Operation Performance Evaluation Review · 2011. 2. 16. · operation performance evaluation review...

Operation Performance Evaluation Review

TC Advisory Services for the Privatisation of the Electricity

Distribution Companies

Bulgaria(A Technical Cooperation Operation)

April 2006

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OPER No: PE05-311

Operation Code:26816

Evaluation Department

EvD

OPERATION PERFORMANCE EVALUATION REVIEW (OPER)

PREFACE

This Evaluation Report The subject of this OPER is TC Advisory Services for the Privatisation of the Electricity Distribution Companies (Bulgaria). The Bank obtained EU funding (Phare allocation of EUR 1 million) for the fixed retainer under the advisory assignment. The report has been executed by Albert Stocker, Senior Evaluation Manager. George Giaouris, Principal Banker, Power and Energy, prepared the Project Completion Report. The operation team and other relevant Bank staff commented on an early draft of this report. The Basic Data Sheet on page iii of this report and the PCRs in Appendix 5 are complementary to this OPER and designed to be read together. Information on the operation was obtained from relevant teams and departments of the Bank and its files as well as from external sector and industry sources. Fieldwork was carried out in September 2005. Appendix 1 presents a list of contacts. EvD would like to take this opportunity to thank those who contributed to the production of this report. Post-Evaluation Selection and Process Selection of an operation for post-evaluation by EvD uses the following criteria: relevance to the Bank's likely future operations; lessons-learned potential; size of the Bank's investment commitment/exposure; balance among countries of operation; balance among sectors and types of operations; relative priority of investment operation OPERs within EvD's overall work programme priorities and resources. The Bank's post-evaluation process is described in Chapter 8 of the Operations Manual. The responsible Operation Leader first writes a TC Project Completion Report (PCR). The PCR serves a self-evaluation function and establishes the basic facts and lessons from the operation's preparation, implementation, and outcome. EvD’s independent evaluation follows, using the PCR as one of several inputs.

OPERATION PERFORMANCE EVALUATION REVIEW TC ADVISORY SERVICES FOR THE PRIVATISATION OF THE ELECTRICITY

DISTRIBUTION COMPANIES (BULGARIA)

TABLE OF CONTENTS

Page PREFACE ABBREVIATIONS AND DEFINED TERMS ii BASIC DATA SHEET iii 1. THE PROJECT 1 1.1 Background 1 1.2 The Bank’s Involvement 1 2. PROJECT RATIONALE 2 3. OBJECTIVES AND ACHIEVEMENTS 2 3.1 Objectives 2 3.2 Achievement of objectives (efficacy) 3 4. OVERALL ASSESSMENT 4 5. TRANSITION IMPACT AND ADDITIONALITY 4 5.1 Overall transition impact 4 5.2 Company impact 4 5.3 Industry impact 4 5.4 Impact on the economy as a whole 5 5.5 Environmental impact 5 5.6 Country strategy and sector policies 5 5.7 Additionality 5 6. BANK HANDLING 5 7. KEY ISSUES AND LESSONS LEARNED 6 7.1 Establishing a supportive local environment with strong political will 6 7.2 Timing of a privatisation to coincide with government policies for overall sector reform 6 7.3 Identifying key elements to be considered when selecting a privatisation advisor 7 7.4 Setting a cost effect advisory fee structure with a retainer and a larger success fee 7 7.5 Working with an evolving regulator in a maturing society 7 LIST OF APPENDICES

Appendix 1 Contact List Appendix 2 Summary Ratings Appendix 3 Transition Impact Appendix 4 Terms of Reference for the Advisor Appendix 5 PCR Completion Reports (2)

i

OPERATION PERFORMANCE EVALUATION REVIEW TC ADVISORY SERVICES FOR THE PRIVATISATION OF THE ELECTRICITY


ABBREVIATIONS

BD Banking Department ED Environmental Department EIRR Economic Internal Rate of Return EvD Evaluation Department FIRR Financial Internal Rate of Return IFI International Finance Institution OCE Office of the Chief Economist (EBRD) OGC Office of the General Counsel (EBRD) OL Operation Leader OPER Operation Performance Evaluation Review OpsCom Operations Committee OT Operation Team TOR Terms of Reference USD United States Dollar XMR Expanded Monitoring Report

DEFINED TERMS

the Bank European Bank for Reconstruction and Development. the Client Ministry of Energy, Privatisation Agency the OPER Team Staff of the Project Evaluation Department and the independent sector

consultant who jointly carried out the post-evaluation the Operation advisory services for the privatisation of the electricity distribution

companies in Bulgaria the Operation Team the staff in the Banking Department and other respective departments

within the Bank responsible for the Operation appraisal, negotiation and monitoring

ii

OPERATION PERFORMANCE REVIEW TC ADVISORY SERVICES FOR THE PRIVATISATION OF THE ELECTRICITY


BASIC DATA SHEET Operation Code 26816 Location: Bulgaria Operation: Power Distribution Privatisation Advisory Services Sector: Electric Power Distribution Type: Technical Cooperation Facilitators: EC Phare Bank Unit: Power and Energy A. Funding TC TCFP Commitment Commitment number Commitment title Amount (EUR) TC1 ECP2000-2002-08-07 Advisory Services for the Privatisation of

Electricity Distribution Companies in Bulgaria

EUR 949,608

TC2 ECP2000-2002-05-01 Power Distribution Privatisation Advisory Services (co-ordinator for Ministry)

EUR 33,900

B. Visits Type of Visit No. of Visits Person-days EvD/OPER 1 4

iii

OPERATION PERFORMANCE EVALUATION REVIEW TC ADVISORY SERVICES FOR THE PRIVATISATION OF ELECTRICITY DISTRIBUTION COMPANIES (BULGARIA)

1. THE PROJECT 1.1 Background

In 2002 the Bank approved a technical cooperation (TC) assignment supporting the restructure of the Bulgarian power sector. A liberalisation plan was agreed by the government to meet EU accession criteria. To help facilitate competition in the electricity sector, 28 electricity distribution companies were consolidated into seven groups for privatisation. The Ministry of Energy and Energy Resources planned to engage advisers for the privatisation of the power distribution sector. The Bank was able to offer its support for the selection and support of the adviser. In addition, financing for the successful bidder was offered. The Bank obtained EU funding (€1 million from the 2000 Phare allocation, available under the Bangkok Facility) for the adviser’s fixed retainer. In addition, the adviser earned a success fee following the successful completion of the assignment. The Bank organised jointly with the government the transparent selection of the adviser, based on a public tender process with clearly defined criteria. During the delivery of the advisory assignment, the Bank’s team supported communication flow between government entities and other IFIs. In the ultimate evaluation of the submitted tenders, the Bank had a delegate involved as a non-voting observer to ensure the transparency of the selection process.

In Bulgaria, energy is a key sector of the economy generating substantial revenues from electricity exports to neighbouring countries. The EU promotes a strong and independent regulatory authority. As part of its accession negotiations, the EU has agreed a plan of liberalisation for the energy sector in Bulgaria. Furthermore, the EU supports the Energy Efficiency Agency and the Kozloduy International Decommissioning Support Fund (managed by the EBRD). The EU also supports a regional energy market as part of the strategy to stabilise the region. Current evidence shows that entry into the EU appears to facilitate the agreed progress towards liberalisation. It is expected that the new three-party coalition government, formed during the third-quarter of 2005, will continue to support the implementation of these agreements.

1.2 The Bank’s involvement

The Bank approved the assignment (TC1) in 2002 and the consultant was selected in a transparent process by the Ministry of Energy in July 2002. Among the eight short-listed firms, seven submitted technical and financial proposals. BNP Paribas (which was ranked second in the technical evaluation) scored the highest financial points based on its offer of lowest percentage success fee and the lowest cap. The Bank participated as observer and had no objections to the selection. At the request of the Ministry a small portion of funds (5 per cent) was used to contract an expert to help the Ministry coordinate and monitor the work of the advisers (TC2).

of 8 TC advisory services for the privatisation of electricity distribution companies (Bulgaria)

The objectives of TC1 were as follows (detailed terms of reference in Appendix 4): (a) to collect all relevant documents on the distribution companies; an essential task since little or no centrally held data was available. (b) to prepare marketing materials to develop investor appetite among the targeted utilities (c) to draft information memoranda (d) to provide monthly written reports to the Minister of Energy detailing the process, issues and recommendations.

2. PROJECT RATIONALE

The Ministry of Energy’s main rationale for undertaking the privatisation process was to ensure the country qualified for EU accession. As part of this process, the government agreed a sector privatisation plan and received assistance from various IFIs. The EU delegation found the Bank well positioned to deliver the TC and prepare the distribution companies for privatisation, particularly given its mandate to invest in the private sector and its interest to participate as an equity investor (or portage equity investor) in the distribution companies after privatisation.

The Bank was interested in the government’s privatisation plans due to its long standing involvement in the Bulgarian power sector. The delivery of a successful TC operation and the privatisation of distribution companies would enable the Bank to ultimately participate in the financing of the successful purchasers of the distribution companies.

3. OBJECTIVES AND ACHIEVEMENTS 3.1 Objectives

The terms of reference for the TC assignment focus on the following: Objective: The objective of the TC operation was to provide the basis for attracting serious bidders to the public tender process and achieve good prices for the government. Scope of work: The assignment was to be completed within one year. The adviser had to collect, review and organise all relevant financial, technical, commercial and legal data on the distribution companies and set up data room files. Subsequently the preparation and distribution of high quality marketing material was considered a high priority. In addition, an information memorandum had to be prepared and support given to the government authorities during the marketing stage of the tender process. A very active interface with the government authorities during the entire advisory process was also considered as a key task of the adviser. In addition, the adviser was required to produce regular monthly reports about the progress achieved and the next tasks ahead.

3.2 Achievement of objectives (efficacy)

The TC objectives were achieved in full and the work performed provided good value for money. The selection process of the adviser was highly transparent and was based on an initial technical rating, determined according to the qualifications of the group submitting the tender. Subsequently, high importance was also given to the success fee required by the

TC advisory services for the privatisation of the page 3 of 8 electricity distribution companies (Bulgaria)

participants in the tender process. The successful adviser was able to assemble an excellent team and also to source a large portion of the work in Bulgaria itself having a local office in Sofia. The difference in success fees between similarly qualified international banking groups was extremely high: the fourth ranked group had a five-times higher success fee than the selected tender participant. The tenders were evaluated by a committee composed of six members (three from the Ministry of Energy and three from the Privatisation Agency). The Bank had the right to nominate one observer to participate in the tender evaluation and selection process. Despite the fact that the successful adviser had quoted a fairly aggressive and low success fee (approximately one quarter of the next tender which reached the second place in the evaluation), he was able to deliver a high quality service and even provided flexibility in accepting changes to the work programme and offering strong support to the government agencies. The Bank was initially of the view that the aggressively low-priced winning proposal would not necessarily ensure the highest quality of services. This proved unfounded as the adviser was able to achieve an adequate profit contribution by utilising the local staff resources and by managing very tightly the contributions from other advisory group members on the legal and accounting sides (for example, payments out of the retainer by achieving certain targets rather than simply by hour spent). The utilisation of local staff well familiar with representatives of the different government entities facilitated the dialogue and conflict resolution supported by the bank office. Key coordination was required between the Ministry of Energy as owner, the Privatisation Agency (Ministry of Economy) and the regulator. Since there were always some issues between these parties, the continuous conflict resolution supported strongly also by Bank staff was critical for the success of the TC operation. Continuous strong support from the Ministry of Energy (both the delegated coordinator and the Minister himself) was extremely important. The personal commitment of the Minister during extensive road show presentations to key European utilities created strong interest and motivation to submit tenders. The prices achieved in the privatisation were substantially higher on a per customer basis than in surrounding countries: Bulgaria €230, Czech Republic €200, Romania €100-150.

4. OVERALL ASSESSMENT

Based on its independent review of the TC operation’s performance, the Evaluation Department (EvD) has concluded that the operation’s overall performance was Highly Successful given the excellent quality of the TC work by the consultants and the highly successful tender process in the context of a difficult market environment. This overall assessment is based on EvD’s internal rating methodology, which takes into account achievement of objectives, transition impact, environmental impact, company and project performance, and profit contribution. The transition impact of this TC operation was Excellent as it established a text book case for a successful privatisation. The Bank’s additionality was rated Verified in all respects given that all parties agreed that the Bank was the ideal delivery entity for this TC. The Bank’s


willingness to offer financing to the winning bidders was considered a useful support to the entire process and lent further credibility in the eyes of bidders and commercial banks. The TC operation generated ultimately higher than expected tender results from well experienced international utilities. Since the TC services were procured on a highly competitive basis, the TC contributed excellent value for money and in this sense the project’s financial performance can be rated as Excellent. The same is true for the fulfilment of project objectives. The Bank handling was Excellent and strongly supported the transparent selection of the adviser as well as the development and delivery of the TC operation through observation of final bid evaluation and award process. There is a good chance that this TC operation will lead to an involvement of the Bank in the financing of at least one of the new distribution companies, possibly with portage equity. Based on this likely outcome, the Bank’s investment performance (in the medium term) was rated Satisfactory.

5. TRANSITION IMPACT AND ADDITIONALITY 5.1 Overall transition impact

The TC operation started at the middle stage on the “transition event line” of the power sector. The careful preparation and strong promotion of the country’s commitment to set the right framework lead ultimately to a highly successful tender process. EvD has rated the TC operation’s overall transition impact as Excellent. This is mainly due to the fact that this was the most transparent privatisation process in Bulgaria and clearly set high standards. The highly successful outcome of the tender process at almost twice the expected price levels underpins this rating. Furthermore, all parties noted that no legal action was taken by any party after the bid award, which is rarely the case in Bulgaria.

5.2 Company impact

Based on the successful TC operation, the distribution companies were successfully privatised. The new owners have recently taken over management and are re-branding and fine tuning the operations. Three different international utilities have taken over the various distribution companies and have involved senior expat staff on the commercial and technical side to implement their changes in the distribution system companies. It is expected that in due course training and transfer of systems and know how will contribute to skill transfers. The TC operation does not have any direct involvement at the company level after privatisation.

5.3 Industry impact The successful privatisation of the distribution companies has changed the industry. The fact

that three European utilities have become the new owners of the various regional distribution companies will maintain some element of service comparability even though each one operates in a different area of the country. The impact on the industry as a whole is rated as Excellent.


5.4 Impact on the economy as a whole

The energy sector is a key sector in Bulgaria and contributes substantial export revenues. The maintenance and improvement of a strong electricity distribution system is crucial for most sectors of the economy. The growing tourism sector along the Black Sea coast north of Varna, for example, requires a high degree of reliability of electricity supply. The time elapsed since privatisation is still too short to reach any meaningful conclusions on this topic.

5.5 Environmental impact

The project design had no specific environmental design element. It is however expected that the international utilities who bought the distribution companies will adhere to their own environmental standards and meet also both the Bulgarian and/or EU standards.

5.6 Country strategy and sector policies The TC operation was in line with the Bank’s country and sector strategies as outlined below and was intended to lay the ground work for follow-on investment operations. The strategy for Bulgaria, approved in November 2001, stated that the Bank will strongly promote the corporatisation, commercialisation and privatisation of public infrastructure and services. The Bank’s first priority was to support the privatisation of the energy sector both in generation and distribution. The Power and Energy Team, in accordance with the most recent strategy for Bulgaria, is focusing on the continued support of the privatisation of the energy sector, both in generation and distribution as well as financing new generation capacity.

5.7 Additionality

The TC operation was timely, highly relevant and additional. From a technical point of view the Bank was also considered by other IFIs as the ideal conduit for this EU-funded TC considering the Bank’s mandate to invest in privatised industries and its specific willingness to participate in the financing of the privatised distribution companies. The successful bidders, to varying degrees, expect continued IFI support regarding the government’s honouring of commitments as per the privatisation framework. Furthermore, continued efforts to support and strengthen the independence of the regulator will be important. Two of the successful bidders are of the view that the Bank’s involvement with portage equity would contribute to maintaining some pressure on the government. It is expected that issues will continue to crop up regarding, for example, rulings by the regulator, and possible slow adjustment of tariff levels. The EBRD’s continued support is expected to ensure that the rules outlined in the information memorandum, laws and principle of independent regulator are maintained.

6. BANK HANDLING

EvD has rated Bank handling Excellent. Both the operation leader (OL) from the Power and Energy Team and support from the Resident Office (RO) were seen as extremely positive during the entire process (from selection of the adviser through to delivery of the preparation work and culminating in the tender evaluation and bid award). The EU delegation and the


World Bank resident office, as well as government officials, commented very positively about the high dedication of Bank staff and the strong support throughout. Particularly impressive was the excellent coordination with EU, World Bank and USAID (technical assistance to the regulator). The Bank’s Power and Energy Team has various ongoing projects in Bulgaria and is recognised as the number one IFI in terms of sector support.

7. KEY ISSUES AND LESSONS LEARNED 7.1 Establishing a supportive local environment, with strong political will.

The government’s drive to meet EU accession criteria was the overriding factor behind the project. This commitment was enhanced by the strong support provided by the Minister of Energy. The government decided to opt for a detailed discussion of the privatisation in parliamentary committees. Even though this proved time consuming and caused some delay, the open consultation process covered in the media gave the opposition the possibility to express their views. Subsequently it will be more difficult for them to challenge the process.

Lesson:

Strong government support underpinned by parliament is essential for a successful privatisation process of an important public infrastructure company. Government support is a crucial prerequisite for a public sector privatisation. The combination of government support and a minister strongly dedicated to the process can enhance the outcomes of an adviser driven preparation effort. This is particularly the case in instances when a judgement call must be made about whether a time consuming consultative process with a parliamentary committee might, in the long term, save time and reduce the likelihood of legal or other objections at a later stage. Openness at all stages has lead to a highly successful result in this case.

7.2 Timing of a privatisation to coincide with government policies for overall sector reform.

During the advisory process and the initial road show it became clear that the international utilities wanted to have more background and comfort on the regulatory side. The government was able to mobilise in record time (20 days for approval) support from USAID to the regulator and within two-three months a regulatory framework was prepared and agreed. This turned out to be a crucial element to secure a sufficient number of bidders for the tender process. Also the strong involvement of the Minister of Energy during the road shows to all the European utilities and his willingness to work out remaining issues contributed to the interest by potential bidders/tender participants which did not initially plan to submit a bid in Bulgaria.

The regulatory agency was established in 1999 and is still maturing as the legal framework evolves. In most countries this process lasts a long time, with the main importance being that the progress continues in the right direction.


Lesson:

Parallel sector reform is a crucial pre-requisite to a successful privatisation. Tender participants in privatisations give a strong importance to sector issues which can have a strong impact on their future financial performance. These include envisaged tariff structures and the independence of the regulatory authority. The government’s track record in sector reform is a key factor for judging risks in the market when preparing a tender submission.

7.3 Identifying key elements to be considered when selecting a privatisation adviser.

The tender and transparent selection of the privatisation advisers was essential and led to good results. The criteria of technical competence and pricing (retainer and success fee with caps) were useful to select the most suitable proposal. The adviser with a strong local experience was well equipped to understand and interface with local entities; foreign experts were called in when necessary. The local team maintained strong daily contacts with all relevant parties. Lesson: The privatisation adviser should have a strong local team, plus access to international expertise to the extent necessary. Local teams can be highly cost effective in particular in time consuming privatisation preparations which last a long time and include a lot of local information collection as well as continual updating of the local decision makers. The combination of a strong local team with experts from abroad contributing relevant expertise can be highly effective.

7.4 Setting a cost effective advisory fee structure with a retainer and a larger success fee. In this TC operation the concept was to have a pre-defined retainer plus a success fee following the successful privatisation. This facilitated cost effective solutions which were used in the case of the selected adviser to obtain defined contributions from sub-contracted advisers on accounting and legal aspects against release of payments from the retainer. Solution-oriented work practice was encouraged rather than advisory activities based on hourly fees. Lesson: When determining the fee structure, focus should be placed on the achievement of privatisation targets and a high success related payment rather than on hours of consultancy time spent. The focus on retainer and success fee for a clearly defined task from the outset can focus advisers on solutions rather than on producing irrelevant advice. Ultimately, the tight timetable with some flexibility also contributed to a focus on getting the job done rather than producing only studies.

7.5 Working with an evolving regulator in a maturing society.

In Bulgaria, there is a substantial need to upgrade the distribution networks. This can only be financed with higher electricity tariffs. Large numbers of hotels are being developed along the Black Sea coast north of Varna due to the growing market for tourism, in particular from Israel and increasing German and Russian clients. The electricity network needs substantial investments to improve reliability and to cope with demand growth. The regulator may be


reluctant to approve the requested tariff increases fearing a political backlash from lower income groups. This needs to be seen in the context of the recent significant tariff increases and the limited purchasing power of the average Bulgarian citizen. (The average salary levels are approximately €150 per month, with many people in the range of €60-80 per month. The minimum pension is €40 per month).

Lesson: Sector participants will need to make a realistic assessment of the transition economy and of achievable progress towards a mature regulatory authority. Realistic expectations for outcomes of regulatory decisions especially in early transition countries with recent high tariff increases and further increases on the horizon are important. The regulator cannot act in a total vacuum and needs to consider and interact with all the sector players including the consumers. The tendency of foreign investors to blame everything on the regulator needs to be balanced by the long time frame which was required even in advanced countries to reach more mature and more independent regulatory authorities. Politicians, electricity users, distribution companies and generators may all have different views to express to the regulator.

APPENDIX 1

LIST OF CONTACTS COMPANY POSITION EC DELEGATION Christophe Fleuleau-Dauloudet Advisor, EC Delegation, Sofia CITIGROUP SOFIA Chavdar Rissin Emerging Markets Corporate Bank Head MINISTRY OF ENERGY (SOFIA) Milko Kovachev Former Minister of Energy Vladimir Stariradev Director European Integration & International ProjectsAlbena Trassieva Head of International Cooperation, Protocol & PR

Department Ludmila Vitanova Expert, Investment Division Ekaterina Stefanova Head of Corporate Finance Department Lubomir Velkov Head of Investment & Development Division THE WORLD BANK Doncho Barbalov Energy and Infrastructure Officer E-ON BULGARIA EAD (VARNA) Markus Kaune Senior Vice President, Law, Regulation,

Communication

APPENDIX 2

OPERATION PERFORMANCE RATINGS

TC ADVISORY SERVICES FOR THE PRIVATISATION OF THE ELECTRICITY DISTRIBUTION COMPANIES

Performance Indicator

Rating OVERALL TRANSITION IMPACT (Analysis in Appendix 3): (Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Negative)

EXCELLENT

ENVIRONMENTAL PERFORMANCE OF THE PROJECT AND SPONSOR: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) The project had no special environmental focus except maybe that it can be expected that the international utilities which bought the distribution companies will apply their own in house standards meeting EU requirements.

N/A

EXTENT OF ENVIRONMENTAL CHANGE: (Ratings: Outstanding, Substantial, Some, None/Negative) The new owners have recently taken over operations and it is too early to judge what if any change can be verified at this stage.

N/A

ADDITIONALITY: (Ratings: Verified in all respects, Verified at large, Verified only in part, Not verified) The TC (financed by the EU and complemented by a substantial success fee offered by the Government) was highly relevant and additional. The Bank was well positioned to facilitate the delivery of the TC given its good local and sector presence. Also the Bank’s willingness to participate with portage equity in the financing of the successful bids was well received by some participants.

VERIFIED IN ALL RESPECTS

PROJECT FINANCIAL PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) The TC operation has contributed to tenders which were substantially higher than initially expected and the financial sales result from the point of view of the Government was rated as excellent.

N/A

COMPANY FINANCIAL PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) The TC focus was only up to successful privatisation of the previously publicly owned electricity distribution companies.

N/A

FULFILMENT OF PROJECT OBJECTIVES: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) The proof of the pudding is in the eating. The high prices offered during the tender process from well established international utilities confirm that the key objectives were achieved. Furthermore, the ambitious time table was essentially adhered to. No legal objections, as often used by certain parties in Bulgaria, were made.

EXCELLENT

BANK HANDLING: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) Both the OL from the power and energy team and the local Bank team member were extremely active to maintain the advisory process on a very transparent basis and acted immediately when the consultant required some support at the various Government levels. Also other IFI’s and EU delegation were highly appreciative of the proactive and open information flow offered by Bank representatives during the process.

EXCELLENT

ANNEX 2 to Appendix 2

BANK’s INVESTMENT PERFORMANCE: (Ratings: Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Highly Unsatisfactory) There is a good chance that this TC process will lead to an involvement of the Bank in the financing of at least one of the new distribution companies possibly with portage equity. This would be the desired result of such a TC operation. The TC operation itself was good value for money and the Bank as well as the advisory team received top marks from all relevant parties.

N/A

OVERALL PERFORMANCE: (Ratings: Highly Successful, Successful, Partly Successful, Unsuccessful) Looking at the time line of the process of reaching sector targets in line with EU accession time table, this TC operation was well timed and very well delivered to the entire satisfaction of the Government.

HIGHLY

SUCCESSFUL

2

APPENDIX 3

TRANSITION IMPACT ANALYSIS (ADVISORY SERVICES FOR THE PRIVATISATION

OF THE ELECTRICITY DISTRIBUTION COMPANIES)

TI

checklist categories

STEPS OF RATING TRANSITION IMPACT

EX POST

Short-term verified impact

Longer- Term transition impact potential

Risk to potential TI

STEP I: CHANGE BY THE PROJECT AT CORPORATE LEVEL

Rating1

Rating2

Rating3

3

Private ownership

N/A

N/A

N/A

5

Skill transfers N/A

N/A

N/A

6

Demonstration effects

N/A

N/A

N/A

7

New standards for business conduct

N/A

N/A

N/A

STEP II: TRANSITION IMPACT AT THE LEVEL OF THE INDUSTRY AND THE ECONOMY AS A WHOLE

Rating

Rating

Rating

1

Competition

N/A

N/A

N/A

2

Market expansion A stronger and more reliable distribution system is also an important backbone for the expanding economic activities in tourism and other sectors.

GOOD

GOOD

LOW

3

Private ownership The investments by international electricity companies will lead to stronger focus on bottom line etc.

GOOD

GOOD

GOOD

4

Frameworks for markets The Government has shown especially under the leadership of the former Minister for Energy a strong commitment to developing all elements necessary to meet EU accession criteria. Continuity of these efforts will be important.

GOOD

GOOD

GOOD

5

Skills transfers The three international electricity companies will all train staff and transfer their own know how acquired in their domestic and international activities.

EXCELLENT

EXCELLENT

LOW

1 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative. 2 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative. 3 This range is: Low/Medium/High/Excessive.

APPENDIX 3

6

Demonstration effects The best example of a successful privatisation in a country where this is not yet standard practice. This TC project established a text book case in the Bulgaria and shows how important the preparation and the transparent process are for a successful tender even during difficult times for obtaining investors for emerging markets.

EXCELLENT

EXCELLENT

LOW

7

New standards for business conduct All parties involved (Government, bankers, private sector participants in the tender, other IFI’s) agree whole heartedly that this TC operation followed by successful transparent tender has raised the bar.

EXCELLENT

EXCELLENT

LOW

SUMMARY OF VERIFIED, POTENTIAL AND RISK RATINGS

EXCELLENT

EXCELLENT

LOW

OVERALL TRANSITION IMPACT RATING:4

EXCELLENT

4 This range is: Excellent/Good/Satisfactory/Marginal/Unsatisfactory/Negative.

Appendix 4

BULGARIA

Advisory Services for the Privatisation of the Electricity Distribution Companies

Terms of Reference

July 2002

CONTENTS A. BACKGROUND AND OBJECTIVES .................................................................... 3

1. Introduction............................................................................................................... 3 1.1 Objective................................................................................................................ 3 1.2 Summary Scope..................................................................................................... 3 2. Background to the Transaction ................................................................................. 4 2.1 Structure of the Industry ........................................................................................ 4 2.2 Legislation and Regulation.................................................................................... 5 2.3 Corporate Profiles and Privatisation Strategy ....................................................... 5 2.4 Completed Technical Assistance Studies .............................................................. 6 2.5 Rationale................................................................................................................ 6

B. SCOPE OF WORK AND IMPLEMENTATION ARRANGEMENTS ................. 7 3.1 General................................................................................................................... 7

3.1.1 The Assignment Overview ............................................................................ 7 3.1.2 Support to be Provided by MoE...................................................................... 8 3.1.3 Reporting Requirements ................................................................................. 9

3.2 Preparation Phase ................................................................................................ 10 3.2.1 Privatisation Process and Resources Planning.............................................. 10 3.2.2 Privatisation Strategy .................................................................................... 11 3.2.3 Marketing Strategy........................................................................................ 12 3.2.4 Enterprise Analysis ....................................................................................... 12 3.2.5 Market Analysis ............................................................................................ 14 3.2.6 Legislation and Regulation ........................................................................... 15 3.2.7 Comparable Transactions.............................................................................. 15 3.2.8 Training and Development ........................................................................... 15 3.2.9 Preparation Phase Deliverables..................................................................... 15

3.3 Transaction Phase ................................................................................................ 16 3.3.1 Potential Investor Relations .......................................................................... 16 3.3.2 Transaction Documentation .......................................................................... 17 3.3.3 Valuation....................................................................................................... 17 3.3.4 Selection........................................................................................................ 18 3.3.5 Transaction Phase Deliverables .................................................................... 18

3.4 Completion Phase ................................................................................................ 18 3.4.1 Evaluation of Offers...................................................................................... 18 3.4.2 Negotiation and Finalisation of SPA ............................................................ 19 3.4.3 Post privatisation Control Strategy ............................................................... 19 3.4.4 Completion Phase Deliverables .................................................................... 19

C. DELIVERABLES................................................................................................... 19

2

A. BACKGROUND AND OBJECTIVES

1. Introduction The Government of Bulgaria (“GoB”, the “Government”) recently restructured the National Electric Company (“NEK”), which has resulted in the unbundling of the country’s generation, transmission and distribution network. While the GoB is committed to maintaining government ownership of the transmission network and certain elements of the country’s generation capability (nuclear and some large hydro-generation facilities in particular), the GoB is equally committed to privatising the majority of its generation assets and all of its distribution network. To this end, the Privatisation Agency of the Government of Bulgaria (“PA”) has been mandated to work with the Ministry of Energy and Energy Resources (“MoE”) to proceed with the privatisation of the electricity distribution companies (the “Project”). The GoB is therefore seeking an Advisor (The “Advisor”, the “Consultant”) to prepare and manage the transaction. The Government’s principal objective for the energy sector is to improve the quality of service delivered to electricity consumers by:

• Attracting investment to modernise infrastructure; • Introducing market forces and encouraging good commercial practices; and, • Addressing environmental and energy efficiency issues.

The Government believes that privatisation is the best way in which to achieve these objectives. The European Bank for Reconstruction and Development (the “EBRD”, the “Bank”) has agreed to provide financial support to the Project.

1.1 Objective The objective of the Project is to prepare information memorandа for the seven regional distribution companies, to arrange them to be combined into three sale packages as deemed appropriate and agreed with the MoE, and to complete the subsequent privatisation of the first package through a trade sale of a majority stake to strategic investors with proven experience of operating a similar businesses. It is intended that the first of the three sale packages to be sold within eight months of the appointment of the Advisor, with the remaining two packages to be sold as soon as possible thereafter, ideally within 12 months of the appointment of the Advisor.

1.2 Summary Scope The GoB wishes to appoint the Advisor who will lead a consortium comprising companies and experts able to deliver advice on all aspects of the transaction, including inter alia:

• Privatisation strategy;

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• Transaction marketing; • Commercial, financial, technical, legal, environmental and management due

diligence; • Valuation of enterprises to be privatised; • Preparation of sales documentation; and, • Negotiation with potential investors and finalisation of the privatisation contracts.

However, the GoB does not intend the Advisor to simply implement a model for electricity distribution privatisation taken from another source. The GoB requires the Advisor to be aware of and take full account of the current situation and the potential future development of the Bulgarian energy sector.

2. Background to the Transaction The GoB has already completed a number of steps, accepted as preconditions to the successful privatisation of the electricity industry in Bulgaria:

• Segregation of the state owned vertical monopoly, NEK, into independent commercial entities responsible for generation, transmission and distribution;

• Establishment of an independent and effective regulator for the energy sector; and • Preparation of IAS financial statements and appointment of international

auditors1.

2.1 Structure of the Industry In 2000 the restructuring of NEK was initiated in accordance with the Energy and Energy Efficiency Act 1999 (as amended in 2001). The restructuring took place in two phases:

• Phase 1: Segregation of medium and low voltage distribution operations into seven independent regional distribution companies and separation of Kozloduy NPP (nuclear power plant), Russe and Maritza East 1 TPPs (thermal power plants) as IPPs (independent power plants); and

• Phase 2: Segregation of the remaining TPPs as IPPs. NEK now owns and operates the high voltage transmission network, Maritza East 3 TPP and the larger hydropower plants (HPPs) and pump storage hydropower plants (PSHPPs). NEK also functions as the single buyer of electricity. The Single Buyer Model is considered to be the most appropriate model in the country’s current circumstances, however there will be the possibility for eligible customers to conclude direct contracts with generators from 2002. 1 It is expected that the audit of the electricity distribution companies will be completed by June 2002. It is possible, however, that these audits might be “qualified”, and the Advisor should therefore be prepared to review the accounts and re-state them as necessary as part of the financial due diligence taken under this assignment.

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The new structure of the electricity industry is shown in the diagram below:

Source: NEK

2.2 Legislation and Regulation Under the Energy and Energy Efficiency Act, the MoE is the body responsible to the Government of Bulgaria for the preparation and implementation of the Government’s energy policy and for managing the national energy balance. The MoE is also responsible for restructuring and investment management within the energy sector, while the PA is charged with managing the privatisation process. Regulatory functions have been transferred to the State Commission for Energy Regulation (“SCER”). Under the new Energy Act, the State Agency for Energy Efficiency has been made a part of the MoE and it remains responsible for developing policies to improve energy efficiency and the development of renewable energy sources. The privatisation of the electricity distribution companies will be subject to the provisions of the Privatisation and Post-Privatisation Act 2001.

2.3 Corporate Profiles and Privatisation Strategy The electricity distribution business of NEK has been segregated and seven regional companies have been established, as follows: Stolichno (the city of Sofia), Sofia District,

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Plovdiv, Stara Zagora, Pleven, Gorna Oriachovitsa, and Varna. Preliminary background information on the companies is attached in Annex 12. It is envisaged that the seven companies would be organised into a number of appropriate sales packages, combining the financially more attractive companies with the less attractive ones in single packages, in order to ensure that all the companies are sold to reputable strategic investors. The indicative proposal of the GoB concerning the contents of the separate packages is as follows: 1st Package: Stolichno, Sofia District, and Pleven distribution companies; 2nd Package: Varna and Gorna Oriachovitsa distribution companies; and, 3rd Package: Plovdiv and Stara Zagora distribution companies. The objective of the Government is to introduce private ownership and competition into the sector. There is an overall objective of introducing an element of separate ownership.

2.4 Completed Technical Assistance Studies A number of relevant technical studies have already been completed and the findings will be made available to the Advisor on appointment. A list of these studies is attached in Annex 2.

2.5 Rationale The Government of Bulgaria is aware that the electricity distribution sector will require substantial capital injections in order to provide an acceptable level of service when measured against international benchmarks. It is also clear that so long as the state remains the beneficial owner of these companies, they will be unable to implement the commercial, financial and managerial changes necessary to secure funding. In the light of the Government’s commitment to improving the quality of service experienced by energy consumers, the GoB has concluded that privatisation of the sector is the best way forward. The Government of Bulgaria is committed to the privatisation of the electricity distribution companies as an important element in a wider strategy to develop the energy sector and to fulfil Bulgaria’s aim to become a major player in the regional energy market.

2 In order to facilitate the due diligence process of the Advisor, the MoE is currently collecting detailed information from the distribution companies. It is expected, however, that the Advisor would conduct a detailed due diligence as necessary, check the available data for consistency, and collect any other data as may be required.

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B. SCOPE OF WORK AND IMPLEMENTATION ARRANGEMENTS3

3.1 General The scope of work included in the Terms of Reference is indicative of tasks and that the Advisor should undertake and that the actual scope of work and details should be driven by the requirement to conclude the transaction efficiently and effectively within the agreed timetable. The precise scope of work and the detailed work programme and timetable, which outline the key tasks, deadlines and deliverables would be set during the Privatisation Process and Resources Planning phase (after the Advisor would (i) become familiar with the electricity distribution companies (ii) refine its understanding of the Government’s objectives and constraints, and (iii) review the completed reports relevant to the project), and included in the inception report.

3.1.1 The Assignment Overview The Advisor is required to assist the MoE and PA, with the intention of creating an economically and financially viable electricity distribution sector capable of fulfilling the Government’s stated objective (the Assignment”). The phases envisaged for the assignment are:

Phase Principal tasks Main Deliverables Preparation • Privatisation process planning

• Enterprise analysis • Market analysis • Review of legislation and regulation • Comparable transactions analysis

• Privatisation strategy • Due diligence report

Transaction • Valuation • Selection • Preparation of transaction

documentation • Managing potential investors

• Valuation report • Information

Memorandum • Data room

Completion • Negotiation and finalisation of Share Purchase Agreement (“SPA”)

• Development of post privatisation control strategy

• SPA • Post privatisation

control strategy

The Advisor will also be responsible for the development and implementation of a marketing strategy and for maintaining full communication with the MoE and the PA and 3 The Advisor is encouraged to propose any revisions to improve the tasks listed under these Terms of Reference, which will be taken into account during the technical evaluation of proposals.

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other relevant Government bodies and agencies throughout the project. The GoB also expects the Advisor to include provisions for appropriate transfer of know-how and knowledge sharing to the MoE and PA personnel. The GoB’s aim is to complete the transaction within 12 months according to the following indicative timetable, with the first package (See Section 2.3) to be sold within eight months and the other two packages within 12 months of the appointment of the Advisor. Firms submitting proposals, are, however, encouraged to propose their own realistic timetables, and suggest how, if at all, the assignment might be completed earlier. The Advisor should ensure that proposals allow adequate resources to achieve their proposed timetable:

Milestone Date Appointment of the Advisor July2002 Preparation phase complete By September 2002 For the first package: Transaction phase complete By October 2002 Tenders launched October 2002 Selection of preferred bidder January 2003 Negotiation and completion of SPA February 2003 For the remaining packages and based on lessons learned above:

Transaction phase complete February 2003 Tenders launched March 2003 Selection of preferred bidders May 2003 Negotiation and completion of SPAs July 2003

3.1.2 Support to be Provided by MoE MoE is fully committed to the successful completion of this project and will offer support to the Advisor as set out below. The MoE will assist the Advisor with the following:

• Obtaining copies of all relevant previous technical assistance project reports (these will be in English wherever possible) including available indicative valuation studies undertaken by the MoE. The Advisor will also be provided with the IAS-based audited financial statements for all distribution companies and public information related to the existing and future regulatory framework and tariff-setting methodology. The MoE will assist the Advisor in obtaining other relevant information from SERC.

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• Facilitating prompt access to all relevant data necessary for the Advisor to undertake his work efficiently (it should be noted that data requests should be prepared in Bulgarian and that responses will be provided in Bulgarian, the Advisor should make provision for translation requirements).

• Appointing a Steering Committee (to be chaired by the Minister of Energy) to oversee the work of the Advisor, to deal with major issues within the competency of MoE as they arise and to receive the regular progress reports. In the proposal, potential advisors should indicate the names of up to three senior members of the project team who would attend regularly the steering committee meetings. Steering committee meetings will be held in Bulgarian. The Advisor will be responsible for co-ordinating with the MoE and PA to prepare an agenda for meetings. The steering committee will meet monthly in Sofia: the Advisor should ensure that senior representatives are able to attend these meetings.

• Appointing a privatisation co-ordinator that will act as the first point of contact for the Advisor and ensure that the MoE provides the on-going support and feedback required for the efficient execution of the transactions.

• Appointing liaison persons (an economist, an engineer and a legal expert) who will be responsible for permanent communication and coordination between the MoE and the Advisor and will help when urgent actions and decisions are needed. The MoE expects the Advisor to work in cooperation with the appointed by MoE liaison persons.

• Providing facilities for a data room - an office space in the MoE’s premises supplied with tables/desks, chairs and cupboards. The Advisor will be responsible for additional facilities or equipment and providing the personnel to manage the data room. When the meetings and the negotiations with potential investors take place, the MoE, on a reasonable request, will provide a meeting room. Additionally, the Advisor will have at its disposal a room in each of the distribution companies (available during normal working hours and additionally by arrangement with the management of each distribution company).

3.1.3 Reporting Requirements In addition to the deliverables described under each phase, the Advisor will be required to prepare and submit reports on a regular basis throughout the assignment :

Report Description Due date Inception report One off report detailing any

issues that come to light after the commencement of the project that necessitate a change in the approach and methodology set out in the Advisor’s proposal.

Within one month of the start date of the contract

Progress report Monthly report summarising progress made

By 10th day of following month

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on all key areas of the project and highlighting issues to be addressed in the coming month.

Steering committee report

A record of each meeting of the steering committee together with action points (showing deadlines and responsibilities)

Within one week of each meeting

Phase completion report In addition to the task deliverables, the Advisor should prepare a report on completion of each phase, describing the process followed and highlighting anticipated issues for the following phase.

Within two weeks of completing each phase

The exact form and content of each report should be agreed between the Advisor and MoE. All reports should be submitted in English and Bulgarian in hard copies and electronic version to the MoE privatisation co-ordinator (four copies of each language) for distribution, and copied in English (two copies) to EBRD. The Advisor will be responsible for all translation and interpretation services they may require in the discharge of the assignment.

3.2 Preparation Phase The preparation phase should not be regarded as a series of sequential and/or disconnected tasks. MoE requires that the Advisor adopts a fully integrated approach to its analysis and reporting and that all relevant issues are considered within the context of the Government’s privatisation objective.

3.2.1 Privatisation Process and Resource Planning MoE already has a well defined strategic framework leading to the privatisation of the electricity distribution companies, an appointment of the Advisor is a key element in that strategy. The MoE expects the Advisor to develop a detailed plan for the preparation and conduct of the privatisation transaction. The plan should include:

• Privatisation strategy; • Marketing strategy; and • Project resource plan.

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The Advisor will be required to undertake necessary actions to become familiar with the details of the structures of MoE and the distribution companies and to establish adequate local resource to conduct the privatisation Project efficiently and effectively. This process will include:

• Meetings with key personnel in the MoE and the distribution companies; • Site visits where necessary; and, • Review and evaluation of completed reports relevant to the is Project.

The Assignment’s resource plan is the means by which the Advisor will present to MoE its logistical plans for managing the privatisation process and identify areas where the Advisor is relying on particular inputs from the MoE or the distribution companies. The resource plan should include the Advisor’s team structure, contact details of key personnel, reporting lines and timing of inputs, proposals for the structure of a project steering committee, to be chaired by the Chairman of MoE, together with outline data requests and deadlines for receipt of information from the distribution companies. The Advisor should present a plan for implementing the necessary training within MoE to ensure that the MoE is able to supply the resource necessary to the successful completion of the Project and to undertake effective post privatisation control. On completion of this familiarisation process and in light of all available information, the Advisor should prepare an inception report updating and developing the contents of the Advisor’s proposal. Additionally, the inception report has to include an outline marketing strategy.

3.2.2 Privatisation Strategy The preparation of a Privatisation Strategy will be the main element of this task. The strategy should start from an appraisal of the privatisation options open to the Government and an awareness of the GoB’s stated intention to sell the distribution companies through a trade sale to strategic investors, but should include an evaluation of the potential impact of different sales strategies and integration possibilities on the success, timing and proceeds arising from each transaction. The Advisor will be required to analyse the indicative proposal of the GoB concerning the composition of the three sale packages (as defined in Section 2.3) and to comment on it, including, if the Advisor deems necessary, a proposal to reallocate companies within the sale packages. This proposal of the Advisor shall form an integral part of the privatisation strategy and will be subject of approval by the PA and the MoE. The strategy should take into consideration the relative attractiveness of the different distribution companies and propose solutions to ensure that the overall objective of sector privatisation is achieved. The strategy should also identify and propose alternative solutions to potential key problem issues that may arise during the course of the transactions.

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The Advisor will be responsible for the preparation and presentation of all necessary documentation covering:

• The definition of the privatisation methodology; • Publication of notices on the privatisation process; and • Information on the entities to be privatised as required by the privatisation law.

The privatisation strategy should take the Government’s plans for the development of the whole of the energy sector into account and explain how the recommended strategy will contribute towards the achievement of that overall development plan.

3.2.3 Marketing Strategy Together with the privatisation strategy, the marketing strategy should address the issues of pre-selection and targeting appropriate potential investors. MoE is aware that the privatisation of the Bulgarian electricity distribution sector is one of many competing opportunities for international investors. MoE is therefore expecting the Advisor to propose and implement a multi-faceted marketing strategy that presents the opportunity effectively and reaches a wide target audience. MoE expects the Advisor to take full advantage of the potential of all communication channels to promote the transaction, including printed media and the internet by preparing appropriate material to be posted on the MoE’s website. MoE will also provide appropriate input into a road show to be organised by the Advisor if deemed necessary. MoE would expect to be fully involved in developing and executing the marketing effort and to work together with its Advisor in developing relationships with potential investors.

3.2.4 Enterprise Analysis The Advisor will be required to undertake an extensive analysis of the current state of the electricity distribution companies. The main areas of analysis that should be undertaken are:

• Commercial; • Financial; • Technical; • Legal; • Environmental; and • Management and Personnel.

This list is indicative of the tasks that the Advisor should undertake. The actual scope and depth of analysis should be driven by the requirement to conclude the transaction efficiently and effectively within the agreed timetable.

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One of the desired consequences of privatisation is the transfer of management know-how and the introduction of modern commercial practices. In order that MoE understands the commercial potential of the distribution companies, the commercial analysis should include a review of commercial and management practices, revenue cycles, cost structures and collection rates, analysis of contracts between the distribution companies and their customers and NEK together with indications of potential areas for improvement. Each of the distribution companies prepares financial statements in accordance with international accounting standards. The financial analysis should include a review of the financial statements (balance sheet, income statement and cash flow statement) of the distribution companies. The Advisor will also analyse the risks associated with:

• Adjustments to distribution tariffs (taking into account current Government policy);

• Declining or shortfalls against projected energy demand; • Adverse changes in energy demand structures; • Extraordinary collection difficulties; and, • Interest and currency risks,

in the light of local circumstances and international experience. The financial analysis should also include a review of all current assets and liabilities (including repayment terms and conditions) within the distribution companies (paying particular attention to liabilities to state entities). MoE is particularly concerned to ensure that privatisation results in the technical upgrades necessary to deliver an improved quality of service to customers. Therefore the technical analysis should include an appraisal of the technical capacities and condition of fixed assets (showing assets by type and function, assessed and reported values, reconciled to Bulgarian and International Accounting Standards) and a critical review of existing investment programmes and prioritisation of potential investments. The technical analysis should lead to the preparation of a viable indicative investment timetable including estimates of investment needs for:

• HV/MV transformer substations; • Underground and overhead 110kV lines; • MV and LV networks; • MV/LV distribution transformers; • EMS-DMS/SCADA; and, • Information systems.

The projections should extend to a reasonable planning horizon, probably a minimum of five years. The legal analysis should include a review of the legal status of the companies, covering ownership and legal right to sell the shares, title to property and assets and major

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contracts and of the terms and conditions of licences already issued. The analysis should include conclusions on outstanding actions in connection with the licensing regime that may be required prior to privatisation. The legal analysis, in conjunction with the management and personnel analysis should address legal obligations likely to arise from organisational rationalisation and/or reduction of personnel, therefore the Advisor should report on collective labour agreements, other labour and civil contracts and relevant employment legislation and associated regulation. The Advisor should benchmark current management and personnel structures and practices against best international practice. The environmental analysis should comprise a review of the environmental impact of the distribution companies operations. The Advisor will be required to report on compliance with national environmental standards and with the liabilities and requirements associated with accession to the European Union. Based on this compliance assessment, the Advisor should prepare estimates of any remediation costs and conclude on liability for funding these costs. The segregation of the seven distribution companies has resulted in the creation of management structures that are not necessarily optimal for the industry. The management and personnel analysis should reach conclusions on the potential for improving efficiency and provide estimates of potential savings.

3.2.5 Market Analysis The Advisor should prepare an analysis of the prevailing and forecast market conditions for the distribution companies, taking into account changing regulation and patterns of energy consumption in the country. The analysis should consider:

• Horizontal consolidation of some of the distribution companies; • Consolidation with suppliers of alternative energies (gas and district heating); and • Vertical consolidation with generation companies.

The Advisor should also consider the customer segmentation of each distribution company. The report form this task should reach conclusions on the:

• Market environment in which the companies will operate; • Financial and economic constraints on the companies post privatisation; and, • Tax issues specific to the sector.

The market analysis should be focused on Bulgaria, but should include an indication of how the electricity distribution sector has evolved during and after privatisation within the varying contexts of energy sector development in other countries. In this respect the analysis should highlight any market and protection of competition issues that MoE or other Government bodies or agencies (in particular competition agencies) should be aware of ahead of the privatisation, and recommend actions that should be taken to

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prevent future problems arising from excessive capital concentration or other competition related issues.

3.2.6 Legislation and Regulation The Government of Bulgaria has already enacted detailed primary and secondary legislation governing the energy sector and leading to the establishment of an independent regulatory commission. The Advisor should nevertheless examine the primary and secondary legislative and regulatory environment to identify issues that, based on international experience, may arise during the course of and after completion of the privatisation of the distribution companies. This analysis should also explain the practical consequences for tariffs and projected investment programmes of the current regulatory regime in the light of the findings of the enterprise analysis. Additionally, the analysis should contain a detailed appraisal of the impact of the latest amendments to the Energy Act.

3.2.7 Comparable Transactions The Advisor should also present a review of international comparable transactions, analysing the strengths and weaknesses of different privatisation strategies and the eventual successes and failures of attempts to privatise the electricity distribution sector in other countries.

3.2.8 Training and Development The Advisor will be expected to provide on-going know-how transfer and information/knowledge sharing to the MoE and PA personnel so that after the completion of the privatisation these agencies are equipped to perform their post privatisation control functions. The process of know-how and knowledge transfer should include:

• Acquaintance with international energy sector privatisation and transaction management practices;

• Advice on the parameters for and implementation of effective post privatisation control; and

• Introduction to the role and evolution of state regulation of the energy sector. The process of know-how transfer and information/knowledge sharing should be driven by the ultimate goal of leaving a “project legacy” so that the state bodies and agencies that have responsibility for the transaction or post privatisation control are sufficiently prepared for their role after the completion of the transaction.

3.2.9 Preparation Phase Deliverables The deliverables from this phase of the assignment are:

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• Due diligence report, covering all aspects of the Enterprise Analysis task and also sections on market analysis and legislative and regulatory review.

• Privatisation and marketing strategy report, including sections covering privatisation strategy, marketing strategy and analysis of the comparable transaction.

It is important to note that MoE’s requirements in this phase are focused on the substance rather than the form of the reporting. All deliverables are subject to review and approval by the MoE.

3.3 Transaction Phase As soon as the preparatory phase is completed, the GoB requires its Advisor to launch the sale process. This will be conducted in accordance with the final recommendations concerning form and timing for each package as set out in the privatisation strategy, working closely with the PA and the MoE.

3.3.1 Potential Investor Relations Building on the results from the early marketing, one of the key aspects to the success of the transaction will be the effective management of relations with potential investors. MoE expects its Advisor to provide all reasonable support and guidance to potential investors and to ensure that the transaction logistics are managed in accordance with best international practices. The Advisor will be responsible for handling initial enquiries from potential investors, co-ordinating the formal expressions of interest, and preparing and disseminating due diligence procedure instructions (within the instructions to bidders contained in the information memorandum). The Advisor will also ensure that all necessary public notices are published in accordance with privatisation law. In association with the privatisation co-ordinator, the Advisor will also arrange meetings with MoE personnel, site, and data room visits. The Advisor will be responsible for setting up and running the data room on the premises of MoE. The Advisor may also make data room documents available in electronic format if considered necessary for the efficient conduct of the transaction. The Advisor will also be required to prepare a detailed Information Memorandum (“IM”) and Sales Process Documentation (“SPD”) for each of the packages. The IMs should be prepared in accordance with Bulgarian legislation and should contain inter alia:

• An introduction to the context of the transaction and description of the Government’s objectives;

• Detailed evaluation of findings from the analysis undertaken in the preparation phase; and,

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• Any other information required by privatisation law. The SPDs should contain inter alia:

• Instructions to bidders on the conduct of due diligence and the transaction; • The privatisation timetable; • Description of the basis of evaluation of offers; • Confidentiality agreement/declaration for potential investors; • Outline framework for expressions of interest and offers in compliance with the

requirements of the privatisation law. The Advisor will be responsible for recommending an appropriate level for charges for the information memorandum and bid bond.

3.3.2 Transaction Documentation The Advisor will be expected to prepare a all of the documents connected to the successful conclusion of the transaction, including:

• Draft share purchase agreement (SPA); • Draft Share Holder Agreement (SHA); • Statutes of incorporation.

The Advisor will be expected to enter into a dialogue with pre-selected potential investors to ensure that the format and the contents of the contract are broadly acceptable prior to entering into final negotiations. The ultimate form and content will be agreed with the PA and MoE. There is a series of documents and technical reports that should be completed to comply with the privatisation law. The Advisor, with the assistance of the MoE and the PA, should follow these steps and draft all necessary reports and other documentation for approval by the relevant Government body or agency.

3.3.3 Valuation The Advisor will carry out a valuation, derived from individual company analysis, of each of the proposed packages of the distribution companies using internationally accepted valuation methods, including (but not necessarily limited to):

• Net present value method; • Comparable transactions; and • Market multiples method.

Whilst MoE has already undertaken its own indicative valuation study, it expects its Advisor to prepare detailed financial model able to generate forecast financial statements according to different tariff and collection scenarios. The Advisor will also prepare a

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model based on the optimal commercial performance of the companies including collection rates, management of working capital and investment strategy management. The Advisor should also comment on the relative applicability, strengths, and weaknesses of each method used.

3.3.4 Selection Based on a review of international experience and taking into account the Government’s objectives and the specific features of the Bulgarian electricity distribution sector, the Advisor should prepare a detailed framework for the evaluation of offers and the selection of a preferred investor. The selection criteria should be based on an appropriate balance of key aspects of the technical and financial offer received from each potential investor. Depending on the final selection of preferred bidder(s), it may be necessary to submit a report to the competition authorities explaining the implications of the new private ownership structure of the electricity distribution sector. The Advisor will be required to prepare such a report if necessary and to present any evidence that the authorities may require.

3.3.5 Transaction Phase Deliverables The principal deliverables from this phase, separately for each package, are:

• Information Memoranda; • Transaction documentation described above; • Valuation report; and • Report on competition issues (if required).

These deliverables may not be combined and are subject to review and approval by MoE and the PA.

3.4 Completion Phase

3.4.1 Evaluation of Offers The Advisor will, together with MoE and the PA, conduct the opening of offers and ensure that offers comply with the technical requirements as set out in the instructions to bidders. The Advisor will then present a report to the Steering Committee setting out a detailed analysis of the offers and making a firm recommendation for short list and resubmission of improved offers or preferred bidder. In the event that the Advisor recommends a short list and call for improved offers, the Advisor will be responsible for agreeing the terms and conditions of the second or subsequent bidding rounds with the PA and communicating the requirements to the potential investors.

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3.4.2 Negotiation and Finalisation of SPA The Advisor will advise and work alongside MoE and the PA in the final negotiation of the share purchase agreement. Having negotiated the terms of the agreement, the Advisor will be responsible for the drafting and advising on the execution of final documentation. The Advisor will be responsible for drafting appropriate reports to Government bodies and agencies (including the SCER) with a supervisory role in accordance with the requirements of the laws on privatisation and electricity. Once the contract has been finalised, initialled by the preferred investor and approved by relevant Government bodies and agencies, the Advisor will be responsible for organising financial closure of the transaction, advising on the fulfilment of conditions arising from the SPA and addressing other closure issues that may arise.

3.4.3 Post privatisation Control Strategy The Government is concerned that this transaction should not be viewed as an end in itself and that privatisation should demonstrably achieve the Government’s objectives for improved customer service. In this context, the GoB requires its Advisor to submit recommendations on the parameters and measurement tools to assess the commitments to be undertaken by the purchasers of the distribution companies. This should be focused on objective and measurable undertakings made by the investor and should be backed up by appropriate training for PA and MoE personnel as well as the SCER to ensure that the capacity exists to carry out this function.

3.4.4 Completion Phase Deliverables The principal deliverables from this phase are:

• Offers evaluation report and recommendation for preferred bidder; • Signed share purchase agreement for each of the seven distribution companies;

and • Post privatisation control strategy.

These deliverables may not be combined and are subject to review and approval by MoE.

C. DELIVERABLES The suggested timetable provided in 3.1.1. is indicative. The exact schedule is to be agreed with the consultants in the inception report based on the consultant’s technical proposal. The deliverables of the assignment are listed in Sections 3.2.9, 3.3.5, and 3.4.4 above for the Preparation, Transaction, and Completion Phases respectively.

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Each of the deliverables should be in sufficient detail and cover all aspects of the scope of work and tasks as listed in these Terms of Reference. The deliverables will be subject to review and final approval by the MoE. In addition to the main deliverables, the Advisor will also present progress reports as detailed in Section 3.1.3 above. The deliverables will be due in accordance with the indicative timetable provided in Section 3.1.1 above. Although changes to the timetable may occur throughout the assignment due to reasons beyond the control of the Advisor, when a change is required, the justification will have to be provided in writing by the Advisor and approved by the MoE. Each deliverable will initially be submitted in draft form to the MoE, and the MoE will provide its comments within two weeks of receipt of the document. The final document which will incorporate the MoE comments, will be submitted within one week of receipt of the comments.

Appendix 5

Completion Reports

TC1: ECP2000-2002-08-07 And

TC2: ECP2000-2002-05-01

TC1: ECP2000-2002-08-07

TC2: ECP2000-2002-05-01

(02)Preface.pdfOperation Performance Evaluation Review (OPER)Preface

(04) Abbreviations.pdfDEFINED TERMS

(05b) BasicData (TC OPERs).pdfBasic Data SheetSector:Electric Power Distribution

FundingTC1

B. Visits

(07) Appendix 1.pdfList of Contacts

(09) Appendix 3 Transition Impact.pdfSteps of Rating Transition ImpactEx PostSummary of verified, potential and risk ratings

(10) Appendix 4 TOR 31-07-02.pdfA. BACKGROUND AND OBJECTIVES1.Introduction1.1Objective1.2Summary Scope2.Background to the Transaction2.1Structure of the Industry2.2Legislation and Regulation2.3Corporate Profiles and Privatisation Strategy2.4Completed Technical Assistance Studies2.5Rationale

B. SCOPE OF WORK AND IMPLEMENTATION ARRANGEMENTS3.1GeneralThe scope of work included in the Terms of Reference is indicative of tasks and that the Advisor should undertake and that the actual scope of work and details should be driven by the requirement to conclude the transaction efficiently and effectively wi

3.1.1The Assignment OverviewPreparationTransactionCompletionAppointment of the Advisor

3.1.2Support to be Provided by MoE3.1.3Reporting Requirements

3.2Preparation Phase3.2.1Privatisation Process and Resource Planning3.2.2Privatisation Strategy3.2.3Marketing Strategy3.2.4Enterprise Analysis3.2.5Market Analysis3.2.6Legislation and Regulation3.2.7Comparable Transactions3.2.8Training and Development3.2.9Preparation Phase Deliverables

3.3Transaction Phase3.3.1Potential Investor Relations3.3.2Transaction Documentation3.3.3Valuation3.3.4Selection3.3.5Transaction Phase Deliverables

3.4Completion Phase3.4.1Evaluation of Offers3.4.2Negotiation and Finalisation of SPA3.4.3 Post privatisation Control Strategy3.4.4Completion Phase Deliverables

C.DELIVERABLES

(12) Appendix 5a ECP2000-2002-05-01.pdfECPSTD_C113649295113641. Commitment Details101.1

201.2

301.3

401.4

501.5

601.6

701.7

801.8

901.9

911.9.1

921.9.2

1001.10

1101.11

1201.12

1301.13

1351.14

2. Objectives & Tasks1402.1

1502.2

1602.3

1702.4

ECPSTD_C113649295113642. Objectives & Tasks1802.5

2002.7

2102.8

2202.9

3. Assessment of Inputs2303.1

2503.2

2603.3

2703.4

2803.5

2903.6

ECPSTD_C113649295113644. Assessment of Outputs3704.1

3804.2

3904.3

4004.4

4104.5

4204.6

4254.7

4304.8

ECPSTD_C113649295113644. Assessment of Outputs4404.9

Operation Performance Evaluation Review · 2011. 2. 16. · operation performance evaluation review...

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Transcript of Operation Performance Evaluation Review · 2011. 2. 16. · operation performance evaluation review...