Kõlvart: Deal with Utilitas gives Tallinn control over its heating network

Mihhail Kõlvart.
Mihhail Kõlvart. Source: Ken Mürk/ERR

Tallinn Mayor Mihhail Kõlvart (Center) defended the joint venture agreement with the private company Utilitas by saying that it leaves Tallinn in control over the city's heat pipelines and that the city doesn't have to pay the private company €250 million for heat pipeline investments.

"With this strategic decision, we will make sure that in seven to eight years and in the long run, the city retains control over its infrastructure," Kõlvart said about the city government's plan to create a joint venture with private company Utilitas to create Utilitas Tallinna Soojus, which would be owned one-third by the City of Tallinn and two-thirds by a private company.

He said that Tallinna Soojus infrastructure was actually sold on a lease-to-own basis in 2001, when the lease agreement with Utilitas was signed. This deal is still in effect until 2031; according to the deal, the city is supposed to pay Utilitas around €250 million for the investments it made in the meantime.

"So after seven to eight years the city will have to save up €250-300 million and also find the means to continue investing. And if this capacity is not found, there will not be many options: either to give up, sell or find new leasers; but really, there will be no possibility to negotiate or set conditions," he said.

"With the current deal, the owner would change but the city would still own it as well. We will no longer need to compensate for the investments and the investments will continue. In the bigger picture, the cost of this transaction for the city is not €250 million, but with the prospective investments it's about half a billion," the mayor explained.

Tallinn linnapea Mihhail Kõlvart Autor/allikas: Priit Mürk/ERR

Kõlvart: Tallinn gets a bigger share in the joint venture than the value of its assets

The head of Utilitas, Priit Koidu, told ERR on Thursday that the city's in-kind contribution to the joint venture is worth at least €77 million and Utilitas's is worth at least €155 million. Kõlvart said, "In reality, the value of Tallinna Soojus is mostly cash flow. If we talk about infrastructure, experts have said that the value of the infrastructure is only €4 million right now."

"In reality, there is no correlation between what we own and the percentage in the joint venture," he said. "This was possible because we took two years to negotiate the deal," the mayor emphasized. "And that is not all: when we participate in this joint venture, we get a bigger share of the price of the infrastructure, while the investment commitment stays with the partner; so the city doesn't have to invest."

Kõlvart: Heat recovery would cost €250 million

Kõlvart spoke as well about how, according to the contract signed in 2001, Tallinn no longer owns the heat transmission system from a financial point of view.

"Because the lease contract was made 20 years ago with the condition that we would not get the infrastructure back, until we made up for the investments, and they have already put in €250 million. The residual value is only €4 million, so in fact what we have is a small part of that value."

"It could be that in order for us to be able to say that this is a city property, we would already have to pay €250 million in compensation. Maybe it (the pipeline - ed.) is not in our hands any longer."

Kõlvart said that if they agreed to start a joint venture, the joint venture would own the pipes, as well as the investments that have already been made and the ones that Utilitas pledges to make.

"In turn, this means that we will get more money than we have now, because what we own in its entirety costs only €4 million. However, what we will own in a partnership will be between €500 and €600 million in the future, just for the infrastructure; and we will still own it," the mayor said. "Yes, we will own only a third, but a third of €600 million is a lot more than the current €4 million."

Mihhail Kõlvart. Source: Priit Mürk/ERR

Kõlvart: All other Estonian cities have sold their pipelines

Kõlvart also pointed out that 15 of Estonia's largest cities have sold their heating infrastructure to private companies.

"However, Tallinn has no intention of selling," he said. "This ownership means that we have a partner who is a co-owner. And the company is also owned by the city. As a result of this agreement, the value of our ownership will increase, as will the city's revenue."

Asked what influence the city would have in the joint venture if it had only a one-third stake, Kõlvart said, "This is regulated by law as well as the shareholders' agreement and according to the law a 33.34 percent stake means that all strategic decisions regarding the budget, the business plan and investments must be made with the city's approval. The agreed-upon shareholding is not arbitrary. It was developed so that our interests and rights would be protected by both the shareholders' agreement and the law."

Kõlvart: Joint undertaking will invest in alternative heating sources

Kõlvart also said that the joint venture would make it possible for Tallinn to switch to alternative heat sources in the coming years: bio-waste and seawater, both of which 100 percent green energy.

"Thanks to this agreement, we can talk about new sources of energy starting right away, in two years from now," the mayor said.

"We might say that energy security is not a municipal issue and should be taken care of by the state, but we cannot wait another seven or eight years to start developing alternative energy sources. This is our strategic choice."

"Plus, we never know what will happen to natural gas," he said, "we cannot guarantee any price stability with it, but if seawater and wastewater are our primary energy sources then we can also guarantee its price stability," Kõlvart added.

Asked where the amount of Utilitas' investment commitment comes from, Kõlvart said that this was the topic of their negotiations.

"Of course, at the beginning of the negotiations, the partner wanted and hoped that the city would also spend or that the city's share percentage would be lower. But that is why it took so long [two years - ed.] to reach a deal. Now, we are working on the assumption that the city's share will stay the same even if it does not spend and the value of our share will start to go up because of these investments," he said.

Mihhail Kõlvart. Source: Priit Mürk/ERR

Kõlvart: Tallinn would have to pay more in the future

Kõlvart also rejected claims that the city may be able to negotiate a more favorable contract for the administration of its heating infrastructure when the current contract expires in 2031.

"The value of this infrastructure is going only to increase, because Utilitas is still investing, and then if we wanted to say that it is our infra

structure, we would have to compensate for that increased value. If today we would have to compensate €250 million, in seven or eight years it would probably be €300 million," he said.

"So yes, in seven to eight years the value will increase, but it is not the value of our property, it is the value of our liabilities that will increase," he said.

"And who will foot the bill? This is paid by the residents of Tallinn. What do they receive in exchange? They will get the current situation. However, now we have a clear understanding how our private partner is going to invest and that the city will not pay for it. In addition, we will get new sources of energy that are both environmentally friendly and more stable in terms of price, and we are going for it right now, not in seven or eight years," Kõlvart summed up his position.

The agreement with Utilitas also requires the approval of the Tallinn City Council.


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Editor: Mait Ots, Kristina Kersa

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