Second DemoUkrainaDH project in Poltava finally ready to start its implementation

17/12/2020

After several years of bureaucratic struggles, the Poltava DH company finally signed its loan and grant agreements with NEFCO, and it is now ready to start the project implementation. The project aims to improve the efficiency of district heating generation and thereby reduces costs. This as an important part of the DH company’s long-term ambition to improve service level and comfort for citizens of Poltava.

This is the second DemoUkrainaDH project to be implemented in Poltava. The first project was fully implemented in 2015, and back then all the administrative procedures for project approval took about a year.

The Poltava II project includes installation of a flue gas condenser in the largest boiler house in Poltava. The EUR 1.7 million investment is expected to save 2.7 million m3 of gas per year, leading to long-term cost savings. The project’s simple payback is calculated at 2.6 years. The project was approved for implementation in April 2017 by the DH company and NEFCO.

Despite convincing benefits, the project ground to a halt in bureaucratic viscosity for 3.5 years. The time was lost in a struggle to prepare and then receive the Ministry of Finance approval of the guarantee required for the NEFCO loan. For 1.5 years, the approval application could not be prepared because the DH company is owned by Poltava Oblast and, back in 2017, oblast councils were not eligible to issue the local guarantees. For the first DemoUkrainaDH project in Poltava, Poltava City Council issued the guarantee, even though the city has no direct influence on nor any responsibility for the business operations of the DH company. For the second project, despite numerous efforts by the DH company and positive experience from the 2015 project, the city council declined to issue the municipal guarantee.

“Bureaucratic litigations led to postponement of the project by 3.5 years. In monetary terms, the lost economic benefit from not implementing the project is about EUR 1.4 million. These funds could have been used by our company for the benefit of our customers, the citizens of Poltava,”

says the DH company Director
Mr Aleksander Aleksenko

The legal barrier was lifted in January 2019 with an amendment of the Budget Code of Ukraine entitling oblast councils to issue the guarantees. Unfortunately, another year was lost in the preparation of the application itself as new administrative challenges emerged. At first, there were no procedures following the Budget Code amendment. While the oblast councils were entitled to prepare the applications, in practice this was not possible for about half a year. Since early in 2019, there have also been considerations to transfer the DH company from its oblast to city ownership. Luckily, this change of ownership has not been implemented, as it would have rolled the project back to its 2017 status. However, the uncertainty over ownership resulted in an inability to complete the preparation of the application package before spring 2020.

The guarantee for the project loan was finally approved by the Ministry of Finance on 6 November 2020, on the third attempt. Two applications were rejected on clerical grounds, such as a request to update the exchange rate by a few decimals or to provide amendments to the documents that are not mentioned by the official procedures. Two applications were rejected on clerical grounds, such as a request to update the calculations based on the exchange rate different by a few decimals. At some point, the Ministry requested to allocate oblast budget funds for the loan repayment for the upcoming budget year, despite all NEFCO loans envisaging a grace period. A grace period means that no repayments occur during at least the first year after signing the loan agreement.

“It is alarming to realise how viscous bureaucracy can slow down municipal infrastructure projects and contribute to worsening an already poor financial situation of DH companies in Ukraine,”

says DemoUkrainaDH Programme Manager
Mr Ronny Nilsson

At the end of November 2020, all the necessary agreements have been signed by Poltava and NEFCO. With this, the Poltava II project is finally ready for implementation. The DemoUkrainaDH team, NEFCO and the Poltava DH company look positively to the future and are eager to successfully implement the project. The project team is currently preparing tender invitations.

Article prepared by: Ronny Nilsson, Alexey Kapustinskiy, Julia Kosulko

Photo: Poltava