Concession Agreements and the Heat Supply System: Replacing Subsidies with Investment

Abstract

ABSTRACT This article considers a wide range of issues concerning the heat supply system in Novosibirsk Oblast and the Russian Federation as a whole. Concession agreements can be used as a tool to increase the efficiency and reliability of the heat supply, especially in population centers that are not attractive for large energy companies. Concession agreements also have their drawbacks. Based on a study of concessions in the Novosibirsk heat supply industry and interviews conducted with the initiators and participants of such projects, we describe the preliminary results and related problems of such concession agreements. In our study, we consider the use of concessions to modernize district heating systems in the urban type of settlement of Maslyanino and the town of Ob. The preliminary results of these projects showed that federal and regional budgetary investment made it possible to greatly reduce the subsidization of heat supply organizations. However, the possibility of replicating these results is limited due to a number of institutional and economic factors. The greatest risks for potential concessionaires are associated with tariff regulation based on “economically justified costs” and the high transaction cost of privatizing the district heating systems formerly operated by municipal unitary enterprises. We argue in favor of new mechanisms for financing concessions in the heat supply industry. These can significantly increase the attractiveness of such projects for private investors and reduce the need for regional and local budgets to subsidize unprofitable heat supply organizations.