Partnership and Incentives: Making Performance Contracting Work in Ukraine

摘要

Ukraine's energy-intensive urban services systems were built in the 1960s and 1970s, when the Soviet Union heavily subsidized electrical power and natural gas. With the rise of energy prices to international market levels, these systems are now very expensive to operate. The large majority of Ukrainian water, wastewater, and districting heating utilities are therefore operating at a financial loss. However, because of the high potential for reducing energy costs, almost all enterprises can readily identify capital investment projects in energy-efficiency equipment such as water pumps and gas boilers that have high financial rates of return. This operating environment poses a unique mix of opportunities and challenges for the application of performance contracting for energy services. The high financial returns on projects are attractive to private capital and emerging energy services companies. With their low tariffs and outstanding debts to creditors, however, utilities have difficulty channeling operational cost savings resulting from improvements back to investors. Under the Tariff Reform and Communal Services Enterprise Restructuring Project, financed by the United States Agency for International Development, the U.S. consulting firms PADCO and PA Consulting designed and implemented pilot projects in energy services performance contracting at four Ukrainian utilities. Based on the results, PADCO then developed regulatory frameworks for performance contracting in four cities. In the process, the specialists had to adapt the standard performance contracting model to the specific conditions in Ukraine. The resulting hybrid model has the potential to produce sub- stantial benefits for utilities in other countries in the former Soviet Union. Urban services systems in Ukraine were designed to be energy intensive and capital light. This made sense in the 1960s and 1970s, when the former Soviet Union heavily subsidized the prices of electrical power and natural gas. Rather than undertaking major capital investments in water towers, pressure zones, and other facilities that maximize the use of gravity in water supply systems, the former central planners of urban infrastructure made extensive use of pumping stations and other energy-intensive devices to move water over hills and ensure service provision to the urban population.