ZOV Wastewater Project


 

Executive Summary

The Croatian city of Zagreb will benefit from cleaner water from its city’s first ever wastewater treatment plant. The concessionaire, Zagrebacke Otpadne Vode (ZOV), a private company, will develop the treatment plant on a BOT basis. Total project costs are €290 million (US$318 million).

The EBRD provided a €55 million (US$59 million) loan to the borrower, Zagrebacke Otpadne Vode, (ZOV), co-financed by a €115 million (US$125 million) loan provided by the German bank KfW (Frankfurt). The two b-lenders that joined the financing in the EBRD B Loan, were Dexia Credit Local and Bank Austria, who donated €10 million (US$11 million) each. The remaining funding comes from ZOV and its affiliates.

Under the terms of the loan agreement, ZOV will design-build the treatment plant and operate the facility for 28 years. ZOV will also design-build supporting infrastructures for the project. The aim of the project is to treat all of Zagreb’s wastewater in accordance with EU environmental standards.  Lovells law firm advised ZOV, and sponsors RWE Aqua Gmbh, and SHW Holter Wassertechnik on the project.

Background and rationale

The Croatian capital currently has no wastewater treatment facilities for its 900,000 residents. Wastewater is discharged directly into the Sava River, causing serious pollution. The ZOV plant is being built to clean the Sava River according to EU standards. Zagreb’s Mayoral office and Zagreb Council, with full cross-party support,  recognised the need for wastewater facilities and ordered the building of the plant in 1999. Independent Swedish consultants VAI VA-Projekt AB assisted the City in the tender evaluation. ZOV was awarded the concession through a tendering process in December 2000.

The EBRD has extensive experience, having invested over €400 million in wastewater projects in Eastern Europe, particularly in EU accession countries. Thomas Maier, head of Municipal Infrastructure at EBRD explained the bank’s interest in the ZOV project:

“Croatia has always had as a political target to be closer to the EU and as such it is not conceivable that a city like Zagreb would be without wastewater treatment. It makes sense for  EBRD to support such projects. In Zagreb we have the combination of a credit-worthy city and in RWE and SWH we have good quality sponsors.”

In order to promote efficiency and sustainability, Eastern European cities such as Hungary’s Sofia and Romania’s Bucharest have also introduced private concessions  for their water sectors. The tariff adjustments under the ZOV project will be paid as part of Zagreb resident’s income, at 2.6 per cent, below the 4 – 5 per cent guidelines that apply internationally.

Investment climate

Since coming into power in 2000, Croatia’s government under Prime Minister Racan has taken measures to welcome foreign investors and improve the Croatian business environment.  The government has established an Agency for Trade and Investment Promotion, passed legislation on investment incentives, and introduced greater transparency in the privatisation process.

As its political imperative is to gain EU membership by 2007, Croatia has successfully established bilateral relations with the EU on trade and has lifted customs duties for EU customers on the tariff base for industrial products. Following the ZOV example, many cities in Eastern Europe, such as Sofia and Bucharest are now introducing private concessions to improve their water facilities.

The project

The greenfield project consists of two elements:

1.       Construction of Zagreb’s first ever wastewater treatment plant in the City of Zagreb on a BOT basis. Germany-based WTE Wassertechnik GmbH will supply in-house engineers for the project and will manage contractors on site.

2.       Construction of supporting infrastructure, including an access road, a 10-kilometre long sewerage transportation system, including a four-lane, 850 metre long bridge over the River Sava.

The  phased program is designed to meet strict EU effluent discharge standards. The supporting infrastructures will bring the wastewater across from the city side of the river to the ZOV plant.

Ownership

ZOV is 97 per cent owned by a consortium consisting of RWE Aqua GmBH, a subsidiary of Thames Water at 48.5 per cent, and SHW Holter Wassertechnik, a subsidiary of Berlinwasser Holding AG, at 48.5 per cent. The remaining 3 per cent is owned by VZ, (Vodoprivreda Zagreb), wholly owned by the City of Zagreb.

Funding

Total project costs are approximately €290 million (US$318 million). ZOV obtained a €55 million (US$60 million) loan from the EBRD, co-financed by a €115 million (US$126 million) loan from German bank Kreditantalt fur Wiederaufbaw.The two co-arrangers that joined the financing in the EBRD B Loan, were Dexia Credit Local and Bank Austria. In addition €42 million (US$46 million) of equity comes from the project sponsors:  RWE Aqua, SHW and VZ. The debt:equity ratio of the project is 80:20.

The remainder of the project costs are to be covered from cash generated from the phased completion of the project facilities. Under the terms of the Concession Agreement, the City will charge ZOV a monthly service fee, with effect from the completion of the mechanical treatment stage of the Project in May 2004.  Part of this service fee will be paid to the City’s water and waste water company by householders in form of an adjusted wastewater tariff.  The project concession was awarded in December 2000, and the project reached final financial close on December 5, 2002.

Legal Issues

Lovells advised ZOV and the sponsors, RWE Aqua GmbH (a subsidiary of Thames Water Aqua Holding GmbH) and SHW Hölter Wassertechnik (a subsidiary of Berlinwasser Holding AG) on the deal.

Shibeer Ahmed, the Lovells partner who advised on the project, explained some of the legal and regulatory issues the ZOV project faced, and how they were mitigated.

One of the risks related to the change in Croatian procurement law after granting of the concession but before the finalization of the construction arrangements.  “In most cases once a BOT concession has been awarded to the preferred bidder, that bidder can freely subcontract the services to other companies controlled by the sponsor group or third parties but the change in the Croatian procurement law raised the possibility that the construction services may need to be put out to tender. This issue was ultimately overcome by working closely with Croatian counsel for ZOV and the banks and by making use of certain transitional provisions in the procurement law and obtaining the necessary governmental exemptions.” said Mr Ahmed.

Risks

The project also faced completion and construction cost overruns, which were mitigated by the support Thames Water and Berlinwasser Holding provided  for certain obligations of the Construction Contractor under the fixed price EPC Contract.

“Given the strong back-to-back nature of the Concession Agreement and EPC Contract (which was necessary in order to make the Project bankable), substantially all of the construction related risks allocated to ZOV under the Concession Agreement are passed through to the Construction Contractor under the EPC Contract,” said Mr Ahmed. 

Conclusion

Thomas Maier from the EBRD insists that the ZOV concession agreement promotes effective management by encouraging best practices. These include setting out clear lines of responsibility, setting clear objectives to meet public needs and encouraging investment and job opportunities in the Zagreb region: “Once a big PPP is under successful implementation, this shows that the economic framework in a country works, and so it sends positive signals generally to the investor community.”IJ

ZOV Wastewater Project Data

Concessionaire

Zagrebacke Otpadne Vode (ZOV)

Advised by

Lovells

Concession awarded

1999

Sponsors

(% project ownership)

RWE Aqua GmBH (48.5 %)

SHW Holter Wassertechnik (48.5%) Vodoprivreda Zagreb (3%)

Total  estimated project costs €/ US$

€290 million /US$318 million

Lender Banks

EBRD (€55 million/ US$59 million; EBRD b-lenders Dexia Credit Local and Bank Austria, who donated €10 million (US$11 million) each. 

KfW (€115 million/ US$126 million)

Lenders

RWE Aqua, SHW, VZ (€42 million/ US$46 million)

Debt: Equity

80:20

Financial Close

5 December 2002

Sponsors advised by

Lovells