of weaknesses and their solution There are a number of weaknesses and uncertainties related to the realisation of the project. This is a capital intensive project requiring long time commitments, a guaranteed cash flow and an increasing customer base. A proper balance would need to be striked between an attractive investment with an acceptable rate of return and affordable tariffs that would allow (and promote) the use of gas. At this stage there are further uncertainties in the infrastructure that needs to be developed (pipeline lengths of various categories) and also on demand. An update of high level engineering design and projected demand has not been the scope of this study which relied in the 2014-FS for data on the technical parameters of the project.

North Macedonia Gas Distribution – FS Update

2.12 Political, social and other issues Gasification of North Macedonia will have not only a significant impact in the air quality and reduction of emissions but is expected to be a substantial driver to overall economic growth. The following are at least necessary:

 Application of non-discriminatory and competitive procedures and tools for the award of the concession.  Clear and well defined terms and conditions of the agreement to be signed between the public entity and the concessionaire. The terms and conditions should ensure a stable revenue for the concessionaire at attractive terms so that funding can be secured. On the other hand, terms and conditions should also guarantee the development of the network in a timely manner. Connection rules should be well specified to ensure at least the envisaged penetration rates and the distribution tariff (together with the cost of gas and the cost of transmission) should be competitive to alternative fuels.  Monitoring of the concessionaire performance is also adamant. Political support at all levels is a necessary precondition for the development of the distribution systems. Local communities should be engaged in the process and made to comprehend the importance of the project for North Macedonia as a means of reducing cost of heating and emissions. The development of transmission infrastructure linking North Macedonia to other sources and markets is anticipated to contribute to the competitiveness of natural gas versus other fuels.

2.13 Issues related to the monitoring (supervision) of the project The overall implementation and realization of the project must be in line with the applicable laws and by-laws, while an additional control mechanism can be applied, to be defined in the Concession/PPP Contract. The inspection supervision could be performed in both phases: during construction and throughout operation. These inspections could be: 1) regular based on annual/monthly supervision plans or 2) extraordinary based on initiative submitted by any party, including Public partner. The following could be supervised: construction works, environmental protection, quality of the equipment installed, maintenance works, financial operations, etc. Additionally, regular audit should be introduced and conducted not necessarily directly by the public partner, but by experts engaged by public partner. To that end, during the construction phase independent civil engineers might be hired to supervise the works, while in the course of the operation financial auditors could check the financial books and accounts of the private partner.

North Macedonia Gas Distribution – FS Update

The concessionaire shall be also monitored by the energy regulator of North Macedonia (ERC). Monitoring shall include milestones in system development, connection rates and quality (technical and quality of service). ERC shall approve the tariff methodology, tariffs and conditions for access of suppliers to the distribution network.

North Macedonia Gas Distribution – FS Update

3 Technical analysis

3.1 Description of the existing facilities of concession/PPP owned by the awarding authority / public partner Currently, there are two small gas distribution systems in the municipalities of Strumica and Kumanovo. Additionally, there is a medium pressure gas ring, operating at 12 bar in the region of Skopje and a Technlogical Industrial Development Zone (TIRZ) near Skopje, operating as a closed distribution network system with a distribution tariff regulated by the ERC, comprising of 12 big foreign industrial consumers. See Sections 2.1, 3.3 of Book A1, as well as “Review of the current situation” in the Introduction of same Book of the 2014-FS.

3.2 Need for construction of new or reconstruction of existing facilities subject to concession / PPP and their description The need to make natural gas available at distribution level (households and commercial facilities) particularly for heating is expected to contribute to a substantial improvement of air quality and reduce airborne pollution which is currently at high levels. As stated in “The Strategy for Energy Development of the Republic of North Macedonia until 2040”11: “Most of the population was exposed to PM in excess of the limit values. Increased concentrations of suspended particulate matters can be recorded in urban areas, especially in autumn-winter seasons, which is mostly due to fuels combustion, increased frequency in traffic, and meteorological conditions. The processed data for the period 2004 to 2017 show that during the entire period, most of the population in larger cities were exposed at concentrations of suspended PM that are in excess of the limit value”. The government of North Macedonia considers the construction of the gas distribution system as a crucial project for the well-being of the country’s population, especially in certain heavily polluted municipalities (mentioned in Error! Reference source not found., Section 2). A detailed description of the subject of the concession is provided in Section 3.6.

3.3 Technical requirements for designing and building of concession / PPP facility, needed to provide the public service / exploit the public good of general interest See Section 2.3 of Book A1 and Sections 5 and 8 of Book A2 of the 2014-FS.

11 http://economy.gov.mk/Upload/Documents/Adopted%20Energy%20Development%20Strateg y_EN.pdf 40

North Macedonia Gas Distribution – FS Update

3.4 Main technical and technological features of the concession / PPP facility based on: a) analysis of the concessionaire’s / public partner’s needs, b) identification of the public interest and c) identification of U planning documents necessary to construct the concession / PPP facility Article 4 paragraph (1) and (4) of the Energy Law identifies natural gas distribution as an energy activity of of public interest, i.e. the operators have an obligation to provide public service (regulated energy activity). Furthermore, Article 2 point 16 of the Construction Law puts the gas pipelines into line infrastructure buildings whose construction is of public interest. Eventually, among the key recommendations in the recently adopted Energy Development Strategy until 204012 is the one referring to the development of gas pipelines, i.e. “Implementing the planned natural gas interconnections with Greece and other countries, as well as the gasification plan. With this, it is anticipated that the natural gas as a transition fuel until 2050, combined with RES, will play an important role in replacing coal used for power generation and industry in the Moderate transition and Green scenarios. New cross-border infrastructure will diversify supply routes and increase market competitiveness of natural gas”. Principal planning documents according to which the development of the distribution system for gas is being planned are the detailed U plans and other development documentation of the municipalities in the region which have been prepared in the 2014-FS. The required documentation for the adoption of the urban plan will depend on the type of plan. The urban planning documentation suitable for this purpose is the infrastructure project as an urban-planning document prepared for line infrastructure facilities defined by the Construction Law, for functional parts of line infrastructure objects as well as for infrastructure facilities composed of several parts of which at least one part represents line infrastructure. The procedure and documents necessary to adopt the appropriate type of urban plan are further elaborated in the section 5 of this study.

3.5 Need and type of preparatory work The preparatory activities regarding the realization of the distribution system will commence immediately after awarding the concession. In that order, the first step should be the preparation of the pipeline design, elaborate for environmental protection, right to use construction land, construction permit issuance. Preparatory construction works can be carried out as needed, in which case a permit for preparatory works is required. Based on the permit for performing preparatory works on the construction site issued by the municipality on which territory the network is to be built, the following preparatory works can be taken (as required):

12 http://economy.gov.mk/doc/2759 41

North Macedonia Gas Distribution – FS Update

 fence for the construction site,  asphalt base, separation of aggregates, plant for concrete production,  transmission line and transformer station which is necessary to be built for powering the construction site with electricity,  installation for supply and drainage of water,  facilities for accommodation of workers and for construction products,  storage facilities for flammable liquids and explosive devices and  other facilities necessary for the construction of the building. Any buildings constructed in the context of preparator works uildings are of a temporary nature and the contractor is obliged to remove them and to arrange the land accordingly until the submission of the application for permission to use the construction. The procedure and documents necessary to carry out preparatory work are further elaborated in the Section 5 of this study. In general, arrangement of construction land means providing connection of the construction to the electricity, water and sewage networks and access to the road. It is an obligation of the municipality to provide this, but only after a fee is paid by the investor within 15 days from the day the municipality verified the project design. The municipality and the investor may agree to arrange the payment in a different manner, including the possibility the investor to be exempted from payment of the fee. The amount is calculated based on a methodology13 and it is not a significant expense. Without prejudice to the decision of the municipality on whose territory the land in question is located, it is recommended:  the investor to be exempted from paying this fee, or  the investor and the municipality to enter into a contract that stipulates that the investor will arrange the land at his own expense, which is likely to be the most acceptable variant for potential private partner.

3.6 Necessary infrastructure to bring the facility into functional condition The object of the present PPP is the construction and operation of natural gas distribution networks, i.e. the necessary infrastructure within the boundaries of the municipalities of North Macedonia with the aim to deliver natural gas to residential and

13 Rulebook on the level of arrangement of the constructions built on construction land with the communal infrastructure and manner of determining the amount for arrangement depending on the level of arrangement (http://www.slvesnik.com.mk/Issues/45553ded9bcf41bc9f647a5ee9a781a5.pdf) (http://www.slvesnik.com.mk/Issues/e6125c5b12fc4ba0b6c281f5929f4c7a.pdf)

North Macedonia Gas Distribution – FS Update commercial end-users through a network of medium and low pressure pipelines. The project does not concern high pressure (transmission) pipelines, transporting natural gas in long distances. A schematic presentation of natural gas supply chain is illustrated in Figure 9, where the scope of the concession is indicated by a set of boundaries.

Figure 9: Generic natural gas supply chain Distribution systems typically consist of an extensive network of small-diameter pipes, which deliver gas to each individual customer’s metering equipment. Within a distribution system, there are sections that operate at different pressures, with regulators controlling the pressure. Generally speaking, the closer natural gas gets to a customer, the smaller the pipe diameter is and the lower the pressure is. Because of the transportation infrastructure required to move natural gas to many diverse customers across a reasonably wide geographic area, distribution costs typically represent a large portion of natural gas costs for households and small volume customers. While large pipelines can reduce unit costs by transmitting large volumes of natural gas, distribution companies must deliver relatively small volumes to many different locations. The infrastructure to be built is presented schematically in Figure 10 and consists of the following main components: 1. Medium pressure pipelines 2. Pressure reduction stations 3. Low pressure pipelines 4. Service lines 5. Meters and risers

North Macedonia Gas Distribution – FS Update

Figure 10: Main components of the gas distribution network

For the purposes of the present study, data from the 2014-FS have been utilized for the dimensioning of the infrastructure to be built. These data have been treated in a manner so as to serve the methodology followed in the present FS. A detailed description of the data used is presented in the following sections. Note that European policy on natural gas is evolving from market integration, competition and security of supply towards sustainability. Long term (2050) decarbonisation objectives are expected to be fulfilled by energy efficiency actions and further additions of renewables in the energy mix including the injection of gases of reduced carbon footprint into transmission and distribution networks. Such gases may comprise biomethane, renewable hydrogen and synthetic -low carbon- gas produced conventional fuels. In terms of their suitability for conventional gas networks and type of gases accepted, we note that biomethane is methane produced from renewable sources (biogas as specified in Directive 2018/2001/EU or Directive 2009/28/EC as applicable for the Energy Community Contracting Parties). As natural gas typically comprises over 90% methane it is clear that conventional networks are fully compatible with a future injection of biomethane. Injection of hydrogen poses however additional challenges due to its large diffusivity and also due to its low calorific value in 3 comparison to natural gas: 1m of H2 has a caloric value of over 3 times less than the calorific value of natural gas at the same pressure and temperature conditions. This 44

North Macedonia Gas Distribution – FS Update means that either compression or larger size pipelines would be required to transport the same amount of energy as with gas. The suitability of conventional distribution networks to transport hydrogen (mainly due to its diffusivity, ) is also an evolving topic at European level. Marcogaz, the technical association of the European natural gas industry has published a preliminary assessment on the admissible percentage of hydrogen in natural gas networks. An extract of their publication14 is shown in Error! Reference source not found.. As shown in the figure, overall typical components used in existing distribution can accommodate at least up to 10% hydrogen. It is clear that this percentage is subject to further assessments to be carried out by the European gas industry (system operators and manufacturers). Also note that the additional cost required to move from e.g. a low hydrogen level (5-10%) to higher values is yet unclear. A general recommendation to be provided herein is that the concessionaire when designing and construction the network should take into account the European decarbonization trends and ensure that the network constructed can accommodate at least blends of natural gas and hydrogen. Follow up of the works of CEN, Marcogaz and the overall European gas industry shall be required.

The European Committee for Standardisation (CEN) is currently working towards establishing a standard regarding the accepted concentration of H2 in natural gas transmission and distribution systems. CEN presented their progress and roadmap

14 Marcogaz, Hydrogen admission to distribution networks, 33rd Madrid Forum, https://ec.europa.eu/info/sites/info/files/energy_climate_change_environment/events/presenta tions/02.c.03_mf33_presentation_-_marcogaz_-_infographic_hydrogen_admission_- _j_dehaeseleer_g_linke.pdf

North Macedonia Gas Distribution – FS Update towards the adoption of a standard at the 33rd Madrid Forum in October 201915. Completion of the standard and its adoption is not expected earlier than 2024.

3.6.1 Medium pressure pipelines These pipelines are connected to the transmission system, which transports the gas at a pressure of the order of 50 to 70 bar, up to the city gate. From the gate station, natural gas is depressurized and moves into smaller pipelines at a pressure of up to 19 bar16. Medium pressure is usually the first part of infrastructure to be constructed. The aggregated lengths of Main Distribution Network per municipality, as provided in the 2014-FS have been considered. These are indicated in Table 10.

3.6.2 Pressure reduction stations These stations are installed at the beginning of each low pressure branch and regulate the gas pressure from 19 to 4 bar. In the 2014-FS, the number of low pressure branches and, thus, pressure reduction stations was not indicated. In order to tackle this lack of data, the number of stations reducing the pressure from medium to low, was determined based on international benchmarks, under the assumption that one station per 33 km of low pressure pipeline would be built17. The assumed number of pressure reduction stations in each municipality is presented in Table 10.

3.6.3 Low pressure pipelines Low pressure pipelines are the main components of branches connecting the medium pressure network to individual customers. They usually are smaller in diameter and operate at a pressure of up to 4 bar. Low pressure usually follow the road network structure, so as to make gas available to all potential customers. The calculation of the total length of low pressure pipelines is based on the notion of ELSU (Estimated Load Surface Unit), as defined in the 2014-FS. In this study, the area of each municipality had been divided into a certain number of standardized units, the ELSUs, in which a standard length of low pressure pipelines was assumed. A schematic presentation of the dimensioning of a typical ELSU for IRF and one for CRF, as defined in the 2014-FS, is given in Figure 11 and Figure 12.

15 https://ec.europa.eu/info/sites/info/files/02.c.04_mf33_presentation_-_cen_- _towards_h2_standardisation_-_schulken_dejong.pdf 16 The existing medium pressure network in Skopje region, which is built and owned by the TSO, operates at 12 bar. However, common practice for medium pressure pipelines is to operate at a pressure of 16-19 bar. 17 GT analysis based on (confidential) data from previous projects 46

North Macedonia Gas Distribution – FS Update

______Local distribution pipeline (Low pressure network) ______Consumer pipeline for multiple facilities ______Consumer pipeline for two facilities ______Consumer pipeline for one facility

Figure 11: Typical ELSU for IRF, from 2014-FS

______Local distribution pipeline (Low pressure network) ______Consumer pipeline for multiple facilities ______Consumer pipeline for two facilities ______Consumer pipeline for one facility 47

North Macedonia Gas Distribution – FS Update

Figure 12: Typical ELSU for CRF, from 2014-FS The length of low pressure pipelines in each ELSU is considered to be equal to 1500 m, as provided in the 2014-FS. The number of ELSUs per municipality as well as the corresponding pipeline length are given in Table I-1 of Annex I, while a summary is provided in Table 10.

Table 10: Main components of the medium and low pressure networks (Full table in Annex I) Medium No of pressure Low pressure pressure reduction No of ELSUs pipeline length pipeline stations (m) length (m) TOTAL 227,476 44 503 753,193 Average for all 7,844 2 17 25,972 municipalities

3.6.4 Service lines These are low pressure lines (4 bar) connecting each individual customer to the low pressure network. Service lines are assumed to be built every time that a new customer requests to be connected to the grid and are part of the low pressure network. For the purposes of the present study, it is assumed that the number of service lines for Individual Residential Facilities (IRF) is equal to the number of the latter facilities, while for Collective Residential Facilities (CRF) one service line is considered to serve a block of 10 consumers. In the case of residential consumers, service lines are considered to have a standardized length of 20 meters, which is the weighted average value of service lines’ length in a typical ELSU, as provided in the 2014-FS. In Other Facilities (OF), on the other hand, in order to reflect the difference in cost of service lines between commercial and industrial consumers, a weighted average of the cost between the two categories has been calculated. Since there is no distinction between commercial and industrial facilities in the 2014-FS, a percentage of 11% industrial consumers has been considered, based on statistical data for the country of North Macedonia18. The number of service lines by municipality is analysed, for each consumer category in Table 11.

3.6.5 Meters and risers These are the final components of the gas distribution system. Their purpose is to facilitate delivery of gas to the end-users. Lately, electronic metering systems are being installed, thus allowing the transmission of information directly to the utility, without requiring meter-reading personnel to be dispatched in order to record the volumes

18 Republic of North Macedonia – State Statistical office http://www.stat.gov.mk/OblastOpsto_en.aspx?id=19 48

North Macedonia Gas Distribution – FS Update

consumed. Risers are commonly used to bring buried natural gas piping above ground, in order to reach the consumer’s heating equipment. One metering device accompanied by one riser has been assumed for each consumer, regardless of their category. The number of metering devices and risers by municipality is summarized in Table 11, for each consumer category, while the analysis by municipality is provided in Annex I (Table I-2).

Table 11 Summary of Service lines, risers and meters, by consumer category (Full table in Annex I) No of No of No of No of No of No of Service Risers / Risers / Risers / Municipality Service Service lines Meters Meters Meters lines (IRF) lines (OF) (CRF) (IRF) (CRF) (OF) TOTAL 94,150 14,420 10,745 94,150 144,189 10,744 Average for all 1,177 352 138 1,177 3,517 140 municipalities

3.6.6 Construction period The medium pressure network is constructed according to the requirements of the Tender Document (i.e. “The private partner shall, within four years of receiving each individual building permit, build […] the envisaged primary natural gas distribution network”). We therefore consider that the total medium pressure network of each municipality is constructed during the first four (4) years following the issuance of the corresponding permit for each municipality. Depending on the phase in which each municipality belongs, according to the tender, the corresponding construction rates, in terms of percentage of completion of construction of the medium pressure network are presented in Table 12. A 20%-30%-30%-20% rate is considered for each of the four years.

Table 12: Construction of the MP network per Phase

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 PHASE 1 20% 30% 30% 20% 0% 0% 0% 0% PHASE 2 0% 20% 30% 30% 20% 0% 0% 0% PHASE 3 0% 0% 0% 0% 20% 30% 30% 20%

The development of the low pressure network is assumed to begin one (1) year after the initiation of the construction of the medium pressure network, for each phase. Its construction is assumed to last fourteen (14) years, while 100% of the network is considered built in the final (14th) year. The development rate of the low pressure network was assumed to be similar to that of the distribution company of Thessaloniki. Since the consumer penetration rate considered, as is explained in section 3.10, was sourced from the same gas distribution

North Macedonia Gas Distribution – FS Update

network19 we may assume that the particular network was built at a rate meant to meet the increasing demand. Therefore, construction of the low pressure network was assumed to follow the development curve of the corresponding network of Thessaloniki. Figure 13 depicts the function for network increase, as derived from the data of the gas distribution company of Thessaloniki.

Figure 13: % increase of LP network based on Thessaloniki

Based on the above function, the percentage of network, in terms of pipeline length, developed each year can be derived for N. Macedonia (Table 13).

Table 13: % of the network developed in each year of the analysis, depending on the municipality phase

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 PHASE 1 0% 14% 8% 9% 10% 9% 9% 8% 7% 6% 5% 5% 4% 3% 3% 0% 0% 0% 0% PHASE 2 0% 0% 14% 8% 9% 10% 9% 9% 8% 7% 6% 5% 5% 4% 3% 3% 0% 0% 0% PHASE 3 0% 0% 0% 0% 0% 14% 8% 9% 10% 9% 9% 8% 7% 6% 5% 5% 4% 3% 3%

The development of the service lines over the years, directly follows demand increase. It is assumed that the number of service lines constructed for Individual Residential Facilities (IRF) and Other Facilities (OF) is equal to the number of new consumers for each customer category, while for Collective Residential Facilities (CRF) one service line is considered to serve a block of 10 consumers.

19 Thessaloniki can be considered a similar case to North Macedonian municipalities, due to its similar climatic conditions and since Thessaloniki’s network has the highest penetration rate in Greece 50

North Macedonia Gas Distribution – FS Update

The above assumptions regarding construction periods, for each phase of the project are summarized in the Gantt chart of Figure 14.

Figure 14: Construction timeline assumptions

3.7 Estimated value of investment for construction, costs for preparatory works, cost of management, maintenance and operation of concession / PPP facility The capital expenditure for the construction of the gas distribution networks was based on international experience from other projects of similar nature. Table 14 provides the unit costs taken into account for the various elements of the project in both the Baseline and the CAPEX30 scenarios. CAPEX30 scenario assumes a 30% reduction in unit costs compared to the baseline, while pressure reduction stations’ cost is assumed to be included in the low pressure pipeline cost.

Table 14: Baseline and CAPEX30 scenarios unit costs of distribution network components Baseline CAPEX30 Components Rationale Scenario Scenario Cost Cost (€) (€) Medium Pressure Sourced from Greek distribution companies’ 259 181.3 network (€/m) data Low Pressure Sourced from Greek distribution companies’ 94 65.8 network (€/m) data Each standardized service line is a low CRF and IRF pressure pipeline (4 bar) with a length of 20 1,316 Service lines 1,880 meters (20 m * 94 €/m for baseline scenario or (€/unit) 65.8 €/m for CAPEX30 scenario) Weighted average price between industrial and non-industrial OF OF Service lines  For non-industrial OF (89% of the total 4,490 3,737 (€/unit) number of facilities): Service lines are standardized low pressure pipelines 51

North Macedonia Gas Distribution – FS Update

Baseline CAPEX30 Components Rationale Scenario Scenario Cost Cost (€) (€) with a length of 30 meters (typical distance of a service line based on the Greek experience)  For industrial OF (11% of the total number of facilities): The unitary cost was directly sourced by Greek companies and assumed to be 18000 €/unit CRF and IRF Meters Sourced from Greek distribution companies’ 370 370 & Risers (€/unit) data OF Meters & Risers Sourced from Greek distribution companies’ 500 500 (€/unit) data Included in low Pressure reduction Sourced from Greek distribution companies’ 45,000 pressure stations (€/unit) data pipeline cost

Based on the above unit costs, the total CAPEX by municipality for all cost components is presented in Tables I-3 to I8 of Annex I for the all scenarios considered, while a summary is given in Table 15.

Table 15: Summary of capital expenditure by scenario and cost component. Costs refer to overall network development (Year 35 of the concession – non discounted values) Medium Low Meters Pressure Service Scenario Pressure pressure and Reduction TOTAL (€) Lines (€) (€) (€) Risers (€) Stations (€) Baseline 174,169,032 219,469,993 252,363,675 93,560,338 5,355,000 744,918,038 Included in LP CAPEX30 121,918,322 153,628,995 183,038,072 93,560,338 552,145,727 CAPEX BA-FPOL 152,279,870 201,435,552 241,224,058 91,308,640 4,185,000 690,433,121 BA_U50_R20 73,804,536 97,444,407 115,034,704 44,747,609 3,796,955 334,828,212 BA-COMBO 69,488,552 94,115,848 112,820,887 44,312,482 2,626,955 323,364,724 CAPEX30- Included in LP 48,641,987 65,881,093 81,847,578 44,312,482 240,683,140 COMBO CAPEX

3.8 Equipment needed to perform the public service / exploit the public good of general interest Requirements for equipment are listed (in terms of medium and low pressure pipelines, service lines, meters etc.) are listed in Section 3.6.

3.9 Standards for performing the public service / exploit the public good of general interest The project shall be realized according to the laws and regulations currently applicable in the Republic of North Macedonia. See the 2014-FS20, as well as Section 5 of the present document on more details regarding the currently applicable legal framework.

20 Book A2, Section 5.3.3 Used regulations, and standards during the project making 52

North Macedonia Gas Distribution – FS Update

A complete list of standards applicable to natural gas infrastructure in Energy Community contracting parties is provided in Reg.No: MC2/4-3/04-04-07ECS “GENERALLY APPLICABLE STANDARDS - NATURAL GAS”21. For the Republic of North Macedonia, the institution in charge with standardization and the transposition of European CEN standards is the Standardization Institute of the Republic of Macedonia.

3.10 Predictions for the level of demand of the public service vis-à-vis the investment and facilities considering the duration of the contract

3.10.1 Natural gas demand The total natural gas demand by consumer category and by municipality at the end of the concession period is sourced from the 2014-FS. Specifically, we calculated the number of IRF, CRF and OF consumers for every municipality by dividing the total load (in MW) forecasted in the 2014-FS for every year and for each consumer category by the load (in kW) considered for each individual consumer in the same study. Consequently, we multiplied the number of consumers by the annual consumption considered by consumer category in the 2014-FS, in order to calculate the forecasted demand of natural gas for each year of the concession period. Total annual load for [IRF, CRF, or OF] (MW) Number of [IRF, CRF, or OF] Consumers = Load of each [IRF, CRF, or OF] (MW) Total Annual Demand of [IRF, CRF, or OF] (푘푊ℎ) = = Number of [IRF, CRF, or OF] ∗ Consumption of [IRF, CRF, or OF] (kWh) The annual consumption and load by consumer category, as sourced from the 2014- FS are indicated in Table 16.

Table 16: Energy load and consumption by consumer category according to the 2014-FS C H Cooking Annual Annual Total annual o e load (kW) consumption consumption consumption n a for heating for cooking (kWh) s t (kWh) (kWh) u i m n e g r l c o a a t d e (

21 https://energy-community.org/dam/jcr:d0750d90-ab4e-4d5a-8c52- d86f5f4a23e5/MC062007_ECS_G.PDF 53

North Macedonia Gas Distribution – FS Update

g k o W r ) y I 2 4.8 31,449 5,400 36,849 R 8 F . 8 C 9 4.8 10,483 1,800 12,283 R . F 6 ( a p a r t m e n t ) O 3 N/A 360,360 N/A 360,360 F 3 0

Potential consumers have been sourced from the 2014-FS. In order to make realistic projections on the level of demand, it was assumed that only a certain percentage of potential consumers would eventually be connected to the grid. This percentage was assumed to be equal to 70% for municipalities with a population greater than 30,000 inhabitants, while in municipalities with a population below this threshold, this percentage is assumed to be 45%22. More details on the assumed penetration of natural gas among potential consumers are provided in the following section. It is important to note that in the OF category, which represents the commercial and small industrial consumers, the forecasted annual gas consumption in the 2014-FS does not take into account any energy needed other than space heating, thus neglecting all other potential consumption for commercial or industrial processes and activities. The demand for such uses usually represents a large proportion of the total consumption for commercial customers. As an example, in Greek distribution companies, the average annual natural gas consumption by industrial customers

22 In Greek distribution networks, the overall penetration rate (combined urban and rural areas) ranges from 50% to 60%, in terms of ratio of connected apartments compared to the apartments covered by the grid. In North Macedonia, it is assumed that this ratio will be higher, since there will be more incentives provided to potential consumers. 54

North Macedonia Gas Distribution – FS Update ranges from 8.7 to 11.2 GWh per customer (0.36 GWh in 2014-FS), depending on the region. The figures provided for OF demand are, therefore, very low compared to international experience and should be treated as a conservative underestimation. The total demand per municipality at the end of the concession period, according to the assumptions described above, is detailed in Table 17.

Table 17: Forecasted natural gas demand at the end of the concession period by municipality Demand IRF Demand CRF Demand OF Total Share in Municipality (kWh) (kWh) (kWh) Demand total (kWh) consumption Aerodrom 103,266,592 260,096,696 174,348,396 537,711,684 5.90% Butel 78,173,775 15,763,436 54,912,881 148,850,092 1.63% Gazi Baba 99,406,158 38,282,631 178,466,862 316,155,651 3.47% Gjorche Petrov 114,847,892 29,274,953 116,689,871 260,812,716 2.86% Karposh 86,859,750 103,588,295 100,216,007 290,664,052 3.19% Kisela Voda 178,545,042 70,935,463 152,383,244 401,863,748 4.41% Saraj 18,337,058 - 2,745,644 21,082,702 0.23% Centar 37,639,225 236,451,542 468,132,307 742,223,075 8.15% Chair 62,732,042 91,202,738 52,167,237 206,102,016 2.26% Shuto Orizari 21,094,511 - 6,864,110 27,958,621 0.31% Arachinovo 9,306,402 - 1,372,822 10,679,224 0.12% Zelenikovo 7,445,121 - 2,745,644 10,190,765 0.11% Ilinden 14,269,816 - 311,630,598 325,900,414 3.58% Petrovec 3,102,134 - 157,874,532 160,976,666 1.77% Sopishte 7,445,121 - 1,372,822 8,817,943 0.10% Studenichani 36,605,180 - 8,236,932 44,842,113 0.49% Chucher Sandevo 13,028,963 - 1,372,822 14,401,785 0.16% Berovo 8,847,874 1,308,400 5,104,197 15,260,472 0.17% Bogdanci 13,409,819 2,440,243 70,115,865 85,965,927 0.94% Bosilovo 22,214,484 - 8,054,052 30,268,536 0.33% Valandovo 22,261,650 493,782 67,156,822 89,912,254 0.99% Vasilevo 22,707,557 - 6,304,720 29,012,276 0.32% Veles 120,957,696 101,903,814 128,584,491 351,446,001 3.86% Vinica 23,833,216 2,193,883 43,162,065 69,189,165 0.76% Gevgelija 57,473,635 15,027,740 218,700,062 291,201,437 3.20% Gradsko 4,253,646 - 12,558,576 16,812,222 0.18% Delchevo 21,280,807 6,976,048 26,030,220 54,287,075 0.60% Demir Kapija 6,184,414 - 23,250,114 29,434,528 0.32% Dojran 4,967,714 708,781 11,478,695 17,155,191 0.19% Zrnovce 2,338,963 - 2,192,602 4,531,565 0.05% Kavadarci 20,829,933 30,925,610 63,650,893 115,406,436 1.27% Karbinci 1,302,736 - - 1,302,736 0.01% Konche 2,609,646 - 296,832 2,906,478 0.03% Kochani 69,285,163 10,185,103 49,489,212 128,959,477 1.42% Kratovo 13,460,159 897,551 3,978,438 18,336,148 0.20% 55

North Macedonia Gas Distribution – FS Update

Demand IRF Demand CRF Demand OF Total Share in Municipality (kWh) (kWh) (kWh) Demand total (kWh) consumption Kriva Palanka 20,618,023 4,083,856 22,382,490 47,084,369 0.52% Kumanovo 194,838,001 41,612,094 52,079,376 288,529,470 3.17% Lipkovo 19,632,165 - 2,617,972 22,250,136 0.24% Lozovo 2,200,979 - 1,340,201 3,541,180 0.04% Makedonska 7,692,404 2,566,718 5,588,364 15,847,486 Kamenica 0.17% Negotino 23,580,561 2,387,195 20,442,693 46,410,449 0.51% Novo Selo 10,916,751 - 4,356,180 15,272,931 0.17% Pehcevo 6,922,687 552,297 3,672,806 11,147,789 0.12% Prilep 273,353,424 57,212,265 150,643,878 481,209,568 5.28% Probishtip 21,254,574 10,881,772 21,660,847 53,797,194 0.59% Radovish 26,901,950 3,628,185 24,443,156 54,973,291 0.60% Rankovce 2,450,456 - 858,835 3,309,291 0.04% Rosoman 4,509,793 - 3,197,874 7,707,667 0.08% Sveti Nikole 32,241,719 2,010,079 31,049,116 65,300,914 0.72% Staro 2,549,954 - 439,303 2,989,257 Nagorichane 0.03% Strumica 79,322,956 21,380,817 91,967,903 192,671,676 2.11% Chashka 2,830,843 - 1,968,328 4,799,171 0.05% Cheshinovo 10,584,061 - 3,168,850 13,752,911 Obleshevo 0.15% Shtip 111,539,500 39,795,920 73,053,351 224,388,772 2.46% Bitola 195,927,608 242,174,795 318,861,251 756,963,655 8.31% Bogovinje 69,387,291 - 21,286,978 90,674,269 1.00% Brvenica 35,479,106 - 2,930,975 38,410,081 0.42% Vevchani 2,972,146 - 1,837,722 4,809,869 0.05% Vrapchiste 82,526,069 - 11,251,649 93,777,718 1.03% Gostivar 120,187,836 21,610,545 71,125,909 212,924,290 2.34% Debar 36,191,026 2,875,559 16,243,986 55,310,571 0.61% Debarca 16,406,725 - 304,748 16,711,473 0.18% Demir Hisar 5,320,649 - 5,178,076 10,498,725 0.12% Dolneni 1,066,038 - 179,419 1,245,456 0.01% Zhelino 22,432,771 - 2,438,132 24,870,903 0.27% Jegunovce 13,813,802 - 11,582,499 25,396,302 0.28% Kichevo 143,141,810 16,715,485 40,465,628 200,322,924 2.20% Krivogashtani 4,197,971 - 356,199 4,554,169 0.05% Krushevo 11,619,095 47,996 10,316,574 21,983,665 0.24% Mavrovo I 8,527,705 - 2,263,842 10,791,547 Rostushe 0.12% Makedonski Brod 17,812,011 76,515 7,302,076 25,190,602 0.28% Mogila 3,796,392 - 137,282 3,933,674 0.04% Novaci 3,293,225 - 1,252,014 4,545,239 0.05% Ohrid 128,830,244 54,059,059 108,850,409 291,739,712 3.20% Plasnica 3,846,202 - - 3,846,202 0.04% 56

North Macedonia Gas Distribution – FS Update

Demand IRF Demand CRF Demand OF Total Share in Municipality (kWh) (kWh) (kWh) Demand total (kWh) consumption Resen 19,202,988 1,707,668 5,455,119 26,365,775 0.29% Struga 123,540,996 87,604,003 79,460,046 290,605,046 3.19% Tearce 31,276,335 246,103 3,388,125 34,910,562 0.38% Tetovo 182,914,087 139,218,164 103,085,205 425,217,457 4.67% Centar Zhupa 1,426,153 - 530,340 1,956,494 0.02% TOTAL 3,469,400,976 1,771,103,799 3,872,656,313 9,113,161,092 100%

3.10.2 Penetration rate The rate by which customers would be connected to the gas distribution network over the years was determined by analysing the equivalent rate in other jurisdictions. In particular, it was assumed that the penetration rate for North Macedonian municipalities follows the curves, shown in Figure 15 and Figure 16, for residential and commercial consumers respectively, which represents the yearly increase of number of consumers connected to the grid of the area of Thessaloniki in Greece, since the beginning of its operation.

% Increase of residential customers in Thessaloniki (IRF & CRF) 1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% 0 2 4 6 8 10 12 14 Year from beginning of operation

Figure 15: Penetration rate for residential customers in Thessaloniki

North Macedonia Gas Distribution – FS Update

% Increase of commercial customers in Thessaloniki (OF) 600% 500% 400% 300% 200% 100% 0% 0 2 4 6 8 10 12 14 Year from beginning of operation

Figure 16: Penetration rate for commercial customers in Thessaloniki In the above figures, it is evident that the trend line tends to zero after ten years for both categories of customers. It was, thus, assumed that at the tenth year of operation the penetration will have reached its maximum, i.e. 70% of potential consumers for municipalities of over 30,000 inhabitants and 45% for smaller municipalities, as discussed in the previous section. From that year onwards, it was considered that there would be a 1% increase of demand every year up to the end of the concession. The same penetration rate is considered for municipalities belonging to all three phases of the project, according to the corresponding timing of network construction, with Phase 1 demand starting at the third year of the concession, Phase 2 demand starting at the fourth year of the concession and Phase 3 starting at the seventh year of the concession period. The percentage of annual increase per phase is presented in Table 18.

Table 18: Percentage of yearly increase in number of customers per phase Year Phase 1 Phase 2 Phase 3 IRF & OF IRF & OF IRF & OF CRF CRF CRF 1 ------2 ------3 N/A N/A - - - - 4 475% 243% N/A N/A - - 5 110% 96% 475% 243% - - 6 56% 51% 110% 96% - - 7 36% 30% 56% 51% N/A N/A 8 25% 19% 36% 30% 475% 243% 9 19% 12% 25% 19% 110% 96% 10 14% 8% 19% 12% 56% 51% 11 12% 6% 14% 8% 36% 30% 12 10% 4% 12% 6% 25% 19% 13 1% 1% 10% 4% 19% 12% 14 1% 1% 1% 1% 14% 8% 58

North Macedonia Gas Distribution – FS Update

Year Phase 1 Phase 2 Phase 3 IRF & OF IRF & OF IRF & OF CRF CRF CRF 15 1% 1% 1% 1% 12% 6% 16 1% 1% 1% 1% 10% 4% 17 1% 1% 1% 1% 1% 1% 18 1% 1% 1% 1% 1% 1% 19 1% 1% 1% 1% 1% 1% 20 1% 1% 1% 1% 1% 1% 21 1% 1% 1% 1% 1% 1% 22 1% 1% 1% 1% 1% 1% 23 1% 1% 1% 1% 1% 1% 24 1% 1% 1% 1% 1% 1% 25 1% 1% 1% 1% 1% 1% 26 1% 1% 1% 1% 1% 1% 27 1% 1% 1% 1% 1% 1% 28 1% 1% 1% 1% 1% 1% 29 1% 1% 1% 1% 1% 1% 30 1% 1% 1% 1% 1% 1% 31 1% 1% 1% 1% 1% 1% 32 1% 1% 1% 1% 1% 1% 33 1% 1% 1% 1% 1% 1% 34 1% 1% 1% 1% 1% 1% 35 1% 1% 1% 1% 1% 1%

In conclusion, depending on the population and the phase in which the gas distribution network is expected to be built in each municipality, the total penetration rate, in terms of number of customers compared to the number of potential customers, as sourced from the 2014-FS, is presented in Table 19.

Table 19: Consumer penetration rate by municipality Penetration at the Penetration at the Municipality end of the Municipality end of the concession concession Aerodrom 89% Negotino 59% Butel 89% Novo Selo 56% Gazi Baba 90% Pehcevo 56% Gjorche Petrov 89% Prilep 89% Karposh 89% Probishtip 56% Kisela Voda 89% Radovish 56% Saraj 88% Rankovce 55% Centar 90% Rosoman 56% Chair 88% Sveti Nikole 59% Shuto Orizari 58% Staro Nagorichane 57% Arachinovo 57% Strumica 86% 59

North Macedonia Gas Distribution – FS Update

Penetration at the Penetration at the Municipality end of the Municipality end of the concession concession Zelenikovo 58% Chashka 56% Ilinden 91% Cheshinovo Obl. 55% Petrovec 105% Shtip 89% Sopishte 57% Bitola 89% Studenichani 57% Bogovinje 58% Chucher Sandevo 57% Brvenica 57% Berovo 56% Vevchani 56% Bogdanci 65% Vrapchiste 57% Bosilovo 55% Gostivar 89% Valandovo 64% Debar 55% Vasilevo 55% Debarca 54% Veles 88% Demir Hisar 57% Vinica 58% Dolneni 55% Gevgelija 62% Zhelino 57% Gradsko 65% Jegunovce 59% Delchevo 56% Kichevo 88% Demir Kapija 67% Krivogashtani 55% Dojran 61% Krushevo 57% Zrnovce 57% Mavrovo I Rostushe 55% Kavadarci 89% Makedonski Brod 56% Karbinci 54% Mogila 57% Konche 55% Novaci 58% Kochani 86% Ohrid 86% Kratovo 57% Plasnica 54% Kriva Palanka 59% Resen 55% Kumanovo 88% Struga 85% Lipkovo 57% Tearce 57% Lozovo 58% Tetovo 88% Makedonska Centar Zhupa Kamenica 55% 55%

3.10.3 Incentives to increase demand Typical incentives to facilitate switching and thus increase penetration include offering zero connection costs and discounts in the cost of internal installations. The latter internal can be combined with a favourable financing scheme. In Greece, residential connection costs have been set equal to zero on several occasions to increase penetration. Currently also costs of commercial connections and connections to CHP are set to zero in Greece. In Turkey, during the massive development of distribution networks over the last decade connection costs were also set equal to zero. In both cases however this means that the cost of connection is borne by the concessionaire and subsequently recovered through system use tariffs.

North Macedonia Gas Distribution – FS Update

Increase in network utilisation counterbalanced the lost revenue from connections. In the context of this study we assume that an amount of 100 € is paid by each individual and collective household and € 3.625 per other facility. Regarding internal installations, we draw once more from the Greek experience. In the context of government initiatives to increase energy efficiency and improve air quality (in mainly in the cities of Athens, Thessaloniki) part of the cost of internal installation was paid by funds made available by the so called Partnership Agreement for the Development Framework 2014-2020 programme (co-funded by EU Structural funds). Currently and also through a period of several years, DSOs and suppliers have been providing funds to cover part or the full cost of internal installations. Payback periods have historically been of the order of 18-30 months with zero interest. Other types of incentives include reduced VAT on internal installations and also incentives regarding the cost of gas.

3.11 Benchmarking analysis In order to assess the credibility and completeness of the data used in the present feasibility study, a thorough benchmarking analysis has been performed. Selected indicators have been calculated with the aim to compare all figures related to the investment required for the development of gas distribution networks in North Macedonia and the forecasted demand of natural gas in the municipalities of the country. The comparison has been implemented on the basis of data from Greek gas distribution companies. In particular, 5 different reports have been utilized for data sourcing, namely:  Benchmark 1: 2013 data, Distribution Company, Greece (Confidential)  Benchmark 2: 2016 data, Distribution Company, Greece (Confidential)  Benchmark 3: 2013 data, Distribution Company, Greece (Confidential)  Benchmark 4: 2013 data, Distribution Company, Greece (Confidential)  Benchmark 5: Network Development Plan for the period 2018-2022, Gas Distribution Company of Thessalia-Thessaloniki Key findings of the analysis are detailed in the following sections.

3.11.1 Level of demand Key demand-related indicators are shown in Table 20. The next paragraphs describe each indicator considered and conclusions drawn:  Residential (IRF&CRF) consumers/Population: This indicator is relevant to obtaining insight on the type of consumers connected to the network per unit of area and also on the penetration of natural gas by sector. Our Benchmarks refer to 10-15 years from the beginning of the operation of the distribution companies. As shown in the Table, Benchmarks are of the order of 8-

North Macedonia Gas Distribution – FS Update

10% (with the exception of Benchmark 3 which refers to an excessively populated area with known small penetration). The respective values for North Macedonia (shown here for 35 years from the beginning of the concession are rather in the lower side (just 3-9%). This means that there is substantial room for additional penetration of natural gas than the one foreseen in this study. Note that maximum penetration values here were sourced from the 2014-FS. The implications of a larger penetration is enhanced utilisation of the investment, potentially more favourable return on the investment and also a favourable impact on tariffs.  Residential (IRF&CRF) consumers/km2: This indicator is relevant to obtain insight on type of customers per square kilometer. Larger values of this indicator imply more metres of service lines and risers and a larger number of residential metering devices per meter of low pressure line laid. This means increased capital cost per unit of pipeline. Nevertheless such a check can serve well to assess our assumptions made in this study versus the benchmarks. The number of residential consumers per square kilometer in Greece is of the order of 5-50. The respective values in North Macedonia is from 40 to 128. This means that municipalities in North Macedonia are more densely populated so that longer meters of service lines and risers and number of metering devices per meter of low pressure pipeline are expected. We test this assumption in the next section.  Average annual consumption (MWh)/Residential (IRF&CRF) consumer: We computed an annual consumption in this work based on the demand by customer provided in the 2014-study. We use this indicator to check our assumptions. As shown in the Table, our Benchmarks indicate values of annual consumption in the range from 7-16 MWh/customer. The respective value computed for North Macedonia is 22 MWh/customer which is relatively high. However, it is worthy to note that the annual consumption considered in the CRF category (80 m2 apartments) is 12.28 MWh/consumer, which compares well to the Greek levels.  Commercial (OF) consumers/km2: This indicator provides information on the number of commercial/industrial consumers by unit of area. As commercial/industrial consumers have typically larger consumption than residential customers, a large number of OFs imply higher consumption values and dense locational distribution of OFs can have an impact on pipeline lengths. The number of commercial facilities in North Macedonia per square kilometer exceed the respective of Greece by a factor of 3 to 30. Increased number of OFs implies increased consumption.  Average annual consumption (MWh)/ OF consumer: Average annual consumption in North Macedonia (also sourced from the 2014-FS) is 360 MWh/customer (heat only). The 2014-FS study does not distinguish between large and small OFs. Respective values for small OFs in our benchmarks are of the order 35 to 75 MWh/customer. For large OFs, the respective values are of the order 62

North Macedonia Gas Distribution – FS Update

of 2500 to 5000 MWh/customer. This difference is due to the fact that large OFs typically use natural gas for other processes in addition to heat, something not considered in the 2014-FS. This may have an important positive impact on the feasibility of the network development. This means that, as already mentioned elsewhere in this document, commercial/industrial demand in this study is underestimated. As also discussed in the context of residential consumers, larger levels of consumption are related to enhanced utilisation, more favourable investment conditions and implications both on the investment return and on tariffs.

North Macedonia Gas Distribution – FS Update

Table 20: Benchmarking analysis results regarding the level of natural gas demand

Benchmarks Scenarios

Indicator BO BO Baseline Baseline BA-FPOL BA-FPOL CAPEX30 CAPEX30 BA_COMBO BA_COMBO BA_U50_R20 BA_U50_R20 Benchmark Benchmark 1 Benchmark 2 Benchmark 3 Benchmark 4 Benchmark 5 CAPEX30_COM 1 Population / Distribution Area 52 52 986 301 103 79 79 98 79 98 98 2 Residential (IRF&CRF) consumers / Population 8% 10% 2% 15% 15% 7% 7% 9% 3% 3% 4% 3 Residential (IRF&CRF) consumers / km2 4.28 5.11 19.73 46.49 15.94 90 90 128 44 44 63 5 Average annual consumption (MWh) / Residential 9.39 9.78 16.34 7.23 9.33 21.99 21.99 21.99 21.99 21.99 21.99 (IRF&CRF) consumer 6 Commercial (OF) consumers / km2 0.12 0.12 1.63 1.47 0.34 4 4 5 2 2 2 7 Average annual consumption (MWh) / Small 44.08 46.57 75.46 36.36 49.28 360.36 360.36 360.36 360.36 360.36 360.36 Commercial (OF) consumer 8 Average annual consumption (MWh) / Large 3,303 2,114 5,486 2,458 2,833 360.36 360.36 360.36 360.36 360.36 360.36 Commercial (OF) consumer

North Macedonia Gas Distribution – FS Update

3.11.2 Level of investment Key investment-related indicators are shown in Table 21.  Population/Distribution Area: This indicator measures population density. Large values imply a high need for low pressure pipelines, service lines and risers, however comparatively lower lengths of medium pressure pipelines. Our benchmarks refer to inhabitants per km2 ranging from 52 to 986. The respective average indicator for the Baseline scenario in North Macedonia23 is 487 inhabitants per km2 with a maximum of 16193 in Chair and values below 50 in 36 municipalities24. In addition to Chair, Aerodrom, Karposh, Kisela Voda, Centar and Shuto Orizari have more than 1000 inhabitants per square km. The municipalities in the range below 50 inhabitants per km2 represent 18% of the population. The municipalities at the other end (over 1000 inhabitats/ km2) correspond to another 16%. This means that the remaining municipalities (76% of the population) are within the range of our benchmarks (from 52-986) with 50% of the population living in municipalities with 100-1000 inhabitants per square kilometer. Thus, although we acknowledge the uncertainties in the comparisons to follow, it is clear that there is an identifiable common base for us to assess trends in pipeline lengths. We note the following. All values shown in Table 21 with our scenarios are average values over the total number of the municipalities considered in each scenario. Medium pressure pipelines  The length of medium pressure pipelines per square kilometer in the Baseline scenario, as sourced from the 2014-FS and used here, is 152 m/km2. This is higher than the respective values in Greece (max 35 m/km2, Benchmark 4) by over a factor of 4. Given the fact that overall municipalities in North Macedonia are at least as densely populated than the respective Greek ones, one would have expected that medium pressure pipeline lengths in North Macedonia per km2 would be at least equal to the Greek ones. This causes a significant uncertainty in the calculated CAPEX values presented in Section 3.7. It is clear that further evaluation shall be necessary, in a detailed technical feasibility study to be undertaken by a potential concessionaire. Such an evaluation was out of scope of the present work. We note however that the diverging trend from our benchmark becomes more pronounced in Phases II and III.  The length of medium pressure pipelines per customer in the Baseline Scenario is 11 m/customer. The respective values for our Benchmarks are in the range from 0.7-1.1 m/customer. Once again, we note the major difference in pipeline length between Greece and North Macedonia. As this study did not include

23 Average of all indicators computed separately 24 Zelenikovo, Petrovec, Sopishte, Chucher Sandevo, Berovo, Valandovo, Vinica, Gevgelija, Gradsko, Delchevo, Demir Kapija, Dojran, Kavadarci, Karbinci, Konche, Kratovo, Kriva Palanka, Lozovo, Makedonska Kamenica (24), Negotino, Novo Selo, Pehcevo, Probishtip, Rankovce , Rosoman, Sveti Nikole, Staro Nagorichane, Chashka, Debarca, Demir Hisar, Dolneni, Mavrovo I Rostushe, Makedonski Brod, Mogila, Novaci, Resen. 65

North Macedonia Gas Distribution – FS Update

an on-site assessment but instead the 2014-FS design was used as input we are not able to offer further justification on the discrepancies.  The CAPEX per customer in the Baseline scenario for medium pressure pipelines is 2,784 €/customer. This is a factor of 10 above all our Benchmarks and mostly due to the longer length of the medium pressure network per customer. Large discrepancies persist in all scenarios. Low pressure pipelines  The length of low pressure pipelines per square kilometre for Benchmark 3 is 2 492.4 m/km . The respective value from the 2014-FS study as considered in the Baseline scenario is 448 m/km2. We consider this a fair convergence given all uncertainties. In the remaining scenarios of lower penetrations (BA_U50_R20, BA_COMBO, CAPEX30_COMBO) values decrease by about a factor of 2. We note consistency of these scenarios with Benchmark 4 (268.6 m/km2). On the other hand, an increase in this specific indicator appears in the BA_FPOL scenario which is due to the fact that the municipalities concerned by this scenario are generally the most densely populated in the country and, thus, the LP network is generally more lengthy in order to cover the demand.  The length of low pressure pipelines per customer in the Baseline Scenario is 23 m/customer. This compares remarkably well to Benchmark 3 which also happens to be 23 m/customer. The remaining Benchmarks yield values in the range from 5 to 12 m/customer. Thus one may argue that the 23 m/customer for the Baseline scenario is an upper limit. Remaining scenarios with lower penetrations yield values in the range of 17-18 m/customer.  The CAPEX per customer in the Baseline scenario for low pressure pipelines is 2,153 €/customer. The value is in line with the values of Benchmark 3 (2,166 €/customer). Reduction in required network lengths in the remaining of the scenarios result in equivalent reductions in the capex. Service Lines, Meters and Risers  The CAPEX for service lines, meters and risers per consumer for all scenarios is in good agreement with the Benchmarks, with the Greek data being on the higher side as far as service lines are concerned. Total Costs  The total network cost per customer for the Baseline scenario is a factor of 2 larger than Benchmark 2. The difference between the network cost per customer for all scenarios as compared to the benchmarks is of the order of 1.5 to 3 with the current estimates always in excess to the Benchmarks. Τhe main reason for this difference is the length of the medium pressure pipelines. This is also demonstrated in Figure 17 which presents the breakdown between different CAPEX components of the Baseline scenario compared to an average of all corresponding components’ costs for all benchmarks.

North Macedonia Gas Distribution – FS Update

Table 21: Benchmarking analysis results regarding the level of investment

Benchmarks Scenarios

Indicator Baseline Baseline BA-FPOL CAPEX30 CAPEX30 BA_COMBO BA_COMBO BA_U50_R20 BA_U50_R20 Benchmark 1 1 Benchmark 2 Benchmark 3 Benchmark 4 Benchmark 5 Benchmark CAPEX30_COMBO 1 Population / km2 52 52 986 301 104 487 487 678 487 678 678 Medium Pressure Network Indicators 2 MP network length (m) / km2 4.7 5 N/A 35.2 11.6 152 152 209 70 70 98 3 MP network length (m) / Consumer 1.07 0.95 N/A 0.73 0.71 11 11 7 10 7 7 4 MP CAPEX (€) / Consumer 277 247 N/A 190 184 2,784 1,949 1,852 2,666 1,784 1,249 Low Pressure Network Indicators 5 LP network length (m) / km2 53.5 59.0 492.4 268.6 112.1 448 448 623 203 203 287 6 LP network length (m) / Consumer 12.16 11.27 23.05 5.6 6.88 23 23 19 22 18 18 7 LP CAPEX (€) / Consumer 1,143 1,059 2,166 526 647 2,153 1,507 1,761 2,022 1,699 1,189 Indicators relevant to Service Lines, Meters and Risers 8 Service lines CAPEX (€) / Consumer 1,950 1,942 2,080 1,960 1,935 1,711 1,239 1,635 1,711 1,635 1,196 9 Meters & Risers (€) / Consumer 373 373 380 374 373 379 379 381 379 381 381 Overall Indicators 10 Total CAPEX (€) / Consumer 3,760 3,636 4,657 3,058 3,148 7,219 5,073 5,717 7,653 5,823 4,015 11 % CAPEX for Service lines + Meters and 62% 64% 53% 76% 73% 38% 41% 43% 38% 43% 47% Risers / total CAPEX

North Macedonia Gas Distribution – FS Update

2020-FS CAPEX breakdown Average Benchmark CAPEX (Baseline) breakdown

1% 0%

13% 11% 6% 23% 26%

34% 29% 57%

MP MP LP LP Service lines Service lines Meters & Risers Meters & Risers Pressure reduction stations Pressure reduction stations

Figure 17: Breakdown of total costs comparison of Baseline scenario vs. benchmarks

North Macedonia Gas Distribution – FS Update

4 Financial analysis This chapter presents our financial analysis on the Baseline and Alternative Scenarios. Capital and operational costs are calculated according to the assumptions of Section 3. Revenues are calculated and analysed based on: a) The projected volume of gas consumption for each consumer category and b) The evolution of distribution tariffs. These have been calculated according to the methodology of the Energy Regulatory Commission (ERC) as approved in December 2018. The financial analysis presented in this chapter is carried out to: a) Assess the project’s consolidated profitability. This assessment is achieved by calculating the Internal Rate of Return (IRR) and Project NPV b) Verify the financial sustainability throughout the concession period. A sensitivity analysis is conducted with a view to identify factors influencing the feasibility of the project. Scenarios considered are those of Table 6. A risk assessment and mitigation plan has been further developed to enhance opportunities and reduce threats to project objectives.

4.1 Analysis of revenues and costs for each year of duration of the PPP project, including methodology for establishment of price for public service that end users shall pay As already discussed in previous sections of this document, the project concerns the development of a natural gas distribution network in the region of North Macedonia through a public private partnership. The development includes the construction, operation and maintenance of the medium pressure distribution network, the low pressure network, the pressure reduction stations, as well as the service lines for the connection of individual households (IRF), collective households (CRF) and other facilities per municipality of North Macedonia.

The length of the medium pressure network in the Baseline scenario is estimated at 672 Km, while the length of the low pressure distribution network is estimated at 2,335 km. The total cost of the investment, which refers to the construction of the distribution network is estimated at € 744.92 mn. The investment cost constitutes a critical parameter for the development of the natural gas distribution network in North Macedonia as it forms the basis for the calculation of the revenues, as well as for the estimation of the operating expenses and impacts the duration of the concession period. The financial analysis is spread over a concession period of 35 years, starting in year 2021 and ending in year 2055,

Table 22.

North Macedonia Gas Distribution – FS Update

Table 22: Main parameters of the BASELINE scenario Parameters Values Medium Pressure Network [km] 672 Low Pressure Network [km] 2,335 Total CAPEX [mn €] 744.92 Concession period [no. of years] 35

4.2 Feasibility analysis of the operational revenues, operational costs, capital expenditures and cash flow analysis

4.2.1 Investment Costs for the BASELINE Scenario Unit costs and assumptions have been detailed in Section 3. Elementary cost items by year in the 35 year period are included in Annex I, Table I-9. The main distribution network is assumed to be completed in the first 8 years as described in Section 3 with Phase 1 constructed in between Years 1 and 4 (e.g. 2021- 2024), Phase 2 between Years 2 – 5 (e.g. 2022-2025) and Phase 3 between Years 5 to 8 (2025-2028). Assumptions regarding construction and penetration have also been presented in Section 3. Capital costs are shown in Table 23, Table 24 and Table 25. It is useful to note that there is no construction of Phase 2 connections for scenario BA-COMBO and CAPEX30-COMBO. We also note that the CAPEX index per customer for Phase 1 is remarkably close to the benchmarks (Section Error! Reference source not found.). Note that Phase 1 customer connect to the network on Year 3.

Table 23: CAPEX by Phase and capital costs by customers for each Phase

BASELINE Phase 1 Phase 2 Phase 3

CAPEX [mil Euros] 528.2 73.7 142.9

no. connected 188,481 22,559 38,050 customers (Y35) CAPEX [Euros] / connected 2,803 3,270 3,756 customer]25 Table 24: CAPEX by Scenario CAPEX per Scenario and Phase [mil Phase 1 Phase 2 Phase 3 Euros]

CAPEX30 393.3 54.7 104

25 Capex per customer refers to the total cost divided by the total number of customers. This value is different than the value of Table 21, where we show the average capex/customer (averaged over the municipalities). 70

North Macedonia Gas Distribution – FS Update

BA-FPOL 498.9 73.1 118.3

BA_U50_R20 235.7 36.8 62.2

BA-COMBO 266.6 - 56.7

CAPEX30-COMBO 199.1 - 41.5

Table 25: CAPEX by Connected Customer for each Phase25

CAPEX [Euros] / Phase 1 Phase 2 Phase 3 connected customer]

CAPEX30 2,087 2,428 2,734

BA-FPOL 2,681 3,254 3,431

BA_U50_R20 2,608 3,269 3,542

BA-COMBO 2,632 - 3,381

CAPEX30-COMBO 1,966 - 2,475

70 100% 90% 60 80% €] 50 70%

40 60% 50% 30 40% 30% capital costs [mil [mil costs capital 20 20% 10 10% 0 0%

Medium pressure pipelines Low pressure pipelines MRS Service Lines Risers and low pressure MRS [%] completed

Figure 18 Evolution of capital costs in the 35-year concession period (BASELINE Scenario) The cost of the investment forms the value of the Intangible Asset which is built up and depreciated over the concession period. It is understood that the investment will be also added at cost in the Regulated Asset Base (RAB) of the state-owned distribution 71

North Macedonia Gas Distribution – FS Update network and form the base for the calculation of the Allowed Revenue according to the methodology of Energy Regulatory Commission (ERC) with the application of the WACC.

4.2.2 Weighted Average Cost of Capital (WACC) In general practice, the WACC calculation methodology is based on CAPM, which is the most internationally recognized approach26, as well as in international valuation standards27. Most countries in the EU follow a similar approach28 regarding WACC calculation. The Weighted Average Cost of Capital (WACC) applies to the Regulated Asset Base (RAB) for calculating the Allowed Revenue (AR). The latter is further used for the calculation of the distribution tariffs. The specific WACC (real, pre-tax) has been calculated according to the methodology of the ERC’s Decision as of 24.12.2018 for the construction of the natural gas distribution network in North Macedonia.

Table 26:: WACC calculation parameters Parameters Values

Equity beta (β) 1,00 Rm 6,11% Risk-free rate (rf) 3,00% MRP ( = Rm – Rf ) 3,11% Debt borrowing rate (i) 4,00% Income Tax (t) 10% (1-t) 0,90 Gearing ( g = D / (D+E) ) 70,0% (1-g) ( = E / (D+E) ) 0,77 Cost of equity post-tax real ( Ke = Rf + (MRP) *β ) 6,42% WACC pre-tax, real ( = (1-Debt)*Ke / (1-Tp) – Debt *Kd ) 4,94%

In particular, the following were considered:  Beta of equity (market portfolio) is determined as equal to one (1) according to the Energy Regulatory Commission (ERC)  The average revenue of risk investment (Rm) is determined as equal to the average interest rates for long-term loans (in EUR, USD and MKD), published by the National Bank of the Republic of North Macedonia  The market risk premium (MRP) is determined as the difference between “average revenue of risk investments (Rm) and revenue of risk-free investments (Rf)

26 See related: https://assets.publishing.service.gov.uk/media/544e0c0640f0b61312000007/Paul_Hunt_sub mission_on_WACC_for_Network_Firms.pdf

27 https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-wacc-formula/

28 https://www.ceer.eu/documents/104400/-/-/9665e39a-3d8b-25dd-7545-09a247f9c2ff

North Macedonia Gas Distribution – FS Update

 The risk-free rate (rf) of return is determined as equal to the return on bonds issued by the Government of the Republic of North Macedonia  Debt borrowing rate is estimated at 4.00%, assuming loan financing from European Bank or similar financial institutions  The tax rate is set at 10.00% according to the Government of the Republic of North Macedonia  The Gearing ratio is based on the estimations of equity and bank loan evolution at the time of the proposal The above assumptions resulted in a WACC of 4.94%.

4.2.3 Regulated Asset Base for the BASELINE scenario Distribution of natural gas is a regulated activity according to the Energy Law. The assets used for performing the regulated activity, i.e. the distribution of natural gas, are Regulated Assets, with the exception of assets acquired from capital contributions such as grants, and unjustifiable investments and form the Regulated Asset Base (RAB). The methodology for calculation of the maximum allowed revenue for distribution of natural gas has been adopted by the Energy Regulatory Commission (ERC) on 24.12.2018. The ERC decision determines that the RAB is calculated annually as the average undepreciated value of the Regulated Assets at the first and last date of each year

푹푨푩풔풕풂풓풕푹푨푩풆풏풅 푹푨푩풂풗 = 풕 풕 +퐴푉푆푡 풕 ퟐ Where 푅퐴퐵 average value of assets used for performing the regulated activity (regulated assets) in year t; 푅퐴퐵 value of the assets for performing the regulated activity in the beginning of year t; 푅퐴퐵 value of the assets for performing the regulated activity at the end of year t . This is calculated as the sum of 푅퐴퐵 plus any additional investments minus the depreciation of existing assets. We have not taken into account any grants that would also need to be subtracted. 퐴푉푆푡 value of natural gas stock in grid in year t, calculated at average purchase price in year t

The calculation of the depreciation is made over the useful life of the tangible assets of the network. More specifically, for the fixed assets (pipelines) of the distribution network (MP, LP) and the service lines a useful life of 40 years has been applied while the useful life of the rest of the equipment (Meters and Pressure reduction stations) is set at 20 years, according to the annual depreciation rates determined by the Nomenclature of Depreciation Assets and also based on the practice applied by Greek natural gas distribution companies.

North Macedonia Gas Distribution – FS Update

The average RAB is the base on which the required return, as defined by WACC, is applied. The average RAB is calculated from Y2 of the concession (e.g. 2022 in our example) onwards.

Table 27: Evolution of the RAB (in mn €) year Annual additions additions (A + B) 2/ + (A Regulated Regulated Investment Investment Assets EoY Assets EoY Assets BoY AssetsBoY RAB End [B] [B] RABEnd Depreciation Average RAB Average RAB RAB Start [A] RAB Start

2021 0.00 23.83 23.83 0.00 0.00 23.83 n.a. 2022 23.83 62.42 86.25 23.83 0.60 85.65 54.74 2023 86.25 60.97 147.22 85.65 2.20 144.42 115.04 2024 147.22 64.07 211.29 144.42 3.76 204.73 174.58 2025 211.29 55.53 266.82 204.73 5.50 254.76 229.75 2026 266.82 65.95 332.77 254.76 7.08 313.63 284.20 2027 332.77 62.03 394.80 313.63 8.97 366.69 340.16 2028 394.80 58.71 453.51 366.69 10.74 414.66 390.68 2029 453.51 48.46 501.97 414.66 12.43 450.69 432.68 2030 501.97 44.61 546.58 450.69 13.86 481.44 466.07 2031 546.58 40.44 587.02 481.44 15.17 506.71 494.08 2032 587.02 36.14 623.16 506.71 16.37 526.48 516.60 2033 623.16 19.70 642.86 526.48 17.45 528.73 527.61 2034 642.86 15.75 658.61 528.73 18.01 526.47 527.60 2035 658.61 13.85 672.46 526.47 18.45 521.87 524.17 2036 672.46 8.85 681.31 521.87 18.84 511.88 516.88 2037 681.31 4.47 685.78 511.88 19.10 497.25 504.57 2038 685.78 4.23 690.01 497.25 19.23 482.25 489.75 2039 690.01 3.99 694.00 482.25 19.36 466.88 474.57 2040 694.00 2.95 696.95 466.88 19.48 450.35 458.62 2041 696.95 2.98 699.93 450.35 19.57 433.76 442.06 2042 699.93 3.01 702.94 433.76 19.67 417.10 425.43 2043 702.94 3.04 705.98 417.10 19.67 400.47 408.79 2044 705.98 3.07 709.05 400.47 19.70 383.84 392.16 2045 709.05 3.10 712.15 383.84 19.52 367.42 375.63 2046 712.15 3.13 715.28 367.42 19.24 351.31 359.37 2047 715.28 3.16 718.44 351.31 18.85 335.62 343.47 2048 718.44 3.19 721.63 335.62 18.51 320.30 327.96 2049 721.63 3.23 724.86 320.30 18.17 305.36 312.83 2050 724.86 3.26 728.12 305.36 17.84 290.78 298.07 2051 728.12 3.29 731.41 290.78 17.55 276.52 283.65 2052 731.41 3.32 734.73 276.52 17.27 262.57 269.55 2053 734.73 3.36 738.09 262.57 17.02 248.91 255.74 2054 738.09 3.39 741.48 248.91 17.01 235.29 242.10 74

North Macedonia Gas Distribution – FS Update year Annual additions additions (A + B) / 2 + (A Regulated Regulated Investment Investment Assets EoY EoY Assets Assets BoY AssetsBoY RAB End [B] [B] RABEnd Depreciation Average RAB Average RAB RAB Start [A] RAB Start

2055 741.48 3.42 744.90 235.29 17.02 221.69 228.49 Values at 744.9 523.2 221.69 Y35

At the end of the concession period, the undepreciated value of the Regulated Assets is expected to amount to € 221.70 mn for the Baseline Scenario.

4.2.4 Operational Expenditures for the BASELINE Scenario Operating expenses may be divided into two broad categories: employee and variable expenses. a) Employee expenses are calculated based on the number of Full Time Equivalents (FTEs) per year over a fixed annual gross salary (€ 7,500). The value of the annual gross salary stems from the Statistical Office of N. Macedonia for the average annual salary. The number of employees is estimated based on Greek natural gas distribution companies according to network length. The estimated number of FTEs in the first year of the operation period is zero and gradually increases through the operation year, reaching the maximum of 293 FTEs in year 2039 until the end of the concession period. b) Variable expenses include third party expenses, rents and leases, utilities (water supply expenses, electricity cost, heating etc.) and assets insurance. Variable expenses re estimated as a percentage of the undepreciated value of the CAPEX (4,28%) based on Greek natural gas distribution companies until year 13 of the concession. From year 13 onwards a constant value has been assumed. A Public Authority Fee may also be included in the operating expenses. Such a fee could be of the order of 1% on the annual revenue. We note that Art.9 of the LCPPP stipulates: “When the concessionaire or private partner has an obligation to pay a concession compensation to the concession grantor or public partner, the minimum amount of the compensation shall be determined in the contract announcement, on the basis of a feasibility study on the justification for granting a concession of goods of general interest or the public- private partnership contract, unless otherwise provided by a special law.” Unlike the concession of goods of general interest, such as the water or mineral raw materials, where the concession fee is mandatory and determined in special laws, in this case the fee is optional. Clearly, although from a legal point of view nothing prevents the public partner to introduce such fee / payment obligation, its introduction is an additional item to be considered in the scope of our analysis. It is understood that the introduction of a fee is within the scope of this tender. Table 28 summarizes the operating expenses as calculated for the Baseline scenario.

North Macedonia Gas Distribution – FS Update

Table 28: Operating Expenses of the natural gas network (in mn €) Year Employee Total Opex Public Total OPEX Variable Expenses without fee Authority fee with fee Expenses (B) (A) (TO=A+B) (C) (TO+C) 2021 - 1.02 1.02 - 1.02 2022 0.22 3.66 3.88 - 3.88 2023 0.37 6.16 6.53 0.03 6.56 2024 0.53 8.71 9.24 0.11 9.35 2025 0.70 10.81 11.51 0.20 11.71 2026 0.93 13.27 14.2 0.29 14.48 2027 1.12 15.47 16.59 0.37 16.95 2028 1.31 17.43 18.73 0.44 19.17 2029 1.48 18.85 20.33 0.51 20.84 2030 1.63 20.04 21.67 0.57 22.24 2031 1.76 20.97 22.73 0.62 23.36 2032 1.88 21.64 23.52 0.67 24.19 2033 1.98 21.85 23.83 0.67 24.50 2034 2.07 22.00 24.06 0.68 24.74 2035 2.14 22.09 24.23 0.70 24.92 2036 2.16 22.09 24.25 0.71 24.96 2037 2.18 22.09 24.27 0.71 24.98 2038 2.19 22.09 24.28 0.72 25.00 2039 2.20 22.09 24.29 0.73 25.02 2040 2.20 22.09 24.29 0.74 25.03 2041 2.20 22.09 24.29 0.74 25.03 2042 2.20 22.09 24.29 0.75 25.04 2043 2.20 22.09 24.29 0.76 25.05 2044 2.20 22.09 24.29 0.77 25.06 2045 2.20 22.09 24.29 0.77 25.06 2046 2.20 22.09 24.29 0.78 25.07 2047 2.20 22.09 24.29 0.79 25.08 2048 2.20 22.09 24.29 0.80 25.09 2049 2.20 22.09 24.29 0.80 25.09 2050 2.20 22.09 24.29 0.81 25.10 2051 2.20 22.09 24.29 0.82 25.11 2052 2.20 22.09 24.29 0.83 25.12 2053 2.20 22.09 24.29 0.84 25.13 2054 2.20 22.09 24.29 0.85 25.14 2055 2.20 22.09 24.29 0.85 25.14 Total 62.01 665.78 21.43 749.22 Average 1.77 19.02 0.61 21.41

The average total cost for the distribution network during the concession period is approximately € 21.41 mn per year and includes the following:  € 1.77 mn approximately per year for employee expenses, which consists the wages of the management team and other administrative employees for the construction of the new distribution network  € 19.02 mn approximately in variable costs  € 0.61 mn approximately per year for Public Authority fee

North Macedonia Gas Distribution – FS Update

4.3 Transactional analysis based on projected cash flow and possibilities for financing the capital investment

4.3.1 Financing Scheme for the BASELINE Scenario All capital needs required for the implementation of the project will be financed using equity and loan capital, with gearing ratio Equity to Debt 30:70.

Table 29:: Financing Scheme Parameters Values Total Investment cost (in mn €) 744.92 Equity (in mn €) 223.48 Bank loan (in mn €) 521.44 Interest rate 4.00%

The bank debt will be disbursed in tranches in the first four years of the development and is expected to be fully repaid in a total of 25 years. The debt repayment is assumed to be made with equal annual instalments over a 21 years period, after a grace period of 4 years. The effect of 20 year total tenor would result in a funding gap of € 128 mn.

Table 30: Bank debt evolution (in mn €) Year Debt Additions Debt Debt Interest balance repayment balance EoY BoY 2021 - 26.07 - 26.07 1.04 2022 26.07 78.22 - 104.29 1.26 2023 104.29 78.22 - 182.50 4.17 2024 182.50 338.94 - 521.44 7.30 2025 521.44 - -24.83 496.61 20.86 2026 496.61 - -24.83 471.78 19.86 2027 471.78 - -24.83 446.95 18.87 2028 446.95 - -24.83 422.12 17.88 2029 422.12 - -24.83 397.29 16.88 2030 397.29 - -24.83 372.46 15.89 2031 372.46 - -24.83 347.63 14.90 2032 347.63 - -24.83 322.80 13.91 2033 322.80 - -24.83 297.97 12.91 2034 297.97 - -24.83 273.14 11.92 2035 273.14 - -24.83 248.31 10.93 2036 248.31 - -24.83 223.48 9.93 2037 223.48 - -24.83 198.64 8.94 2038 198.64 - -24.83 173.81 7.95 2039 173.81 - -24.83 148.98 6.95 2040 148.98 - -24.83 124.15 5.96 2041 124.15 - -24.83 99.32 4.97 2042 99.32 - -24.83 74.49 3.97 2043 74.49 - -24.83 49.66 2.98 2044 49.66 - -24.83 24.83 1.99 2045 24.83 - -24.83 - 0.99 Total 521.44 -521.44 243.21 77

North Macedonia Gas Distribution – FS Update

4.3.2 Revenues Revenues include two categories: a) Distribution revenues, derived by the multiplication of the expected volumes distributed through the network per consumer, times the tariff for each consumer segment serviced by the distribution networks and b) Connection revenues, derived by the calculation of a specific charge per new connection. The tariff calculation was performed using the methodology by Energy Regulatory Commission (ERC) on 24.12.2018. For the purposes of estimating the revenues during the reference period, a proprietary financial model was used.

4.3.2.1 Distribution tariff calculation – Allowed Revenue for the Baseline Scenario Natural gas distribution is an activity regulated by the ERC so as to allow the DSO to recover the justified costs and earn a return on the Regulatory Asset Base (RAB) based on the contracted distribution capacity and the expected distributed volumes. This implies, as stated, the calculation of the annual average RAB, based on the annual undepreciated balance of the asset’s cost, the application of the approved WACC, the addition of the annual depreciation of the investment and the OPEX related to the project.

Table 31: Estimation of the allowed revenue (in mn €) Return on Annual OPEX (no Allowed RAB @ Depreciation Year Average fee) Revenue 4,94% (B) RAB (C) (A + B + C) (A) 2021 - - - 1.02 1.02 2022 54.75 2.70 0.60 3.88 7.18 2023 115.04 5.68 2.20 6.53 14.42 2024 174.58 8.62 3.76 9.24 21.63 2025 229.75 11.35 5.50 11.51 28.36 2026 284.20 14.04 7.08 14.20 35.32 2027 340.17 16.81 8.97 16.59 42.36 2028 390.68 19.30 10.74 18.73 48.77 2029 432.68 21.38 12.43 20.33 54.14 2030 466.07 23.03 13.86 21.67 58.55 2031 494.08 24.41 15.17 22.73 62.31 2032 516.59 25.52 16.37 23.52 65.42 2033 527.60 26.07 17.45 23.83 67.35 2034 527.59 26.06 18.01 24.06 68.13 2035 524.16 25.90 18.45 24.23 68.57 2036 516.87 25.54 18.84 24.25 68.62 2037 504.56 24.93 19.10 24.27 68.29 2038 489.75 24.20 19.23 24.28 67.71 2039 474.56 23.44 19.36 24.29 67.09 2040 458.61 22.66 19.48 24.29 66.43 2041 442.05 21.84 19.57 24.29 65.70 2042 425.42 21.02 19.67 24.29 64.97

North Macedonia Gas Distribution – FS Update

2043 408.78 20.20 19.67 24.29 64.16 2044 392.15 19.37 19.70 24.29 63.36 2045 375.63 18.56 19.52 24.29 62.37 2046 359.36 17.75 19.24 24.29 61.28 2047 343.47 16.97 18.85 24.29 60.11 2048 327.97 16.20 18.51 24.29 59.01 2049 312.83 15.46 18.17 24.29 57.92 2050 298.07 14.73 17.84 24.29 56.86 2051 283.65 14.01 17.55 24.29 55.85 2052 269.55 13.32 17.27 24.29 54.88 2053 255.75 12.63 17.02 24.29 53.95 2054 242.11 11.96 17.01 24.29 53.26 2055 228.50 11.29 17.02 24.29 52.60 Total 616.93 523.22 727.79 1,867.94 Average 17.63 14.95 20.79 53.37

This is the basis for the tariff calculation, which is then applied to all consumers’ categories. Subsequently, the final revenue per consumer category is calculated based on the resulting pricing and consumption volume projected from the number of users and unit consumption.

Table 32: Levelized tariff calculation Total Concessio (in mn €) n Period Allowed revenue 1,867.94 Total estimated natural gas distribution volumes (TWh) over concession 223.64 period Sum of PV of Annual Allowed Revenues @ WACC (A) 779.05 Sum of PV of Annual estimated volumes @ WACC (TWh) over concession 83.76 period (B) Levelized Tariff (€ / MWh) for the concession period ( A / B ) 9.30

In addition to the distribution revenues a connection fee of € 100 per individual and collective households and € 3.625 per other facility is calculated for the installation (construction) of the connection to the distribution network. Assumptions on connection costs have been provided by MER. We note that the cost of service lines, risers and metres are already taken into account in the regulatory asset base and thus included in the tariffs. Connection fees are considered as income to the DSO and used for example to cover part of the funding gap identified for the baseline scenario, Table 3729. Nominal connection costs for Greece are shown in Table 34. Costs borne by the investor are eventually recovered

29 The following values provide a summary of the effect of removing the connection fee for residential consumers

Total (in mn €) Funding Gap EBITDA EBITDA marginProject % FCF Project NPV Project IRR Revenue DSCR avg DSCR min Basiline -54,95 2.142,88 1.393,66 65,04% 804,07 87,64 5,13% 0,58 -1,16 Baseline - no residential connection fees -73,56 2.119,04 1.370,06 64,65% 782,66 73,55 4,94% 0,55 -1,21

North Macedonia Gas Distribution – FS Update through system tariffs. Revenues for the concessionaire in the 35-year period due to connection fees are included in Table 33 and amount to just 3% of total revenues. Note that currently (and for a number of years) connection costs have been discounted by 100% to increase penetration, see Section 3.10.3 . As we discuss in Section 3.10.3, setting connection costs to zero has been a common practice to increase penetration. It is useful to note that through the approach adopted here (where the costs of connection are included in the RAB and therefore considered in the tariff), there is a possibility that the DSO over-recovers the required revenue in the later years of the investment. The tariff methodology should explicitly provide for addressing over/and also potential under-recoveries.

Table 33: Total concession revenues of the natural gas distribution network (in mn €) Year Distribution Revenues Connection fee Total Revenues Revenues 2021 - - - 2022 - - - 2023 1.52 1.34 2.86 2024 6.71 4.12 10.83 2025 14.10 5.87 19.97 2026 22.15 6.37 28.52 2027 30.21 6.29 36.50 2028 38.28 6.07 44.34 2029 45.80 5.49 51.29 2030 52.55 4.76 57.31 2031 58.45 4.02 62.47 2032 63.57 3.35 66.92 2033 65.73 1.43 67.16 2034 67.33 1.06 68.39 2035 68.80 0.95 69.75 2036 70.16 0.87 71.03 2037 70.86 0.52 71.38 2038 71.57 0.52 72.10 2039 72.29 0.53 72.82 2040 73.01 0.54 73.55 2041 73.74 0.54 74.28 2042 74.48 0.55 75.02 2043 75.22 0.55 75.77 2044 75.97 0.56 76.53 2045 76.73 0.56 77.30 2046 77.50 0.57 78.07 2047 78.28 0.57 78.85 2048 79.06 0.58 79.64 2049 79.85 0.59 80.44 2050 80.65 0.59 81.24 2051 81.45 0.60 82.05 2052 82.27 0.60 82.87 2053 83.09 0.61 83.70 2054 83.92 0.62 84.54 2055 84.76 0.62 85.38 Total 2,080.09 62.79 2,142.88 Average 59.43 1.79 61.23 80

North Macedonia Gas Distribution – FS Update

90 80 70 €] 60 50 40 30 Revenues [mil 20 10 0

Distribution Revenues Connection fee Revenues Allowed Revenue

Figure 19: Estimated revenues due to distribution and new connections and allowed revenue in the 35- year concession period.

During the 35-year concession period € 2,142.88 mn of total revenues are projected. The majority of the distribution revenues are expected to be generated by Other facilities (44%) i.e. commercial and industrial sectors, 37% from individual households and the remaining 19% from collective households. It is clear that the uncertainties related to the consumption of commercial and industrial facilities affect revenue estimations. This uncertainty would need to be further quantified (and revised) by parties interested in participating in it.

Table 34: Nominal Connection Costs

Connection fee (€) Riser fee (€) Meter fee (€) Nominal fees IRF, CRF OF IRF, CRF OF IRF, CRF OF 1373 - 162 - 480- On a Not EDA Thess 0 162-778 Data not 2406 case applicable available basis 440 – On Not EDA Attikis 440-630 a case 500 0 0 applicable basis30

Table 35 Revenues by consumer category

30 For pressure > 25mbar, no 81

North Macedonia Gas Distribution – FS Update

Consumer

categories (A) (B) (C) (D) (TWh) (TWh) (€/MWh) (€/MWh) x (C) (B) x (D) (A) (in mn €) mn€) (in mn€) (in connection) connection) 35 year period year 35period Total revenues revenues Total Levelised Tariff Tariff Levelised Connection fee fee per Connection connection type (€ / (€ type connection Numbet of consumers consumers of Numbet Aggregate consumption in in consumption Aggregate revenues connection Total Total distribution revenues revenues distribution Total

Individual 94,152 83.624 9.30 777.80 100 9.42 787.21 households Collective 144,191 43.240 9,30 402,18 100 14,42 416.60 households Other 10,747 96.775 9,30 900,11 3.625,00 38.96 939.07 facilities Total 249,090 223.64 n.a. 2,080.09 n.a. 62.79 2,142.88 consumers & revenues

4.3.2.2 Levelized tariff calculation in comparison to the current distribution tariff methodology In the previous section, a levelized tariff was calculated for the 35-year concession period. This tariff is a result of all required revenue in the 35 year period and respective consumption. In principle, subject to no changes in the capital and operational costs, WACC value, financing and other parameters included in the model, this tariff would be valid for 35 years (excluding inflation). By this tariff, and subject to the financing constraints identified, the investor shall recover its costs in the duration of the concession. This is an average tariff (averaged over all types of consumers). Commonly, distribution systems adopt a more customer specific methodology. This means that different tariffs are charged by type of consumer (e.g. residential, commercial, industrial, CHP). The Energy Regulator of North Macedonia has already adopted a methodology to distinguish between consumer categories31 based on a constant multiplied by an average tariff. Other methodologies adopted by European DSO are based on a capacity and a commodity charge. The former relates to the type of meter installed (for non-daily metered customers) or the peak capacity (for daily metered customers). The latter relates to energy consumption. We shall not touch upon options for alternative tariff design as this is beyond the scope of the project. We note however that the distribution tariff methodology adopted by the Regulator in December 2018 sets out a rather different approach regarding the calculation of the average tariff. In the ERC methodology, tariffs are calculated on an annual basis as the ratio of the required revenue on a specific year divided by the estimated

31 https://www.erc.org.mk/odluki/2018.12.24%20- %20Tarifen%20sistem%20za%20distribucija%20na%20PG%20ZA%20GS%20so%20obrazlo zenie.pdf 82

North Macedonia Gas Distribution – FS Update consumption in that year. However, although this approach is perfectly workable in an already constructed grid with a relatively stable number of customers (and thus consumption) from one year to another, its implementation is not workable in case where the grid is upon construction and the number of connected customers is low. Indicatively, applying the adopted tariff methodology for the first 10 years of the concession would yield tariffs of the order of 90 €/MWh in year 3 down to 30 €/MWh in year 4, down to 20 in year 4 etc.

4.4 Analysis and conclusions for the efficiency of the concession / PPP from the concessionaire / public partner point of view based on IRR, NPV, break-even point and proposal for concession fee The financial analysis of the project comprises three main sections: the profit and loss results, the balance sheet results and the estimation of cash flows. The analysis is performed over a 35-year reference period (which equals the maximum concession period). The reference period includes an eight (8) year medium network construction period (developed in the 3 Phases discussed in Section 4.2 and in Section 2) and further investments throughout the concession period (in terms of low-pressure pipelines, service lines, risers, meters etc.) for the connection of new consumers to the network.

4.4.1 Baseline Scenario

4.4.1.1 Profit and Loss for the Baseline Scenario It is assumed that the newly established distribution system operator operates from year 1 of the investment (e.g. 2021) whereas revenues are generated from year 2023, Figure 19. As penetration increases revenues also increase. with an upward trend as penetration increases. The project becomes profitable (EAT) on Year 10 (2030) of the investment onwards. At the end of the period the project’s EBITDA margin reaches 71%,Table 36.

4.4.1.2 Balance sheet In the context of the concession/PPP, the private investor will construct, maintain and operate the distribution network. At the same time the concessioner/private partner does not earn the proprietary rights over the facility under concession/PPP, but does earn the right to use it as well the right to perform public activity, by charging the users of the service. The assets to be developed will remain at the ownership of the public partner. This right takes the form of an Intangible Asset in the investor’s accounts. The intangible asset of the concession is valued at the cost of the investment and it is building up during the concession period, being increased with every new part added to the regulated assets. The Intangible Asset is depreciated over the 35 years of the concession, in a manner that by the end of the period the total intangible asset is fully depreciated despite the starting period of any additions following the construction of the MP and LP network. Regarding the senior loan, it is expected to be fully repaid over a 25 years period.

North Macedonia Gas Distribution – FS Update

Table 36: Profit and Loss (in mn €) Year Revenue OPEX EBITDA EBITDA margin Depreciation EBIT EBIT margin Financial expense EBT EBT margin EAT EAT margin 2021 - 1.02 -1.02 - - -1.02 - 1.04 -2.06 - -2.06 - 2022 - 3.88 -3.88 - 0.70 -4.58 - 1.26 -5.62 - -5.83 - 2023 2.86 6.56 -3.71 -130% 2.59 -6.30 -221% 4.17 -10.47 -367% -10.47 -367% 2024 10.83 9.35 1.48 14% 4.50 -3.02 -28% 7.30 -10.32 -95% -10.32 -95% 2025 19.97 11.71 8.26 41% 6.56 1.70 8% 20.86 -19.16 -96% -19.16 -96% 2026 28.52 14.48 14.04 49% 8.42 5.62 20% 19.86 -14.25 -50% -14.25 -50% 2027 36.50 16.95 19.55 54% 10.69 8.86 24% 18.87 -10.01 -27% -10.01 -27% 2028 44.34 19.17 25.17 57% 12.91 12.26 28% 17.88 -5.61 -13% -5.61 -13% 2029 51.29 20.84 30.45 59% 15.08 15.37 30% 16.88 -1.51 -3% -1.51 -3% 2030 57.31 22.24 35.07 61% 16.94 18.12 32% 15.89 2.23 4% 2.01 4% 2031 62.47 23.36 39.12 63% 18.73 20.39 33% 14.90 5.49 9% 4.94 8% 2032 66.92 24.19 42.73 64% 20.41 22.32 33% 13.91 8.41 13% 7.57 11% 2033 67.16 24.50 42.66 64% 21.98 20.68 31% 12.91 7.77 12% 6.99 10% 2034 68.39 24.74 43.65 64% 22.88 20.77 30% 11.92 8.85 13% 7.96 12% 2035 69.75 24.92 44.83 64% 23.63 21.20 30% 10.93 10.27 15% 9.25 13% 2036 71.03 24.96 46.07 65% 24.32 21.74 31% 9.93 11.81 17% 10.63 15% 2037 71.38 24.98 46.40 65% 24.79 21.61 30% 8.94 12.67 18% 11.41 16% 2038 72.10 25.00 47.10 65% 25.04 22.06 31% 7.95 14.11 20% 12.70 18% 2039 72.82 25.02 47.80 66% 25.29 22.51 31% 6.95 15.56 21% 14.00 19% 2040 73.55 25.03 48.52 66% 25.53 22.99 31% 5.96 17.03 23% 15.32 21% 2041 74.28 25.03 49.25 66% 25.73 23.52 32% 4.97 18.55 25% 16.70 22% 2042 75.02 25.04 49.98 67% 25.94 24.04 32% 3.97 20.07 27% 18.06 24% 2043 75.77 25.05 50.73 67% 26.18 24.55 32% 2.98 21.57 28% 19.41 26% 2044 76.53 25.06 51.48 67% 26.43 25.05 33% 1.99 23.06 30% 20.75 27% 2045 77.30 25.06 52.23 68% 26.71 25.53 33% 0.99 24.53 32% 22.08 29% 2046 78.07 25.07 53.00 68% 27.02 25.98 33% - 25.98 33% 23.38 30% 2047 78.85 25.08 53.77 68% 27.37 26.41 33% - 26.41 33% 23.77 30% 2048 79.64 25.09 54.55 68% 27.76 26.79 34% - 26.79 34% 24.11 30% 2049 80.44 25.09 55.34 69% 28.22 27.12 34% - 27.12 34% 24.41 30% 2050 81.24 25.10 56.14 69% 28.76 27.38 34% - 27.38 34% 24.64 30% 2051 82.05 25.11 56.94 69% 29.41 27.53 34% - 27.53 34% 24.78 30% 2052 82.87 25.12 57.75 70% 30.23 27.52 33% - 27.52 33% 24.77 30% 2053 83.70 25.13 58.57 70% 31.34 27.24 33% - 27.24 33% 24.51 29% 2054 84.54 25.14 59.40 70% 33.02 26.39 31% - 26.39 31% 23.75 28% 2055 85.38 25.14 60.24 71% 39.83 20.41 24% - 20.41 24% 18.37 22% Total 2,142.88 749.22 1,393.66 65% 744.92 648.74 30% 242.99 405.7 19% 357.05 17% Avg. 61.23 21.41 39.82 65% 21.28 18.54 30% 6.94 11.59 19% 10.20 17%

North Macedonia Gas Distribution – FS Update

Table 37: Balance sheet main figures (in mn €)

Net Fixed Year Cash Assets Assets Equity Equity Equity & & Equity Liabilities Liabilities Shareholders’ Shareholders’ Total Liabilities Liabilities Total Long term Debt term Debt Long

2021 23.83 11.35 35.18 9.11 26.07 26.07 35.18 2022 85.55 55.52 141.08 36.79 104.29 104.29 141.08 2023 143.93 98.41 242.34 59.84 182.50 182.50 242.34 2024 203.50 512.72 716.22 194.78 521.44 521.44 716.22 2025 252.47 419.76 672.23 175.62 496.61 496.61 672.23 2026 310.01 323.15 633.15 161.37 471.78 471.78 633.15 2027 361.34 236.97 598.31 151.36 446.95 446.95 598.31 2028 407.15 160.72 567.87 145.75 422.12 422.12 567.87 2029 440.53 101.00 541.53 144.24 397.29 397.29 541.53 2030 468.19 50.51 518.70 146.25 372.46 372.46 518.70 2031 489.91 8.91 498.81 151.19 347.63 347.63 498.81 2032 505.63 -24.07 481.56 158.76 322.80 322.80 481.56 2033 503.35 -39.64 463.72 165.75 297.97 297.97 463.72 2034 496.22 -49.38 446.85 173.71 273.14 273.14 446.85 2035 486.44 -55.17 431.26 182.96 248.31 248.31 431.26 2036 470.97 -53.91 417.06 193.59 223.48 223.48 417.06 2037 450.65 -47.01 403.64 205.00 198.64 198.64 403.64 2038 429.85 -38.33 391.51 217.70 173.81 173.81 391.51 2039 408.55 -27.86 380.69 231.70 148.98 148.98 380.69 2040 385.97 -14.79 371.18 247.03 124.15 124.15 371.18 2041 363.21 -0.17 363.04 263.72 99.32 99.32 363.04 2042 340.28 15.99 356.27 281.78 74.49 74.49 356.27 2043 317.14 33.71 350.86 301.20 49.66 49.66 350.86 2044 293.79 53.00 346.78 321.95 24.83 24.83 346.78 2045 270.18 73.85 344.03 344.03 - - 344.03 2046 246.29 121.12 367.41 367.41 - - 367.41 2047 222.09 169.09 391.18 391.18 - - 391.18 2048 197.52 217.77 415.29 415.29 - - 415.29 2049 172.53 267.17 439.70 439.70 - - 439.70 2050 147.04 317.31 464.34 464.34 - - 464.34 2051 120.92 368.21 489.13 489.13 - - 489.13 2052 94.01 419.88 513.90 513.90 - - 513.90 2053 66.03 472.38 538.41 538.41 - - 538.41 2054 36.41 525.75 562.16 562.16 - - 562.16 2055 0.00 580.52 580.52 580.52 - - 580.52

It is assumed that there is no distribution of dividends over the concession period. This results to the accumulation of cash, equal to the initial share capital and the non- distributed profits carried forward, which at the end of the concession will be returned to the investor. The nine year period negative cash balance starting in year 2032 is reaching a maximum cash shortfall (€ 54,95 mn) in year 2035 and could be funded by bridge financing, which would be gradually paid back over a 5 years period. This would increase the interest expenses by another ~€ 14,00 mn (if a 4% interest rate is applied). 85

North Macedonia Gas Distribution – FS Update

4.4.1.3 Cash Flow In order to determine the project’s financial profitability, the annual cash balance was calculated. According to the table below, the annual project cash flows from operating activities receive negative values for the first three years of operation, mainly driven by the negative EBITDA.

Table 38: Cash Flow main figures (in mn €) Year Net cash from Net cash Net cash from Net annual Cash at the Cash at the Operating from Financing Cash Flow Beginning of End of Activities Investing Activities Year Year Activities 2021 -1.02 -23.83 36.20 11.35 - 11.35 2022 -3.88 -62.42 110.47 44.17 11.35 55.52 2023 -3.71 -60.97 107.57 42.89 55.52 98.41 2024 1.48 -64.07 476.90 414.31 98.41 512.72 2025 8.26 -55.53 -45.69 -92.96 512.72 419.76 2026 14.04 -65.95 -44.70 -96.61 419.76 323.15 2027 19.55 -62.03 -43.70 -86.18 323.15 236.97 2028 25.17 -58.71 -42.71 -76.25 236.97 160.72 2029 30.45 -48.46 -41.72 -59.72 160.72 101.00 2030 34.84 -44.61 -40.72 -50.49 101.00 50.51 2031 38.57 -40.44 -39.73 -41.60 50.51 8.91 2032 41.89 -36.14 -38.74 -32.98 8.91 -24.07 2033 41.89 -19.70 -37.74 -15.56 -24.07 -39.64 2034 42.76 -15.75 -36.75 -9.74 -39.64 -49.38 2035 43.80 -13.85 -35.76 -5.80 -49.38 -55.17 2036 44.88 -8.85 -34.76 1.27 -55.17 -53.91 2037 45.13 -4.47 -33.77 6.90 -53.91 -47.01 2038 45.68 -4.23 -32.78 8.68 -47.01 -38.33 2039 46.24 -3.99 -31.78 10.47 -38.33 -27.86 2040 46.82 -2.95 -30.79 13.08 -27.86 -14.79 2041 47.39 -2.98 -29.80 14.62 -14.79 -0.17 2042 47.98 -3.01 -28.80 16.16 -0.17 15.99 2043 48.57 -3.04 -27.81 17.72 15.99 33.71 2044 49.17 -3.07 -26.82 19.28 33.71 53.00 2045 49.78 -3.10 -25.82 20.86 53.00 73.85 2046 50.40 -3.13 - 47.27 73.85 121.12 2047 51.13 -3.16 - 47.97 121.12 169.09 2048 51.87 -3.19 - 48.68 169.09 217.77 2049 52.63 -3.23 - 49.40 217.77 267.17 2050 53.40 -3.26 - 50.14 267.17 317.31 2051 54.19 -3.29 - 50.90 317.31 368.21 2052 55.00 -3.32 - 51.68 368.21 419.88 2053 55.85 -3.36 - 52.49 419.88 472.38 2054 56.76 -3.39 - 53.37 472.38 525.75 2055 58.20 -3.42 - 54.77 525.75 580.52 Total 1,345.18 -744.92 -19.74 580.52

According to the financial results, the project requires refinancing for a nine-year period (Year 12 to Year 20). The revenues generating for this reference period seem insufficient to cover the bank loan repayment, therefore the need for a short-term loan arises. Total cash flows of the concession become positive in Year 21 (2041).

Table 39: FCFF - CFADS – DS - DSCR (amounts in mn €) 86

North Macedonia Gas Distribution – FS Update

FCF DSCR CFADS (incl. after after Debt Operating (-) residual (+) grace Year CFADS grace service cash flow CAPEX value Funding period period (DS) (B) of (A) / (A) assets) (B) 2021 -1.02 -23.83 -24.85 37.25 12.39 - -1.04 - 2022 -3.88 -62.42 -66.30 111.74 45.44 - -1.26 - 2023 -3.71 -60.97 -64.68 111.74 47.06 - -4.17 - 2024 1.48 -64.07 -62.59 484.20 421.61 - -7.30 - 2025 8.26 -55.53 -47.27 -47.27 -47.27 -45.69 -1.03 2026 14.04 -65.95 -51.92 -51.92 -51.92 -44.70 -1.16 2027 19.55 -62.03 -42.48 -42.48 -42.48 -43.70 -0.97 2028 25.17 -58.71 -33.54 -33.54 -33.54 -42.71 -0.79 2029 30.45 -48.46 -18.01 -18.01 -18.01 -41.72 -0.43 2030 34.84 -44.61 -9.76 -9.76 -9.76 -40.72 -0.24 2031 38.57 -40.44 -1.87 -1.87 -1.87 -39.73 -0.05 2032 41.89 -36.14 5.75 5.75 5.75 -38.74 0.15 2033 41.89 -19.70 22.18 22.18 22.18 -37.74 0.59 2034 42.76 -15.75 27.01 27.01 27.01 -36.75 0.74 2035 43.80 -13.85 29.96 29.96 29.96 -35.76 0.84 2036 44.88 -8.85 36.03 36.03 36.03 -34.76 1.04 2037 45.13 -4.47 40.66 40.66 40.66 -33.77 1.20 2038 45.68 -4.23 41.45 41.45 41.45 -32.78 1.26 2039 46.24 -3.99 42.25 42.25 42.25 -31.78 1.33 2040 46.82 -2.95 43.87 43.87 43.87 -30.79 1.42 2041 47.39 -2.98 44.41 44.41 44.41 -29.80 1.49 2042 47.98 -3.01 44.97 44.97 44.97 -28.80 1.56 2043 48.57 -3.04 45.53 45.53 45.53 -27.81 1.64 2044 49.17 -3.07 46.10 46.10 46.10 -26.82 1.72 2045 49.78 -3.10 46.68 46.68 46.68 -25.82 1.81 2046 50.40 -3.13 47.27 47.27 47.27 - - 2047 51.13 -3.16 47.97 47.97 47.97 - - 2048 51.87 -3.19 48.68 48.68 48.68 - - 2049 52.63 -3.23 49.40 49.40 49.40 - - 2050 53.40 -3.26 50.14 50.14 50.14 - - 2051 54.19 -3.29 50.90 50.90 50.90 - - 2052 55.00 -3.32 51.68 51.68 51.68 - - 2053 55.85 -3.36 52.49 52.49 52.49 - - 2054 56.76 -3.39 53.37 53.37 53.37 - - 2055 58.20 -3.42 276.48 54.77 54.77 - - Total 1.345.18 -744.92 821.96 744.92 1.345.18 312.0132 -764.66 0.41

The total CFADS of the 35 years period is actually equal to the operating cash flow of the project, as the projected CAPEX is fully funded by bank debt and equity. The funding is assumed to be completed in the first 4 years of the project, the CAPEX however is extended throughout the whole period of the project. The CFADS after the completion of the funding and the grace period of the loan (i.e. after the first four years) is not sufficient to cover the debt service obligations, as those

32 This amount is the sum of the CFADS after grace period and until the last year of the bank loan repayment (i.e. for the period 2025-2045) 87

North Macedonia Gas Distribution – FS Update have been projected, on an annual basis. This is the reason for the creation of the funding gap, as the funding of the project has been utilised not only for the CAPEX, for which it was intended, but also for the covering of the debt obligations as well as the operating losses of the first years, until the project starts generating cash flows from operations, i.e. the profitability is increased, sufficient to cover both debt obligations.

Figure 20: Funding Gap The CFADS after grace period based on the calculations and as shown in table 39 are negative for the first 7 years, so the DSCR cannot be more than 1 in each year of repayment regardless of the percentage of debt. However, the exercise can be performed on an average level. The percentage of debt from which an average DSCR of more than 1 results is 35/65 (Debt / Equity). The table below demonstrates the results in comparison with the baseline scenario and includes a second scenario of 30/70 (Debt / Equity).

Table 40: Summary of DSCR Scenarios

(in mn €) DSCR I DSCRII Baseline

CAPEX 744.92 744.92 744.92 Gearing ratio 70/30 35/65 30/70 (Debt to Equity) . 4yrs grace period . 4yrs grace period . 4yrs grace period Financing terms . 21yrs fixed . 21yrs fixed . 21yrs fixed repayments repayments repayments Funding Gap (mn €) -55.17 - - WACC 4.94% 4.94% 4.94% Allowed Revenue 1,867.94 1,867.94 1,867.94 Tariff (€/MWh) 9.30 9.30 9.30 Total Revenue 2,142.88 2,142.88 2,142.88 Total OPEX 749.22 749.22 749.22 EBITDA 1,393.66 1,393.66 1,393.66 EBITDA margin % 65.04% 65.04% 65.04% EBT 405.70 527.01 544.38 EAT 357.05 470.76 486.83 88

North Macedonia Gas Distribution – FS Update

(in mn €) DSCR I DSCR DSCR II Baseline

Project IRR 5.13% 5.13% 5.13% Equity IRR 5.01% 5.45% 5.49% DSCR avg 0,58 1,13 1,32 DSCR min -1,16 -2,32 -2,71

4.4.1.4 Project Internal Rate of Return (IRR) The financial analysis resumes with the calculation of the Internal Rate of Return (IRR), along with the Net Present Value (NPV). The IRR calculation assumes all potential future cash inflows and outflows of the project within the reference period. For the estimation of the project NPV, a discount factor of 4% is applied, according to the European Commission Guide to CBA of Investment Projects.

Table 41: Project Valuation (in mn €) EBITDA 1,393.66 (-) Depreciation -744.92 (-) Non cash profit on construction services - EBIT 648.74 (-)Taxes -66.37 (-) Subsidy - (+) Depreciation 744.92 NOPAT 1,327.29 (-) CAPEX -744.92 (+) Subsidy - Residual value 221.70 PROJECT FCF 804.07 Discount rate 4.00% PROJECT NPV 87.64 PROJECT IRR 5.13%

Based on the assumptions as those have been presented and on the expected operating cash flows of the company, the project’s NPV amounts to 87.64 mn and the project’s IRR stands at 5.13% for the Baseline Scenario.

4.4.1.5 Equity Internal Rate of Return (Equity IRR) The Equity or Investor’s IRR is calculated on the free cash flow, which will be distributed to the investor(s). Based on the latest information and on realistic setting of the parameters the Equity IRR is set at 5.01% for the full period of the concession (Maximum 35 years).

Table 42: Equity Valuation (in mn €) EBITDA 1,393.66 (-) Depreciation -744.92 (-) Non-cash profit on construction services - EBIT 648.74 (-) Taxes -48.48 89

North Macedonia Gas Distribution – FS Update

(-) Subsidy - (+) Depreciation 744.92 (-) Financial cash flows -762.35 NOPAT 582.83 (-) Shareholder contributions -223.48 Remaining cash at the end of the period 580.74 EQUITY FCF 940.10 EQUITY IRR 5.01%

The annual cash from operations is not distributed to the investor through dividends, therefore the accumulated cash of € 580.74 mn at the end of the concession period is reported as residual value.

4.4.2 Sensitivity Analysis A number of items are crucial to the feasibility of the project: a) Network sizing (length of pipelines) b) Project development (consider all municipalities e.g. all 80 or only a smaller fraction) c) Costs of distribution network elements d) Penetration rates e) The value of WACC and f) The financing structure. The sensitivities test the impact of those factors on financial figures significant for the feasibility of the project and the returns of the stakeholders. The results of the sensitivity scenarios are measured mainly on the P&L (Revenues and EBITDA) and the return of the investment (Project IRR).

4.4.2.1 CAPEX30

This is a lower cost scenario in Summary – CAPEX 30 comparison to the baseline (CAPEX: € Comparison to 552 mil.). Baseline [mil. €] (%) As a result, in the CAPEX reduction, Capital Cost -192.77 -26% there are subsequent reductions in all reduction costs, revenues and related financial OPEX reduction -181.13 -24% parameters. Allowed revenue -475.55 -25% reduction The allowed revenue for the total life of EBITDA reduction -353.11 -25% the project is proportionally impacted by Funding gap -29.46 -53% -25% or € -475.55 mn respectively. reduction IRR increase 0.002

There is a minor increase in the project IRR (+0,20%@5.33%).

North Macedonia Gas Distribution – FS Update

The funding gap in comparison to the Baseline scenario is reduced by -29.46 mil €.

4.4.2.2 BA-FPOL This is also a lower cost scenario in BA-FPOL comparison to the Baseline. However, Comparison to with a capital cost of 690 mil € this Baseline scenario remains a more challenging [mil. €] (%) Capital Cost option in comparison to CAPEX30. The -54.49 -7% project IRR is once again only marginally reduction improved. OPEX reduction -54.28 -7% Allowed revenue -155.21 7% reduction EBITDA reduction -100.92 -7% Funding gap 9.38 -17% reduction IRR increase 0.0005

4.4.2.3 BA_U50_R20 Capital cost reduction in this scenario BA_U50_R20 comparison to the baseline is massive Comparison to (334 mil €). With a CAPEX of just 44% Baseline of the Baseline, all remaining costs and [mil. €] (%) Capital Cost parameters are also proportionally and -410.09 -55% substantially affected. reduction OPEX reduction -413.73 -55% Allowed revenue - 55% reduction 1,182.54 EBITDA reduction -768.76 -55% Funding gap 31.54 -57% reduction IRR increase 0.0002

4.4.2.4 BA_COMBO CAPEX in this scenario is almost the BA_COMBO same as in BA_U50_R20. Comparison to Baseline

[mil. €] (%) Capital Cost -421.56 -57% reduction OPEX reduction -424.09 -57% Allowed revenue - 57% reduction 1,058.56 EBITDA reduction -790.33 -57% Funding gap 35 -65% reduction 91

North Macedonia Gas Distribution – FS Update

IRR increase 0.0004

4.4.2.5 CAPEX30_COMBO This scenario represents the lowest level CAPEX30_COMBO in terms of CAPEX expenditure. Comparison to Baseline

[mil. €] (%) Capital Cost -504.24 -68% reduction OPEX reduction -501.60 -67% Allowed revenue - 67% reduction 1,261.80 EBITDA reduction -940.75 -67% Funding gap -47 -86% reduction IRR increase 0.0025

4.4.2.6 BA_INCREASED_WACC This scenario is additional to the ones of BA_INCREASED_WACC Table 6 and presented in the sensitivity Comparison to analysis so far. Baseline [mil. €] (%) Here we assume that the WACC for the Capital Cost 0 0% Baseline is increased by 1.2%. This reduction scenario that sets WACC at 6.14% OPEX reduction 2.40 0.3% indicates that the allowed revenue for the Increase in 240.22 11% total life of the project changes by € +8% allowed revenue or by € +149.81 mn respectively. Increase in 237.82 17% EBITDA reduction EBITDA is affected by + 17% or by € + Funding gap 55.17 100% 237.82 mn for +1.2 % change in WACC. reduction The implementation of the scenarios and IRR increase 0.012 the estimation of their relative results show that the IRR of the Project is set from 5.13% in the base case to 6,30% (+1.17). Based on the above assumptions no additional financing is required in this scenario.

4.4.2.7 BA_LIQUIDITY This is one more scenario additional to BA_LIQUIDITY the ones of Table 1. Here it is assumed Comparison to that bank loan repayments are adjusted Baseline according to the liquidity of the project, in [mil. €] (%) Capital Cost order to cover any funding gap that may 0 0% occur. Grace period is 7 years and reduction repayment period is set to 20 years. The OPEX reduction 0 0%

North Macedonia Gas Distribution – FS Update

Increase in adjusted financing parameters do not 0.00 0% affect allowed revenue, OPEX, EBITDA allowed revenue Increase in and Project IRR, however it impacts EBT 0.00 0% EBITDA reduction by -30% or -119.97 € and EAT by 31% or Funding gap 55.17 100% -111.15 €. reduction IRR increase -0.0515

Table 43 provides a summary of the sensitivity analysis.

Table 43: Summary of the sensitivities financial results

(in mn €)

BO Baseline D_WACC BA-FPOL CAPEX30 BA_COMBO BA_U50_R20 BA_LIQUIDITY BA_INCREASE CAPEX30_COM

CAPEX 744.92 552.15 690.43 334.83 323.36 240.68 744.92 744.92 Gearing 70/30 70/30 70/30 70/30 70/30 70/30 70/30 70/30 ratio (Debt to Equity) Financing . 4yrs . 4yrs . 4yrs . 4yrs . 4yrs . 4yrs . 4yrs . 7yrs terms grace grace grace grace grace grace grace grace period period period period period period period period . 21yrs . 21yrs . 21yrs . 21yrs . 21yrs . 21yrs . 21yrs . 20yrs fixed fixed fixed fixed fixed fixed fixed repayme repayme repayme repayme repayme repayme repayme repayme nts nts nts nts nts nt nt nts based on liquidity Funding -55.17 -25.71 -45.79 -23.63 -19.59 -7.73 - - Gap (mn €) WACC 4.94% 4.94% 4.94% 4.94% 4.94% 4.94% 6,14% 4.94% Allowed 1,867.94 1,392.39 1,729.61 836.83 809.37 606.14 2,017.75 1,867.94 Revenue Tariff 9.30 6.91 8.61 9.04 8.80 6.57 10,38 9.30 (€/MWh) Total 2,142.88 1,608.65 1,987.67 960.34 928.45 700.52 2,383.10 2,142.88 Revenue Total 749.22 568.09 694.94 335.49 325.13 247.62 751.62 749.22 OPEX EBITDA 1,393.66 1,040.55 1,292.74 624.90 603.32 452.90 1,631.48 1,393.66 EBITDA 65.04% 64.69% 65.04% 65.07% 64.98% 64.5% 68.46% 65.04% margin % Project 804.07 599.19 746.12 359.57 346.85 259.81 1,018.21 804.07 FCF Project 87.64 73.69 83.73 39.67 38.76 32.85 182.84 87.64 NPV Project 5.13% 5.33% 5.18% 5.15% 5.17% 5.38% 6.30% 5.13% IRR DSCR avg 0,58 0,58 0,58 0,57 0,58 0,58 0.76 0,61 DSCR min -1,16 -1,09 -1,10 -1,17 -1,10 -1,03 -1,10 -1,47

North Macedonia Gas Distribution – FS Update

4.5 Elaborated proposal for the conditions for the concession / PPP based on the period needed for return of investment

4.6 Risk assessment and proposal for risk mitigation Public Private Partnerships (PPP) contracts are long-term contracts with their duration increasing according to the level of private sector involvement in the provision of the investments. The complexity of these contracts leads to an increased risk exposure for all the parties involved. The section of the risk analysis will identify the risks per phase and per source and develop the principles for the risk allocation method, clarify the risk which will be managed by each part by building up the risk matrix and evaluate the final risk allocation and propose the appropriate risk mitigations. The three broad stages in a PPP project with different risk profiles are the development phase, the construction phase and the operation phase. PPP contracts are characterized by a specific risk allocation to the involved parties which is differentiated by the scope of activities delegated to the private sector.

4.6.1 Categories of risks during the preparation phase Three main risk categories emerge during the development phase of a PPP project: the planning risk, the misspecification of output requirements risk and the design risk. These risks could arise when untested technical innovations are specified in the tender documents.  Planning risk includes the risk that the planning permission for the construction of the project may be refused, the risk that unacceptable conditions may be applied to any planning permission granted and the risk that the planning process may take longer than anticipated and the cost may be more than expected  Misspecification of output requirements risk refers to the possibility that the output characteristics specified in the contract, which form the basis of the contractual obligations, are not clearly described or cannot be met  Design risk includes the risk of failing to complete the design process in time and within the budgeted costs, the risk of failing to deliver a solution that works satisfactorily and meets the requirements set by the public-sector party. This risk category also includes the possibility of changes in technical standards during the design phase.

4.6.2 Categories of risk during the construction / development phase Three main risk categories emerge during the construction phase of a PPP project: the construction risk, the time schedule risk and the fiscal risk. Insufficient engineering (construction) work in the preliminary stages of the project can induce risks in all subsequent phases.  Construction risk: the project company draws down the majority of the loan to finance construction activity, equipment purchase, and other pre operating costs. The construction risk includes factors such as changes in labor and materials costs and inadequate cost management may lead to cost overruns. Inefficient construction and management practices resulting in bad coordination with 94

North Macedonia Gas Distribution – FS Update

suppliers will impact the financial terms during this phase  Time schedule risk: the time schedule risk includes the cases when adverse site, bad weather conditions, delays in obtaining administrative approvals and permits, problems with the land acquisition or geological conditions, result to construction delay  Fiscal risk: many PPP projects anticipate a capital contribution from the Public Authority to the Contractor. In such cases a fiscal risk arises due to the possibility of default on behalf of the Public Authority and its weakness to contribute the necessary amount to the project.

4.6.3 Categories of risk during the operation phase These risks relate to the operation period when the project generates revenue. Such risks can be classified to operating risk, market (demand and price) risk and financial and taxation risk  Operation risk includes the risk factors that may lead to an increase in operation costs and failure to meet availability and performance standards. These factors include shortage of skilled labor, labor disputes, late delivery of equipment, poor maintenance schedule, inadequate cost management, increase in labor cost etc.  Market risk is often the most important risk a project confronts. This category includes a “demand” risk or sales volume risk, which is the risk of making lower- than-expected revenues if the actual demand for service falls short of the demand initially forecasted. The demand risk is particularly strong in case of new facilities, where the absence of historical data complicates demand estimates.  Market risk can also arise from tariff risk or unexpected changes in the level of the price. Tariff risk can also arise from the composition of demand. A high variability in the nature of demand structure induces a corresponding variability in the weighted average tariff and in revenue  Financial and taxation risks relate to the financial and taxation issues for the phase of project operation. Such risks consist of: (i) the inflation rate risk, (ii) the interest rate risk – when the project is financed through variable-rate loans; (iii) the exchange rate risk – when costs and revenues are expressed in different currencies and iv) changes in the taxation regulatory framework

4.6.4 Categories of risk during any phase of the project These risks could emerge during any phase of the project. Such risks can be classified as macroeconomic, legal, political and technological risks  Macroeconomic risk includes risks which are related to the overall stance of the economy, such as balance of payment crisis, currency crisis, severe economic downturns and other economic and financial disturbances  Legal risk contain changes and unexpected modifications in the general legal framework such as corporate laws, tax laws, environmental standards, tariff- 95

North Macedonia Gas Distribution – FS Update

setting rules, changes in the judicial system and contractual obligations regarding the investment and quality standards  Political risk relates to the possibility of changes in public needs. It is the risk of the output specifications set up in the initial contract being proved inadequate because of changes in political preferences. The relative importance of this risk increases with contract length  Technological risk refers to the equipment used in a PPP project can become obsolete during the duration of the contract and may need to be replaced. New technologies can significantly improve the profitability of the project, but also adversely impact the functioning/commercial viability of other projects that use obsolete technology.

4.7 Analysis of the domestic market and if needed the regional markets with emphasis on the risk of return of investment Please refer to Sections 3.11 and 4.8.

4.8 Value for money analysis

4.8.1 Currently used energy sources In order to assess the competitiveness of natural gas for distribution in comparison to other fuels, we carried out a comparative analysis of costs at end-user level. The most common energy sources used for heating purposes in North Macedonia are LPG, biomass (wood), gasoil, electricity and district heating. The data sources used for the estimation of costs of the latter alternative fuels are presented in Table 44. The end- user prices of the latter energy sources and the methodology used for their calculation are detailed in Table 45. Our analysis is based in calculating the cost of fuel for one unit of energy (heat) produced. The efficiency values used are based on own estimates taking into account that heating equipment to be replaced will be mostly aged.

Table 44: End-user price of energy sources currently used for heating in North Macedonia

Fuel Reference Fuel Unit Price Source of data Methodology period (€/Unit) Used the average 05/18- value of the prices LPG liter 0.55 makpetrol.com 12/18 available for the reference period Makedonski Sumi Used the price of oak (www.mkdsumi.co (stable since 2014), Wood m3 67.5 2014-2019 m.mk/admin/docu also adding VAT at ments/cenovnik__ the warehouse .pdf) Used the spot price Gas oil / 05/18- available for fuel oil, Heavy fuel kg 0.42 makpetrol.com 12/18 and adapted it based oil on the monthly % 96

North Macedonia Gas Distribution – FS Update

change of the diesel price Eurostat (Electricity prices 07/18- All taxes and levies Electricity kWh 0.08 for household 12/18 included consumers - bi- annual data) Energy and water services For calculating the regulatory cost, the typical CRF District From commission of the apartment’s load and kWh 0.05 Heating 01.08.2018 Republic of North annual consumption Macedonia for heating purposes Annual Report was used 2018 ERC Annual Report 2018 for N.Macedonia / EC Natural Section Average wholesale kWh S2 2018 Quarterly report gas 4.8.2 price for pipeline gas on European Gas Markets for other Countries

Table 45: Methodology and End-user price for currently used energy sources

33 fuel fuel Fuel Fuel €/kWh) [B] Unit Unit [B] ( (kg/Unit) (kWh/Unit) (kWh/Unit) [E]=[C]*[D] [E]=[C]*[D] [C] Density Density [C] System [G] Efficiency (%) Efficiency of useful energy energy of useful [A] Price (€/Unit) Price(€/Unit) [A] [D] GCV GCV (kWh/kg) [D] [F]=[A]/[E] €/kWh of of €/kWh [F]=[A]/[E] [H]=[F]/[G] Final cost cost Final [H]=[F]/[G]

LPG 0.55 litre 0.537 13.69 7.35 0.074 0.7 0.106

Wood (Oak) 67.5 m3 59035 4.5 2655 0.025 0.5 0.051

Gas oil / HFO 0.42 kg 1 11.95 11.95 0.036 0.7 0.051

Electricity 0.08 kWh n/a n/a 1 0.079 1 0.079

District Heating 0.05 kWh n/a n/a 1 0.047 0.9 0.052

33 For conversions: https://www.engineeringtoolbox.com/fuels-higher-calorific-values- d_169.html 34 GT Estimations 35 https://www.simetric.co.uk/si_wood.htm (The Lowest density of Oak was used. Range is 590-930) 97

North Macedonia Gas Distribution – FS Update

4.8.2 End-user price of natural gas Natural gas price at consumer level has been calculated on the basis of three different wholesale gas supply costs, namely the current price in North Macedonia, the average cost of gas in Greece and the equivalent of Bulgaria at the same time periods. This analysis was made under the assumption that the gas wholesale price in North Macedonia is already strongly dependent to the price in Bulgaria. Completion of the interconnection with Greece shall link North Macedonia also to the Greek market. In turn, linkage to the Greek market may result in a decrease in the premium currently faced by consumers receiving gas from Bulgaria. We refer to these cases as Supply Scenarios. We shall refer to the scenarios with the different evolutions of the distribution system as Distribution Scenarios. Table 46 shows end-user prices for the Supply and Distribution Scenarios. The following components of the total cost are shown in the Table.  Gas supply cost. Gas supply costs for North Macedonia have been sourced from the ERC annual reports. For Greece and Bulgaria, values were sourced from the European Commission Quarterly Reports of Q3 and Q4 2018 (average values, import prices).  Transmission tariff. Transmission tariffs have been provided by NER and include the cost of construction of all extensions of the transmission system (including the cost of the construction of the interconnection to Greece (from the border onwards).  Distribution tariff as calculated in the Distribution Scenarios  VAT  Cost of internal heating equipment (a payback period of 5 years has been considered). The cost of heating equipment was sourced from 2014-FS as the average cost of heating equipment for residential facilities (60 €/kWh for a boiler of 9.6 kWh). These values yield an investment of 576 €. Assuming a 5-year depreciation the resulting cost is that of Table 46.  Cost of 1 unit of energy (heat) produced assuming a certain efficiency value. We have assumed an efficiency of 0.85 which is a lower side average taking into account that current levels for normal (non-condensing boilers) have efficiencies in the range of 0.8 to 0.88. Modern condensing boilers have efficiencies over 0.9. A range of values have been computed from 0.0562 €/kWh to 0.0695 €/kWh with an average at 0.0624 €/kWh. Comparison with the alternative fuels is shown in Figure 21.

North Macedonia Gas Distribution – FS Update

Table 46: Calculation of natural gas end-user price for different scenarios and supply options

36 [B] [B] [D]= [D]= tariff tariff [G] = [G] Tariff Tariff energy (€/kWh) (€/kWh) (€/kWh) (€/kWh) of useful of useful equipment equipment [E] System System [E] [A]+[B]+[C] [A]+[B]+[C] Heating [H] [F] VAT (%) (%) VAT [F] supply cost supply Distribution Distribution [A] Gascost [A] [G]+[H] Final [G]+[H] tariff (€/kWh) (€/kWh) tariff Tariff (€/kWh) (€/kWh) Tariff [D]/[E]*(1+[F]) [D]/[E]*(1+[F]) Transmission Transmission Transmission (€/kWh) costs 1 kWh of cost Cost of useful useful Cost of including VAT including Wholesale gas gas Wholesale Gas & GasNetwork & energy (€/kWh) energy (€/kWh) [C] Distribution Distribution [C] (%) Efficiency

CAPEX30_COMBO 0.0066 0.0359 0.0498 0.0608 NER Tariff Baseline 0.0035 0.0093 0.0386 0.0536 0.0646 2022 BA_INCREASED_ 0.0104 0.0397 0.0551 0.0661 WACC CAPEX30_COMBO 0.0066 0.0347 0.0482 0.0591 NER Tariff Baseline 0.0258 0.0023 0.0093 0.0374 0.0520 0.0629 2029 BA_INCREASED_ 0.0104 0.0385 0.0534 0.0644

Macedonia Macedonia WACC CAPEX30_COMBO 0.0066 0.0343 0.0476 0.0586 NER Tariff Baseline 0.0020 0.0093 0.0370 0.0514 0.0624

Current cost of gas in North Currentcostofgas North in 0,0110 2036 BA_INCREASED_ 85% 18% 0.0104 0.0381 0.0529 0.0639 WACC CAPEX30_COMBO 0.0066 0.0322 0.0448 0.0557 NER Tariff Baseline 0.0035 0.0093 0.0350 0.0485 0.0595 2022 BA_INCREASED_ 0.0104 0.0360 0.0500 0.0610 WACC CAPEX30_COMBO 0.0221 0.0066 0.0311 0.0431 0.0541 NER Tariff Baseline 0.0023 0.0093 0.0338 0.0469 0.0579 2029 BA_INCREASED_ 0.0104 0.0349 0.0484 0.0594 WACC Cost of gas Cost Greece in CAPEX30_COMBO 0.0020 0.0066 0.0307 0.0426 0.0536

36 GT Estimation 99

North Macedonia Gas Distribution – FS Update

36 [B] [B] [D]= [D]= tariff [G] = [G] Tariff Tariff energy (€/kWh) (€/kWh) (€/kWh) (€/kWh) of useful useful of equipment [E] System System [E] [H] Heating Heating [H] [A]+[B]+[C] [A]+[B]+[C] [F] VAT (%) VAT (%) [F] supply cost supply cost Distribution Distribution [A] Gas cost [A] Gas [G]+[H] Final [G]+[H] tariff (€/kWh) (€/kWh) tariff Tariff (€/kWh) (€/kWh) Tariff [D]/[E]*(1+[F]) [D]/[E]*(1+[F]) Transmission Transmission Transmission (€/kWh) costs of 1 kWh cost Cost of useful useful Cost of including VAT including Wholesale gas gas Wholesale Gas & Network GasNetwork & energy (€/kWh) energy (€/kWh) [C] Distribution Distribution [C] (%) Efficiency

NER Baseline 0.0093 0.0334 0.0464 0.0574 Tariff BA_INCREASED_ 0.0104 0.0345 0.0479 0.0589 2036 WACC CAPEX30_COMBO 0.0066 0.0326 0.0453 0.0563 NER Tariff Baseline 0.0035 0.0093 0.0354 0.0491 0.0601 2022 BA_INCREASED_ 0.0104 0.0365 0.0506 0.0616 WACC CAPEX30_COMBO 0.0066 0.0315 0.0437 0.0547 NER Tariff Baseline 0.0226 0.0023 0.0093 0.0342 0.0475 0.0585 2029 BA_INCREASED_ 0.0104 0.0353 0.0490 0.0600 WACC CAPEX30_COMBO 0.0066 0.0311 0.0431 0.0541 NER Cost ofgasCost Bulgaria in Tariff Baseline 0.0020 0.0093 0.0338 0.0469 0.0579 2036 BA_INCREASED_ 0.0104 0.0349 0.0484 0.0594 WACC Range of cost of 1 kWh of useful energy (€/kWh) Min Average Max 0.0562 0.0594 0.0661

100

North Macedonia Gas Distribution – FS Update

0.12

0.10

0.08

0.06

0.04

0.02

0.00 LPG Wood Gas oil Heavy fuel Electricity District

Final costof1 kWh of useful energy(€/kWh) (Oak) oil heating

Natural gas price range, all Supply Scenarios, all Distribution Scenarios

Competitive technologies

Natural gas average cost (all Supply and all Distribution Scenatios) without VAT

Natural gas average cost (all Supply and all Distribution Scenatios) without VAT & 100% subsidy on heating equipment cost

Figure 21: Comparison of the price of gas versus currently used fuels for heating

It is useful to note that the lowest range of values computed, related to the Supply Scenario of Greece (i.e. convergence of the gas price in North Macedonia to the price of Greece). Operation of the TransAdriatic Pipeline within 2020 shall be linking Greece and the remaining Western Balkan area to the liquid and competitive markets of western Europe so that further price reductions are anticipated. As discussed in Section 3.10.3, a number of incentives may be considered. Figure 21 includes as an example the case of zero VAT and the extreme of zero VAT and full subsidization of the heating equipment. Values shown correspond to the average cost of fuel for all Supply and all Distribution Scenarios.

4.8.3 Comparison of gas end-user prices in other countries in the region This section provides a comparison between the actual end-user prices of natural gas in North Macedonia, Greece and Bulgaria. Relevant cost components are based on public data from gas supply companies, TSOs and DSOs in the respective countries. The results of this benchmark analysis are presented in Figure 22. Once again we have built two alternative scenarios for North Macedonia. The scenario referred to as North Macedonia (low tariffs) in Figure 22 uses the equivalent tariff calculated for Scenario CAPEX30_COMBO (6,57 €/MWh). Scenario referred to as 101

North Macedonia Gas Distribution – FS Update

North Macedonia (high tariffs) uses the equivalent tariff calculated for Scenario BA_Increase_WACC (10.38 €/MWh) which is the highest tariff we have calculated. Further scenario North Macedonia (low tariffs) uses the transmission tariff of 2036 as provided by NER (lowest of all values provided) whereas North Macedonia (high tariffs) uses the values of 2022 (upper range of all values provided. Supply cost of gas is the average price for North Macedonia as shown in Table 46. Values for Greece and Bulgaria are also those of Table 46. For Greece we also show values taking into account the decrease in VAT and taxes applicable since 2020. Although the total price in both scenarios is in the higher range, we note that the price of gas as a commodity in North Macedonia is already more expensive than in the two markets used for comparison. Competitiveness in the gas price is expected to improve upon the completion of the interconnections.

End-user gas price - Country benchmark

0.050

0.045 0.007 15.3% 11.5% 0.040 15.3% 0.005 16.7% 0.006 22.2% 0.002 5.7% 0.035 0.010 0.006 0.007 0.012 0.030 16.2% 0.012 23.4% 28.8% 7.5% 31.2% 0.009 0.002 4.8% 0.004 0.025 7.9% 1.7% 0.003 0.002 0.001 €/kWh 4.8% 0.020 63.7% 55.0% 0.015 51.8% 58.3% 58.2% 0.026 0.026 0.023 0.010 0.022 0.022

0.005

0.000 N.Macedonia (low N.Macedonia (high Greece (2018 Greece (2020 Bulgaria tariffs) tariffs) tariffs) tariffs)

Gas wholesale cost (S2 2018) Transmission Distribution VAT

Figure 22: Comparison between end-user prices of gas in North Macedonia, Greece and Bulgaria

4.8.4 Estimates of avoided emissions Natural gas is one of the most environmentally friendly fossil fuels. Comparatively large scale penetration of natural gas at distribution level in North Macedonia is expected to displace old and inefficient burners firing mainly gasoil and other petroleum products as well as solid fuels including solid biomass. In principle, gas may also replace electric heaters of various type. In this section, an analysis on emissions reduction is made.

102

North Macedonia Gas Distribution – FS Update

Table 47 shows the current energy mix used for heating purposes in the residential and the commercial sectors. As shown in the table, solid biomass represents about 60% of total fuel consumed.

Table 47 Energy mix of residential and commercial facilities for heating purposes in North Macedonia Source: Eurostat, complete energy balances

Final consumption (%) of fuel in energy Fuel [GWh] mix Solid biomass37 2,162.0 58.7% Liquid fuels 799.7 21.7% Electricity for heating38 185.7 5.0% District heating 535.4 14.5% TOTAL 3,682.7 100%

The annual consumption (GWh) of each fuel to be replaced by natural gas was calculated by multiplying each fuel’s percentage in the energy mix with the total gas consumption of that year (as used in this study). Calculations for district heating are not included, since the fuel used there is natural gas. We note that consumption of alternative fuels (in case the distribution system is not realized) is estimated to be at least 60-70%39 higher than the respective quantities of natural gas due to the lower efficiency of existing combustion devices particularly at the residential sector. Air pollutant emission factors per fuel (kg/kWh) used for calculations, are presented in Table 48. Values are generic as provided by the European Environmental Agency. NOx emission factors are expected to be even lower at the time of first installations of in-house appliances firing natural gas. For calculating the emission factors of electricity, the power generation mix included in the 2014FS was used (20% RES, 80% Lignite). For the RES clearly emissions are zero. As North Macedonia does not report to the European Pollutant Release and

37 Also includes a small portion of solid fossil fuels (0.5%) that due to its insignificant share and similar emission factors with solid biomass is not analysed separately 38 For calculating the volume of electricity that is used for heating purposes from Eurostat’s aggregated electricity data, the average EU28 household share of electricity used for heating purposes (Electricity consumption for heating/Total electricity consumption=16.5%) was sourced from EC. [https://ec.europa.eu/eurostat/statistics- explained/images/9/93/Energy_consumption_households_data2017-mod.xlsx] [https://ec.europa.eu/eurostat/statistics- explained/index.php?title=Energy_consumption_in_households&oldid=456802#Use_of_ener gy_products_in_households_by_purpose] 39 Value estimated by taking into account the efficiency factors of Table 45 in comparison to natural gas efficiency (Table 46) and the fact that solid biomass accounts for 60% of fuel consumption. Removing district heating from Table 47, shares of fuels to be replaced become 68.7, 21.7 and 5.8 Then if one assumes that current fuels are replaced proportionally for each unit of gas replaced, at least 68.7/100 x 1/0.5+21.7/100x1/0.7 = 1.68 units of other fuels shall be replaced. This simplistic analysis excludes fuel not consumed at electricity production level. 103

North Macedonia Gas Distribution – FS Update

Transfer Register (E-PRTR) , lignite emissions where evaluated using Greek data as published in the E-PRTR. Emission factors for electricity are presented below.

Table 48 Emission factors per fuel. Source: EMEP/EEA air pollutant emission inventory guidebook 2019 Pollutant g/GJ Kg/kWh Natural Gas NOx 51 0.000184 SOx 0.3 0.000001 PM10 1.2 0.000004 Solid biomass NOx 51 0.000184 SOx 11 0.000040 PM10 760 0.002736 Liquid fuels NOx 51 0.000184 SOx 70 0.000252 PM10 1.9 0.000007 Table 49 Emission factors of electricity Electricity Emissions (kg/kWh) NOx SOx PM10 0.0009 0.0038 0.0002

Emission reductions per pollutant (kg/GWh) for each fuel replaced with natural gas were calculated based on the above data, and were used to estimate the total avoided emissions (NOx, SOx, PM10) for each fuel annually. The total avoided NOx emissions over the 35 year concession period reach 8,621 tones, avoided SOx emissions reach 59,896 tones, while PM10 emissions are reduced by 360,875 tones. Detailed data are provided in Table 50. Taking into account that the amount of fuel consumed in the absence of substitution shall be at least 70%40more relative emissions saved are estimated of at least 14.656 tons of NOx, 101.823 tons of SOx and 613.488 tons of particulate matter emissions (PM10). If one looks at values per capita, on average annual reductions per capita are of the order of 120- 204 gr NOx, 835 -1420 gr SOx and 5.032- 8.554 gr of particulate emissions. Note that per capita levels (2014 data41) are at a level of 32000 tones NOx, 80000 tones Sox and another 32000 tones particulate emissions of less than 10 μm (PM10). Per capital respective values are 15.240, 40160, 10751 gr. Thus expected environmental savings per capita from the development of a distribution system although marginal in terms of NOx (1-1.5%) are estimated at least in the range of 1-1.5%, 2-4% in terms SOx and at least 50% in terms of particulate emissions. Note that particularly the reduction in particulate emissions is significant. The European Environmental Agency in its 2019 air quality report 42 ranks North Macedonia as the country with the highest average exposure indicator (AEI) in terms of emissions of less than 2.5 μm (PM2.5 included in our PM10 estimates) in Europe.

40 See footnote 39 41 http://air.moepp.gov.mk/wp-content/uploads/2017/07/AirQualityReport_EN.pdf 42 https://www.eea.europa.eu/publications/air-quality-in-europe-2019, page 32. 104

North Macedonia Gas Distribution – FS Update

105

North Macedonia Gas Distribution – FS Update

Table 50 Gas consumption, Consumption per fuel to be replaced, and Resulting avoided emissions per fuel [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] Years Years emissions emissions emissions emissions emissions emissions emissions emissions emissions [GWh] [GWh] [tones] [tones] biomass biomass Avoided SOx Avoided SOx Avoided SOx Avoided Avoided NOx Avoided NOx Avoided NOx Avoided Total gasTotal Avoided PM10 Avoided PM10 Avoided PM10 Avoided Total solid solid Total consumption consumption consumption consumption consumption Total avoided avoided Total Total electricity replaced [GWh] [GWh] replaced [GWh] replaced [GWh] replaced PM10 emissions emissions PM10 Total liquid fuels liquid Total emissions [tones] emissions[tones] emissions[tones] Total avoided SOx Totalavoided Liquid fuels Solid biomass Electricity NOx Totalavoided

Y1 ------

Y2 ------

Y3 163 35 96 8 9 0 4 262 6 31 2 6 44 263 - -

Y4 721 157 423 36 39 0 16 1,156 28 138 7 28 193 1,164 - -

Y5 1,516 329 890 76 83 1 34 2,431 58 289 14 58 406 2,446 - -

Y6 2,382 517 1,398 120 130 1 54 3,819 92 454 23 92 638 3,843 - -

Y7 3,248 705 1,907 164 177 2 73 5,209 125 620 31 125 870 5,241 - -

Y8 4,115 894 2,416 208 224 2 93 6,600 159 785 39 159 1,102 6,641 - -

Y9 4,925 1,069 2,891 248 268 3 111 7,897 190 939 47 190 1,319 7,947 - -

Y10 5,650 1,227 3,317 285 308 3 128 9,060 218 1,078 53 218 1,513 9,117 - -

Y11 6,285 1,365 3,689 317 342 3 142 10,078 242 1,199 59 242 1,683 10,141 - -

Y12 6,835 1,484 4,013 345 372 4 155 10,961 263 1,304 65 263 1,831 11,030 - -

106

North Macedonia Gas Distribution – FS Update [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] [tones] Years emissions emissions emissions emissions emissions emissions emissions emissions emissions [GWh] [GWh] [tones] [tones] biomass biomass Avoided Avoided SOx Avoided SOx Avoided SOx Avoided Avoided NOx Avoided NOx Avoided NOx Total gasTotal Avoided PM10 Avoided PM10 Avoided PM10 Avoided Total solid Totalsolid consumption consumption consumption consumption consumption Total avoided Totalavoided Total electricity replaced [GWh] [GWh] replaced [GWh] replaced [GWh] replaced PM10 emissions emissions PM10 Total liquid fuels Total liquid emissions [tones] [tones] emissions [tones] emissions Total avoided SOx Totalavoided Liquid fuels Solid biomass Electricity NOx Totalavoided

Y13 7,067 1,535 4,149 356 385 4 160 11,333 272 1,348 67 272 1,893 11,403 - -

Y14 7,239 1,572 4,250 365 394 4 164 11,609 279 1,381 68 279 1,939 11,682 - -

Y15 7,397 1,606 4,343 373 403 4 167 11,863 285 1,411 70 285 1,981 11,937 - -

Y16 7,543 1,638 4,428 380 411 4 171 12,097 291 1,439 71 291 2,020 12,172 - -

Y17 7,619 1,654 4,473 384 415 4 172 12,218 294 1,453 72 294 2,041 12,294 - -

Y18 7,695 1,671 4,517 388 419 4 174 12,340 297 1,468 73 297 2,061 12,417 - -

Y19 7,772 1,688 4,563 392 423 4 176 12,463 300 1,482 73 300 2,082 12,541 - -

Y20 7,850 1,705 4,608 396 428 4 178 12,588 303 1,497 74 303 2,102 12,666 - -

Y21 7,928 1,722 4,654 400 432 4 179 12,714 306 1,512 75 306 2,123 12,793 - -

Y22 8,007 1,739 4,701 404 436 4 181 12,841 309 1,527 76 309 2,145 12,921 - -

Y23 8,088 1,756 4,748 408 441 4 183 12,969 312 1,542 76 312 2,166 13,050 - -

Y24 8,168 1,774 4,795 412 445 4 185 13,099 315 1,558 77 315 2,188 13,181 - -

Y25 8,250 1,792 4,843 416 450 5 187 13,230 318 1,573 78 318 2,210 13,313 - - 107

Y26 8,333 1,809 4,892 420 454 5 188 13,362 321 1,589 79 321 2,232 13,446 - -

Y27 8,416 1,828 4,941 424 459 5 190 13,496 324 1,605 80 324 2,254 13,580 - -

Y28 8,500 1,846 4,990 429 463 5 192 13,631 328 1,621 80 328 2,277 13,716 - -

Y29 8,585 1,864 5,040 433 468 5 194 13,767 331 1,637 81 331 2,299 13,853 - -

Y30 8,671 1,883 5,090 437 472 5 196 13,905 334 1,654 82 334 2,322 13,992 - -

Y31 8,758 1,902 5,141 442 477 5 198 14,044 338 1,670 83 338 2,345 14,132 - -

Y32 8,845 1,921 5,193 446 482 5 200 14,184 341 1,687 84 341 2,369 14,273 - -

Y33 8,934 1,940 5,245 450 487 5 202 14,326 344 1,704 84 344 2,393 14,416 - -

Y34 9,023 1,959 5,297 455 492 5 204 14,470 348 1,721 85 348 2,417 14,560 - -

Y35 9,113 1,979 5,350 460 497 5 206 14,614 351 1,738 86 351 2,441 14,705 - -

223,640 48,564 131,289 11,277 - 12,186 122 - 5,057 358,638 8,621 42,653 2,115 8,621 59,896 360,875 TOTAL TOTAL (Y1-Y35) (Y1-Y35)

108

North Macedonia Gas Distribution – FS Update

4.9 Analysis of the availability and sustainability especially regarding the availability of basic projects, applicable for projects that need a support from public sector in any form or means Realisation of Phase 2 and 3 depends on the timely completion of the transmission system. It is upon the private partner to prepare and seek to obtain all necessary approvals for the construction of the network from the state and municipal authorities. In turn the state and municipal authorities shall provide support where needed and timely approve relevant applications as provided by the legal framework.

4.10 Public sector comparative analysis - analysis of the project implementation profitability through PPP compared to the usual way of providing public service by public partner Not applicable

4.11 Quality standards and payment mechanisms for private financing initiatives Technical and commercial quality standards (quality of service) would need to be specified by the Regulator or set in the concession agreement. The investment shall recover costs through network tariffs. It is expected that an over/under recovery mechanism may need to be introduced in the tariff regulation.

4.12 Risk matrix analysis Regarding the estimation of the project risk, a Project Risk Matrix (PRiM) tool is adopted, including the risks probabilities and impacts attributes. The risks in this matrix are categorized in five main categories: construction and operational risk, financial and economic risk, procurement and contractual risk, general environment risks, regulatory and delay risks. This Matrix shows the risk level for each category, being split into probability (P) and impact (i), using the ranking values of “low”, “medium” and “high”. Each risk will be divided into: low impact & low probability (LI-LP), low impact & medium probability (LI-MP), low impact & high probability (LI-HP), and similarly MI-LP, MI-MP, MI-HP, HI-LP, HI-MP and HI-HP. As far as the natural gas distribution network project in North Macedonia is concerned, there are some key risk factors (see list below) of vital importance to the project’s outcome and should be well taken into account while computing the project’s total expected risk because their probability of occurrence is medium but the impact could be high.  Construction & operational risk includes risks such as changes in labor and materials costs, inadequate cost management, cost overruns, lack of resources, the risk that the planning permission for the construction of the project may be refused or not be given on time, the risk that unacceptable conditions may be applied to any planning permission granted and the risk that the planning process may take longer than anticipated or that the cost exceeds expectations. It stands for the risk of failing to deliver a solution that works satisfactorily and meets the 109

North Macedonia Gas Distribution – FS Update

existing requirements as well. This constitutes a major factor in our analysis because the impact on the outcome will be very high, in case of occurrence  Financial & economic risks arises due to the inability of the investor to contribute the pre agreed amount to the project  Market risk is often the most important risk that such a project might confront. This category includes a “demand” risk, which is the risk of making lower-than- expected revenues if the actual demand of the natural gas falls short of the demand initially forecasted  Regulatory and delay risk contain changes and unexpected modifications in the general legal framework. In addition, they relate to the possibility of changes in public needs. It is the risk of the output specifications set up in the initial contract being proved inadequate because of changes in political preferences. The relative importance of this risk increases with contract length. However, the most important factor in this risk category is the project delay and third parties delay that are related to delays in obtaining administrative approvals and permits or other delays. In this case, the permits and the administrative approvals for the construction should been issued After having described the methodology and taking into consideration the risk analysis above in combination with all available information provided, the PRiM can now be produced, in order to estimate the total project’s risk, as follows:

Table 51: Risk Matrix Risk Categories/ LP LP-MI LP-HI MP- MP-MI MP-HI HP- HP- HP- Subcategories -LI LI LI MI HI Construction and Operational Risk Construction risk X Operational risk X Performance risk X Financial and Economic Risk Credit default X Sponsors’ default X Budget constraints X Insurance X Funding terms X Inflation X Interest rate X Price of raw X materials Demand X Procurement and Contractual Risk Market competition X Subcontractor X procurement risk Contractual X agreement General Environmental Risks Political X Environmental X Social X Regulatory and delay risks 110

North Macedonia Gas Distribution – FS Update

Changes in X regulations Project delay X Third party delay X

Proper risk identification and allocation is a key to successful PPP project implementation and is important for the public client & the private bidders to assess all the potential risk through the whole project life.

4.12.1 Risk mitigations plan Efficient risk allocation and mitigation are central in bringing the natural gas distribution network project in North Macedonia to financial closure and in providing appropriate incentives during construction and operation. Risk in any transaction cannot be eliminated. It always exists for both parties to the contract. However, risk can be managed to an acceptable level through a suitable risk allocation and mitigation. The role of the mitigations is to enhance opportunities and reduce threats to project objectives. Table below indicates the mitigations plan per risk category during all phases of the project.

Table 52: Risk mitigation plan Risk Categories Potential Risk Mitigation Measure Environmental . Land contamination . Ensure environmental and social standards will be and Social . Labor & working met conditions . Develop an Environmental and Social . Occupational health Management Plan (ESMP), aiming at preventing and safety and mitigating potential adverse environmental & social impacts during the life of the Project Land and site . Access rights . For any potential delays the concession period risk . Security should be extended by an equal period . Heritage Design/ . Inadequate design . The design of gas distribution network complies Engineering and specifications with the Natural Gas Code, local and international quality standards as to equipment and in particular pipeline. It must also be fully compatible with the other parts of the network . Engage the services of local legal, design and construction service firms with deep knowledge of the local permitting process . Clear design objectives should be selected and described in the contract . Different site . Perform all necessary site investigations and Conditions studies during the planning and early design stages . Maintenance risk . Properly define the maintenance obligations on the private partner to ensure that the facility is properly maintained throughout the life of the project . Ensure that the facility is in a satisfactory condition in the event of early termination or on expiry of the agreement Construction . Project execution . Establish industry leading governance program risk and delay in . Establish regular reporting procedure of project completion construction progress

111

North Macedonia Gas Distribution – FS Update

. Prescribe completion date and construction delay compensation completion on construction contract . Utilize insurance contracts such as performance bond and years completion guarantee . Unavailability of . Develop personnel plan, including research of sufficient skilled labour market and skills labour . Develop tailor-made personnel plan for the operation phase . Transmission lines . Conduct the evaluation of contractor’s schedules through productivity analysis . Prioritize the definition of engineering design . Integrate schedules and evaluate interfaces . Adopt the appropriate technology tool for linear projects . Untimely completion . Develop comprehensive master permit list of the utilities and . Develop a detailed division of responsibility basic infrastructure . Monitor and track progress on a master schedule to the site to support . Coordinate with local agencies and municipalities project schedule and overall master planning at adjacent plots to ensure adequate infrastructure is installed to support the planned program and schedule local agencies and municipalities Market Risk . Volume and price . Develop financial instruments and hedging fluctuations affecting techniques penetration rate Finance/Funding . Lack of funds . Different sources of funds including equity and availability debt financing will be adopted simultaneously in a balanced manner . Regulations/changes . Engage local tax and accounting experts to identify in tariffs and account for the treatment for all applicable methodology and tariffs required tax . Engage local tax and accounting experts to ensure proper treatment in changes such as Natural Gas Carbon tax (NGCT), excise duty on gas or regulations changes . Exchange rates . Deploy proper hedging mechanism as needed could change and increase our foreign currency risk . Price inflation of . Selection of an appropriate type of contract such construction as lump-sum to transfer the risk to other parties materials . Incomplete or . Develop project development budget based on inaccurate cost input from local experts, leveraging current market estimate data cost, research and operational experience Procurement . Lack of available . Engage a leading general contractor with deep skilled knowledge on natural gas distribution networks subcontractors . Importing and . Develop a detailed procurement plan with primary Customs focus on local market and resources . Coordinate with the appropriate governmental agencies to ensure all proper applications, approvals and regulatory requirements are addressed . Logistics . Develop a detailed logistics plan . Coordinate with all appropriate agencies and local are needed to minimize impact to communities and

112

North Macedonia Gas Distribution – FS Update

ensure efficient material, equipment and labour to the network Legal . Governing . Deploy proper contractual agreements as Law/Contract stipulated by local business practices and in-line formalities with lenders requirements . Environmental . Engage local environmental experts and consulting Permitting firms that are knowledgeable with local practices and regulations . Ensure open communication and coordination with the appropriate local and governmental agencies to ensure timely preparation and approval of required permits . General contractor to address needed permits within his/her scope of services . Corrupt Business . Implement a leading governance and compliance Practices program to ensure compliance with local regulatory requirements . Excessive approval . Engage the services of local legal, design and procedures in construction service firms with deep knowledge of administrative the local business practices and processes government . Ensure adequate time allowance for approvals departments such a permits and licenses are factored in the overall development schedule Political risk . The risk of . Ensure that all parties involved keep in line with the government project objectives and will need to actively manage intervention, the various stakeholders in the project to achieve discrimination, this seizure or . Outline certain political events as delay events, expropriation of the compensation events excusing causes (relief from project payment deductions) that involve a breach of obligations of the project Force Majeure . Unexpected events . Stipulate firmly and clearly in the contract cases of occur that are force majeure: i) that may lead to transferring the beyond the control of project into public operation, ii) including cases/ the parties and delay thresholds for renegotiation in case the profitability or prohibit of the project is affected performance . Include the necessary insurance services which could cover the cases of Force Majeure

113

North Macedonia Gas Distribution – FS Update

5 Legal analysis

5.1 Analysis of the legal framework related to provision of public service or performing activities related to concession / PPP facility, especially the mandatory requirements and elements that should be considered by the contracting parties The most relevant legislation for awarding PPP contract for this kind of projects (design, financing, construction, operation and maintenance of natural gas distribution networks) includes the following:  Law on Concessions and Public Private Partnerships – LCPPP (“Official Gazette of the Republic of Macedonia" No. 6/12, 144/14, 33/15, 104/15 and 215/15 and "Official Gazette of the Republic of North Macedonia" No. 153/19). This law regulates the awarding of concession of goods of general interest and contract for establishment of PPP, the legal protection of any person who has or has had an interest in obtaining such a contract and who has risked or risks to be damaged in the award procedure, as well as other matters relating to concessions of general interest and contracts for establishing PPP. This law is important for the subject of the feasibility study in terms that it defines the PPP models to be established, the manner to select the private partner, as well as the rights and obligations of the public and private partner during the contract implementation.  Public Procurement Law (“Official Gazette of the Republic of Macedonia” No. 24/2019). This Law regulates the manner and procedures for public procurement, the competences of the Public Procurement Bureau, the competences of the State Commission on Public Procurement Appeals and legal protection in public procurement procedures, as well as the legal protection in the procedures for awarding contracts for concessions and PPP. This law is relevant to the subject of a feasibility study in terms of the procedure for selecting a private partner. The LCPPP makes a reference to the application of the rules and procedures contained in the PPL when awarding a PPP contract. In this regard, the preparation of the tender documentation and implementation of the procedure should be done fully in line with this law.  Energy Law (“Official Gazette of the Republic of Macedonia” No. 96/18 and “Official Gazette of the Republic of North Macedonia” No. 96/19). This Law regulates: goals and manner of implementation of the energy policy, construction of energy facilities, status and competence of the Energy Regulatory Commission of the Republic of North Macedonia, electricity market, natural gas market, thermal energy market and petrol market, manner and procedure for determining and fulfilling the obligations to provide public service in the electricity, natural gas and thermal energy markets, as well as rights and obligations of energy consumers and users of energy systems, manner and conditions for encouraging the use of renewable energy sources and other 114

North Macedonia Gas Distribution – FS Update

energy issues. This law is important to the subject of a feasibility study for several reasons. The proposed PPP concerns construction of and operation with energy facilities – networks through which natural gas will be distributed, which according to the provisions of article 4 of this law is an activity of public interest, i.e. operators are obliged to provide public service. Article 62 sets out the conditions and manner of construction of new natural gas distribution networks. The Government, upon a proposal by the minister or by the local self-government unit is in charge to award PPP contract or concession contract to a private partner or concessionary to construct, use and manage a new natural gas distribution network. According to Article 61, the provisions of the LCPPP shall accordingly apply to the tendering procedure. The Government may also conclude a contract for cooperation with the local self-government units on whose territories the natural gas distribution network is to be constructed. The procedure for constructing a new natural gas distribution network shall not be conducted should on that territory a natural gas distribution network is already in place and is not sufficiently used. According to Article 135, it is allowed a company to function as a combined natural gas transmission and distribution system operator, to which a license for natural gas transmission and distribution is issued, pursuant to this Law and special bylaw that ERC has to adopt, which is an exception of the general prohibition for a same operator to perform transmission and distribution of natural gas. Furthermore, if the operator of the distribution network is at the same time natural gas supplier using the same network, which is not prohibited in case it supplies less than 100.000 consumers, then the Government could decide to impose obligation to the supplier to provide public service for a limited time period under terms and conditions defined by the law. Provisions for distribution of natural gas are set out in the Chapter VII.4 (articles 129-135) which regulate the rights and obligations of the natural gas distribution system operator, planning of the distribution system, measurement of the quantities of natural gas, unbundling of distribution and transmission, closed distribution system and combined operator. Provisions for suppliers of natural gas, including the obligation to provide public service and supplier of last resort, are set out in the Chapter VII.4 (articles 136- 140). The natural gas distribution system operator shall not be entitled, pursuant to Article 164 para (3) of the Energy Law, to refuse to connect a new industrial consumer on the grounds that it will cause restrictions on the available capacities in the network or because of additional costs related to the required capacity increase. Furthermore, the operator of the natural gas transmission and/or distribution system shall be obliged to provide sufficient input and output capacity for the new connection. The following bylaws are of relevance for operating natural gas distribution network and for supplying consumers with natural gas: Rules on Natural Gas Supply („Official Gazette of the Republic of North Macedonia” no.51/2019) adopted by the ERC based on the present Energy Law and Grid Codes for Natural Gas Distribution adopted in 115

North Macedonia Gas Distribution – FS Update

2015 by the local enterprises who operate the local natural gas distribution networks in Kumanovo and Strumica. In addition to these laws, for implementation of the awarded PPP contract, the following laws are also of great importance:  Law on Strategic Investment in the Republic of North Macedonia (“Official Gazette of the Republic of Macedonia” No. 14/20). This law regulates the criteria, conditions and procedure for reporting, status determination, selection, preparation and implementation of investment projects of highest strategic priority for the state. This law is important for the subject of the feasibility study because the development of natural gas distribution networks shall be considered as a strategic investment project. According to Article 4 of this law, strategic investment project is a project amounting to at least 100 million EUR in the territory of at least two or more municipalities or project financed by international financial institutions, where the holder of the investment is a state administration body, public enterprises or companies established by the state or municipalities. For the realization of strategic investment projects, the necessary approvals, permits, approvals, licenses, authorizations, certificates and other documents issued in accordance with special laws shall be issued within the deadlines determined by the law regulating the realization of the strategic investment project, while for the project financed by international financial institutions the deadline for obtaining a construction permit shall not be longer than 36 months from the date of acquiring the status of strategic investment project.  Law on Spatial and Urban Planning (“Official Gazette of the Republic of Macedonia” No. 199/14, 44/15, 44/15, 193/15, 31/16, 163/16, 64/18 and 168/18)43. This law regulates the conditions and the system of spatial and U planning, types of planning documentation and the procedure for its preparation and adoption as well as other issues in the field of spatial and U planning. This law is important for the subject of the feasibility study since the distribution network should be built on an area / land for which an appropriate U plan has to be adopted prior to the preparation of the project design and in a procedure elaborated in section 4.5 of the Feasibility Study.  Law on Agricultural Land (“Official Gazette of the Republic of Macedonia” No. 135/07, 17/08, 18/11, 42/11, 148/11, 95/12, 79/13, 87/13, 106/13 , 164/13, 39/14, 130/14, 166/14, 72/15, 98/15, 154/15, 215/15, 7/16, 39/16 and “Official Gazette of the Republic of North Macedonia” No. 161/19). This law regulates the use, disposal, protection and conversion of agricultural land. This law might be relevant to the subject of the feasibility study because of the possibility the land on which the distribution networks are planned to be constructed to have status of agricultural land, which has to converted into construction land in a procedure governed by the provisions of this Law, shortly elaborated in section 4.5 of the

43 At the time of writing this Feasibility Study, a new Law for Urban Planning was enacted by the Parliament published in the Official Gazette of the Republic of North Macedonia no. 32/2020 from 10.02.2020, but its application will start on 18 June 2020 116

North Macedonia Gas Distribution – FS Update

Feasibility Study.  Law on Construction Land (“Official Gazette of the Republic of Macedonia” No. 15/15, 98/15, 193/15, 226/15, 31/16, 142/16 and 190/16). This law regulates the rights and obligations regarding the construction land, arrangement of the construction land, conditions and manner of disposal with the construction land, as well as other issues related to construction land. This law is relevant to the subject matter of the feasibility study in the sense that the distribution networks must be built on land that has status of construction land owned by the Republic of North Macedonia or legal entity established by the Government or by the municipalities. The owners may transfer the ownership or lease the construction land to the operator of the distribution network under the terms and conditions prescribed in this law.  Law on Expropriation (“Official Gazette of the Republic of Macedonia no. 95/12, 131/12, 24/13, 27/14, 104/15, 192/15, 23/16 and 178/16”). This law regulates the deprivation and restriction of the right to property and property rights for the purpose of realizing the public interest determined by law for the purpose of construction of buildings and other works (hereinafter: expropriation), determining the public interest, the expropriation procedure and the procedure for determining market compensation. This law is relevant to the subject matter of the feasibility study in the sense that the distribution networks might need to be built on land that is privately owned and therefore has to be expropriated in order for the public partner to become an owner with the right to construct.  Law on Environment (“Official Gazette of the Republic of Macedonia” No. 53/05, 81/05, 24/07, 159/08, 83/09, 48/10, 124/10, 51/11, 123/12, 93/13, 187/13, 42/14, 44/15, 129/15, 192/15, 39/16 and 99/18). This Law regulates the rights and obligations of the Republic of North Macedonia, the municipalities, legal entities and natural persons in the provision of conditions required to ensure protection and improvement of the environment, for the purpose of exercising the right of citizens to a healthy environment. The environment includes: soil, water, air; areas of the environment, biodiversity and other natural resources, as well as the protection of the ozone layer and protection against the negative impact of man on the climate system. This law and the supporting bylaws are important for the subject of the feasibility study in that before the design and construction of distribution networks, the requirements for environmental protection have to observed, that is to prepare an environmental impact study on the project / activity or elaborate for environmental protection, both aiming to evaluate the impact of the activities on the environment.  Law on Ownership and Other Real Rights (“Official Gazette of the Republic of Macedonia” No. 18/01, 92/08, 139/09 and 35/10). This Law regulates the ownership right and other real rights, which may be acquired by all domestic and foreign natural and legal persons, including the state and local self-government units, under the conditions and in the manner provided in the law. This law is relevant to the subject of a feasibility study in terms of ownership of the land planned for construction of distribution networks and of the already constructed

117

North Macedonia Gas Distribution – FS Update

networks, as well as to determine the rights and obligations of public and private partners arising from ownership.  Construction Law (“Official Gazette of the Republic of Macedonia” No. 130/09, 124/10, 18/11, 36/11, 54/11, 13/12, 144/12, 25/13, 79/13, 137/13, 163/13, 27/14, 28/14, 42/14, 115/14, 149/14, 187/14, 44/15, 129/15, 217 / 15,226 / 15, 30/16, 31/16, 39/16, 71/16, 132/16, 35/18, 64/18 and 168/18 and Official Gazette of the Republic of Northern Macedonia No. 244/19). This law regulates the construction, basic requirements of the construction, necessary project design documentation for obtaining a construction permit, rights and obligations of the participants in the construction, manner of use and maintenance of the construction, as well as other issues of importance to the construction. This law is important for the subject of the feasibility study in terms of the design and construction of distribution networks that are to be conducted in accordance with the rules, standards and norms set forth in this law and the bylaws arising therefrom. These procedures are elaborated in section 4.5 of the Feasibility Study.  Law on Real Estate Cadastre ("Official Gazette of the Republic of Macedonia" No. 55/13, 41/14, 115/14, 116/15, 153/15, 192/15, 61/16, 172/16, 64/18 and "Official Gazette of the Republic of North Macedonia” No. 124/19). This Law regulates the management of the Geodetic Cadastral Information System, the maintenance of the real estate cadastre, the establishment and maintenance of the cadastre of infrastructure objects as part of the real estate cadastre, the basic geodetic works, the geodetic works for special purposes, the special geodetic surveys, surveying and maintenance of the state border, topographic maps, mass real estate estimation, establishment and management the Graphic Register of construction land, keeping of the spatial units Register, keeping of the Graphic Register of streets and house numbers, supervision of the operation of authorized surveyors and the surveying companies, as well as the status, organization, operation and oversight of Agency for Real Estate Cadastre. This law is important for the subject of the feasibility study for the early (preparatory) and final (operational) stages in the PPP. Namely, official data for the ownership and purpose of the land planned for distribution networks to be constructed can only be obtained from the real estate cadastre registries. The converted land and transferred ownership or other property right established on the land has to be recorded in these registries as well.  Company Law (“Official Gazette of the Republic of Macedonia”, No. 28/04, 84/05, 25/07, 87/08, 42/10, 48/10, 24/11, 166/12, 70/13, 119/13, 120/13, 187/13, 38/14, 41/14, 138/14, 88/15, 192/15, 6/16, 30/16, 61/16 64/18 and 120/18) regulates the commercial entity (according to the activity, form, type and scope of activity, the entry); the sole proprietor; the core (charter) capital; the parts and shares; the company agreement; or company charter; the pre-incorporated company; the duration of the company; the capacity of a legal person (legal status); the branch offices; the liability of the company; the special responsibility of the members; or shareholders; the persons that may or may not found a company; the conditions under which the foreign person may be a member, or 118

North Macedonia Gas Distribution – FS Update

shareholder; the rights of the foreign persons; the annulment of the company; the contributions (monetary and non-monetary); the prohibition on exemption from the liability to pay, or making the contribution; the participation in the profit; the member’s or shareholder’s right to information; the legal regime of the company’s property; the protection of the rights of the members or shareholders before the court; the judgment of validity; the characteristics of the company (business name, registered office, scope of operations); the representation (legally authorized representative, representative by proxy and representative by employment); the commercial representative; the sales agent; the commercial register; the procedure, the entries in the commercial register and their disclosure; the conditions for founding, management, supervision; decrease and increase of the core (charter) capital; the relations between the members or shareholders; and other issues pertinent to the different types of companies – the general partnership, the limited partnership, the limited liability company, the joint stock company and the limited partnership by shares; the major transactions and the interested party transactions of the company; the trade books; the annual accounts and financial statements and their audit; the dividend; the equity holding in other companies (related companies); the consolidated annual accounts and the consolidated financial statements; the transformation of the companies from one form to another form of a company; accession, merger and division of companies; the liquidation of the company; the economic interest grouping; the silent partnership; the foreign company and foreign sole proprietor; the branch offices of the foreign company, or of the foreign sole proprietor and the representative offices of foreign companies; the manner of establishing a centralized commercial register in material and electronic form and the one-stop- shop system; the control and supervision; the penalty provisions as well as the transitional regime pertaining to application of this Law. This law is important for the subject of the feasibility study from the point of view how the special purpose vehicle will be established and operate with the natural gas distribution networks and in general how the company will act in the business environment.

5.2 Identification and analysis of the ownership regarding the subject of the PPP According to the Constitution of the Republic of North Macedonia the legal protection of property is the fundamental value of the constitutional order. Article 30 of the Constitution provide that the ownership of property creates rights and duties and should serve the wellbeing of both the individual and the community. According to the Article 2 of the Law on Ownership and Other Property Rights, all domestic and foreign natural and legal persons can acquire the right of ownership, including the state and local government units, under conditions and in a manner provided by this and other laws. Acquisition, protection and termination of ownership and other real rights are regulated by this law as well. In that order Article 11 of the LCPPP stipulates that the facilities constructed under PPP contract, including accessories and improvements, shall be property of the public partner unless otherwise provided in the PPP contract.

119

North Macedonia Gas Distribution – FS Update

It should be noted that, when it comes to ownership rights on the natural gas distribution network, the Energy Law does not contain a strict requirement for the distribution system operator to be owner of the network, unlike the obligation for ownership of the natural gas transmission system by the transmission system operator44. The fact that the natural gas distribution system operator is not the owner of the distribution network does not constitute legal obstacle for the ERC to issue a license for performing distribution of natural gas activity. Moreover, the fact that at the time of submission of the license application the private partner has no possession of tangible property related to the natural gas distribution activities, will not prevent the issuance of the license. In accordance to the Licensing Rulebook adopted by the ERC, as a valid precondition for the issuance of license for natural gas distribution shall be PPP Contract awarded by the Government.45 In that order, the PPP contract should be perceived as a contract by which a private partner is obliged to undertake the obligation to provide a public service to the end users by: a) financing, design, construction and/or reconstruction/renovation a facility of public infrastructure, or operate and maintain a new facility and / or reconstructed / renovated facility on public infrastructure or, b) use, manage and maintain an existing facility on public infrastructure, or c) any combination of the above obligations as long as the combination of those obligation serves the purpose to providing public services to the end-users.46 That means that the private partner, under the PPP contract can construct, operate and maintain the natural gas distribution network facilities, performing energy activity distribution of natural gas based on the license issued by ERC, and can simultaneously supply natural gas to customers connected to that distribution network, also based on the license.47 Given the specifics of the distribution of natural gas, i.e. provision of the public services, the volume of the assets needed for the performance of the energy activity, as well as the requested period indicated in the licensing application, the license could be issued for a period of up to 35 years.48 This license duration period should be aligned with the duration of the PPP contract. Namely, according to the Article 39 of the LCPPP, contracts provided for by this law shall be concluded for a period of up to 35 years, unless otherwise provided by a special law. However, Energy Law, as a special law on this issue, does not contain provisions defining specific duration of the concession/PPP contract. Furthermore, in cases where the natural gas distribution system operator is part of a vertically integrated natural gas company, the independence of the natural gas distribution system operator shall not include the obligation to separate the ownership

44 Energy Law, Article 109: The operator of the natural gas transmission system in the Republic of North Macedonia is a company which owns the natural gas transmission system. 45 Licensing Rulebook, Annex I, part 6, item 2). 46 LCPPP, Article 5. 47 According to the 133, para (9) of the Energy Law the company that performs natural gas distribution may also perform natural gas supply, natural gas supply with a public service obligation and natural gas supply of last resort, if less than 100,000 consumers are connected to its distribution system. 48 Energy Law, Article 38, para. (4).

120

North Macedonia Gas Distribution – FS Update of the distribution system assets from the vertically integrated natural gas company49. In order to fulfil the legal requirements related to the independence of the natural gas distribution system operator, the vertically integrated company may make a change to another legal form, whereby any form of transfer of assets from the vertically integrated company to the newly established company shall not be deemed to be a transaction in accordance with the taxation regulations. Regarding the assets of the existing natural gas distribution systems in the country, it should be noted that they are not owned or possessed by the public partner, and therefore cannot be transferred to the use of the private partner without previous consent issued by the owners of those systems, before PPP contract is signed. Owners of the existing natural gas distribution networks are:  Municipality of Kumanovo that performs this activity through the Public enterprise for energy activities Kumanovo Gas  Municipality of Strumica that performs this activity through the Public enterprise for energy activities Strumica-Gas  Government of the Republic of North Macedonia that performs this activity through the Directorate for Technological Industrial Development Zones (TIRZ) While the possibility of the private partner to use distribution network in the TIRZ owned by the Government is rather clear, private partner possibility to use existing natural gas distribution assets in the municipal ownership should be further elaborated. There are two options how can these two distribution networks be given to another party to upgrade, manage and maintain them. 1. Given that the above quoted Article 5, para (1), point b), , second line of the LCPPP stipulates that in order to fulfil its obligation to provide public service to the end user, private partner can use, manage and maintain an existing facility on public infrastructure, the municipality as an owner of the public enterprise can decide to use this possibility and initiate procedure for establishing PPP, where the public partner will be existing municipal public enterprise. However, the principles of competitiveness and non-discrimination on which the PPP award procedure is based, do not allow to the municipality directly to conclude PPP contract with the private partner who is selected to perform natural gas distribution activity on the national level. This means that an open procedure must be conducted by the municipality or the public enterprise in line with the PPL to select a private partner to upgrade, use, manage and maintain the existing network, who might be different than the one selected on national level. 2. According to the article 4 paragraph (1) of the Law on Public Enterprises, the founder of a public enterprise (i.e. municipality) may decide to transform the public enterprise into limited liability company or joint stock company. Тhis provision enables the selected private partner to acquire shares in such transformed municipal public enterprise and to carry out the natural gas distribution activity with the existing distribution network, including its extension

49 Energy Law, Article 133. 121

North Macedonia Gas Distribution – FS Update

and upgrade. Furthermore, paragraph (2) of the same article provides that if funds of legal or natural persons are invested in a public enterprise, the founder shall adopt a decision to organize a public enterprise as a limited liability, or joint stock company. In order this option to be realized, the following steps must be taken: a) Based on Article 62 paragraph (4) of the Energy Law, the Government and each municipality on whose territory the natural gas distribution system is already constructed and operational to conclude contract for cooperation; b) Based on the concluded contract and article 4 paragraph (1) of the Law on Public Enterprises, each municipality council to adopt decision for transformation of the public enterprise into limited liability company or joint stock company; c) Each municipality to define the number of shares that will be transferred to the selected private partner on national level, who will be obliged to expand and upgrade the existing network. It is recommended that all these steps are timely completed, so that the rights and responsibilities of each contracting party in respect to the existing networks are clearly stipulated in the ongoing tender procedure for award of PPP contract.

5.3 Identification and qualification of the acquired rights over the object of PPP The natural gas distribution system includes output measuring and control stations, pipelines, valves, cathodic protection system, surveillance system, data collection and management system, other equipment, as well as buildings for the safe and secure operation of the distribution system and delivery of natural gas to consumers with agreed quality. As it was explained above (4.2), the facilities constructed under a PPP contract, including accessories and improvements, shall be property of the public partner unless otherwise provided in the PPP contract. However, the decision whether during the contractual period the owner of the network will be public or private partner, should be unambiguously specified in the tender documentation, based on the feasibility study on analysis for justification of the awarding the PPP contract. In case where the private partner is owner of the distribution network during contractual period, when the PPP contract terminates, the private partner shall be obliged to return, i.e. transfer to the public partner’s ownership the facilities constructed under the PPP, regardless of whether or not they were either fully or partially constructed, reconstructed, conserved, furnished or improved by the private partner, under conditions and in a manner stipulated in the PPP contract, if not otherwise provided50. Regardless of the ownership status, during the contractual period private partner should have right to use the distribution network for performing energy activities, as

50 LCPPP Article 11, para 3. 122

North Macedonia Gas Distribution – FS Update well as the right to use, without any limitations and impediments, construction land on which the distribution system is built, or should be built. For these purposes, in order possible misunderstandings and disputes to be avoided, all rights and obligations of the parties provided in the PPP contract related to the ownership status (including right to use, obligation to transfer) of the natural gas distribution system need to be properly and undoubtably registered in the Real Estate Cadastre Agency of the Republic of North Macedonia. It would be advisable, in the course of construction of the network, all newly constructed parts of the network simultaneously to be registered in the real estate cadastre. However, if the private partner is owner of the distribution system during the contractual period, in the property certificate the irrevocable note must be added stating that after the PPP contract termination, the ownership on the distribution system assets shall be transferred to the public partner. It is important to emphasize the provision of Article 42 of the LCPPP where is stipulated that the PPP contract can be transferred, based on the previously issued consent by the public partner, under the conditions laid down in the PPP contract and without violation of the contract duration, unless otherwise provided by a special law. Furthermore, the LCPPP provide opportunity for transferring the private partner’s rights and obligations of the PPP contract in favour of lenders as a means of securing their claims from private partner, provided that it does not endanger the continuous and quality performance and provision of the public services, including the prices. In such cases, the public partner concludes a contract for transfer with the entity to which the PPP contract is transferred under the conditions and in the manner set forth in the existing PPP contract. It should be also noted that according to LCPPP the transfer of shares or stocks of the Special Purpose Company (SPC) established by the private partner for the purpose of executing the PPP contract to the third party cannot be executed without the written consent of the public partner. However, where the transfer of the SPC shares to the third party nominated by the lender is prescribed in the Direct agreement concluded between the lender, Private partner and Public partner, the written consent of the Public partner shall be provided in accordance to the Direct agreement provisions. In all of these described cases, the ownership on the natural gas distribution system after the PPP contract termination must be transferred to the public partner. It should be noted that according to the Article 5 of the LCPPP the public partner may also enable the private partner to perform certain commercial activities in addition to the obligations to provide public services, set out in the PPP contract, but only if there is no other possible way to provide the necessary level of cost-effectiveness of the private participation and reasonable return of the investment (for example, design, installation and maintenance of the gas equipment in the consumer’s premises, sales of spare parts, etc.).

5.4 Identification of rights the public partner will transfer to the concessionaire/private partner The public partner will transfer to the private partner right to design, finance, construct and use the natural gas distribution system and to connect the distribution system to

123

North Macedonia Gas Distribution – FS Update the natural gas transmission system in order for the private partner to perform distribution of natural gas and possibly supply of natural gas. Given that the public partner is currently not the owner of the construction land on which the distribution system shall be build, the land use right cannot be transferred by the public to the private partner. Private partner can acquire land use right in accordance to the Law on Construction Land. Land use right shall be in compliance with the duration of PPP contract. Pursuant to the Article 17 of the Law on Construction Land, construction land owned by the Republic of North Macedonia intended for the construction of infrastructures defined by the Construction Law51 shall be leased on a long-term basis, be given a right of easement or be entitled to a permanent use on the basis of an infrastructure project. The right to long-term lease of construction land owned by the Republic of North Macedonia shall be acquired by agreement and decision of a state authority. The right of long-term lease of construction land entitles the holder of the right to construct its own building (on the surface or under it) on the construction land that belongs to another person. The holder of the right to long-term lease is the owner of a constructed building on that construction land and in respect of the construction land has rights and obligations of the usufructuary, and any contractual provision to the contrary is null and void. According to the Article 11- b of the LCPPP the public partner shall be obliged to submit to the Real- Estate Cadastre Agency all documents adopted for the implementation of the procedure for awarding the PPP contract, based on which the registration/recording of the property rights is made in the real-estate cadastre. Public partner cannot provide access to the existing distribution systems to the private partner without previous consent issued by the distribution systems owners

5.5 Summary of necessary documentation for construction of the concession / PPP facility or provision of public service, including the procedure for providing documentation, as well as the responsible authorities for issuing the documentation

5.5.1 Preparation and adoption of U plan and U planning documentation Project design can be developed and a construction permit issued for a location / land that is covered by an appropriate U plan or U planning documentation, thus acquiring the status of construction land. Part of the land on which the distribution networks will be constructed are not Uized, i.e. not covered by U plan or U planning documentation and has status of agricultural land. In some cases, the land might have status of construction land but to be used for purpose different then construction of infrastructure object as the distribution network is, which means the existing U plan has to be changed.

51 According to the Article 2, item 16 of the Construction Law, natural gas pipeline is an infrastructure facility. 124

North Macedonia Gas Distribution – FS Update

The required documentation for the adoption of the U plan will depend on the type of plan. The U planning documentation suitable for this purpose is the infrastructure project as an U-planning documentation prepared for line infrastructure objects defined by the Construction Law, for functional parts of line infrastructure objects as well as for infrastructure objects composed of several parts of which at least one part represents line infrastructure (Article 52 of the Law on Spatial and U Planning which is still in force52). The infrastructure project shall be prepared on the basis of an extract from the spatial plan or from an U plan or from an U planning documentation showing the infrastructure route and other data. The infrastructure project shall also include:  an elaborate for environmental protection in case for the same scope elaborate has not been approved by the competent authority prior to the adoption of the U plan, and  positive audit report for second category infrastructure facilities. The infrastructure project has to be developed in accordance with the standards and norms of U planning by a licensed person for designing second category constructions and its content and form have to be in line with the requirements set in the Rulebook on the content, form and manner of processing of an infrastructure project.The procedure is conducted through the e-Uism information system (https://www.e- Uizam.mk/admin#/account/login), and the responsible authority to adopt / approve the infrastructure project is the council of the municipality on which territory the network will be constructed. In case, part of the land has status of agriculture land, within the procedure for adoption of the appropriate U plan / U-planning documentation, the conversion of agricultural land into construction land will be carried out. This part of the overall procedure is conducted in accordance with Article 49 of the Law on Agricultural Land. The procedure is initiated by the competent authority for adoption of the plan (municipality) and is also conducted through the e-Uism information system. The initiative (request) for conversion is reviewed by the Ministry of Agriculture, Forestry and Water Economy, which prepares and submits proposal for conversion to the Government that has a final say in the procedure.

5.5.2 Procedure for issuing construction permit The main gas pipeline (transmission network) is categorized as a facility of first category, whereas the secondary gas pipeline (distribution network) is considered as a facility of second category (Article 57 of the Construction Law).

52 The new Law on Urban Planning (OG no.32/2020) that will start applying from 18 June 2020, similarly defines the urban infrastructure project “project through which urban- architectural, construction or technical-technological plan-project development is performed for the route (line), architectural, construction and technical elements of the transport and other infrastructures, as well as overhead structures belonging to the infrastructure systems”. Conditions to be met, required documents and procedural steps for its approval are generally same as in the present law. 125

North Macedonia Gas Distribution – FS Update

Ministry of Transport and Communication grants construction permits for the first category facilities. The permits for the facilities of second category are issued by the municipality mayor. To obtain a construction permit for a distribution network, the investor must submit an application electronically through the e-permit information system (https://www.gradezna-dozvola.mk/Account/Login?ReturnUrl=%2f) to the competent authority. The following documents accompany the application for construction permit:  Infrastructure project approved by the competent authority,  Architectural-U project certified by the competent authority, if the U plan foresees development of this project, prepared by a legal person for construction planning.  Project design with a report of the project design audit or a written report with approval of the project design notification, if it is made abroad, as well as a positive opinion on the projected degree of mechanical resistance, stability and seismic protection of the construction,  Preliminary design, in cases when such preliminary design was submitted and approved,  Evidence for a right to construct, which in this case may be: o Property certificate with a registered ownership or long-term lease or right of easement of the construction land, which is an integral part of the geodetic report for numerical data on construction land, or o Concession agreement or public private partnership agreement, or o Property certificate with a registered ownership right of the Republic of North Macedonia, or a final decision for expropriation or a property certificate with a registered ownership right or a right to a long lease or the right of easement on the construction land, in case of construction of line infrastructures, which is an integral part of the geodetic report for numerical data on construction land.  Geodetic elaborate for numerical data for the construction land. The aforementioned design documentation is prepared in accordance with design standards and norms and other technical regulations, which determine the basic parameters in the design and architectural design of constructions. The design of the main gas pipeline can be drafted only by a legal entity for construction design holding A designing license, whereas the legal entity that designs the secondary pipeline network must hold B designing license. After verification of the project design, the municipality calculates the fee for arrangement of construction land, which the investor is obliged to pay within 15 days or to arrange the payment by concluding contract with the municipality to pay the fee in instalments or by concluding contract stipulating that it will arrange the land at its own expense or submit a bank guarantee for payment of the fee or will establish a mortgage in favour of the municipality. Eventually, the municipality decide to exempt the investor from paying the fee. 126

North Macedonia Gas Distribution – FS Update

The municipality issues the permit to the investor and submits a copy thereof and the certified project design to the Agency for Real Estate Cadastre for marking in the public register, as well as copy to the competent civil engineer inspector.

5.5.3 Preparatory construction works Preparatory construction works can be carried out as needed, in which case a permit for preparatory works is required. With the granted permit the following preparatory works can be taken:  fence for the construction site,  asphalt base, separation of aggregates, plant for concrete production,  transmission line and transformer station which is necessary to be built for powering the construction site with electricity,  installation for supply and drainage of water,  facilities for accommodation of workers and for construction products,  storage facilities for flammable liquids and explosive devices and  other facilities necessary for the construction of the building. These buildings are of a temporary nature and the contractor is obliged to remove them and to arrange the land accordingly until the submission of the application for permission to use the construction.

5.5.4 Procedures and documents during the construction phase According to Article 68 of the Construction Law, the deadline for construction of first and second category buildings may not exceed 10 years, except for the line infrastructure objects. Changes to the construction, in accordance with Article 69 of the Construction Law, may be made during the construction, if the changes do not affect the fulfilment of any basic requirements for the construction and do not change the conformity of the construction with the parameters of the U plan or U planning documentation or infrastructure project. In order to make changes, the investor must submit an application accompanied with amended project design and report on audited project design to the competent authority that issued the construction permit. The permit will be issued within 15 days of receiving the request and complete supporting documentation. Prior to the commencement of the earthwork on the construction site, the investor has to mark the projected construction on the ground, with appropriate signs in a manner and under conditions prescribed in a bylaw adopted by the Minister of Transport and Communications. The contractor is also obliged to encircle the construction site, as well as to take other measures in accordance with Articles 83-85 of the Construction Law. In addition to undertaking these measures, the constructor is obliged to provide documentation as described in Article 86 of the Construction Law. The investor at his own expense must hire a supervising engineer with the authorization A for first category constructions.

127

North Macedonia Gas Distribution – FS Update

5.5.5 Issue of permit for use If in the procedure for obtaining construction permit, the investor submitted a statement that until the construction is completed will resolve all the land property legal issues, then the permit for use can be obtained only if the investor has proven that these legal issues are resolved. This means that during the construction of the natural gas distribution network, the procedure for expropriation of the private land will be conducted and completed, if necessary. The application for issuance of permit for use is submitted by the investor, who must enclose the following:  Project design, as well as performance design verified by supervising engineer if changes have been made during the construction,  Final report by the supervising engineer confirming that the building has been constructed in accordance with the project design and construction permit,  Excerpt from the public record of real estate rights registry for the last status of the recorded property rights (property certificate) for the purpose of determining the legal relationship between the investor and the landowner regarding the construction, and  In cases where a construction permit has been issued for line infrastructure facilities based on investor’s statement that will regulate property issues until granting the permit for use, the investor must submit a geodetic report for numerical data and evidence of resolved property issues. A commission established by the Ministry of Transport and Communications will carry out technical inspection of the construction within 15 days of the receipt of the application for permit for use. In the Commission’s report on the conducted technical inspection it will be stated whether:  the building is constructed in accordance with the project design or performance design and the construction permit,  the building can be used,  there are certain disadvantages that must be removed before approval can be issued for use and  there are deficiencies that violate the basic requirements of the building that relate to mechanical resistance, stability and seismic protection and will suggest that no permit for use is granted for that construction. The investor will cover the costs of carrying out the technical inspection on his own expense. The Ministry of Transport and Communications will issue a permit for use within 15 days of the date of the technical inspection, if the commission that carried out the technical inspection in the minutes finds that the construction can be put into service.

128

North Macedonia Gas Distribution – FS Update

In addition to the permit for use, prior to the commencement of natural gas distribution, the private partner must request and obtain a decision on the use of technical equipment from the State Inspectorate for Technical Inspection.

5.5.6 Usage, conversion, adaptation, reconstruction, maintenance and disposal of the facility The construction must be used in accordance with its purpose, and as an exception, it will be possible to perform conversion, reconstruction or adaptation. The documentation that is submitted with the application for conversion, reconstruction or adaptation and the procedure for issuing the approval are regulated by the provisions of Article 97 of the Construction Law. The owner of the facility is obliged to maintain and invest in the construction in order to preserve the basic construction requirements in accordance with the use and maintenance project. Removal of an object or part of it is performed in the event of damage to the object if there is a risk of collapse. The owner of the facility must take urgent measures for removal of the facility i.e. to mark the facility as dangerous with appropriate markings, to place a protective fence until the removal of danger and to submit a request with supporting documentation for obtaining approval for removal from the Ministry of Transport and Communications, pursuant to Article 99 of the Construction Law.

5.5.7 Obtaining energy license Conditions for issuing a license for operating natural gas distribution network are provided in the Energy Law and the Licensing Rulebook adopted by the ERC. To prove that it meets the general requirements, as well as the requirements regarding financial standing, non-existence of legal impediments to perform the activity and technical qualifications, the investor must submit to the ERC long list of documents referred to in Article 1 item 6 from the Rulebook on Licenses. ERC will then schedule a preparatory session to be held within 30 days of receipt of the full request. If the ERC determines from the conclusions of the preparatory session, as well as from the submitted documentation, that the conditions for issuing the license are met, it will schedule a regular session within 10 days to reach a decision and issue the license. At the request of the investor, the ERC may within seven days of the date of receipt of the request, issue a probationary license to the energy facility (natural gas distribution network) through which the investor will perform the activity. The probationary licensee, for the duration of the probationary license, has all rights and obligations with respect to the operation of the facility as if it were a licensee.

5.6 Analysis and recommendations regarding the content of the PPP contract Article 40, para 2 of the LCPPP stipulates that the PPP contracts shall be prepared in accordance with the tender documentation, announcement or public call and the decision for selection of the most favourable bid. It should be noted that according to the Article 15 of the LCPPP, the provisions of the Law on Public Procurement shall be

129

North Macedonia Gas Distribution – FS Update applicable for awarding PPP contracts. In that sense, according to the Article 81 of the Law on Public Procurement, the tender documentation should contain the mandatory elements of the РРР contract. In the Article 40, para 6 of the LCPPP, the Government shall prescribe the content of the PPP contract. On 23.03.2012, Government adopted the Decree on the content of the contract for establishment of public private partnership and the concession contract for use of the goods of general interest. In Article 2 of the Decree the content of the contract for providing public services is prescribed and in Article 3 the additional provisions of the contract for providing public services are listed. These provisions are applicable if the private partner assumes responsibilities for the design, construction and/or reconstruction of public infrastructure, along with the one or more obligations related to the financing, operation and maintenance, in order to provide to the end users public services that should be provided by the public partner, or in order to provide to the public partner the necessary conditions for performing public service that is under its responsibility. Further, Article 5 of the Decree provide that depending on the type / subject of the public-private partnership, the PPP contract shall state all or part of the elements of Articles 2 and 3 above, or the PPP contract may contain other elements than the elements of Articles 2 and 3 of this Decree. Given that the goal of the project is to develop natural gas distribution system through private partner obligations to design, invest (finance), build, operate and maintain the system, as well as during the contractual period private partner to perform energy activities distribution and supply of natural gas, following content of the PPP contract is recommended: 1. Introduction The introduction contains reference to decisions/conclusions and other documents that preceded the conclusion of the PPP contract, such as: o Decision of the public partner to initiate a procedure for awarding a PPP contract, o Decision on selection of the most favourable bid (private partner), o Proof of registration of the Special Purpose Company, if it is provided in the tender documents, o Proof of secured guarantee for quality and timely execution of the object of the PPP contract (performance bond) 2. Contracting Parties o Public partner (Government or fully state-owned joint stock company, and o Private partner - Article 12 of the LCPPP provide that public partner in the tender documents may require establishment of the Special Purpose Company (SPC) by the private partner (most favourable bidder), and in such case the PPP contract will be concluded between public partner and the SPC.

130

North Macedonia Gas Distribution – FS Update

3. Interpretation of the PPP contract (definitions, abbreviations, references) 4. Purpose and subject of the contract – design, invest (finance), build, operate and maintain the system, as well as during the contractual period private partner to perform energy activities distribution and supply of natural gas. 5. Term of the PPP contract - 35 years 6. Property legal documentation – registration of the property rights in the real-estate cadastre. 7. Risk sharing and associated costs – according to the Decree on the content of the PPP contract, risk sharing matrix shall be included in the Appendix to the PPP contract. 8. Financing and refinancing of the building – possible financial obligations of the partners, rights of the lenders, refinancing gains, consequences of the termination of the financing agreement with the lenders. 9. Financial guarantees – issuance of the bank guarantee for regular and quality performance of the construction, as well as for the operation of the natural gas distribution system shall be mandatory stipulated in the contract, according to the requirements provided in the tender documentation. 10. Subcontractors - Article 48 of the LCPPP provides that the public partner can require that the private partner awards contracts that represent at least 30% of the total value of PPP contract to third parties, at the same time enabling the bidders to increase this minimum percentage which is to be determined in the contract, or the bidders indicate in their bids the percentage of the total value of the PPP contract that they plan to assign to third parties. 11. Preparation of project documentation – according to the Decree on the content of the PPP contract, project documentation, as well as the dynamics of the preparation shall be included in the Appendix to the PPP contract. 12. Obtaining permits needed for project implementation – Private partner shall be obliged to obtain all necessary permits, licenses, approvals and other documents proscribed by the laws, while the public partner shall be obliged to provide assistance and facilitate in the procedures. 13. Construction of the natural gas distribution network – private partner shall construct the system in accordance with the time schedule for the construction contained in the Appendix to the PPP contract. 14. Supervision of the construction of the natural gas distribution system – possibility to introduce supervising engineer 15. Connection to the natural gas transmission system – shall be executed in accordance to the Energy Law and Natural Gas Transmission Grid Code. 16. Natural gas distribution system management – private partner shall be responsible to manage natural gas distribution system in accordance to the 131

North Macedonia Gas Distribution – FS Update

issued license, appropriate grid code, other regulations governing the operation of natural gas systems, as well as in line with the instructions by the natural gas transmission system operator; 17. Energy activities licenses – the private partner shall be obliged to obtain license for natural gas distribution and license for natural gas supply. 18. Maintenance of the natural gas distribution system – private partner shall be responsible for the maintenance of the system in accordance to the regulations in force (maintenance standards) as well as to the maintenance schedule enclosed as an appendix to the PPP contract. The liability for non- proper maintenance shall be prescribed in the PPP contract. 19. Ownership of a natural gas distribution system – the public partner shall be the owner of the natural gas distribution system, unless in the tender documentation and in the PPP contract is provided that during the contractual period the private partner shall be owner of the system. 20. Contractual penalty - identification of the conditions under which contractual penalties are levied, determination of the occurrence of a condition for the payment of contractual penalties, as well as the amount and manner of payment of contractual penalties, 21. Insurance policies - The private partner is obliged to provide, throughout the constructing as well as the operational period, insurance for the works, property and facilities. 22. Consequences of non-fulfilment of contractual obligations - The parties agree that if a party violates the contractual obligations and caused damage to the other party, it will compensate the actual damage to the other party. The injured party shall have the right to claim compensation for lost profit if the damage is caused by fraud, wilful default of the contractual obligations or failure to fulfil the contractual obligations due to gross negligence. 23. Right of supervision by the public partner – According to the Article 53 of the LCPPP the public partner shall continuously and regularly supervise the implementation of the PPP contract, as well as the compliance with the obligations of the private partner in accordance with the law and the PPP contract. 24. Force Majeure – Event or condition which at the time of its occurrence was outside the control of a contractual party, could not have been foreseen by the party and the consequences of such events or situations the party could not overcome by applying a reasonably acceptable effort (acts of god, acts of state or municipal authorities). Notifications on the event of force majeure as well as the consequences of the force majeure should be properly addressed. 25. Changes in legislation - All new laws and bylaws, as well as the amendments and supplements to the laws and bylaws governing the subject matter of the PPP contract, which have entered into force and whose application commenced after the commencement of the application of PPP contract, by which the private partner’s obligations are increased or his rights 132

North Macedonia Gas Distribution – FS Update

are diminished, or private partner’s financial position is worsened, the private partner, in order not to cause worsening of its economic situation, has the right to request the public partner an annex to PPP contract to be concluded, except if the novelties or amendments to the laws and bylaws are used equally and non-discriminatory applicable on all companies in the Republic of North Macedonia, notwithstanding their activity. 26. Termination of the contract – The PPP contract shall cease to be valid with the expiry of the term of validity of the contract, unilateral termination of the PPP contract public or by the private partner, consensual termination of the PPP contract by the contracting parties, bankruptcy or liquidation of the private partner and other cases provided by law and the PPP contract. In case of significant breach of the obligations by the other contracting party: The public partner may unilaterally terminate the PPP contract especially when: the activity conferred by the contract is carried out in an inappropriate or inadequate manner, having regard to the rules, parameters and other conditions which specify the proper performance of the activity established with the contract; the private partner has otherwise committed a crucial violation to the provisions of the PPP contract or of the laws and regulations applicable to it; the private partner has terminated or caused the termination of performance of the activity; the private partner has lost the economic, technical or the operational capabilities required to perform the activity in line with a special law and the PPP contract, and the private partner failed to comply with the measures imposed in the supervision procedure conducted in accordance with a special law. The private partner may unilaterally terminate the PPP contract when: the public partner fails to perform their obligations arising from the contract and has otherwise significantly violated the contractual provisions or the laws and regulations applicable thereto. 27. Transfer of rights under the contract – According to the Article 42, para 2 of the LCPPP the PPP contract may provide for the transfer of the rights and obligations of the contract, from the private partner in favour of lenders as a means of securing their claims from the private partner, provided that it does not endanger the continuous operation and / or service provision, quality performance of the activity, including the price. 28. Transfer of contract - Article 42, para 1, of the LCPPP provide that the PPP contract can be transferred, with the written consent of the public partner, under the conditions laid down in the contract and without breach of the contract duration, unless otherwise provided by a special law. 29. Changes in a legal status of the contractual party- If the private partner, in accordance with the law regulating the operation of the companies in the Republic of North Macedonia, made a change in the ownership structure or legal status change, he shall be obliged to notify the public partner thereof within (TBD) working days of the day of the entry of the change in the Central Registry of the Republic of North Macedonia. If due to a change in the law 133

North Macedonia Gas Distribution – FS Update

whereby the rights and obligations of the public partner arising from PPP contract are assumed by another person determined by law, the parties agree that within (TBD) days after the entry into force of that law they will conclude annex by which the PPP contract will be aligned with the changes. The parties agree that they will not require the termination of the PPP contract by cancelation due to the above elaborated changes. 30. Changes of the PPP contract - Article 41 of the LCPPP stipulates that the PPP contract may be amended by concluding an annex to the contract, if such possibility is expressly stated in the tender documentation. The annex to the contract shall be concluded by the public partner, especially in the following cases: o occurrence of a threat to the national security and defense of the country, endangerment of the environment, nature and human health and the public order facilities, o collapse of the facility of the public-private partnership, or in the event of an objective impossibility of its use, in the event of a force majeure, o in case of modification of the legal and regulatory framework relevant to the subject of the PPP contract, o other cases leading to modification of the factual or legal basis for use of the facility or for the provision of the service, and o other cases determined by special laws. If the private partner submits a report confirming that the contract cannot be executed as a result of external and other objective impacts, an annex to the contract can be concluded by its initiative, and in such case the private partner shall be obliged to submit a programme for redirection of the full amount of funds envisaged for the execution of the contract, upon previous consent of the Government. In case of modification of the essential terms of the contract, which were not provided in the tender documentation a new procedure for contract awarding is to be implemented. The term "essential terms” shall refer to such conditions that if they would have been provided in the original announcement the tender documentation, the bidders would have been able to submit a substantially different offer as well as if the modifications would exceed the scope of the contract to the extent that these changes would include services that were not originally covered. 31. Applicable law – The laws and regulations of the Republic of North Macedonia shall be applicable to the PPP contract. 32. Settlement of disputes arising out of the PPP contract – Amicable settlement, alternative dispute resolution, mediation, arbitration, competent Court of the Republic of North Macedonia. 33. Language of the contract – The PPP contract shall be concluded on Macedonian language, and depending of the nationality of the private partner, 134

North Macedonia Gas Distribution – FS Update

can be concluded beside on Macedonian language, on other language. However, in case of any inconsistency between Macedonian text and the text of the PPP contract on other language, the Macedonian text shall prevail. 34. Entry into force of the Contract. The following appendices must be included in the PPP contract:  Appendix 1: Standards for quality of public service;  Appendix 2: Risk-sharing matrix;  Appendix 3: Decision on selection of most favourable bid;  Appendix 4: Tender documentation;  Appendix 5: Bid of the selected bidder;  Appendix 6: Extract from the Trade Register and the Statute (Articles of Incorporation) of the private partner;  Appendix 7: Guarantee for timely and high-quality performance of the contract;  Appendix 8: Guarantee of the parent company for the Special Purpose Vehicle;  Appendix 9: Business plan of the private partner;  Appendix 10: Copy of the cadastral plan for the land parcel to be used for construction;  Appendix 11: Property certificate;  Appendix 12: Project documentation;  Appendix 13: Environmental impact assessment study / elaborate;  Appendix 14: Conditions for use and maintenance of structure;  Appendix 15: Financial model;  Appendix 17: Construction timetable.

135

North Macedonia Gas Distribution – FS Update

6 General conclusions and recommendations

6.1 Analysis of the legality and feasibility of the concession / PPP award, including the establishment of preventive measures of interest to the country's defence and security Distribution of natural gas is an energy activity of public interest. Energy networks such as the ones for transmission and distribution of natural gas are considered as line infrastructure objects for which an infrastructure project is considered as most appropriate type of U plan. Natural gas network is considered as first category of construction if it is used for transmission (main pipeline), while the secondary network (distribution) is considered as second category construction. The construction permit for the former is granted by the Ministry of Transport and Communication, while for the latter by the municipality mayor. As regards who and when can construct natural gas distribution networks and operate them, the Energy Law is quite clear about it. In addition to the possibility that a public enterprise is established by the municipality to construct and operate the distribution network, which is the case with the existing networks in the municipalities of Strumica and Kumanovo, the Government can award PPP contract or concession to a private partner or concessionaire to construct, use and manage a new natural gas distribution network. The Government may also conclude a contract for cooperation with the local self-government units on whose territories the natural gas distribution network is to be constructed, which seem to be inevitable if the existing distribution networks in the municipalities of Kumanovo and Strumica are to be included in the procedure for awarding PPP contract in order to be expanded and upgraded. The procedure for constructing a new natural gas distribution network shall not be conducted on a territory where a natural gas distribution network is already in place and is not sufficiently used. As there are no official planning documents that foresee construction of gas distribution networks by the Government and/or municipalities on their own and the budgets of the local self-government units (municipalities) are not sufficient to invest in such infrastructure projects of high value nor is it cost-effective for each municipality to develop networks on its own, the only viable option for construction of network and expansion of existing ones is for the Government to conduct a procedure for awarding PPP / concession contract, i.e. involve private partner / concessionaire. Awarding concession for public works / public services is the legally most adequate model to be established for this purpose. Traditional concession contract applicable for goods of public interest (water, raw minerals, etc.) seems less suitable as the subject of this feasibility study is not good of public interest to be given to a concessionaire. What the private partner will get from the public partner is a land, often without status of construction land, that itself will not be exploited as a commodity, but will be used as ground for construction and later on for operation of the distribution network. Properly determining the type of PPP model is not just a theoretical question, but an important one for the type of the procedure to be conducted in order to award the

136

North Macedonia Gas Distribution – FS Update contract. Only if the subject is a good of public interest, the provisions from the LCPPP will apply in the procedure. For all other types of PPP, the procedure for awarding the contract will be conducted in line with the Public Procurement Law.

6.2 Recommendation on the procedure for selecting a concessionaire / private partner

6.2.1 Preparatory work for awarding a PPP contract The Managing Board of the Public Partner must adopt a decision to commence the procedure for awarding PPP contract, which shall be approved by the Government of the Republic of North Macedonia53 as the founder of Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI (Article 17 of the LCPPP). The decision shall contain the elements set forth in Article 18 of the law, namely:  an explanation of the justification for awarding PPP contract, including an explanation of the basis for identifying the type of contract considering the definition of PPP emerging from this Law,  setting the objectives thereof,  subject of the PPP contract and the basic conditions for awarding PPP contract,  in case of PPP contract, the type of the procedure to be applied based on the Public Procurement Law,  the manner and time in which the procedure is to be conducted; and  the amount of the compensation for issuing the tender documentation. The General Director of the public partner will set up a Commission to implement the procedure for awarding PPP contract (Article 20 of the LCPPP), the tasks of which are set out in Article 21 of the LCPPP. The Commission should prepare the tender documentation for the procedure for awarding PPP contract as well as the model contract, to be derived from and based on this study.

6.2.2 Type of procedure to be applied The Public Procurement Law, which provisions will be applied in the procedure for awarding the PP contract, stipulates several types of procedures for selecting the most favourable bidder (private partner). Taking into account the complexity of this project’s subject, the two most suitable procedures for awarding the PPP contract are: restricted procedure and competitive dialogue. According to article 51 of the Public Procurement Law, the restricted procedure shall be conducted in two phases and it may be conducted for any subject-matter of the procurement. In the first phase of the procedure, any interested economic operator

53 According to article 110 paragraph (1) of the Energy Law, the Ministry of Economy shall be the owner of the company that operates the natural gas transmission network. However, the process of transferring the ownership over NER from the Government to the Ministry of Economy has not started yet. 137

North Macedonia Gas Distribution – FS Update may submit a request to participate in response to the contract notice published by submitting documentation for determining of the qualifications in accordance with the requirements in the tender documentation for the first phase. The time limit for the receipt of requests to participate in this procedure shall be no less than 30 days from the date on which the contract notice was published. The contracting authority shall adopt a decision on the selected candidates to which it shall deliver an invitation to bid, and only the selected candidates may submit a bid in the second phase. The contracting authority may limit the number of suitable candidates to be invited to submit a bid in the second phase (short-list). The time limit for the receipt of bids may be set by mutual agreement between the contracting authority and the selected suitable candidates, provided that they have the same time to prepare and submit their bids. In the absence of such mutual agreement, the minimum time limit for the receipt of bids in the second phase shall be ten days from the date on which the invitation to bid was sent. According to Article 53 of the Public Procurement Law, the competitive dialogue shall be conducted in three phases, namely:  A pre-selection phase,  Dialogue phase and  Phase for submitting a final bid. Relevant conditions for the subject matter of the feasibility study to be met in order for the public partner to conduct a competitive dialogue are the following:  Due to specific circumstances related to the nature, the complexity or the legal and financial makeup or the risks attaching to them, the PPP contract cannot be awarded without prior negotiations; or  The technical specifications cannot be established with sufficient precision by the contracting authority in accordance with the requirements of the Public Procurement Law. As the public partner and the subject matter of this feasibility study falls under utilities, the competitive dialogue procedure may be used as a regular procedure without prior determining whether the afore-mentioned conditions have been met. In the competitive dialogue procedure, any interested economic operator may submit a request to participate accompanied by the documentation required for determining of the qualifications. The time limit for the receipt of requests to participate in this procedure shall be no less than 30 days from the date on which the contract notice was published. The contracting authority shall adopt a decision on the selected candidates to which it shall deliver an invitation to participate in the dialogue, and only those candidates invited to do so may participate in the dialogue. The contracting authority may limit the number of suitable candidates to be invited to participate in the dialogue phase. In the competitive dialogue procedure, the contract shall be awarded only according to the criterion of the best price-quality ratio. The contracting authority shall set out its needs and requirements in the contract notice, which shall be defined in more detail in 138

North Macedonia Gas Distribution – FS Update the tender documentation for the first phase, and also the criteria for selection of the most advantageous tender and an indicative timeframe. The contracting authority shall open a dialogue with the suitable candidates where all aspects of the PPP could be discussed with the purpose of identifying and defining the means best suited to satisfying its needs. The contracting authority shall continue the dialogue until it can identify one or more solutions that are capable of meeting its needs. When the contracting authority will conclude the dialogue and inform thereof the participants involved in the final part of the dialogue, it shall invite each of them to submit their final bids on the basis of the solution or solutions agreed, which were presented and specified in more detail during the dialogue. The contracting authority may request that the bidder clarify its final bid, specify it in more detail and optimise it, however, that shall not involve changes to the essential elements of the bid or of the tender documentation. The contracting authority may negotiate with the bidder identified as having submitted the tender with best price-quality ratio to confirm the financial commitments or other requirements of the tender by finalising the terms of contract, provided this does not modify the essential elements of the tender, including the needs and requirements set out in the tender documentation and does not distort the competition or has discriminatory effects. The advantage of conducting restricted procedure vis-à-vis open procedure is that the commission formed by the public partner will not deal with numerous bids that need to be evaluated from the aspect of eligibility of the bidder and suitability of the technical and financial offer, as only the short listed, assumedly serious and renowned companies, will submit a bid. On the other hand, the advantage of competitive dialogue as opposed to the restricted procedure is that it allows for flexibility, i.e. discussion and negotiation with the qualified candidates in order to come up with a solution that suits best the needs, which at the stage of publishing the tender might not be precisely described in the technical specification. Yet, the experience of conducting this type of procedure in the country is very limited. At the time of finalizing this study the public partner decided to implement competitive dialogue procedure to award the PPP contract.

6.3 Draft decision on initiation of a concession / public-private partnership procedure As it is required by the Decree on the content of the Feasibility Study, we hereby propose a Decision on initiation of procedure for awarding PPP contract for design, financing, construction and operation of new natural gas distribution networks, although the drafters of this study are completely aware that at the time of finalizing this study the decision was brought by the public partner.

139

North Macedonia Gas Distribution – FS Update

6.4 Recommendation on the criteria for selection of candidates / bidders and evaluation of bids

6.4.1 Obligations of the private partner of relevance for determining the selection / award criteria According to the Energy Law, the Operator of Distribution System (ODS) shall be obliged to invest in the connection to the Natural Gas Distribution System and the Metering and Regulating Station (MRS) through which the distribution system is connected to the natural gas transmission system. The connection is done pursuant to the network rules of the Operator of Transmission System (OTS) (Now AD GAMA). In addition to this, ODS constructs the Main Distribution Network (MDN) and the Local Distribution Network (LDN). The natural gas consumer shall invest to connect its facility to the natural gas distribution network. The methodology for determining the connection costs should be part of the Natural Gas Distribution Grid Code. ODS shall be obliged to invest only in the meter for gas consumption from the MRS. In order to further define the investment policy for the investments of the private partner in the distribution system, i.e. in those parts that are, according to the valid regulations, an obligation of the gas user, one must take into consideration the type of the facility that is being connected to the distribution system. In general, there are three types of facilities:  Individual residential facilities (IRF) with not more than four separate residential units,  Collective residential facilities (CRF) with five or more separate residential units,  Other facilities (OF) such as business facilities, institutions, local government and state facilities, industrial facilities, and  Electricity and heat generating facilities (CHP) connected to the natural gas distribution network.

6.4.2 Criteria for selection of candidates/bidders According to the above defined principles and data, the following criteria for selection of most favourable bidder are proposed:  The bidder should have above 10 years of experience in development and/or operating natural gas distribution systems.  The natural gas distribution systems that are operated by the bidder should have more than 40,000 users.  The bidder shall have annual income from the natural gas distribution and supply of at least EUR 40 million in each of the last three years.

140

North Macedonia Gas Distribution – FS Update

6.4.3 Criteria for awarding the PPP contract For the realization of the PPP project on construction and managing with the natural gas distribution and supply system, and to select the private partner pursuant to the LCPPP, the following criterion will be used to select the most favourable bidder:  Number of U areas covered and number of consumers connected per year for the period of 10 years from the day the PPP contract is concluded

6.5 Tender documentation recommendations The Commission drafts the tender documents for designing, financing, construction and operation of natural gas distribution system within the deadline determined with the Decision on commencement of procedure for award of PPP contract. Tender documentation contains requirements, conditions, criteria and other necessary information, so as to ensure that the economic operator has complete, accurate and precise information regarding the manner in which the PP contract award procedure is to be conducted. More precisely, based on Article 81 of the PPL and depending on the type of procedure, the tender documentation must contain the following elements:  general information regarding the contracting authority;  instructions regarding the legal time limits and the necessary requirements for participation;  the minimum selection criteria and documents to be submitted by the bidders or candidates so as to prove that they meet the selection criteria;  technical specifications or in case of competitive dialogue a descriptive document;  instructions regarding the preparation and submission of the technical and financial proposal;  detailed and complete information regarding the criteria for selection of the most advantageous tender;  instructions regarding the review procedures in the procedure for awarding PPP contract; and information regarding the compulsory provisions of the PPP contract

6.6 Recommendations for Draft Contract The analysis and recommendations regarding the contents of the concession/PPP contract are based on the Decree on the Content of the Public Private Partnership Contract and the Concession Contract for Goods or General Interest which was adopted by the Government of the Republic of Macedonia pursuant to Article 40 paragraph 6 of the Concessions and Public Private Partnerships Act. The PPP contract can be amended by signing an annex to the contract, if this possibility is expressly provided for in the tender documentation. In case of change of the essential terms and conditions of the contract which have not been provided 141

North Macedonia Gas Distribution – FS Update for in the tender documentation, a new procedure for awarding a contract shall be initiated. The PPP Contract can be transferred by written consent of the Public Partner, under conditions determined in the contract, without prejudice to the term of the contract, unless otherwise stipulated by a special law. The PPP Contract can provide for the transfer of the rights and obligations under the Contract, from the Private Partner to the benefit of the lenders, as a means of securing their claims against the Private Partner, provided that it does not jeopardize the continuing operations and/or service provision, the quality regarding the performance of the activity, and the price. In the event of transfer of the PPP Contract, the Public Partner shall sign a Contract of Transfer with the entity to which the PPP contract is to be transferred, under conditions and in a manner stipulated by the existing PPP Contract. The transfer of stocks or shares from the Private Partner to an SPV in order to accomplish the PPP may not be made without the written consent of the Public Partner. Based on the Decree requirements, the mandatory elements of the PPP contract are given in Section 4.6.

142

North Macedonia Gas Distribution – FS Update

ANNEX 1: PROPOSAL FOR DECISION FOR COMMENCING PROCEDURE FOR AWARDING PPP CONTRACT

Pursuant to Article __ of the Statute of the Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI, Skopje, Article _____ of the Rules of Procedure of the Management Board of the Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI, Article 17 paragraph 5 and Article 18 of the Law on Concessions and Public Private Partnership (“Official Gazette of the Republic of Macedonia” No. 6/12, 144/14, 33/15, 104/15 and 215/15 and “Official Gazette of the Republic of North Macedonia” No.15 3/19 and 261/19), the Board of Directors of the Company at its meeting held on DD.MM.YYYY, adopted

DECISION

on commencing procedure for awarding contract for establishing public-private partnership for the design, construction, financing and operation of natural gas distribution networks

Article 1 With this decision, Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI is commencing a procedure for awarding contract for establishing public-private partnership for design, construction, financing and operation of XY natural gas distribution networks (hereinafter: PPP contract). Justification for awarding PPP contract derives from the need to move from conventional fossil fuels to more affordable sources of energy primarily for heating purposes.

Article 2 With the award and implementation of the PPP contract the following goals will be accomplished: - Expanding and increasing energy generated by use of cost-effective and less polluting sources, - Provide households in many U areas with options how to satisfy their demand for energy, and - Improving the reliability of energy supply. Article 3 The PPP contract will be implemented based on the following model: design- construction-financing-management.

143

North Macedonia Gas Distribution – FS Update

The PPP contract will be established as combined contract that includes elements of public works concession and public service concession. . Article 4 The subject of the PPP contract is the design, financing, construction and operation of XY natural gas distribution networks. Article 5 The PPP contract shall be awarded for a period of 35 years starting from the date of conclusion of the Contract. The most favourable bidder will establish a Special Purpose Company with which the PPP contract will be concluded. Prior to the expiration of the deadline referred to in paragraph 1 of this Article, the private partner shall be obliged to transfer the constructed networks into ownership and possession of the Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI. The terms, rights and obligations of the Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI, as a public partner will be set out in the tender documentation and the PPP contract. Article 6 The PPP contract shall be awarded by conducting restricted procedure / competitive dialogue, with the publication of a contract notice, in accordance with the provisions of the Public Procurement Law. Article 7 The procedure for awarding PPP contract will be carried out by the Commission for implementation of the procedure. The General Director of the Joint Stock Company for Natural Gas Transmission NACIONALNI ENERGETSKI RESURSI, within 5 days from the entry into force of this Decision shall adopt a Decision for establishing Commission for implementation of the procedure. The Commission shall prepare the tender documentation within 30 days from the day of adopting the Decision for establishing the Commission. The procedure for awarding PPP contract shall be conducted within 150 days of the publishing the contract notice. Article 8 The fee for issuing the tender documentation is 300 Euro in Denar equivalent according to the middle exchange rate of the NBRSM on the day of payment of the funds. Article 9

144

North Macedonia Gas Distribution – FS Update

This Decision shall enter into force on the day of its publication in the "Official Gazette of the Republic of North Macedonia" and shall be published after obtaining the consent of the Government of the Republic of North Macedonia.

145

North Macedonia Gas Distribution – FS Update

Annex I – Tables Table I-1: Main components of the medium and low pressure networks by municipality Medium No of pressure Low pressure pressure Municipality reduction No of ELSUs pipeline length pipeline stations (m) length (m) Aerodrom 17,451 2 53 79,500 Butel 16,270 2 47 70,500 Gazi Baba 32,396 4 75 112,500 Gjorche Petrov 18,385 2 43 64,500 Karposh 26,527 3 51 76,500 Kisela Voda 32,870 3 70 105,000 Saraj 2,470 1 3 4,500 Centar 20,441 2 38 57,000 Chair 14,882 1 21 31,500 Shuto Orizari 4,250 1 12 18,000 Arachinovo 2,299 1 15 22,500 Zelenikovo 6,370 1 15 22,500 Ilinden 14,037 3 57 85,500 Petrovec 9,966 1 16 24,000 Sopishte 7,250 1 21 31,500 Studenichani 8,850 2 26 39,000 Chucher Sandevo 10,220 2 27 40,500 Berovo 6,395 1 3 4,500 Bogdanci 10,905 1 11 16,500 Bosilovo 2,580 1 2 3,000 Valandovo 5,132 1 4 6,000 Vasilevo 1,938 1 2 3,000 Veles 12,966 2 54 81,000 Vinica 7,200 2 23 34,500 Gevgelija 11,606 2 48 72,000 Gradsko 2,711 1 3 4,500 Delchevo 6,720 1 15 22,500 Demir Kapija 3,490 1 5 7,500 Dojran 4,995 1 5 7,500 Zrnovce 1,378 1 1 1,500 Kavadarci 14,935 2 37 55,500 Karbinci 862 1 1 1,500 Konche 1,320 1 1 1,500 Kochani 13,030 2 39 58,500 Kratovo 2,963 1 1 1,500 Kriva Palanka 7,833 1 8 12,000 Kumanovo 13,090 3 49 73,500 Lipkovo 2,456 1 7 9,817 Lozovo 899 1 1 1,500

146

North Macedonia Gas Distribution – FS Update

Medium No of pressure Low pressure pressure Municipality reduction No of ELSUs pipeline length pipeline stations (m) length (m) Makedonska 1,904 1 2 3,000 Kamenica Negotino 6,380 1 12 18,000 Novo Selo 2,570 1 2 3,000 Pehcevo 2,750 1 1 1,500 Prilep 19,744 4 81 121,500 Probishtip 5,380 1 9 13,500 Radovish 6,680 1 15 22,500 Rankovce 736 1 1 1,500 Rosoman 1,852 1 2 3,000 Sveti Nikole 13,865 1 19 28,500 Staro Nagorichane 2,792 1 1 1,278 Strumica - - - - Chashka 1,227 1 2 3,000 Cheshinovo 8,696 1 2 3,000 Obleshevo Shtip 20,236 2 41 61,500 Bitola 25,088 5 91 136,500 Bogovinje 7,295 1 4 6,000 Brvenica 3,272 1 2 3,000 Vevchani 1,680 1 3 4,500 Vrapchiste 4,504 1 3 4,500 Gostivar 18,252 4 76 114,000 Debar 5,273 1 15 22,500 Debarca 4,526 1 6 8,482 Demir Hisar 2,390 1 6 9,000 Dolneni 297 1 0 556 Zhelino 4,208 1 1 1,500 Jegunovce 3,835 1 5 7,186 Kichevo 15,078 2 29 43,500 Krivogashtani 4,030 1 1 1,500 Krushevo 4,470 1 7 10,500 Mavrovo I Rostushe 2,386 1 3 4,471 Makedonski Brod 2,435 1 4 6,000 Mogila 1,352 1 2 3,000 Novaci 3,135 1 1 1,670 Ohrid 30,330 4 73 109,500 Plasnica 1,995 1 2 3,000 Resen 3,686 1 9 13,500 Struga 12,045 2 37 55,500 Tearce 8,579 1 11 16,076 Tetovo 25,151 3 66 99,000 Centar Zhupa 2,025 1 1 752 147

North Macedonia Gas Distribution – FS Update

Table I-2: Number of Service lines, risers and meters by municipality, by consumer category Service Risers / Risers / Risers / Service Service Municipality lines Meters Meters Meters lines (IRF) lines (OF) (CRF) (IRF) (CRF) (OF) Aerodrom 2,802 2,118 484 2,802 21,175 484 Butel 2,121 128 152 2,121 1,283 152 Gazi Baba 2,698 312 495 2,698 3,117 495 Gjorche Petrov 3,117 238 324 3,117 2,383 324 Karposh 2,357 843 278 2,357 8,433 278 Kisela Voda 4,845 578 423 4,845 5,775 423 Saraj 498 - 8 498 - 8 Centar 1,021 1,925 1,299 1,021 19,250 1,299 Chair 1,702 743 145 1,702 7,425 145 Shuto Orizari 572 - 19 572 - 19 Arachinovo 253 - 4 253 - 4 Zelenikovo 202 - 8 202 - 8 Ilinden 387 - 865 387 - 865 Petrovec 84 - 438 84 - 438 Sopishte 202 - 4 202 - 4 Studenichani 993 - 23 993 - 23 Chucher Sandevo 354 - 4 354 - 4 Berovo 240 11 14 240 107 14 Bogdanci 364 20 195 364 199 195 Bosilovo 603 - 22 603 - 22 Valandovo 604 4 186 604 40 186 Vasilevo 616 - 17 616 - 17 Veles 3,283 830 357 3,283 8,296 357 Vinica 647 18 120 647 179 120 Gevgelija 1,560 122 607 1,560 1,223 607 Gradsko 115 - 35 115 - 35 Delchevo 578 57 72 578 568 72 Demir Kapija 168 - 65 168 - 65 Dojran 135 6 32 135 58 32 Zrnovce 63 - 6 63 - 6 Kavadarci 565 252 177 565 2,518 177 Karbinci 35 - - 35 - - Konche 71 - 1 71 - 1 Kochani 1,880 83 137 1,880 829 137 Kratovo 365 7 11 365 73 11 Kriva Palanka 560 33 62 560 332 62 Kumanovo 5,287 339 145 5,287 3,388 145 Lipkovo 533 - 7 533 - 7 Lozovo 60 - 4 60 - 4 Makedonska 209 21 16 209 209 16 Kamenica Negotino 640 19 57 640 194 57 148

North Macedonia Gas Distribution – FS Update

Service Risers / Risers / Risers / Service Service Municipality lines Meters Meters Meters lines (IRF) lines (OF) (CRF) (IRF) (CRF) (OF) Novo Selo 296 - 12 296 - 12 Pehcevo 188 4 10 188 45 10 Prilep 7,418 466 418 7,418 4,658 418 Probishtip 577 89 60 577 886 60 Radovish 730 30 68 730 295 68 Rankovce 66 - 2 66 - 2 Rosoman 122 - 9 122 - 9 Sveti Nikole 875 16 86 875 164 86 Staro Nagorichane 69 - 1 69 - 1 Strumica 2,153 174 255 2,153 1,741 255 Chashka 77 - 5 77 - 5 Cheshinovo 287 - 9 287 - 9 Obleshevo Shtip 3,027 324 203 3,027 3,240 203 Bitola 5,317 1,972 885 5,317 19,716 885 Bogovinje 1,883 - 59 1,883 - 59 Brvenica 963 - 8 963 - 8 Vevchani 81 - 5 81 - 5 Vrapchiste 2,240 - 31 2,240 - 31 Gostivar 3,262 176 197 3,262 1,759 197 Debar 982 23 45 982 234 45 Debarca 445 - 1 445 - 1 Demir Hisar 144 - 14 144 - 14 Dolneni 29 - 0 29 - 0 Zhelino 609 - 7 609 - 7 Jegunovce 375 - 32 375 - 32 Kichevo 3,885 136 112 3,885 1,361 112 Krivogashtani 114 - 1 114 - 1 Krushevo 315 0 29 315 4 29 Mavrovo I Rostushe 231 - 6 231 - 6 Makedonski Brod 483 1 20 483 6 20 Mogila 103 - 0 103 - 0 Novaci 89 - 3 89 - 3 Ohrid 3,496 440 302 3,496 4,401 302 Plasnica 104 - - 104 - - Resen 521 14 15 521 139 15 Struga 3,353 713 221 3,353 7,132 221 Tearce 849 2 9 849 20 9 Tetovo 4,964 1,133 286 4,964 11,334 286 Centar Zhupa 39 - 1 39 - 1

149

North Macedonia Gas Distribution – FS Update

Table Ι-3: Capital expenditure by municipality and cost component for Baseline Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values)

Investment Cost in Baseline Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Aerodrom 4,519,809 7,473,000 11,421,767 9,113,682 90,000 32,618,258 Butel 4,213,930 6,627,000 4,913,791 1,335,974 90,000 17,180,695 Gazi Baba 8,390,564 10,575,000 7,881,104 2,398,943 180,000 29,425,611 Gjorche Petrov 4,761,715 6,063,000 7,761,364 2,196,940 90,000 20,873,019 Karposh 6,870,493 7,191,000 7,265,604 4,131,590 135,000 25,593,687 Kisela Voda 8,513,330 9,870,000 12,093,486 4,140,983 135,000 34,752,799 Saraj 639,730 423,000 969,747 187,932 45,000 2,265,409 Centar 5,294,219 5,358,000 11,371,932 8,150,083 90,000 30,264,234 Chair 3,854,438 2,961,000 5,246,412 3,449,567 45,000 15,556,418 Shuto Orizari 1,100,750 1,692,000 1,161,743 221,333 45,000 4,220,826 Arachinovo 595,441 2,115,000 491,908 95,350 45,000 3,342,699 Zelenikovo 1,649,830 2,115,000 414,051 78,566 45,000 4,302,447 Ilinden 3,635,583 8,037,000 4,610,702 575,671 135,000 16,993,956 Petrovec 2,581,194 2,256,000 2,125,259 250,200 45,000 7,257,653 Sopishte 1,877,750 2,961,000 396,947 76,661 45,000 5,357,358 Studenichani 2,292,150 3,666,000 1,970,186 378,981 90,000 8,397,317 Chucher 2,646,980 3,807,000 681,829 132,728 90,000 7,358,538 Sandevo Berovo 1,656,305 423,000 535,030 135,336 45,000 2,794,671 Bogdanci 2,824,395 1,551,000 1,595,094 305,441 45,000 6,320,929 Bosilovo 668,220 282,000 1,233,708 234,230 45,000 2,463,159 Valandovo 1,329,188 564,000 1,980,046 331,583 45,000 4,249,817 Vasilevo 501,942 282,000 1,237,069 236,754 45,000 2,302,765 Veles 3,358,194 7,614,000 9,332,914 4,462,587 90,000 24,857,695 Vinica 1,864,800 3,243,000 1,787,291 365,282 90,000 7,350,374 Gevgelija 3,005,954 6,768,000 5,887,088 1,333,218 90,000 17,084,260 Gradsko 702,149 423,000 373,487 60,136 45,000 1,603,772 Delchevo 1,740,480 2,115,000 1,516,815 459,936 45,000 5,877,231 Demir Kapija 903,910 705,000 605,201 94,357 45,000 2,353,468 Dojran 1,293,705 705,000 407,312 87,158 45,000 2,538,175 Zrnovce 356,902 141,000 146,650 26,528 45,000 716,079 Kavadarci 3,868,165 5,217,000 2,329,101 1,229,039 90,000 12,733,305 Karbinci 223,258 141,000 66,464 13,081 45,000 488,803 Konche 341,880 141,000 136,840 26,615 45,000 691,335 Kochani 3,374,770 5,499,000 4,307,348 1,071,162 90,000 14,342,280 Kratovo 767,417 141,000 750,030 167,710 45,000 1,871,157 Kriva Palanka 2,028,747 1,128,000 1,393,286 361,099 45,000 4,956,131 Kumanovo 3,390,310 6,909,000 11,226,215 3,282,103 135,000 24,942,627

150

North Macedonia Gas Distribution – FS Update

Investment Cost in Baseline Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Lipkovo 636,104 922,820 1,034,232 200,759 45,000 2,838,915 Lozovo 232,841 141,000 128,990 23,960 45,000 571,790 Makedonska 493,136 282,000 501,371 162,310 45,000 1,483,817 Kamenica Negotino 1,652,420 1,692,000 1,494,295 337,045 45,000 5,220,760 Novo Selo 665,630 282,000 611,237 115,659 45,000 1,719,526 Pehcevo 712,250 141,000 407,402 91,243 45,000 1,396,896 Prilep 5,113,696 11,421,000 16,698,802 4,677,156 180,000 38,090,654 Probishtip 1,393,420 1,269,000 1,520,818 571,262 45,000 4,799,500 Radovish 1,730,120 2,115,000 1,732,586 413,328 45,000 6,036,034 Rankovce 190,624 141,000 135,720 25,797 45,000 538,141 Rosoman 479,668 282,000 269,928 49,720 45,000 1,126,316 Sveti Nikole 3,591,035 2,679,000 2,062,554 427,369 45,000 8,804,958 Staro 723,128 120,128 135,570 26,214 45,000 1,050,039 Nagorichane Strumica - - 5,520,07554 1,568,139 - 7,088,214 Chashka 317,793 282,000 168,951 31,155 45,000 844,899 Cheshinovo 2,252,264 282,000 579,470 110,671 45,000 3,269,405 Obleshevo Shtip 5,241,124 5,781,000 7,209,928 2,420,097 90,000 20,742,149 Bitola 6,497,792 12,831,000 17,675,450 9,704,741 225,000 46,933,983 Bogovinje 1,889,405 564,000 3,805,291 726,252 45,000 7,029,948 Brvenica 847,448 282,000 1,846,627 360,312 45,000 3,381,387 Vevchani 435,120 423,000 174,533 32,393 45,000 1,110,046 Vrapchiste 1,166,536 423,000 4,350,586 844,254 45,000 6,829,376 Gostivar 4,727,268 10,716,000 7,348,803 1,956,464 180,000 24,928,535 Debar 1,365,707 2,115,000 2,092,830 472,552 45,000 6,091,090 Debarca 1,172,345 797,263 840,852 165,162 45,000 3,020,623 Demir Hisar 619,010 846,000 335,969 60,609 45,000 1,906,588 Dolneni 76,829 52,248 56,624 10,953 45,000 241,654 Zhelino 1,089,872 141,000 1,174,875 228,630 45,000 2,679,377 Jegunovce 993,238 675,460 849,075 154,775 45,000 2,717,548 Kichevo 3,905,202 4,089,000 8,062,967 1,996,949 90,000 18,144,119 Krivogashtani 1,043,770 141,000 218,614 42,646 45,000 1,491,030 Krushevo 1,157,730 987,000 722,066 132,427 45,000 3,044,223 Mavrovo I 617,993 420,271 463,281 88,768 45,000 1,635,312 Rostushe Makedonski 630,665 564,000 1,000,901 191,286 45,000 2,431,852 Brod

54 Based on the data provided in the 2014-FS, there are no additional pipelines to be constructed in Strumica; however, there were data on the natural gas demand for this specific municipality. It was assumed that the forecasted consumption sourced from the 2014-FS for Strumica corresponds to additional demand, therefore there should be need for installation of additional service lines and meters, in order to serve the new customers. 151

North Macedonia Gas Distribution – FS Update

Investment Cost in Baseline Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Mogila 350,168 282,000 195,399 38,310 45,000 910,877 Novaci 811,965 156,981 183,616 34,804 45,000 1,232,366 Ohrid 7,855,470 10,293,000 8,756,395 3,073,029 180,000 30,157,894 Plasnica 516,705 282,000 196,229 38,620 45,000 1,078,554 Resen 954,674 1,269,000 1,073,821 251,826 45,000 3,594,321 Struga 3,119,655 5,217,000 8,633,791 3,989,613 90,000 21,050,059 Tearce 2,222,031 1,511,112 1,641,668 326,159 45,000 5,745,970 Tetovo 6,514,109 9,306,000 12,747,291 6,173,327 135,000 34,875,726 Centar Zhupa 524,475 70,709 79,369 15,056 45,000 734,608 TOTAL 174,169,032 219,469,993 252,363,675 93,560,338 5,355,000 744,918,038

Table Ι-4: Capital expenditure by municipality and cost component for CAPΕX30 Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values)

Investment Cost in CAPEX30 Scenario Municipality Medium Low pressure Service Meters and TOTAL (€) Pressure (€) (€) Lines (€) Risers (€) Aerodrom 3,163,866 5,231,100 8,282,625 9,113,682 25,791,273 Butel 2,949,751 4,638,900 3,530,170 1,335,974 12,454,794 Gazi Baba 5,873,395 7,402,500 5,810,949 2,398,943 21,485,787 Gjorche Petrov 3,333,201 4,244,100 5,625,301 2,196,940 15,399,542 Karposh 4,809,345 5,033,700 5,251,114 4,131,590 19,225,749 Kisela Voda 5,959,331 6,909,000 8,716,621 4,140,983 25,725,935 Saraj 447,811 296,100 683,349 187,932 1,615,192 Centar 3,705,953 3,750,600 8,731,999 8,150,083 24,338,636 Chair 2,698,107 2,072,700 3,758,479 3,449,567 11,978,852 Shuto Orizari 770,525 1,184,400 824,534 221,333 3,000,793 Arachinovo 416,809 1,480,500 346,598 95,350 2,339,257 Zelenikovo 1,154,881 1,480,500 294,362 78,566 3,008,309 Ilinden 2,544,908 5,625,900 3,741,168 575,671 12,487,647 Petrovec 1,806,836 1,579,200 1,747,914 250,200 5,384,150 Sopishte 1,314,425 2,072,700 280,126 76,661 3,743,912 Studenichani 1,604,505 2,566,200 1,392,708 378,981 5,942,393 Chucher 1,852,886 2,664,900 479,543 132,728 5,130,058 Sandevo Berovo 1,159,414 296,100 382,935 135,336 1,973,784 Bogdanci 1,977,077 1,085,700 1,232,141 305,441 4,600,358 Bosilovo 467,754 197,400 876,872 234,230 1,776,256 Valandovo 930,432 394,800 1,496,730 331,583 3,153,545 Vasilevo 351,359 197,400 876,341 236,754 1,661,854 Veles 2,350,736 5,329,800 6,744,992 4,462,587 18,888,115 Vinica 1,305,360 2,270,100 1,322,250 365,282 5,262,993 Gevgelija 2,104,168 4,737,600 4,481,456 1,333,218 12,656,442 152

North Macedonia Gas Distribution – FS Update

Investment Cost in CAPEX30 Scenario Municipality Medium Low pressure Service Meters and TOTAL (€) Pressure (€) (€) Lines (€) Risers (€) Gradsko 491,504 296,100 282,142 60,136 1,129,882 Delchevo 1,218,336 1,480,500 1,104,678 459,936 4,263,450 Demir Kapija 632,737 493,500 461,965 94,357 1,682,559 Dojran 905,594 493,500 304,039 87,158 1,790,291 Zrnovce 249,831 98,700 106,269 26,528 481,328 Kavadarci 2,707,716 3,651,900 1,735,290 1,229,039 9,323,944 Karbinci 156,281 98,700 46,525 13,081 314,586 Konche 239,316 98,700 96,277 26,615 460,908 Kochani 2,362,339 3,849,300 3,096,719 1,071,162 10,379,520 Kratovo 537,192 98,700 531,579 167,710 1,335,181 Kriva Palanka 1,420,123 789,600 1,012,194 361,099 3,583,016 Kumanovo 2,373,217 4,836,300 7,944,196 3,282,103 18,435,815 Lipkovo 445,273 645,974 728,278 200,759 2,020,283 Lozovo 162,989 98,700 92,502 23,960 378,150 Makedonska 345,195 197,400 360,171 162,310 1,065,077 Kamenica Negotino 1,156,694 1,184,400 1,079,703 337,045 3,757,842 Novo Selo 465,941 197,400 435,046 115,659 1,214,046 Pehcevo 498,575 98,700 291,236 91,243 979,754 Prilep 3,579,587 7,994,700 11,937,476 4,677,156 28,188,919 Probishtip 975,394 888,300 1,100,277 571,262 3,535,233 Radovish 1,211,084 1,480,500 1,253,101 413,328 4,358,013 Rankovce 133,437 98,700 96,420 25,797 354,353 Rosoman 335,768 197,400 194,221 49,720 777,108 Sveti Nikole 2,513,725 1,875,300 1,494,968 427,369 6,311,361 Staro 506,190 84,090 95,623 26,214 712,116 Nagorichane Strumica - - 4,015,648 1,568,139 5,583,787 Chashka 222,455 197,400 121,510 31,155 572,521 Cheshinovo 1,576,585 197,400 410,852 110,671 2,295,508 Obleshevo Shtip 3,668,787 4,046,700 5,167,367 2,420,097 15,302,951 Bitola 4,548,454 8,981,700 12,898,411 9,704,741 36,133,306 Bogovinje 1,322,584 394,800 2,698,792 726,252 5,142,427 Brvenica 593,214 197,400 1,297,470 360,312 2,448,395 Vevchani 304,584 296,100 125,202 32,393 758,279 Vrapchiste 816,575 296,100 3,063,957 844,254 5,020,886 Gostivar 3,309,088 7,501,200 5,261,403 1,956,464 18,028,154 Debar 955,995 1,480,500 1,491,757 472,552 4,400,804 Debarca 820,641 558,084 589,099 165,162 2,132,987 Demir Hisar 433,307 592,200 243,714 60,609 1,329,830 Dolneni 53,780 36,574 39,932 10,953 141,240 Zhelino 762,910 98,700 826,432 228,630 1,916,672 Jegunovce 695,267 472,822 613,445 154,775 1,936,308

153

North Macedonia Gas Distribution – FS Update

Investment Cost in CAPEX30 Scenario Municipality Medium Low pressure Service Meters and TOTAL (€) Pressure (€) (€) Lines (€) Risers (€) Kichevo 2,733,641 2,862,300 5,710,779 1,996,949 13,303,669 Krivogashtani 730,639 98,700 153,617 42,646 1,025,602 Krushevo 810,411 690,900 522,451 132,427 2,156,190 Mavrovo I 432,595 294,190 328,028 88,768 1,143,580 Rostushe Makedonski 441,466 394,800 712,667 191,286 1,740,219 Brod Mogila 245,118 197,400 137,005 38,310 617,833 Novaci 568,376 109,887 130,595 34,804 843,662 Ohrid 5,498,829 7,205,100 6,308,900 3,073,029 22,085,859 Plasnica 361,694 197,400 137,361 38,620 735,074 Resen 668,272 888,300 760,667 251,826 2,569,064 Struga 2,183,759 3,651,900 6,174,632 3,989,613 15,999,904 Tearce 1,555,422 1,057,778 1,154,753 326,159 4,094,112 Tetovo 4,559,876 6,514,200 9,093,024 6,173,327 26,340,427 Centar Zhupa 367,133 49,496 56,432 15,056 488,117 TOTAL 121,918,322 153,628,995 183,038,072 93,560,338 552,145,727

Table Ι-5: Capital expenditure by municipality and cost component for BA-FPOL Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values) Investment Cost in BA-FPOL Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Aerodrom 4,519,809 7,473,000 11,421,767 9,113,682 90,000 32,618,258 Butel 4,213,930 6,627,000 4,913,791 1,335,974 90,000 17,180,695 Gazi Baba 8,390,564 10,575,000 7,881,104 2,398,943 180,000 29,425,611 Gjorche Petrov 4,761,715 6,063,000 7,761,364 2,196,940 90,000 20,873,019 Karposh 6,870,493 7,191,000 7,265,604 4,131,590 135,000 25,593,687 Kisela Voda 8,513,330 9,870,000 12,093,486 4,140,983 135,000 34,752,799 Saraj 639,730 423,000 969,747 187,932 45,000 2,265,409 Centar 5,294,219 5,358,000 11,371,932 8,150,083 90,000 30,264,234 Chair 3,854,438 2,961,000 5,246,412 3,449,567 45,000 15,556,418 Shuto Orizari 1,100,750 1,692,000 1,161,743 221,333 45,000 4,220,826 Arachinovo 595,441 2,115,000 491,908 95,350 45,000 3,342,699 Zelenikovo ------Ilinden 3,635,583 8,037,000 4,610,702 575,671 135,000 16,993,956 Petrovec 2,581,194 2,256,000 2,125,259 250,200 45,000 7,257,653 Sopishte ------Studenichani ------Chucher ------Sandevo Berovo ------Bogdanci 2,824,395 1,551,000 1,595,094 305,441 45,000 6,320,929 154

North Macedonia Gas Distribution – FS Update

Investment Cost in BA-FPOL Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Bosilovo ------Valandovo 1,329,188 564,000 1,980,046 331,583 45,000 4,249,817 Vasilevo 501,942 282,000 1,237,069 236,754 45,000 2,302,765 Veles 3,358,194 7,614,000 9,332,914 4,462,587 90,000 24,857,695 Vinica 1,864,800 3,243,000 1,787,291 365,282 90,000 7,350,374 Gevgelija 3,005,954 6,768,000 5,887,088 1,333,218 90,000 17,084,260 Gradsko 702,149 423,000 373,487 60,136 45,000 1,603,772 Delchevo 1,740,480 2,115,000 1,516,815 459,936 45,000 5,877,231 Demir Kapija 903,910 705,000 605,201 94,357 45,000 2,353,468 Dojran 1,293,705 705,000 407,312 87,158 45,000 2,538,175 Zrnovce ------Kavadarci 3,868,165 5,217,000 2,329,101 1,229,039 90,000 12,733,305 Karbinci ------Konche ------Kochani 3,374,770 5,499,000 4,307,348 1,071,162 90,000 14,342,280 Kratovo 767,417 141,000 750,030 167,710 45,000 1,871,157 Kriva Palanka 2,028,747 1,128,000 1,393,286 361,099 45,000 4,956,131 Kumanovo 3,390,310 6,909,000 11,226,215 3,282,103 135,000 24,942,627 Lipkovo ------Lozovo ------Makedonska ------Kamenica Negotino 1,652,420 1,692,000 1,494,295 337,045 45,000 5,220,760 Novo Selo ------Pehcevo ------Prilep 5,113,696 11,421,000 16,698,802 4,677,156 180,000 38,090,654 Probishtip 1,393,420 1,269,000 1,520,818 571,262 45,000 4,799,500 Radovish 1,730,120 2,115,000 1,732,586 413,328 45,000 6,036,034 Rankovce ------Rosoman 479,668 282,000 269,928 49,720 45,000 1,126,316 Sveti Nikole 3,591,035 2,679,000 2,062,554 427,369 45,000 8,804,958 Staro ------Nagorichane Strumica - - 5,520,075 1,568,139 - 7,088,214 Chashka ------Cheshinovo ------Obleshevo Shtip 5,241,124 5,781,000 7,209,928 2,420,097 90,000 20,742,149 Bitola 6,497,792 12,831,000 17,675,450 9,704,741 225,000 46,933,983 Bogovinje 1,889,405 564,000 3,805,291 726,252 45,000 7,029,948 Brvenica 847,448 282,000 1,846,627 360,312 45,000 3,381,387 Vevchani 435,120 423,000 174,533 32,393 45,000 1,110,046 Vrapchiste 1,166,536 423,000 4,350,586 844,254 45,000 6,829,376 155

North Macedonia Gas Distribution – FS Update

Investment Cost in BA-FPOL Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Gostivar 4,727,268 10,716,000 7,348,803 1,956,464 180,000 24,928,535 Debar 1,365,707 2,115,000 2,092,830 472,552 45,000 6,091,090 Debarca ------Demir Hisar 619,010 846,000 335,969 60,609 45,000 1,906,588 Dolneni ------Zhelino 1,089,872 141,000 1,174,875 228,630 45,000 2,679,377 Jegunovce 993,238 675,460 849,075 154,775 45,000 2,717,548 Kichevo 3,905,202 4,089,000 8,062,967 1,996,949 90,000 18,144,119 Krivogashtani ------Krushevo 1,157,730 987,000 722,066 132,427 45,000 3,044,223 Mavrovo I ------Rostushe Makedonski 630,665 564,000 1,000,901 191,286 45,000 2,431,852 Brod Mogila 350,168 282,000 195,399 38,310 45,000 910,877 Novaci 811,965 156,981 183,616 34,804 45,000 1,232,366 Ohrid 7,855,470 10,293,000 8,756,395 3,073,029 180,000 30,157,894 Plasnica ------Resen 954,674 1,269,000 1,073,821 251,826 45,000 3,594,321 Struga 3,119,655 5,217,000 8,633,791 3,989,613 90,000 21,050,059 Tearce 2,222,031 1,511,112 1,641,668 326,159 45,000 5,745,970 Tetovo 6,514,109 9,306,000 12,747,291 6,173,327 135,000 34,875,726 Centar Zhupa ------TOTAL 152,279,870 201,435,552 241,224,058 91,308,640 4,185,000 690,433,121

Table Ι-6: Capital expenditure by municipality and cost component for BA_U50_R20 Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values) Investment Cost in BA_U50_R20 Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Aerodrom 2,259,905 3,736,500 5,710,884 4,556,841 54,008 16,318,137 Butel 2,106,965 3,313,500 2,456,896 667,987 47,894 8,593,241 Gazi Baba 4,195,282 5,287,500 3,940,552 1,199,472 76,427 14,699,232 Gjorche Petrov 2,380,858 3,031,500 3,880,682 1,098,470 43,818 10,435,328 Karposh 3,435,247 3,595,500 3,632,802 2,065,795 51,970 12,781,313 Kisela Voda 4,256,665 4,935,000 6,046,743 2,070,492 71,331 17,380,231 Saraj 127,946 84,600 193,949 37,586 45,000 489,082 Centar 2,647,110 2,679,000 5,685,966 4,075,042 38,723 15,125,840 Chair 1,927,219 1,480,500 2,623,206 1,724,784 21,399 7,777,108 Shuto Orizari 220,150 338,400 232,349 44,267 45,000 880,165 Arachinovo 119,088 423,000 98,382 19,070 45,000 704,540 156

North Macedonia Gas Distribution – FS Update

Investment Cost in BA_U50_R20 Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Zelenikovo 329,966 423,000 82,810 15,713 45,000 896,489 Ilinden 727,117 1,607,400 922,140 115,134 23,234 3,395,025 Petrovec 516,239 451,200 425,052 50,040 45,000 1,487,531 Sopishte 375,550 592,200 79,389 15,332 45,000 1,107,472 Studenichani 458,430 733,200 394,037 75,796 90,000 1,751,463 Chucher 529,396 761,400 136,366 26,546 90,000 1,543,708 Sandevo Berovo 331,261 84,600 107,006 27,067 45,000 594,934 Bogdanci 1,412,198 775,500 797,547 152,720 45,000 3,182,965 Bosilovo 133,644 56,400 246,742 46,846 45,000 528,632 Valandovo 664,594 282,000 990,023 165,792 45,000 2,147,409 Vasilevo 100,388 56,400 247,414 47,351 45,000 496,553 Veles 1,679,097 3,807,000 4,666,457 2,231,293 55,027 12,438,875 Vinica 932,400 1,621,500 893,646 182,641 23,437 3,653,624 Gevgelija 1,502,977 3,384,000 2,943,544 666,609 48,913 8,546,043 Gradsko 351,075 211,500 186,743 30,068 45,000 824,386 Delchevo 870,240 1,057,500 758,408 229,968 45,000 2,961,116 Demir Kapija 451,955 352,500 302,600 47,179 45,000 1,199,234 Dojran 646,853 352,500 203,656 43,579 45,000 1,291,587 Zrnovce 71,380 28,200 29,330 5,306 45,000 179,216 Kavadarci 1,934,083 2,608,500 1,164,550 614,519 37,704 6,359,356 Karbinci 44,652 28,200 13,293 2,616 45,000 133,761 Konche 68,376 28,200 27,368 5,323 45,000 174,267 Kochani 1,687,385 2,749,500 2,153,674 535,581 39,742 7,165,882 Kratovo 383,709 70,500 375,015 83,855 45,000 958,079 Kriva Palanka 1,014,374 564,000 696,643 180,549 45,000 2,500,566 Kumanovo 1,695,155 3,454,500 5,613,107 1,641,051 49,932 12,453,746 Lipkovo 127,221 60,423 206,846 40,152 45,000 479,642 Lozovo 46,568 28,200 25,798 4,792 45,000 150,358 Makedonska 98,627 56,400 100,274 32,462 45,000 332,763 Kamenica Negotino 826,210 846,000 747,147 168,523 45,000 2,632,880 Novo Selo 133,126 56,400 122,247 23,132 45,000 379,905 Pehcevo 356,125 70,500 203,701 45,622 45,000 720,948 Prilep 2,556,848 5,710,500 8,349,401 2,338,578 82,541 19,037,868 Probishtip 696,710 634,500 760,409 285,631 45,000 2,422,250 Radovish 865,060 1,057,500 866,293 206,664 45,000 3,040,517 Rankovce 38,125 28,200 27,144 5,159 45,000 143,628 Rosoman 95,934 56,400 53,986 9,944 45,000 261,263 Sveti Nikole 1,795,518 1,339,500 1,031,277 213,684 45,000 4,424,979 Staro 144,626 7,866 27,114 5,243 45,000 229,848 Nagorichane Strumica - - 2,760,038 784,069 - 3,544,107 157

North Macedonia Gas Distribution – FS Update

Investment Cost in BA_U50_R20 Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Chashka 63,559 56,400 33,790 6,231 45,000 204,980 Cheshinovo 450,453 56,400 115,894 22,134 45,000 689,881 Obleshevo Shtip 2,620,562 2,890,500 3,604,964 1,210,049 41,780 10,367,854 Bitola 3,248,896 6,415,500 8,837,725 4,852,370 92,731 23,447,222 Bogovinje 377,881 112,800 761,058 145,250 45,000 1,441,990 Brvenica 169,490 56,400 369,325 72,062 45,000 712,277 Vevchani 87,024 84,600 34,907 6,479 45,000 258,009 Vrapchiste 233,307 84,600 870,117 168,851 45,000 1,401,875 Gostivar 2,363,634 5,358,000 3,674,402 978,232 77,446 12,451,713 Debar 682,854 1,057,500 1,046,415 236,276 45,000 3,068,045 Debarca 61,475 52,202 168,170 33,032 45,000 359,880 Demir Hisar 123,802 169,200 67,194 12,122 45,000 417,318 Dolneni 4,029 3,421 11,325 2,191 45,000 65,965 Zhelino 217,974 28,200 234,975 45,726 45,000 571,875 Jegunovce 52,083 44,227 169,815 30,955 45,000 342,080 Kichevo 1,952,601 2,044,500 4,031,484 998,475 29,552 9,056,611 Krivogashtani 208,754 28,200 43,723 8,529 45,000 334,206 Krushevo 578,865 493,500 361,033 66,214 45,000 1,544,611 Mavrovo I 32,406 27,518 92,656 17,754 45,000 215,334 Rostushe Makedonski 126,133 112,800 200,180 38,257 45,000 522,370 Brod Mogila 70,034 56,400 39,080 7,662 45,000 218,175 Novaci 162,393 10,279 36,723 6,961 45,000 261,356 Ohrid 3,927,735 5,146,500 4,378,198 1,536,515 74,388 15,063,336 Plasnica 103,341 56,400 39,246 7,724 45,000 251,711 Resen 477,337 634,500 536,911 125,913 45,000 1,819,660 Struga 1,559,828 2,608,500 4,316,896 1,994,806 37,704 10,517,733 Tearce 116,518 98,942 328,334 65,232 45,000 654,026 Tetovo 3,257,055 4,653,000 6,373,645 3,086,663 67,255 17,437,619 Centar Zhupa 104,895 4,630 15,874 3,011 45,000 173,410 TOTAL 73,804,536 97,444,407 115,034,704 44,747,609 3,796,955 334,828,212

Table Ι-7: Capital expenditure by municipality and cost component for BA-COMBO Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values) Investment Cost in BA-COMBO Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Aerodrom 2,259,905 3,736,500 5,710,884 4,556,841 54,008 16,318,137 Butel 2,106,965 3,313,500 2,456,896 667,987 47,894 8,593,241

158

North Macedonia Gas Distribution – FS Update

Investment Cost in BA-COMBO Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Gazi Baba 4,195,282 5,287,500 3,940,552 1,199,472 76,427 14,699,232 Gjorche Petrov 2,380,858 3,031,500 3,880,682 1,098,470 43,818 10,435,328 Karposh 3,435,247 3,595,500 3,632,802 2,065,795 51,970 12,781,313 Kisela Voda 4,256,665 4,935,000 6,046,743 2,070,492 71,331 17,380,231 Saraj 127,946 84,600 193,949 37,586 45,000 489,082 Centar 2,647,110 2,679,000 5,685,966 4,075,042 38,723 15,125,840 Chair 1,927,219 1,480,500 2,623,206 1,724,784 21,399 7,777,108 Shuto Orizari 220,150 338,400 232,349 44,267 45,000 880,165 Arachinovo 119,088 423,000 98,382 19,070 45,000 704,540 Zelenikovo ------Ilinden 727,117 1,607,400 922,140 115,134 23,234 3,395,025 Petrovec 516,239 451,200 425,052 50,040 45,000 1,487,531 Sopishte ------Studenichani ------Chucher ------Sandevo Berovo ------Bogdanci 1,412,198 775,500 805,522 154,248 45,000 3,192,467 Bosilovo ------Valandovo 664,594 282,000 999,923 167,449 45,000 2,158,967 Vasilevo 100,388 56,400 247,414 47,351 45,000 496,553 Veles 1,679,097 3,807,000 4,713,122 2,253,606 55,027 12,507,852 Vinica 932,400 1,621,500 893,646 182,641 23,437 3,653,624 Gevgelija 1,502,977 3,384,000 2,972,980 673,275 48,913 8,582,145 Gradsko 351,075 211,500 186,743 30,068 45,000 824,386 Delchevo 870,240 1,057,500 758,408 229,968 45,000 2,961,116 Demir Kapija 451,955 352,500 302,600 47,179 45,000 1,199,234 Dojran 646,853 352,500 205,692 44,015 45,000 1,294,060 Zrnovce ------Kavadarci 1,934,083 2,608,500 1,164,550 614,519 37,704 6,359,356 Karbinci ------Konche ------Kochani 1,687,385 2,749,500 2,153,674 535,581 39,742 7,165,882 Kratovo 383,709 70,500 375,015 83,855 45,000 958,079 Kriva Palanka 1,014,374 564,000 696,643 180,549 45,000 2,500,566 Kumanovo 1,695,155 3,454,500 5,613,107 1,641,051 49,932 12,453,746 Lipkovo ------Lozovo ------Makedonska ------Kamenica Negotino 826,210 846,000 747,147 168,523 45,000 2,632,880 Novo Selo ------

159

North Macedonia Gas Distribution – FS Update

Investment Cost in BA-COMBO Scenario Pressure Medium Low Meters Municipality Service Reduction Pressure pressure and TOTAL (€) Lines (€) Stations (€) (€) Risers (€) (€) Pehcevo ------Prilep 2,556,848 5,710,500 8,349,401 2,338,578 82,541 19,037,868 Probishtip 696,710 634,500 760,409 285,631 45,000 2,422,250 Radovish 865,060 1,057,500 866,293 206,664 45,000 3,040,517 Rankovce ------Rosoman 95,934 56,400 53,986 9,944 45,000 261,263 Sveti Nikole 1,795,518 1,339,500 1,031,277 213,684 45,000 4,424,979 Staro ------Nagorichane Strumica - - 2,760,038 784,069 - 3,544,107 Chashka ------Cheshinovo ------Obleshevo Shtip 2,620,562 2,890,500 3,604,964 1,210,049 41,780 10,367,854 Bitola 3,248,896 6,415,500 8,837,725 4,852,370 92,731 23,447,222 Bogovinje 377,881 112,800 761,058 145,250 45,000 1,441,990 Brvenica 169,490 56,400 369,325 72,062 45,000 712,277 Vevchani 87,024 84,600 34,907 6,479 45,000 258,009 Vrapchiste 233,307 84,600 870,117 168,851 45,000 1,401,875 Gostivar 2,363,634 5,358,000 3,674,402 978,232 77,446 12,451,713 Debar 682,854 1,057,500 1,046,415 236,276 45,000 3,068,045 Debarca ------Demir Hisar 123,802 169,200 67,194 12,122 45,000 417,318 Dolneni ------Zhelino 217,974 28,200 234,975 45,726 45,000 571,875 Jegunovce 52,083 44,227 169,815 30,955 45,000 342,080 Kichevo 1,952,601 2,044,500 4,071,799 1,008,459 29,552 9,106,911 Krivogashtani ------Krushevo 578,865 493,500 361,033 66,214 45,000 1,544,611 Mavrovo I ------Rostushe Makedonski 126,133 112,800 200,180 38,257 45,000 522,370 Brod Mogila 70,034 56,400 39,080 7,662 45,000 218,175 Novaci 162,393 10,279 36,723 6,961 45,000 261,356 Ohrid 3,927,735 5,146,500 4,378,198 1,536,515 74,388 15,063,336 Plasnica ------Resen 477,337 634,500 536,911 125,913 45,000 1,819,660 Struga 1,559,828 2,608,500 4,316,896 1,994,806 37,704 10,517,733 Tearce 116,518 98,942 328,334 65,232 45,000 654,026 Tetovo 3,257,055 4,653,000 6,373,645 3,086,663 67,255 17,437,619 Centar Zhupa ------TOTAL 69,488,552 94,115,848 112,820,887 44,312,482 2,626,955 323,364,724

160

North Macedonia Gas Distribution – FS Update

Table Ι-8: Capital expenditure by municipality and cost component for CAPEX30-COMBO Scenario. Costs refer to overall network development (Year 35 of the concession – non discounted values)

Investment Cost in CAPEX30-COMBO Scenario Municipality Medium Low Service Meters and TOTAL (€) Pressure (€) pressure (€) Lines (€) Risers (€) Aerodrom 1,581,933 2,615,550 4,141,312 4,556,841 12,895,636 Butel 1,474,876 2,319,450 1,765,085 667,987 6,227,397 Gazi Baba 2,936,697 3,701,250 2,905,474 1,199,472 10,742,893 Gjorche Petrov 1,666,600 2,122,050 2,812,651 1,098,470 7,699,771 Karposh 2,404,673 2,516,850 2,625,557 2,065,795 9,612,875 Kisela Voda 2,979,666 3,454,500 4,358,311 2,070,492 12,862,968 Saraj 89,562 59,220 136,670 37,586 323,038 Centar 1,852,977 1,875,300 4,366,000 4,075,042 12,169,318 Chair 1,349,053 1,036,350 1,879,239 1,724,784 5,989,426 Shuto Orizari 154,105 236,880 164,907 44,267 600,159 Arachinovo 83,362 296,100 69,320 19,070 467,851 Zelenikovo - - - - - Ilinden 508,982 1,125,180 748,234 115,134 2,497,529 Petrovec 361,367 315,840 349,583 50,040 1,076,830 Sopishte - - - - - Studenichani - - - - - Chucher Sandevo - - - - - Berovo - - - - - Bogdanci 988,538 542,850 622,231 154,248 2,307,867 Bosilovo - - - - - Valandovo 465,216 197,400 755,849 167,449 1,585,914 Vasilevo 70,272 39,480 175,268 47,351 332,371 Veles 1,175,368 2,664,900 3,406,221 2,253,606 9,500,095 Vinica 652,680 1,135,050 661,125 182,641 2,631,496 Gevgelija 1,052,084 2,368,800 2,263,136 673,275 6,357,294 Gradsko 245,752 148,050 141,071 30,068 564,941 Delchevo 609,168 740,250 552,339 229,968 2,131,725 Demir Kapija 316,369 246,750 230,982 47,179 841,280 Dojran 452,797 246,750 153,540 44,015 897,101 Zrnovce - - - - - Kavadarci 1,353,858 1,825,950 867,645 614,519 4,661,972 Karbinci - - - - - Konche - - - - - Kochani 1,181,170 1,924,650 1,548,360 535,581 5,189,760 Kratovo 268,596 49,350 265,789 83,855 667,590 Kriva Palanka 710,061 394,800 506,097 180,549 1,791,508 Kumanovo 1,186,609 2,418,150 3,972,098 1,641,051 9,217,908 Lipkovo - - - - - Lozovo - - - - -

161

North Macedonia Gas Distribution – FS Update

Investment Cost in CAPEX30-COMBO Scenario Municipality Medium Low Service Meters and TOTAL (€) Pressure (€) pressure (€) Lines (€) Risers (€) Makedonska - - - - - Kamenica Negotino 578,347 592,200 539,852 168,523 1,878,921 Novo Selo - - - - - Pehcevo - - - - - Prilep 1,789,794 3,997,350 5,968,738 2,338,578 14,094,459 Probishtip 487,697 444,150 550,139 285,631 1,767,617 Radovish 605,542 740,250 626,550 206,664 2,179,007 Rankovce - - - - - Rosoman 67,154 39,480 38,844 9,944 155,422 Sveti Nikole 1,256,862 937,650 747,484 213,684 3,155,680 Staro Nagorichane - - - - - Strumica - - 2,007,824 784,069 2,791,893 Chashka - - - - - Cheshinovo - - - - - Obleshevo Shtip 1,834,393 2,023,350 2,583,684 1,210,049 7,651,476 Bitola 2,274,227 4,490,850 6,449,205 4,852,370 18,066,653 Bogovinje 264,517 78,960 539,758 145,250 1,028,485 Brvenica 118,643 39,480 259,494 72,062 489,679 Vevchani 60,917 59,220 25,040 6,479 151,656 Vrapchiste 163,315 59,220 612,791 168,851 1,004,177 Gostivar 1,654,544 3,750,600 2,630,701 978,232 9,014,077 Debar 477,997 740,250 745,879 236,276 2,200,402 Debarca - - - - - Demir Hisar 86,661 118,440 48,743 12,122 265,966 Dolneni - - - - - Zhelino 152,582 19,740 165,286 45,726 383,334 Jegunovce 36,458 30,959 122,689 30,955 221,061 Kichevo 1,366,821 1,431,150 2,883,943 1,008,459 6,690,373 Krivogashtani - - - - - Krushevo 405,206 345,450 261,226 66,214 1,078,095 Mavrovo I Rostushe - - - - - Makedonski Brod 88,293 78,960 142,533 38,257 348,044 Mogila 49,024 39,480 27,401 7,662 123,567 Novaci 113,675 7,195 26,119 6,961 153,950 Ohrid 2,749,415 3,602,550 3,154,450 1,536,515 11,042,929 Plasnica - - - - - Resen 334,136 444,150 380,333 125,913 1,284,532 Struga 1,091,879 1,825,950 3,087,316 1,994,806 7,999,952 Tearce 81,563 69,260 230,951 65,232 447,005 Tetovo 2,279,938 3,257,100 4,546,512 3,086,663 13,170,214 Centar Zhupa - - - - - TOTAL 48,641,987 65,881,093 81,847,578 44,312,482 240,683,140 162

North Macedonia Gas Distribution – FS Update

Table I-9: Main parameters or the calculation of the investment cost in the BASELINE scenario Costs by main network component [mil €]

Investmen TOTAL YTD t year [mil €] [mil €] pipelines pipelines pipelines Pressure Pressure [%] completed completed [%] Low pressure Low pressure Service Lines Lines Service reduction station station reduction Medium pressure pressure Medium Risers and meters meters and Risers Y1-202155 23.83 - - - - 23.83 23.83 3% Y2-202256 38.94 21.68 1.80 - - 62.42 86.25 12% Y3-2023 40.53 15.49 0.32 3.48 1.15 60.97 147.23 20% Y4-2024 28.62 15.96 0.18 14.02 5.29 64.07 211.29 28% Y5-202557 11.00 16.91 0.14 20.03 7.46 55.53 266.83 36% Y6-2026 11.72 22.49 1.67 21.92 8.16 65.95 332.78 45% Y7-2027 11.72 19.30 0.32 22.37 8.33 62.03 394.81 53% Y8-2028 7.81 18.43 0.18 23.56 8.73 58.71 453.52 61% Y9-2029 - 17.03 0.09 22.83 8.50 48.46 501.97 67% Y10-2030 - 15.33 0.05 21.23 8.00 44.61 546.58 73% Y11-2031 - 13.50 0.23 19.33 7.39 40.44 587.02 79% Y12-2032 - 11.67 0.27 17.42 6.77 36.14 623.16 84% Y13-2033 - 9.95 - 7.31 2.44 19.70 642.87 86% Y14-2034 - 8.39 0.05 5.48 1.84 15.75 658.62 88%

Y15-2035 - 7.00 - 5.11 1.74 13.85 672.46 90% Y16-2036 - 2.43 - 4.78 1.64 8.85 681.32 91% Y17-2037 - 1.56 0.05 2.09 0.77 4.47 685.79 92% Y18-2038 - 1.30 0.05 2.11 0.78 4.23 690.02 93% Y19-2039 - 1.07 - 2.13 0.79 3.99 694.01 93% Y20-2040 - - - 2.15 0.80 2.95 696.96 94% Y21-2041 - - - 2.17 0.81 2.98 699.94 94% Y22-2042 - - - 2.20 0.81 3.01 702.94 94% Y23- - - - 2.22 0.82 3.04 705.98 95% 20433 Y24-2044 - - - 2.24 0.83 3.07 709.05 95%

55 Beginning of construction for municipalities under Phase 1 56 Beginning of construction for municipalities under Phase 2 57 Beginning of construction for municipalities under Phase 3 163

North Macedonia Gas Distribution – FS Update

Costs by main network component [mil €]

Investmen TOTAL YTD t year [mil €] [mil €] pipelines pipelines pipelines Pressure Pressure [%] completed [%] completed Low pressure pressure Low Service Lines Lines Service reduction station station reduction Medium pressure pressure Medium Risers and meters meters and Risers Y25-2045 - - - 2.26 0.84 3.10 712.15 96% Y26-2046 - - - 2.28 0.85 3.13 715.29 96% Y27-2047 - - - 2.31 0.86 3.16 718.45 96% Y28-2048 - - - 2.33 0.86 3.19 721.64 97% Y29-2049 - - - 2.35 0.87 3.23 724.87 97% Y30-2050 - - - 2.38 0.88 3.26 728.13 98% Y31-2051 - - - 2.40 0.89 3.29 731.42 98% Y32-2052 - - - 2.43 0.90 3.32 734.74 99% Y33-2053 - - - 2.45 0.91 3.36 738.10 99% Y34-2054 - - - 2.47 0.92 3.39 741.49 100% Y35-2055 - - - 2.50 0.93 3.42 744.92 100%

Total 174.17 219.47 5.36 252.36 93.56 5.36 744.92 -

164

©2020 Grant Thornton Greece. All rights reserved. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Greece is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. grant-thornton.gr