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PUBLIC-PRIVATE PARTNERSHIP IN THE SERBIAN ENERGY SECTOR ***

OVERVIEW OF THE NATIONAL REGULATORY FRAMEWORK


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Belgrade 23 September 2010

About BDK
Offices in Belgrade and Podgorica, presence in B&H (Republic of S Srpska) Full service (M&A, Finance, Real Estate, Employment, Dispute Resolution ) R Significant regional experience in the energy sector: IFC and Government of Montenegro: Advisory on the project for DBOT concession for a 240 MW hydro-power plant on the Moraa river Montenegrin TSO "Prenos": JV with Italian Terna for acquisition of minority stake in Prenos and joint construction of additional network infrastructure in Montenegro and undersea interconnection between Montenegro and Italy Government of Montenegro: Privatisation of Thermal Power Plant Pljevlja and Coal Mine Pljevlja
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About BDK
Government of Montenegro: Advising on DBOT concessions for small hydro-power plants Advising Spanish renewables company Fersa in the 46 MW windfarm project in Montenegro and negotiating long term lease agreement for the state owned land necessary for development of the project. European Federation of Energy Traders (EFET) - Regular annual opinions on enforceability of the General Agreement Concerning Delivery and Acceptance of Electricity under Serbian law as well as licensing requirements in the sector of electricity and gas trading Advising several foreign investor on their renewable projects mostly windfarms in Serbia, Bosnia & Herzegovina and Montenegro

Introduction
PPPs in Serbia not a success story so far
Not a single concession project has been realized in Serbia pursuant to the current regulatory framework (mining concessions excluded) No BOT arrangements pursuant to the Concession Law Sporadic projects in the communal sector (mainly waste management) Conferral of the activity of general interest to the privately owned entities only in the gas transport and distribution sector (most notably the regional gas distributor Jugorosgaz) None in the electric energy sector Reasons (from the legal perspective) - Mix of under regulation and over regulation - Unresolved property issues
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Introduction
Legislative development
All laws regulating PPP schemes in Serbia should be amended or replaced in the near future: - Amendments to the Concession Law (no draft available yet) - Draft of the new Law on Communal Services and - Draft amendments to the Law on Activities of General interest.

Overview of the Serbian PPP framework (1)


Concessions Law
Concession grants the right to use natural wealth and/or public goods and/or engage in the activities of general interest The Law also covers various build-operate-transfer schemes. Unsolicited bids not possible; competitive tender is a must Bureaucratized and centralized procedure with Government making at least 4-5 decisions during the process; Parliament is also involved in decision making process Expropriation costs borne by the concessionaire the possibility of in-kind compensation to former owners not taken into account (Equator principles) Participation of the state in the expropriation procedure; 30 years maximum duration may be to short for larger HPPs.
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Overview of the Serbian PPP framework (2)


Concessions Law
No protection for concessionaire from expropriation of the subjectmatter of concession market value compensation The Law introduces the principle of contractual authonomy of the parties limitations to this principle material negotiations following the award of concession. Concessionaire protected from tax and customs related change in law Step-in right in favour of the financing institutions is specifically prescribed in the event of bankruptcy and liquidation; No prohibition to extend this right in other events of concessionaire's default under the concession agreement and the finanicng documents.

Overview of the Serbian PPP framework (3)


Law on Activities of General Interest
Production of electric energy is an activity of general interest Procedure for conferral of the activities of general interest is not prescribed by the law. Government renders the decision on conferral (communal activities are within municipal competence); unsolicited bid is possible; No transparency and competitiveness; may raise problems with financing institutions Different rules apply to public companies, companies in majority state ownership and private companies performing the activity of general interest.

Overview of the Serbian PPP framework (4)


Law on Activities of General Interest
The agreement on conferral (signed with the Government) is supposed to regulate in detail mutual rights and obligations. Tight control (governmental approval of tariffs, prices and constitutive documents) - possibility to weaken this through contract Concession v. conferral - duration, - procedure, - flexibility - corporate governance

Sector legislation (1)


Energy Law
Draft of new Energy Law is expected soon as well as a new Energy Strategy Production of electric energy is activity of general interest, i.e. private companies may perform only with awarded concession or conferral by the Government. Concession agreement/decision on conferral may provide for the obligation of the producer to sell energy to the public supplier (i.e. the one supplying tariff customers) in which case the production prices are controlled and are subject to annual power purchase agreement with public supplier. No green certificates in the current regulatory framework License for energy activity may be revoked in the event of failure to comply with approved tariffs and prices.
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Sector legislation (2)


Law on Planning and Construction and Law on Public Ownership
The Law on Public Ownership is not yet enacted; the Law on State owned Assets is therefore applied, according to which the Government is in charge of rendering decision on disposal of state owned immovable property. Construction land separated from this legal regime State owned companies are stripped of rights on construction land (both developed and undeveloped) as a result of the Law on Planning and Construction. Consequences to the ability to enter into PPP schemes on the level of state-owned companies.

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Sector legislation (3)


Law on Waters
New Law adopted in May 2010 to be applied as of 2011 Water Management Strategy and Water Management Plans prerequisite for any hydro power project including PPP projects Construction in watercourse areas is subject to permits issued by the Ministry of Agriculture, Forestry and Water Management Water usage fees payable per kilowatt of produced energy (KWh)

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Contact
Dragoljub Cibuli dcibulic@bdklegal.com

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