Meghraj Capital Advisors Private Limited Infrastructure Consulting I Mergers & Acquisitions I Private Equity I Capital Markets Role of Credit Risk Guarantee Facility in Result Based Incentive model for Distributed Generation Projects 9 th June 2016 Rakesh Jha
Meghraj Group Founded by late Mr. Meghji Pethraj Shah. Early 1970s headquartered in the British Isles Meghraj Group is an international investment banking, fiduciary services and infrastructure (Urban & Power) and real estate consulting organisation. Power Consulting- Generation, Distribution, Regulatory, RE, Energy Efficiency RE Experience Off-Grid Rooftop Solar (RTS) Solar Park Offices Credit Risk Guarantee Facility Result Based Incentive Mini-Grid Regulations in UP Action Plan for Mini- Grid Projects in UP Net metering based RTS scheme in 3 states Policy Coalition RTS policy in West Bengal City-wide 5 MW RTS Program in Rajasthan Sustainable energy development plan in Maldives Badhla Solar Park, Rajasthan Rewa Solar Park, Operating manual Solar Park Development & Transmission Sector Project 2
Substantial electrification at village level; high % un-electrified Households 237 million people in India without having access to electricity (IEA, World Energy Outlook 2015) Jharkhand Maharashtra Haryana Punjab Madhya Pradesh Andhra Pradesh Rajasthan Uttar Pradesh Financial Burden (In USD Billion) 1.6 2.7 2.5 3.0 4.3 8.2 11.4 12.4 Discom s Disinterest: Perceived financial burden, price disparity (ACoS vs Tariff cent 9.93 Vs 7.93) Mini-Grid- Potential Solution Government s initiatives 24X7 electricity access to all Issues: Sustainability, Financing, Grid Arrival 3
Model Scheme Implementation Process Flow Rationale IMPLEMENTATION PROCESS Rationale Benefits of Centralized empanelment Performance monitoring credit ranking Easy Incentive & penalty mechanisms A Empanelment of bidders at MNRE Release of interest subsidy J To be provided as per debt schedule based on performance One standard Ensures quality & reliability B Technical specs, benchmark capital cost, QoS, Performance matrix Performance monitoring I Inclusiveness Performance based ranking Incentive or penalty Economies of scale Area segmentation- on topography Eliminate topography based competition C Clustering of areas by SNA Implementati on of the project H Capacity determination Demand based QoS & inclusiveness D Demand estimation by SNA Debt by banks G Facilitate better leverage of equity Help scaling up Cost based competition Faster electrification Economies of scale Bidding based on capital cost/kw E Centralized BPM by MNRE Counterparty Guarantee by SPV F Help to get debt from banks 4
Performance Metrics designed to provide incentive for good performance for current project and incentive for scale up Generation/minimum expected generation Projects assessment parameters Households electrified/min. households to be electrified based on capacity Inclusiveness (I)* etc. Interest subsidy disbursement contingent on meeting Performance Metrics Maximum project capacity to be bid by Project Developer is dependent upon rating Provision under Bid Process-2, non-performance of local entrepreneurs associated with empanelled bidders, may affect rating of empanelled bidder to ensure empanelled bidders provide good quality & undertake basic due-diligence of projects themselves *(I<0.8 for 1 st year of operation and I<0.7 for subsequent years of operation; I = [N+1/N-1]- (2/(N(N-1)µ) x ( Pi Ui (i=1,n)) (where N is the number of households in the village as per census 2011, µ is the mean electricity consumption, Pi is the rank of the consumer with consumption Ui 5
Schematic diagram of the model BID-1 Local Entrepreneur BID-2 Empanelled Project Developer OR Independent Auditor Assessment as per SLA Tariff Consumers Empaneled Bidder Electricity Services Debt service MNRE Minimum Technical Mini- Grid Specifications BPM Credit rating Bank Counter party guarantee by SPV created by GOI Interest Subsidy SPV SNA List un-electrified areas Segregation of regions Clustering Demand Estimation Performance Monitoring 600 500 400 300 200 100 0 9 44% 20% Illustration 37% 10% 88 13 108 Ph-I (FY15-17) Ph II (FY 17-19) 490 438 34% 5% Ph III (FY 19-20) Pvt Investment (USD Million) Govt Subsidy (USD Million) Govt support (%) NPA (%) 50% 40% 30% 20% 10% 0% The decrease in NPAs shall be due to higher capacity allocation to the entities that have performed as per the performance metrics Additional Funding/Credit Guarantee to the Technology Provider either directly or under Build Maintain model contingent on Meeting SLA Debt Repayment 6
Relevance of a Credit Guarantee Schemes (CGS) Credit Guarantee Scheme Tool for risk mitigation & credit enhancement measures Operated at different levels to substitute part of the collateral required from a borrower If borrower fails to repay, lender can resort to partial repayment from guarantor Promote access to more credit / better credit for the entrepreneurs & diversifies the risk for the lending institutions Difference exist between Viable Projects & Bankable Projects Projects can be viable in long-run, but not definitely bankable on account of Lack of collaterals CGS provides complementary collaterals/guarantees Information asymmetry CGS overcome Information asymmetry High Risk CGS transfers or diversifies risk 7
Operational Parameters Objective Formulation Credit Guarantee Fund Models Eligibility Risk Sharing Creation of fund Operating Procedures & Processes Need Target Scope Funded Vs Non-funded Retail Vs Portfolio Direct or Indirect Beneficiary Eligibility Criteria Delivery Mechanism Size of the guarantee Coverage of interest Type of Fund Size of Fund Sources of Fund Leverage Application Appraisal Issuance Loan follow-up Claims Claims Validation Claims Payment Recovery of Losses Managing Partners Core Partners Participating FI Capacity Building Performance Monitoring Marketing of Fund Organization Setup Institutional Arrangement Structure Governance Capacity Building Staffing Fees & Charges Relates Expenses Methods Fees Incentives Accounting & Reporting Financial Statements Provisioning for Guarantee MIS Performance Monitoring Performance Monitoring Performance Rewards Medium term additionality created 8
Eligibility and Risk Coverage Eligibility Conditions Min. 20 kw & Max 1 MW for systems other than stand-alone systems Self-use & third party (including leasing arrangement) All technologies Grid connected systems eligible after 31st March 2019 Risk Coverage Coverage Ratio- Till 2019, 75% to lending institution. Post 2019, technology & project specific ratio Default amount- Outstanding principal & interest Total amount- As on date of account becoming NPA or on which lending institution has lodged the claim, whichever earlier Provision of partial third party guarantee or personal guarantee Risk Allocation Illustration- Default USD 0.108 Million Any loss be borne by CGS & lending institution in ratio of 75:25 till the bank exhausts their risk coverage of 25 USD 0.108 Million First USD 0.008 Million to FIs USD 0.10 Million 25% of balance to FIs USD 0.025 Million USD 0.75 Million 75% to CGS USD 0.075 Million Nil 9
Upper Band 90 % of Standard Fees Middle Band 95 % of Guarantee Fees Lower Band 100 % of Guarantee Fees Other Aspects Loan follow-up (within 2 weeks of 1 st missed repayment) FIs Findings Review Reporting & Follow up Guaranteed loans portfolio (monthly) Follow up on cases with arrears In agreement with bank can approve rescheduling of the loan on case-by-case basis CGS Loss Recovery Default Claims FI responsible to- Intimate fund, once amount due for 90 days Initiate legal proceedings File claim when amount becomes NPA as per RBI guidelines Pay claim processing fees of USD 76.92 along with their claim for guarantee Credit Rating linked Fee Bank responsible for- Liquidating collateral & pursue for recovery Proceeds from sale of collateral & any additional amount recovered from defaulter, shared in the ratio of coverage ratio (after adjusting expenses of FIs) Unrated or others- 100 % of Guarantee Fees 10
Performance Evaluation FIs & Beneficiaries Evaluation Evaluation based on loan portfolio size & default rates Interest subsidy (~1%- 2%) after 2 yrs of operation, if meets pre-set CUF target Defaulters excluded for 3-5 years & penalized @ 2-3% interest rate for next project Centralised Credit information bureau may help in reducing default rates Scheme Performance Evaluation (after 5 yrs of operation) Additional loans disbursed solely as a result of the guarantee scheme Additional employment generated on account of these loans Additional direct revenue/indirect revenue generated by the beneficiary projects 11
Credit Guarantee scheme will lead to significant economic additionality SN Description USD Million 1 Size of the fund 14.77 2 Total Guarantee Commitments 147.69 3 Total Loan Disbursed (25% risk with the banks) 196.92 4 Equity Contribution (20%) 49.23 5 Total Size of the Projects 246.15 Impact on Beneficiaries Total Project Size- USD 246.15 Million Net Returns- USD 180.77 Million 6 Default Rate 5% 7 Total Defaults 9.85 8 Coverage by Guarantee Fund 75% 9 Total Pay-out by Guarantee Fund 7.38 10 Interest Subsidy 1.5 % 11 Total pay-out towards interest subsidy 5.08 12 Net fund after 8 years 15.38 Impact on FIs Net Inflow-USD 100.46 Million (Banks will have cost of funds to offset against it) Fund will be able to sustain for a period of 8 years under the current assumption set. 12
Thank you Lets Begin! Rakesh Jha Director, Meghraj Capital Advisors Pvt Ltd Email rakesh@meghrajindia.com Skype- rjha1111 Phone - +91 956 000 14 51 13
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Scheme is expected to cater to 40% or 200 MW of the potential market SN Particulars Unit Value 1 Reqd. Capacity Addition MW 500 2 Market to be covered MW 200 3 Per MW rate of Solar PV 1.38 USD 4 Per MW Rate of Bio-mass Million/MW 0.92 5 Per MW Rate of SHP 1.23 6 Contribution of Solar PV % 60% 7 Contribution of Bio-mass % 30% 8 Contribution of SHP % 10% 9 10 Wtd Average Cost per MW for the suggested mix Total Cost towards new capacity addition USD Million/MW 1.23 USD Million 246 11 Debt Financing (@80%) USD Million 197 12 Coverage Ratio of Guarantee % 75% 13 Assumed Leverage No. 10 14 Size of the fund USD Million 15 Potential market for CGS 100 un-electrified villages capacity (MW) 250 150 1st year 2nd year 3rd year Source mix for capacity addition Biomass 30% SHP 10% Solar PV 60% USD 14.8 Million Corpus in 3 tranches 3.0 7.4 As per current benchmark capital cost (MNRE) 4.4 1st Year 2nd Year 3rd Year 16