Challenges in and Levers for success of the 24x7 water supply projects in India

As one wonders what has been holding back the operationalization of the 24x7 water supply projects in India, we thought of penning down our observations around it.

Even before kicking-off the operations, one observes that the long gestation period (5+ years) to engage and realize even first pilot is a show-stopper. This is primarily because of:

• lack of standardization of the model, and various agency issues at Central, State & ULB level
• delays in contract sign-off & getting consensus on SLAs and new Tariff agreement
• Delayed financial closures - constricted investments flow from investors, because of perceived high risk of regulated (& politicised) utility

Levers for Successful Implementation of 24x7 Projects

As the operators take-over and start the operations, the first challenge hitting them in the face is the inaccurate baselines. Revisions in tariff, SLAs, employee deputation follow. The lack of education of customers, employees and local politicians on the PPP models affect all the other stakeholders. 

The nascency of the industry has created an acute shortage of skilled middle management resources that are ready to engage on-ground in Tier-2/3 towns. Further to this, the lack of investment from operators in Strategy, Structure, Systems and Processes, and doing it right from long term perspective creates a totally different shade of problems.

The technological levers of GIS modelling based on low confidence data collection, and fast obsoletion, no useful optimization and design possible. Only static view is captured on GIS and no real  updates happen in the system. Even though water metering (bulk and end-customers) and regular auditing is being stressed upon & invested in, no useful actions are enforced based on analytics. (Power sector has long been metering and doing energy audits, but losses have only increased, because of missing actions. Water is just starting to walk on same trail, and will likely see similar results.)

Finally, there seems to be a total lack of SLAs performance monitoring and enforcement institution. This gives rise to ever-moving targets, and cross blaming.

Overall, currently Management change, and Technology are being stressed upon for the success of 24x7 water supply projects. We believe that there is a need for two additional levers - Performance Monitoring and Customer Engagement, to bring effective Change Management. We strongly believe, that its operationalisation of these models that has to be improved, and rest will follow. 

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. 

Preliminary Termination notice issued to Spanco by MSEDCL

Spanco, operating Distribution Franchisee in Nagpur, has been issued a preliminary termination notice by MSEDCL for its continuous delays in paying the dues. The total dues stands at Rs. 225 Cr., as of 4th July, as per latest news by MSEDCL.

MSEDCL issued the notice on 26th June, 2012 and has given a month's time for Spanco to clear all dues. In response to this, Spanco's top official said, 'We are committed to clear all dues to MSEDCL within the given time frame.'

According to Spanco officials, 'The notice is regarding only dues and MSEDCL is happy over performance of Spanco'. The company has started Escrow payment since January, 2012.

The above is an excerpt from the following news article by Times of India (TOI). For more information, please see:
http://timesofindia.indiatimes.com/city/nagpur/Spanco-issued-termination-notice-by-MSEDCL/articleshow/14681983.cms 

Posted by: Kunjan Bagdia @ pManifold    

Price bid curves and analytics from Jharkhand Distribution Franchisee projects

Our recent blog 'Key comparison of revised RFPs for Jharkhand Distribution Franchisees' covered the baseline comparison between old and revised RFPs for 3 forthcoming Power Distribution Franchisees in Jharkhand - Ranchi, Dhanbad and Jamshedpur.

JSEB has given minimum benchmark input price curve for all the regions, mandating bidders to bid higher than given price curve for all 15 years. The bidders in pre-bid meeting has earlier requested to have no benchmarks, to allow them innovating on financial structuring. (See our blog Jharkhand Distribution Franchisee first pre-bid meeting) 


See below table with useful bid analytics

Jharkhand Min. Benchmark Input prices for Power procurement by DF (Source: pManifold)

Some top level observations:

1. Steep growth rate of around 10% in initial first 2 years, with max. in first year; followed by receding growth rate to 2% by 5 years; almost stable and slow receding of around 1% until 10 years, and then another stagnant increase of less than 0.5% and below until 15 years. 
2. Ranchi has lowest start point around Rs. 2/kWh, with Jamshedpur highest at Rs. 2.5/kWh
3. Ranchi again has lowest end point around Rs. 2.75/kWh, with Dhanbad highest at around Rs. 3.2/kWh. Amongst 3 DF regions, Dhanbad ranks lowest in geographical area, highest in consumer density and highest in AT&C losses. This probably be the reason for its highest end point pricing, because otherwise it ranks lowest in most other metrics of pManifold's DF attractiveness matrix.
4. The ratio of max. to min. rates for each curve is higher than 0.7. 
• The highest ratio is for Jamshedpur, resulting into lowest delta of Rs. 0.540 between the max and min rates of price curve. 
• The lowest ratio is for Dhanbad, resulting into highest delta of Rs. 0.938 between the max and min rates of price 
5. The Levelised Input Price (LIP) calculated at discount rate of 11% is highest for Dhanbad at Rs. 2.876/kWh, followed by Jamshedpur, with lowest for Ranchi at Rs. 2.487/kWh. (Difference of around 40 paise).
6. Average Billing Rate (ABR) of Ranchi is lowest at Rs. 3.050/kWh, revealing greater improvement opportunity for that DF. Dhanbad has highest ABR of Rs. 3.540/kWh, which is sort of contrasting with its highest AT&C losses, lowest revenue billing & collections, and also lower collection efficiencies (see Jhanrkhand's DF attractiveness Matrix for details)
7. Ratio of ABR to LIP is highest 1.231 for Dhanbad, 1.226 for Ranchi and lowest 1.176 for Jamshedpur. (This ratio is static indication of profit margin for bidders, with close to 1.00 value is indication of lower margins and higher risks for DF operator)

pManifold's DF bid advisory services further augment our client's bidding strategy through consolidation of on-site (network and customer) intelligence and other secondary research on electricity value chain for the region and its customer's demographics (socio, economic, political, cultural). Also our Discom Advisory services provides support in preparation of baseline data for new coming DF regions, and integrated financial modeling of Distribution Licensee and Distribution Franchisee to study various trade-offs to design robust DF model and contract for true win-win of Discom and DF. 


Post by: Rahul Bagdia @ pManifold

Key comparison of revised RFPs for Jharkhand Distribution Franchisees

Recently (20th June 2012), Jharkhand has revised its Distribution Franchisee (DF) RFPs for 3 locations namely Ranchi, Dhanbad and Jamshedpur. See our previous blogs on Jharkhand:

• Jharkhand Distribution Franchisee first pre-bid meeting
• Relative DF Attractiveness Matrix for Jharkhand and Mumbra RFPs

DF Attractiveness Matrix, benchmarking old and revised RFPs is shown in the diagram below. Some major changes in revised RFPs (dated 20th June) compared to old are as follows:

Jharkhand DF Attractiveness Matrix - Revised vs. Old RFPs (Source: pManifold)

1. The base year for the RFP baseline continues to be 2010-11. This is most surprising part of this bidding, with bidders to take a call on future with lagging past baseline information.
2. The current DF scope has been extended to entire District level for all 3 areas. Geographical area of all 3 regions - Ranchi, Dhanbad and Jamshedpur, has increased multiple times by approx. 17, 5 and 27 times respectively. This is huge increase, with not much corresponding change in no. of customers and assets variations  (see 2nd and 3rd figure here), creating questions on authenticity of the RFP baseline. 
3. Number of Divisions has increased in Dhanbad from 3 to 4, while remaining the same for other 2 regions. Again increase in Dhanbad divisions, is not correspondingly matching with increase in assets in revised RFP (see 2nd figure here), suggesting inconsistency. 

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.

Pre bid meeting Shil-Mumbra-Kalwa-20120621

View more presentations from pManifold

Relative DF Attractiveness Matrix for Jharkhand and Mumbra RFPs

Recently, new opportunities have emerged in Jharkhand and Maharashtra in Power Distribution Franchisee. See our earlier blogs on Mumbra (Maharashtra) and Jharkhand:

• MSEDCL released revised RFP of Shil-Mumbra-Kalwa
• Jharkhand Distribution Franchisee first pre-bid meeting 

pManifold's DF Attractiveness Matrix on RFP data provides a quick study on new areas in Jharkhand & Maharashtra and its comparison with old one's like Nagpur, Jalgaon, Aurangabad, MP's 3 regions, etc. A coloring scheme is used for better visualization for favorable Distribution Franchisee parameters across each attributes.

A Consumer-Oriented Approach to Water Sector Reform (WSR)

With complex institutional arrangements, aging infrastructure, and poor cost recovery practices, India’s urban Water and Sanitation Services (WSS) sector faces tremendous challenges to providing safe, affordable water in a reliable manner. Ill-suited to tackle these issues on its own, the government began turning to the private sector for solutions in the mid-1990s. While such Public Private Partnerships (PPPs) were introduced with great fanfare, they failed miserably – only 1 in 5 projects initiated during the period remain in operation. One of the most important reasons behind these failures was the unilateral focus on physical infrastructure, completely neglecting the consumer-facing component of water utilities.

India has learned much from its Water Sector Reform (WSR) experiences since then, with three quarters of PPPs henceforth involving Operations and Management (O&M) of the distribution value chain. Correspondingly, PPP failure rates have decreased substantially: 80% (1990s) à 62.5% (2000-2004) à nearly zero (2005 onwards). In this blog, we will outline India’s most critical urban WSS issues from a consumer-oriented approach – the approach that has proven successful in providing lifelines to a sector in dire need of revitalization. (Source: Trends in Private Sector Participation in the India Water Sector, World Sanitation Program 2011) 

To summarize this sector’s main challenges in one sentence (or diagram, rather), it is stuck in the following low-level equilibrium trap:

Escrow payment introduced by MSEDCL for Shil-Mumbra-Kalwa

Our earlier blog covered the 'Technical' and 'Financial' criteria of Shil-Mumbra-Kalwa, followed by listing of key performance parameters.

MSEDCL, from its past bid experience, is facing payment recovery issues from few operating distribution franchisee companies. In a recent development, MSEDCL has enforced strict performance requirements from existing franchisee to participate in its latest bid at Shil-Mumbra-Kalwa. This is by way of the following two clauses which have been added freshly:

• A certificate of 'No Outstanding Dues' of utility (licensee) has been made mandatory for operating distribution franchisees.
• Recovery of six months average billing amount in advance from future franchisee.

The above first condition will further increase pressure on existing franchisees to clear dues in case they wish to participate in new bids. The latter condition will ensure that only serious bidders with strong appetite to bear initial costs will participate in the future DF bids.

A slight change in QR is made, allowing any Distribution Licensee to participate irrespective of the customer base and no limitation of 40K customers.

Another interesting piece to further strengthen DF model is being experimented in this bid, with start of Escrow account, to derisk the Licensee from non-payment by DF operator.

The Shil-Mumbra-Kalwa bid process is through e-tendering and the revised RFP can be downloaded from the following website of Mahadiscom: http://works.mahadiscom.in/eTender/etender. A non-refundable fee of Rs. 2 lacs as tender purchase fee is to be paid online. This practice of MSEDCL of charging fees on RFP downloading is getting rightly challenged by bidders, resulting into risk of lower bid participation, fearing which RFP sale date has been extended to 20th June. (Please take a quick poll to register your vote to agree/disagree on this issue, and help set right practices to improve bidding procedures)

See revised Corrigendum.

Posted by: Kunjan Bagdia @ pManifold

MSEDCL released revised RFP of Shil-Mumbra-Kalwa

Maharashtra State Electricity Distribution Company Limited (MSEDCL), after a long slumber has come into action back again, keeping up its leadership in the Power Distribution Franchisee (DF) segment, with already 4 operating DF models. The company has recently released the RFP for Shil-Mumbra-Kalwa, which comes under Thane Urban Circle, after having scrapped the earlier bidding that started in Dec. 2010.

Qualification criteria for the bidder company are as follows:

• Technical Capability Criteria
• Experience in handling consumer base
• The Bidder Company must have a minimum of 2 years of experience in serving at least 40,000 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.
• For Operational Distribution Franchisee of Utility
• The existing operational  Distribution Franchisee of Utility must have no outstanding dues excluding disputed amount if any, the current payable invoice and preceding payable invoice. A certificate of NO outstanding dues of  utility  except as mentioned above have to be submitted along with the bid. 

• Financial Capability Criteria
• Net worth
• Net worth as on March 31, 2011 should be at least Rs 70 Crore (Rupees  Seventy  Crore). Net worth is defined as Paid up Equity Share Capital plus Equity Share Premium plus General Reserves and other free reserves plus credit balance in profit and loss account less Accumulated losses less intangible assets less Miscellaneous expenditure to the extent not written off.
• Intangible assets are identifiable non-monetary assets, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Net worth excludes statutory reserves and revaluation reserves. 
• Cash Accruals
• Average Cash Accruals, (defined as the sum of Profit after Tax plus depreciation) in the last two years (i.e. FY 2009-10  & FY 2010-11), should be at least Rs. 35 Crore (Rupees Thirty Five Crore).
• Public Limited Company
• The bidder company should be a public limited company as defined in section 3 of Companies Act, 1956.

The Bidder  must satisfy all the above-mentioned criteria to be qualified for evaluation of Financial Proposal.

Key performance parameters of the RFP and its associated weight-age are indicated below:

Parameters	Units	FY 2010-11
Input Energy	MUs	442.6
Sales (Metered)	MUs	263.64
Demand (Inc Subsidy)	Rs. Cr.	135.53
Collection	Rs. Cr.	109.30
Overall AT&C Losses (HT & LT together)	%	40.43
AT&C Loss (only LT side)	%	44.56
Loss Quantum	MUs	178.96
Collection Efficiency	%	80.77
Connected Load	MVA	122
No. of consumers	No.	1,57,699

The revised RFP for Shil Mumbra & Kalwa region is uploaded on website of Mahadiscom:

http://works.mahadiscom.in/eTender/etender. Contrary to other states DF bids, there is a downloadable price to access the RFP online and apply. The complete process will be through e-tendering.

Pre-bid date: 21st June
Bid close date: 21st July

Old RFP, which was released in Dec 2010, can be downloaded from the following link:

http://www.mahadiscom.in/RFP_DFA_JSHIL-MUMBRA-KALWA_21-12-2010.pdf

Post by: Kunjan Bagdia @ pManifold