Friday, June 22, 2012

Shil-Mumbra-Kalwa revised Distribution Franchisee pre-bid meeting takeaways

MSEDCL's organised pre-bid meeting on revised Mumbra DF (on 21st June) saw good participation from 11 bidding companies. See our last revised This participation number is however lower than earlier attended 25+ companies in first pre-bid meeting in 2011 for old Mumbra RFP, which finally received 5 bids, but then got scrapped.

The 11 companies that participated in this pre-bid meeting were DPSCL (IPCL), Torrent Power, Tata Power, Reliance, A2Z, Konark, Sai Infosystems (SIS), Sahakar Global, Rudranee Infrastructures, Supreme Infrastructures, and BVG group. The relaxed non-core QR, with requirement of managing B2C market with min. customer base of 40K, draw some new entrants. There were few other companies that failed to download RFP on 19th, because of some IT issue at MSEDCL side, and were denied entry into the pre-bid meeting. (It will be good for the overall industry, if MSEDCL could re-consider its approach, and allow RFP download till last day of bid submission, and not creating artificial barriers. It is hoped that existing allowed bidders would also support this case, and help set strong and standard bid practice, across utilities.)

MSEDCL shared below presentation during the pre-bid meeting, highlighting the major changes in Shil-Mumbra-Kalwa DF.

MSEDCL is one of forward thinking utilities with good appreciation of the fact that Distribution is a B2C customer business. This made them to go with non-domain mild B2C experience based Technical QR, compared to recent rigid ones like Jharkhand bids. Mumbra project's QR has further been relaxed, to invite increased participation, as compared to previous MSEDCL's DFs at Nagpur, Jalgaon, and Aurangabad**.

MSEDCL was guided by following concerns in its current revisions of Mumbra RFP:
  1. Problem of liquidity: How to ensure that DF makes payment for power purchase to DL? How to convincingly establish DF's 'true' liquidty, which may have been adjusted on books as Net worth, and/or cash accruals?
  2. Problem of intention: How to ensure that DF invest in its area, and does not divert customer's collected revenue into its other business outside DF?

Some major points that got challenged and key discussion items from the meeting are as follows:
  1. Advance Payment of Rs. 45 cr.: RFP states "The Distribution Franchisee shall deposit advance payment of Rs. 45 Cr (Rs. 40 Cr will be against the payment security to MSEDCL in the first year of operations, and Rs 5 Cr will be  security against implementation of minimum investment plan in first five years of operations)"
    • Most bidders believe that parking this additional liquid money with MSEDCL at simple interest rate of 9.5% is not competitive, and also further burdening. They believed that Escrow account sufficiently derisk MSEDCL, from non-payment risk. 
    • MSEDCL sounded open to receive inputs on reducing this limit, but not removing it completely.
  2. First 90% collection to MSEDCL through Escrow: Bidders welcome the Escrow concept, but objected to 90% number. 
    • MSEDCL confirmed, that this is only to begin the arrangement, and they will be fair in reviewing this limit every quarter and map to DF collection & payment performance.
  3. Mandated capex of Rs. 2 cr./year for first 5 years: MSEDCL seems to have set low bar on mandated capex (around 1.5% of billed revenue of Rs. 135 cr. per year), which raised no questions from bidders. 
    • Mandated capex from 6th-10th year is not defined exclusively, and MSEDCL replied that it will be decided after first 5 years of DF performance.
  4. Contract period of 15 years to be reviewed at end of 10 years: MSEDCL took a good step of tieing the DF's contract period with its overall performance. Following benchmarks for 10 years performance are set:
    • Achievement in Distribution Loss below 15% (one clause says this level to be reached at end of 5 years)
    • Minimum Assured Investment by DF during 10 years
    • No Outstanding payments of MSEDCL against supply of energy
  5. No consortium bidding:  Unlike other most recent MP bids, and or Jharkhand bids, MSEDCL continue to stick to its stand of allowing no consortium bidding. The utility should seriously look into allowing consortium, as DF model requires an integration of Technology, Local Management and Financials, which in most cases remains with different players. Rather these partnerships happening during DF tenured track with various struggles, it would make sense that right partners join hands from the very start.
  6. What should be true Financial metrics of Performance to judge bidders 'liquidity': MSEDCL was concerned, that on books, a company's networth and cash accruals might look good, but then they have seen company's facing liquidity issues to finance DF project. Because of this, they want bidders to pay advance money of Rs. 45 cr. 
    • One bidder then raised an interesting question on what is true metric of 'liquidity'? He pointed that recent new big power plant projects have stopped asking for Cash accruals requirement. 
    • With MSEDCL asking for variety of guarantees, bidders find it overkilling:
      • Financial QR: Networth, Cash accruals, public limited
      • EMD for bid submission for Rs. 1 cr.
      • Bid bond of Rs. 10 cr.
      • LC towards 2 months Input energy payment
      • Advance money of Rs. 45 cr.
      • Escrow arrangement with 90% first charge to MSEDCL
  7. Some additions into Force-Majeure clause: Few bidders requested addition of 'change in laws', 'removal of de-facto' and also related to 'transmission outage'.
    • To address some raised apprehensions, MSEDCL Directors confirmed that DF has now a legal institution proved even as high as Supreme court.
  8. Loss level reduction: MSEDCL didn't give a year wise AT&C loss reduction trajectory, but specified atleast 15% by end of 5 years. This is a good step of allowing bidders to decide their loss reduction path. Since there is no penalty associated with not meeting losses, till atleast 10th year, this should be little flexible.
  9. Minimum benchmark input rates: MSEDCL continue with its legacy to have min. input benchmark rates (from Rs. 2.565/kWh for first year to Rs. 3.707/kWh). 
    • At 11% discount, this yields Levelised Input Price (LIP) of Rs. 3.277/kWh
    • With ABR of Rs. 4.56/kWh, the ratio to min. benchmark LIP becomes 1.39
    • In case of Gwalior win bid, this ratio was 1.21; while for average bidders, it was around 1.55, thus making Mumbra attractive (provided that the baseline data shared is robust)
  10. Baseline data: None of the bidders challenged the data consistency, though there were few additional baseline data requests including - DTR failure rate, list of all projects and contractors in-hand, etc.
Overall, MSEDCL team seems pretty determined and co-operative for Mumbra DF. The bidders were requested to seek MSEDCL authorization, before taking up on-site due-diligence, to get best support from the local team there. 

The bid process, RFP & DFA is still evolving. MSEDCL team should be congratulated to have done a fairly good job, without support of any Transaction Advisory. Hopefully with improved learning at Mumbra, the next Malegaon bid process will be strengthened. 

DF model still seems to be lot based on mutual 'trust' between the utility and DF operator, with lot of open loops. At pManifold, we are geared up to support utilities with integrated Analytical modeling of Discom and DF together, to study trade offs, and come with optimum baseline and contract design. 

Post by: Rahul Bagdia @ pManifold

pManifold has done an organised research into all previous Input based Power Distribution Franchisee bids, their derived analytics, including the latest bid from Madhya Pradesh with a very detailed Financial modeling. The Market Research report 'Input-Based Power Distribution Franchisee Market in India 2012Q1' and the detailed Excel financial model are available for interested companies to understand the market and financial details of DF model. Our financial model replicate then participating all bidders strategies and numbers, and will be valuable for all Mumbra interested potential bidders. We also undertake 'measurement based' field technical due diligence. (See our blog Importance of 'Measurements based' Technical Due Diligence)

** The previous MSEDCL DF requirements for Nagpur, Aurangabad and Jalgaon were
"The Bidder Company must have a minimum of 2 (two) years of experience in serving at least 2 lakhs consumers. A consumer is defined as any entity that acquires goods or services for direct use or ownership as well as for resale or use in production and manufacturing. OR The Bidder Company should have a minimum 2 (two) years of experience in employing and managing a workforce of more than 500 (Five hundred) employees. For this purpose, the employees should be engaged with the bidder company on a full time basis, whether on the rolls of the company, on contract basis or as advisors. AND The experience and track record to undertake the distribution of electricity and related activities in the Distribution Franchise Area. The bidding company should have minimum 5 (five) experienced personnel with distribution sector experience. Electricity distribution sector experience is defined in clause 5.2.13 of the RFP."

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