The project sponsor is Dalkia from France, a leading international owner and operator of DH assets in the world. Dalkia is 66% owned by Veolia Environment and 34% owned by EDF, a French national power company. The shareholder of the Company is Dalkia, with IFC expected to take a minority equity stake.

Dalkia plans to expand its activities throughout the region, including in the Baltic States, where there is limited scope for increased market share but increased efficiencies and use of “green” power can add to revenues. Most of the growth in the Company will occur initially in Russia and subsequently in Ukraine. The investment program in DH assets in the CIS is expected to be over €500 million. The IFC investment in the Company will be in the form of equity for an amount of up to €100 million.

122.93 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan
Equity	122.93

* These investment figures are indicative

The assets of the Company will be in the Baltics and in CIS countries. Assets are expected to include refurbishment and rehabilitation of existing DH assets, combined heat and power plants, and heat only boilers.

The need for increased capital and operating expertise in the district heating networks of the former Soviet Union has been clear for many years. A decade long reform effort has recently attracted international industry capital and expertise to the power sector but low tariffs, constrained by limited affordability, has resulted in little progress in the heating sector. A number of domestic groups have entered the sector in recent years, often in conjunction with power distribution. They are new to the heating sector; achieving the improved technical performance they projected has proven a challenge and most are now also suffering from capital constraints. Effective intervention in this sector has the potential to deliver very considerable development impact. Dalkia has demonstrated its ability to achieve significant improvements in the heating sectors of post-Communist markets in Lithuania and Estonia and to generate returns for the long term upgrading of the networks. It is the international industry investor best placed to make a region-wide impact on these systems. Reduced water losses, energy savings and heat generation in CHPs create savings which allow improved maintenance and upgrading, the provision of an improved service and the preservation of important capital assets. More efficient use of water and energy, conversion from HOBs to CHPs, and the increased use of renewable fuels in these CHPs, brings local environment benefits, which also contribute to climate change goals. Improved technical, operational, managerial, environmental, and corporate governance standards in the heating companies will promote the wider development of PPPs and contracting out of services by municipalities.

Support to one of the leading international groups in the sector, to enter the district heating systems of the former Soviet Union on a significant scale. This venture would be the first such attempt on more than a single-network basis. Political risks broadly defined, are the most important risks faced by the new venture in what is otherwise a business providing stable revenues. IFC participation will bring political risk mitigation and will bring comfort to the public authorities letting concessions to an international private provider. Beyond its impact on the neglected heating sector. this transaction will support PPPs in regions where privatization of poorly run and under-funded public services, has been largely confined to domestic groups with limited expertise and now with stretched balance sheets.

Key risks for this category B corporate investment include: the Company’s management capacity to undertake sustainable heat distribution and combined heat and power generation projects; assessment of environmental and social risks in new project planning, design, construction and operation; air emissions and ambient air quality; energy and water efficiency, construction impacts of distribution system expansion; emergency response planning and preparedness; and labor and working conditions, including employee retrenchment and health and safety.