Wednesday, September 5, 2012

Delayed Bids opening: Perceived risks from 'few & new' players

Both Mumbra-Shil-Kalwa and Jharkhand Distribution Franchisee (DF) bids are pending for bid opening for more than a month. SAIL has only recently open the Bhilai bid, while other 3 areas are still pending. There seems no check on the utilities to monitor governance on the bid process, and be responsible to its bidders. One likely inferred reason for this delayed response from DISCOM is its perceived risk of non-performance from following:

  • Few number of bids received 
    • Mumbra: 3 out of 11 RFP purchasing companies
    • Jharkhand: 2 out of 6 only qualified companies
  • Most new entrants, with no prior experience in the Distribution business
    • Mumbra: Konark, Saicare InfoSystem (SIS) and Supreme Infra
    • Jharkhand: JV of Essel & Enzen and CESC

There are increasing risks of Mumbra bid getting scrapped, looking at continuing delays of bid opening date, and previous legacy of bid scrapping with 5 bidders that time. Similar is the case with Jharkhand, with 2 bids received each for Ranchi and Jamshedpur, and only one for Dhanbad. It is understood, that the overall market confidence on DF model is low at the moment, mainly because of reported contractual non-performance at Nagpur and Aurangabad DFs. Also there has been no recent success story on DF model post Torrent at Bhiwandi. These apprehensions of high risk of another failure with a new player is what is likely leading the utility to consider bid scrapping.

While above utility apprehensions might have some grounds, the opposite of it i.e. 'an established & experienced player will do good' has also examples, that were found untrue. For example:

  • same Torrent, is struggling to stabilise the Agra model
  • Reliance continue to struggle with Orissa, and has itself invited different versions of DF models with limited success
So it is not the limited experience of new players, that is causing current slow down in DF, but its the Model characteristics & its resulting forced dynamics from lack of proper planning, and non-involvement of relevant stakeholders during the design phase. The non-attractiveness of the DF model in its existing form to bankers is not only SPANCO's and GTL's problem, but it's a high risk to all other bidders as well. 
Big question is, who pays for these mistakes and delays? And real answer is everyone pays - the bidder, the utility, the State Exchequer and the end-customers. 

An ideal RFP design and bid process could include following:
  1. Engage bidders and seek what all inputs they would need in the baseline document. It might be good at this point, to form a core committee of 3 bidding companies, who will confirm to participate in the bid, and responsible to include & represent views of all bidders, throughout the bid process. This will be one mechanism for improved governance check.
  2. Prepare thorough baseline document (with recent year only as the Base year) including some on-site measurements, and results audited from established & independent firm. The process of audit and underlying assumptions should be clearly stated. 
  3. Let utility price separate money for detail baseline and audit report, but then let all potential bidders have confidence on the status of the network and its customer effects, before they even decide to participate in bidding.
  4. Next important step is to decide upon qualification requirements. Inviting only experienced Distribution players has risk of bringing old school, or even cartel to bring down rates. And inviting only young non-domain players has risk of non-performance. Amidst this, inviting consortium bidding with right technical & financial domain partners will be the right way to harness experience, creativity and better price discovery.
    • It could be made mandatory to share detailed Technical proposal as part of the bid submission, with some weightage in final bid grading and evaluation. This should include AT&C loss reduction plan and associated capex, opex & resourcing plans. In addition, it should state different partnerships in key areas like Metering/Billing, Transformer Mgmt, other Network Management, IT systems, Customer Engagement, Financing etc.
  5. Then detailed terms and conditions in RFP and DFA needs to be drafted. Some key points to address here are:
    • Minimum input price benchmark curve: Best will be not to bind the bidders with any fixed each year minimum rates. If still minimum benchmark rates given, then utility must share their assumptions, to arrive at the stated rates. 
    • BGs and different forms of Performance Guarantees: reasonable to distinguish serious players, and avoiding redundancy with Escrow 
    • Payment mechanism: well thought over Escrow mechanism, as it can hamper bidders position for securitising his assets including receivables for bank funding
    • Penalty/Incentives: Penalty and incentives should co-exist for both the bidders and also the utilities, for their respective SLAs 
    • Bid evaluation/opening criterion: A clear rule of conduct for evaluating bids, opening of bids (with scenarios like low # of bids, quality of bidders, timelines, refund money timelines etc.) should be agreed as part of DFA
    • Exit clause: Clarity on exit options from the DF model
  6. The pre-bid meeting should be preceded by a broader survey from all participating bidders, to appropriately address their concerns during the pre-bid meeting. 
  7. One focus group discussions with bankers, and other financial stakeholders should also be organised to review overall model's favorability for banking. 
  8. The utility should maintain a secured and transparent online bid room, for share of all information, and timely response to all bidders queries. The core committee should monitor governance of this online channel, to meet satisfaction of all bidders. 
  9. ...
The old ways of benefiting from information asymmetry should be dropped, and fresh thinking of rationale co-operation should be imbibed both in bidders and the utilities. 

For Mumbra and Jharkhand, the utilities earlier did not bother to clarify bidders queries and relevant concerns on engagement terms, and that is hitting them back now as lower response and that too from new players (see earlier blogs - Jharkhand Distribution Franchisee first pre-bid meeting; Shil-Mumbra-Kalwa revised Distribution Franchisee pre-bid meeting takeaways ). It now remains to be seen, on which side they drop their decision axe. If bid(s) still gets scrapped for re-tendering, one good hope for existing bidders to cherish, will be likely revised new lower benchmark rates, likely improved escrow mechanism, and hopefully reasonable Performance guarantee fees, to still give them competitive advantage in next round. However, based upon Jharkhand's experience, that will still not guarantee meeting utility's intention to bring experienced players in next round (At Jharkhand, lowering the benchmark rates brought only 2 out of 6 interested bidders. See Price bid curves and analytics from Jharkhand Distribution Franchisee projects).

We wish utilities start becoming more certain to avoid these types of uncertainties, by basing their design of DF tenders on more integrated & dynamical models of Utility and DF combined. 

Let the DF model scale-up to meet better the needs of our fellow countrymen.

Post by: Rahul Bagdia @ pManifold

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