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Railways may seek new bids for engine projects

Railways may seek new bids for engine projects
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First Published: Thu, Nov 17 2011. 11 03 PM IST

Updated: Thu, Nov 17 2011. 11 03 PM IST
New Delhi: Indian Railways may seek renewed financial bids for two long-delayed projects to manufacture electric and diesel train engines after tweaking contentious production-cum-maintenance contracts to break a deadlock in the proposed public-private partnerships (PPPs), estimated to be worth a combined $13 billion (Rs 65,000 crore).
The issue of reworking the draft agreement documents was discussed at a meeting of the railway board on Tuesday, two railway officials said. One of the two officials was present at the meeting. Both declined to be identified.
The two projects—one to build electric locomotives and the other to build diesel engines—were announced by then railways minister Lalu Prasad in 2006.
Electric locomotives are proposed to be manufactured at a factory in Madhepura and the diesel ones in Marhowrah—both in Bihar.
The total estimated value of the contracts for 800 electric engines and 1,000 diesel ones is $13 billion. The value of the projects is based on the price of the engines, design costs and expenditure on establishing the proposed units.
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Mint’s Aman Malik says the Indian Railways may issue fresh bids for two of its long delayed engine manufacturing projects.
Four companies—General Electric Co. (GE), Alstom SA, Bombardier Inc. and Siemens AG—are competing for the electric engine contract. A joint venture between GE and Bharat Heavy Electricals Ltd is competing with Electro-Motive Diesel Inc. for the diesel engine contract. The projects have been conceived as public-private partnerships, with the railways holding a 26% stake in each.
One of the officials cited above said the railways could make at least two important changes to the draft documents. Both officials said Tuesday’s meeting was “informal” and no final decision had been taken yet.
The key issue relates to the so-called price variation clause (PVC) in the draft agreements, which are shared with bidders who respond to open tenders. First, the railways could stipulate a 20% fixed component in the PVC, an instrument in long-term contracting that governs how any increase in price is indexed to inflation over time. At present, the draft agreement for diesel engines stipulates a 15% fixed component, with the remaining 85% being variable. The PVC for the electric engine is currently fully variable.
The bidders are in favour of the PVC being fully variable, said an official at one of the bidders.
“The fixed component typically includes costs like technology that do not rise over time,” said Abhaya Agarwal, executive director and PPP leader at Ernst and Young. “Reducing the variable component will not affect the total cost by very much. It will, however, mean that the railways would hedge itself against any unforeseen cost escalations on account of inflation.”
Samar Jha, a former financial commissioner of the railways, however, said an increase in the fixed component would translate into cost reduction. “While the quantum of actual reduction is tough to ascertain, government payout will go down,” he said.
In another important change, the railways could shorten the stipulated duration for which the engine manufacturer has to maintain the locomotives. At present, the draft contracts stipulate a 16-year maintenance period for the diesel engines while the period for electric engines is 15 years.
The railways’ bid to change the draft agreements could still face hurdles. On 5 August, Mint reported that a high-level committee under the chairmanship of Planning Commission member B.K. Chaturvedi had taken an in-principle decision not to deviate from the draft contracts that were approved by the Union cabinet in 2009.
Mint reported on 28 June that the finance ministry was opposed to making any changes to the bid documents on the ground that they were prepared by the railways itself, and were later approved by the cabinet. A senior Planning Commission official, who did not want be be identified, said the manner in which the process had been delayed in the last five years showed “the lack of transparency” on the part of the railways.
“Frankly, the delay is being caused by vested interests,” the official said. “The railways should explain the rationale behind trying to rework contracts which they themselves had prepared and had been approved by the cabinet.”
In fact, officials said, the railways may have to seek cabinet approval again if the draft documents are tweaked.
The Union cabinet approved the two projects in principle in 2006, but took three years to approve the details.
Several marquee public private partnership projects of the railways have been delayed for various reasons, and the ministry has been considering awarding them to public sector undertakings (PSUs) on a nomination basis.
On 17 September, Mint first reported that the railways could award a proposed rail coach factory project in Kanchrapara, West Bengal, to Bhel on a nomination basis. In 2010, it shortlisted eight bidders—Bombardier Transportation India, Alstom India, Siemens AG, Construccionesy Auxiliar de Ferrocarriles (CAF), Hyundai-Rotem, Stadler Rail with Titagarh Wagons and ABB, Hitachi and Kawasaki Heavy Industries Ltd with Texmaco Ltd-for the project.
On 11 November, The Financial Express reported that the railways was in talks with Bharat Earth Movers Ltd (BEML) to award a project to set up a coach manufacturing unit in Palakkad, Kerala, on a nomination basis.
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First Published: Thu, Nov 17 2011. 11 03 PM IST
More Topics: Railways | Engine Projects | PPP | GE | Alstom |