Will Novi Sad's Stan get a private partner? – Lithuanian Civinity expects tender in April, union asking for the City to have a bigger role

The Lithuanian company Civinity sent a letter of intent to the City of Novi Sad early last year, proposing a way of solving the problems of JKP Stan. This public utility enterprise was facing bankruptcy at one point due to accumulated debts and the city authorities worked intensively on recovering and possibly restructuring the company.

To that end, in late November 2016, the City Assembly of Novi Sad adopted the proposition of finding a strategic partner for JKP Stan through a public-private partnership. The City Council formed the committee for the selection of the best bidder in February 2017, and the Lithuanians have stood out as the most likely candidate for the announced partnership in the past period.

– We had several meetings with the city authorities in which we presented our vision and following which the City actively entered the procedure of realizing the PPP project, and the City Assembly adopted the project in late November 2016. We still have funds and professionals set aside for taking part in the tender, and, seeing how more than a year has passed since our first talks with City and nearly four months since the adoption of the PPP project, I expect the tender to open in early April – Darius Zakarauskas, Member of the Board and CEE Country Manager at Civinity, says in his interview for eKapija.

He says that the City of Novi Sad, JKP Stan and Civinity, as a private partner, should found a joint company, with the majority stock belonging to the private partner (70%), which would oblige to invest a certain amount. The project envisages a 15% stock for the City of Novi Sad and JKP Stan each.

– According to experts' opinion, which I fully agree with, the public-private partnership model is the best option in this case. Civinity is ready to take over around 120 employees, whereas the rest would receive severance payments. Furthermore, we are ready to take over the debts of JKP Stan – Zakarauskas points out.

Union prefers PPRP to PPP

Nevertheless, representatives of the union Nezavisnost (Independence) at JKP Stan remind that the City Assembly adopted a Pre-Packaged Reorganization Plan for the public enterprise back in October 2013, which, according to them, has never been put into effect. Employees believe that the implementation of this PPRP or a modified version of it, considering the changes that took place in the meantime, is currently a better solution than a PPP.

– The PPP project is based on the 2015 financial statement, prepared for statistical purposes, thereby not encompassing JKP Stan's operations in 2016. Furthermore, it needs to be said that it has been envisaged for the stipulations to start being implemented this March, and the tender has not even been opened – says Zoran Bugarski, the main trustee of Nezavisnost.

He says that the proposition of the project imposes as the only possible solution the introduction of private capital and putting two utility services, chimney sweeping and public lighting maintenance, in charge of the newly founded company for a period of ten years. Bugarski emphasizes the fact that JKP Stan does not use the city budget and that its revenues come either directly from the market (building maintenance) or through utility services (which they have been entrusted with by the city). He therefore believes that it makes more sense for the PPP to be first carried out in the companies which are the biggest budget users, thereby reducing the burden on the budget.

Unfortunately, eKapija has not managed to get answers about the announced public-private partnership from the Novi Sad authorities as of the publication of this article.

– Keeping in mind the structure of JKP Stan's debt towards its suppliers, with the biggest creditors being the companies founded by the City – JP Poslovni prostor, JKP Novosadska Toplana and JGSP Novi Sad, the regular meeting of the obligations toward the Tax Administration, as well as the expected meeting of the conditions for a direct write-off of the conditionally written-off interest in the amount of RSD 185 million and the regular loan repayment to AIK Bank, we believe that the proposed private-public capital ratio of 70:30 would practically be a gift to the private partner – Bugarski explains and adds that the only serious financial problem is the halt in the repayment of the reprogrammed debt to Komercijalna Banka, dating back to July 2015.

Debt reprogramming and better service

The Lithuanian investor says that, if it becomes a strategic partner, it plans to reprogram JKP Stan's debt and improve the quality of service. According to Zakarauskas, they also intend to increase their market share, and Civinity estimates that up to EUR 2 million is needed for the Novi Sad public enterprise to start operating normally.

– A great debt burden, as well as an excessive number of employees are an obstacle to the enterprise's stable operations, which reflect directly on the quality of service the citizens get. By solving these problems and implementing more efficient procedures and standards, I expect the service quality and the market share to increase. When it comes to the prices, Stan does not own a monopoly in the market, and, as it will take time to enhance the quality, I don't expect the services to become more expensive in the coming period – our interviewee says.

On the other hand, Nezavisnost claims that there is a great discrepancy between the amount of debt presented in the PPP proposal (RSD 180 million) and the actual amount. Bugarski says that, according to the plan of activities and procedures for the foundation and registration of a special-purpose business entity, it can be presumed that the new company will not be able to start operating before July 2017. By then, JKP Stan will bring its debt toward the Tax Administration down to around RSD 40 million, which would then be taken over by the private partner, whereas the debt toward AIK Bank would reach EUR 90,000.

– Furthermore, the number of employees in JKP Stan is far smaller than envisaged by the PPP project, meaning that the private partner would pay less for the social program and severance payments that envisaged by the project proposition. The employees themselves are a very important group of creditors, as there are liabilities arising from unpaid salaries from 2013 and 2015 – Zoran Bugarski explains.

Regular revenues sufficient for meeting liabilities

Nezavisnost notes that, considering JKP Stan's annual revenues, it is clear that the new enterprise will be able to meet the acquired liabilities from current operations. They believe that the revenues arising from building maintenance and the provision of two utility services over a period of ten years oblige the City of Novi Sad to have a bigger managing role, that is, a majority share in the new business entity, to the end of better control of the quality of service provision and the funds set aside for the purpose.

Civinity is optimistic and they hope that the tender will open soon, which might be the Lithuanian company's first acquisition in the Balkans. Darius Zakarauskas has no doubt that JKP Stan can operate with profit and reminds that these activities aren't extremely profitable anywhere in the world, but believes that a stable profit of 5-10% can be achieved through successful organization.

– When it comes to our global plans, we invested around EUR 5 million in 2016 through the acquisitions of three enterprises in Latvia and we are currently focused on integrating our standards and procedures into these companies. Furthermore, we've started operating in Ukraine this year as well and we're putting a lot of attention to that market. Civinity is currently present in five states, that is, eleven cities. We employ more than 1,500 people and our revenues exceed EUR 35 million – Zarakauskas says.

M.A.

JKP Stan Novi Sad

Grad Novi Sad

NLB Komercijalna banka AD Beograd

JKP Novosadska toplana Novi Sad

JGSP Novi Sad

JP Poslovni prostor Novi Sad