Private Investment Is Helping Belgrade Build Resilience to Shocks—And Making the City Cleaner
Before the COVID-19 pandemic, Serbia took deliberate steps to balance its budget. The government ran surpluses in 2017 and 2018. Debt fell to 52 percent of GDP in March from 63 percent in 2016. Industry recovered, foreign firms invested, and tourism grew.
Now, like so many other countries, Serbia is contending with a shock the world is struggling to tame: a pandemic with no immediate cure. The World Bank estimates that the Serbian economy will contract by 2.5 percent this year, imperiling the country’s progress.
Steps taken several years earlier were designed, among other things, to increase the country’s resilience to shocks. One such step was a law adopted in 2011 that encouraged public-private partnerships (PPP) for the first time in the country’s history. Private investment can make countries more resilient by easing their need to borrow to provide basic services, especially in times of crisis. Under its new PPP law, Serbia plans to rebuild the Nikola Tesla Airport in Belgrade, and to construct at least four wind farms.
Among the more critical PPP projects kicked off earlier this year: the cleanup of Belgrade’s municipal dump, the largest garbage pile left in Europe. More than 500 trucks arrive every day in the town of Vinča, 12 kilometers from downtown, disorderedly heaping rubbish into piles that leach toxins. Decaying trash burps climate-damaging methane, and acrid smoke from spontaneous fires poisons the air.
A consortium led by French global utility company SUEZ and Japanese trading and investment conglomerate ITOCHU Corporation (ITOCHU) won a 25-year PPP contract to close and contain the landfill and build a modern disposal site that will include a new sanitary landfill and an Energy-from-Waste facility, fueled by incinerating tons of waste that will turn Belgrade’s trash into valuable electricity and heat. SUEZ, ITOCHU, and their partner, Marguerite Fund II, a pan-European equity investment fund investing in renewables, energy, transportation, and digital infrastructure, expect to produce up to 30MW of electricity and 56MW of heat, processing up to 43 tons of waste per hour, which they will sell to Serbian utilities.
IFC and MIGA are providing the consortium with EUR260 million in loans and guarantees to the project. For its part, MIGA is insuring 90 percent of the consortium’s equity investment against losses with EUR97.2 million of guarantees for up to 20 years. MIGA’s guarantees protect against non-commercial risks, including breach of contract.
The estimated cost of the project is EUR370 million. When it’s up and running in 2022, the facility will accept 510,000 tons of waste per year (about 28 percent of the total waste generated in Serbia) and use at least 340,000 tons of it to produce energy. IFC and MIGA expect the project to be a bankable model for waste disposal, heat generation, and electricity production in Serbia and beyond.
Per the PPP contract, the consortium is guaranteed predictable revenue streams. Among them are: waste management fees from the city of Belgrade; a 25-year agreement under which a district heating company JKP Beogradske Elektrane will buy heat from the facility; and a 12-year power-purchase agreement with Serbian national electric utility EPS.
A big bonus: The new power source will be an alternative to dirty coal and bolster Serbia’s efforts to curb greenhouse gases. SUEZ and ITOCHU have an unrivalled track record of joint development and investments in similar Energy-from-Waste projects in the UK, processing 1.3 million tons of waste every year. SUEZ and Marguerite have developed together a similar Energy-from-Waste PPP project in Poznań, Poland.
The Vinča dump has been in IFC’s sights since the early 2000s, when an advisory team from its public-private partnership unit determined that waste management was among the most pressing issues facing Belgrade, a city of 1.4 million that accounts for 40 percent of Serbia’s GDP.
IFC and MIGA expect that the project will be a model for how private companies can help public entities deal with solid waste. The dump at Vinča is one of many in Serbia that needs modernization. All but 10 of Serbia’s 164 landfills are classified as unsanitary, and only 8 percent of waste is recycled.
SUEZ, ITOCHU and Marguerite said that MIGA’s guarantees significantly improved the Vinča project’s risk profile, facilitating their investment decisions and enabling them to deliver an affordable waste management solution to the City. In this sense, MIGA’s involvement was instrumental for the successful closing of the project financing. MIGA’s coverage also ensures that the government does not have to issue a sovereign guarantee, bolstering Serbia’s fiscal position.
One of the risks of the project is whether Belgrade supplies enough waste in the long term to run the turbine and create energy and heat. To mitigate that risk and also improve affordability, the Energy-from-Waste facility has been sized to process only two thirds of the annual volume of waste generated in Belgrade with the excess of incoming waste volume above the EfW capacity being channeled to a new sanitary landfill which will be built as part of the project , leaving substantial headroom for potential waste stream reductions should recycling rates in Belgrade increase in future as intended by the local authorities.
Though the project has no sovereign guarantee, IFC and MIGA believe that the project is bankable, as it will generate predictable revenue streams with low volatility which are governed by the PPP Contract and offtake agreements for electricity and heat. The project cash flow is underpinned by an availability fee from the City of Belgrade, Serbian capital with a crucial role in the national economy and strong governance.
For all these reasons, MIGA sees the project risks as manageable, especially given the potential payoff from success at Vinča, a first-of-a-kind project in the Balkans.
Many other cities beyond the Balkans face similar problems, and Vinča could show a path forward through public-private waste ventures that are competitive and good for the climate. Cities and towns worldwide produce about 2 billion tons of waste each year, and one third of it isn’t managed in a sustainable way. That figure is expected to grow to 3.4 billion tons by 2050, twice as fast as population, and management of that trash can absorb up to half of a city’s budget. Waste management is often left to public entities, and, worldwide, only a third involve private participation through partnerships.