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