Rail engine factories in Bihar gets further delayed

Indian Railways’ already delayed plan to set up two engine-making plants in partnership with private companies, Indian and foreign, could be delayed further with the ministries of finance and railways differing on several aspects of the plan, including the price the companies can charge for their engines.

The two projects—one to build electrical engines and the other to build diesel ones—were announced by then railways minister Lalu Prasad in 2006. They were conceived as public-private partnerships (PPPs) with the railways holding 26% stake in each. The total estimated value of the contracts for 800 electric engines and 1,000 diesel ones is $13 billion.

The electric locomotives will be manufactured at a factory in Madhepura and the diesel ones at Marora—both in Bihar. The value of the projects is based on the price of the engines, design costs and costs incurred towards establishing the proposed units.

The difference between the two ministries is on the inflation-related price rise that the winning bidder can charge the railways for the engines. The railway ministry wants to make some changes in this, while the finance ministry says that since the projects were originally structured by the former, there is nothing to be gained by revisiting the structure. Mint couldn’t immediately figure which structure would work out to be more cost-efficient from the perspective of the railways.

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.

An empowered committee comprising top officials from the ministries of railways, finance and law, and the Planning Commission met on 21 June to consider the changes. Mint has reviewed a copy of the minutes of this meeting.

According to the minutes of the meeting, a railway official, who attended the meeting, said the original bid documents had not accurately factored in cash flows from the projects and the impact of the pricing model agreed upon on costs including those incurred in maintaining the engines. The official described the contracts, that cover both maintenance and procurement, as “complex”.

The minutes also cite a second railway official present in the meeting saying the committee had the right to approve changes in the contracts based on concerns aired by the bidders, always keeping in mind the government’s interests.

The 21 June meeting remained inconclusive and a follow-up meeting scheduled for 23 June wasn’t held. The government has to finalize the terms of the contract before the next pre-bid conference with the qualified bidders; the last such meeting for the electric engine project was held on 19 January. The last meeting for the diesel engine project was held in October.

The Union cabinet had approved the two projects in principle in 2006, but took three more years to sign off on the details. The opening of price bids for the electric engine project has been deferred eight times and is now scheduled for 15 July. That for the diesel engine project has been put off six times and is now set for 29 July.

Abhaya Agarwal, executive director and PPP leader at Ernst and Young, said such PPP deals were essential for the railways because they would help it leapfrog technologically. “Already, Indian Railways uses obsolete technology as compared to global standards. Any further delay in awarding such projects would put it back several years.”