Note on attraction of external investor to the ESCO-Rivne

Note on attraction of external investor to the ESCO-Rivne

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Project Background and History:

In 2003, United Nations Development Programme and the Global Environment Facility initiated a new pilot project in Rivne, Ukraine in the area of energy efficiency. The project document under the title Climate Change Mitigation in Ukraine through Energy Efficiency in Municipal District Heating (Pilot Project in Rivne) was signed and implementation started in 2003.

Following the pilot phase, a Phase-2 project under the title Removing Barriers to Greenhouse Gas Emissions Mitigation through Energy Efficiency in the District Heating System was signed in May 2006 and its implementation started on 1 June 2006. Project documents of the pilot phase and phase-2 are attached as Attachment 1.

The overall objective of the Phase-2 was to create a sustainable system of energy service provision through the Energy Service Company (ESCO).

Since the expected capital of ESCO was limited and financing from municipal sources was not at the level allowing for expansion of the business, independent project experts recommended the attraction of an external investor to ESCO Rivne.

A detailed description of the process of private investor attraction to ESCO-Rivne Company and conditions were laid out in pilot project documentation " Climate Change Mitigation In Ukraine Through Energy Efficiency In Municipal District Heating (Pilot Project In Rivne)" and in te phase-2 documentation " Removing Barriers to Greenhouse Gas Emissions Mitigation through Energy Efficiency in the District Heating System, Phase 2".

Project documentation indicated that:

“The ultimate condition for the investor is to invest into the ESCO-Rivne Company directly or indirectly (in it's projects) initially the funds in the amount not less then the Project and that the ratio of external funds to UNDP/GEF funds would be at least 3:1 (investor should commit investments from his own or dept financing sources prior to UNDP Project Phase 2 expenditures)":

"Full amount of the UNDP/GEF $3.5 million Phase 2 investment grant will be allocated if targeted financing from other sources is confirmed. In case if targeted level of ESCO equity/debt financing is not reached within the planned period, the ESCO will proceed with smaller-scale investment activities. Actions (developed in course of ESCO preparation) will be taken to expand internal financing for the project and attract external investor through privatization of already operating municipal entity."

Thus, at the initial stage the investor should invest into the company the funds (working capital or assets) not less then funds already transferred to ESCO-Rivne as the technical assistance, i. e. GEF conditional investment grant (not less then USD 1.7 M), and further to implement the Phase 2 of the UNDP/GEF project (USD 3.5 M) investor should commit itself for not less then USD 10 million.

The joint-stock company ESCO-Rivne was registered in November 2003 with two shareholders – communal enterprise Misksvitlo (City Lighting Company) owned and controlled by the city of Rivne and KomunEnergia, owned and controlled by the Rivne Oblast Administration. The initial arrangement was that Misksvitlo owned 50%+1 share of ESCO-Rivne and KomunEnergia owned 50%-1 share of ESCO-Rivne. Later, following the recommendation of the international GEF project evaluation mission, 10% of shares have been sold to ESCO-Rivne staff.

Investor Attraction

From the very start of ESCO-Rivne company’s operation the investor attraction campaign was started by the company and its shareholders (City and Oblast) with the support and advice from GEF and UNDP. Deadline for the investor selection was the end of the pilot phase of the project. It was envisaged that Phase 2 can not be granted without strong written commitment from the investor and no GEF resources allocated for Phase 2 can be spent on ESCO projects without the investment made. Thus a calendardead line was the end of year 2006.

Adherence to the principles of the Corporate Governance

UNDP Ukraine has always supported good governance at all levels of society and promoted its development.

UNDP advised and strongly recommended to ESCO-Rivne and its shareholders to ensure full transparency of the investor attraction process, with equal treatment of all potential investors, and in full compliance with international principles of corporate governance. It was also clear that ESCO-Rivne as a market-oriented company understood the importance of international accepted corporate governance practices.

The principles embodied by ESCO-Rivne are drawn from and inspired by various international sources of good governance best practices, including the International Finance Corporation (IFC), World Bank, Organization for Economic Cooperation and Development (OECD), the Global Corporate Governance Forum.

Investor Attraction for ESCO-Rivne

The process of Investor Attraction has taken place in the following ages:

A call for expression of interest was publicised (2004) A list of 130 potential investors was developed (2004). The list included local and foreign private sector companies specialising in energy efficiency and communal services, banks and entities in the financial services sector, International Financial Institutions (IFIs) and other organisations ESCO-Rivne issued letters to 130 companies identified as potential investors (2004) Information campaign was conducted, including professional gatherings and public information sessions () Collection of initial expressions of interests from 20 potential investors(2005) Familiarisation process between 20 potential investors and ESCO-Rivne, mutual evaluation (2005) Final formal expressions of interest received from 8 potential investors (2005) Negotiations between potential investors (8), ESCO-Rivne and its shareholders conducted (2006) Investor is pre-selected. Assessment of investor by UNDP, UNDP/GEF (2006) Formal memorandum of agreement signed between Investor and the city of Rivne (2006)

The call for investor/s attraction and the requirements to investor/s was publicised on the ESCO-Rivne and UNDP web sites, as well as in different local mass media. Information was distributed by Rivne Mayor’s office, Rivne Governor’s office, UNDP/GEF. It was also disseminated through business and international networks in 2004.

The list of potential investors consisted of 130 local and foreign private sector companies specialising in energy efficiency and communal services, banks and entities in the financial services sector, International Financial Institutions (IFIs) and other organisations. Invitation letters to all those companies were sent by ESCO-Rivne (Attachment 3) in 2004-early 2005.

Information about the investor attraction process was presented during different events related to the business of ESCO: National Conference on Communal Sector Development organised by the Cabinet of Ministers of Ukraine on the basis of ESCO-Rivne (Rivne, 17 September 2004); international trade fairs e. g. ESCO-Europe Annual Conferences (Vienna, 4-6 October 2005 and Prague, 26-28 September 2006); seminars and round tables held by local and national authorities on energy, energy efficiency (Kharkov, 20 October 2005; Kiev, 26 October 2005, Poltava, 02 December 2005), through business channels of ESCO-Rivne, etc.

UNDP advised and strongly recommended to hold the process transparently and to ensure equal treatment of all potential investors.

Throughout 2005, initial expressions of interest were received from 20 companies and international organisations. ESCO Rivne and its shareholders conducted talks with all of them and, as a result, 8 companies issued final and formal Expressions of Interest letters (Annexes F6 to F14 to the ProDoc Phase 2).

In 2006, meetings and negotiations were held with all 8 potential investors. In the end of 2006, one company remained as potential investor, meeting all established criteria. The UK based “Independent Energy Company” (IECo) was pre-identified for further due-diligence process.

The IEC and ESCO-Rivne scrutinized each other very closely. The IECo did it’s own due diligence of ESCO-Rivne (April 2006). Representatives of investor, IEC management and its shareholders visited Rivne and Kiev. They met with ESCO-Rivne, Rivne Oblast officials and participated in the official session of Rivne City Council (21 March 2006) and made detailed presentations of their company, investment capacity and plans with regard to. Representatives of Rivne’s communal sector enterprises were also present in meetings with the Oblast and city authorities. UNDP participated in meetings, ensuring compliance with the Project Document and project strategy.

As a result of negotiations, parties agreed on investor attraction to the ESCO-Rivne operations and signed appropriate documents. Additional shares issuance was selected as a mechanism for investor attraction in order to ensure that all municipal/communal property stays in the hands of current owners and the investor invests “new” money to be further utilised for business development and new projects.

“Community” participation

The Rivne community was always involved into Company decision making procedures. Following intensive discussions on 21 March 2006, the Rivne City Council made an unanimous decision on ESCO-Rivne Investor attraction, thus allowing co-operation between the UK based “Independent Energy Company” (IECo) and Communal Energy Service Company ESCO-Rivne.

The Independent Energy Company is investing USD1.7 million and over USD10 million in future for energy saving programme implementation. UNDP/GEF resources will supplement the above mentioned resources in heat-and-power plant rehabilitation on Makarova St. and heating and energy-related infrastructure in the city of Rivne.

The fact that a new investor for ESCO-Rivne was identified has been covered by local media (TV and newspapers). Some of the articles can be found on:

http://www. city-adm. /ukr/news/2006/03_22_01.shtml

http://www. gazeta. /?n=6562

http://www. rivnepost. /lenta_msgshow. php? t=

http://www. rivnepost. /lenta_msgshow. php? t=

http://www. ogo.

ATTACHEMENTS

Attachment 1 Project documents:

· GEF/UNDP Project Title: Climate Change Mitigation in Ukraine Through Energy Efficiency in Municipal District Heating (Pilot Project in Rivne) was signed in July 2002 and it’s operations started in 2003.

· Phase 2 of the project with a title: Removing Barriers to Greenhouse Gas Emissions Mitigation through Energy Efficiency in the District Heating System, was signed in May 2006 and it’s operations started on June 01, 2006

Attachment 2 List of potential investors (companies around the world specialising in the area of energy, energy efficiency/energy saving and utilities, providing services in communal sector)

Attachment 3 Invitation letter to all potential investors which has been sent by ESCO-Rivne (Template letter)