Since June last year, the Railway Board has been sitting on a Cabinet decision of February 2009, ratified in February 2010, to set up an electric engine plant at Madhepura and a diesel engine factory in Marhowra, both in backward areas of Bihar, in partnership with private companies. The Cabinet wanted international bids to be called. It approved the bid documents as well. Multinational corporations like Siemens, General Electric, EMD, Bombardier and Alstom are keen. The railways and the nation will benefit from the projects. They were significant enough to be on the agenda of the Prime Minister and German Vice-chancellor Angela Merkel during their meeting in Delhi last May. But the Railway Board is stonewalling the project.
Last June, while he was briefly in charge, the Prime Minister chaired a meeting of the railway ministry and gave the Board a set of 15 issues for urgent action. Among these was early completion of the two factories after 'duly ensuring a transparent and fair bidding process.'
Since then, the PMO has been knocking on the Railway Board every month.
It wrote to the Railway Board Chairman on 20 July.
On 8 August, it sent a reminder that the 'Prime Minister has desired to know whether there was any deadline… and whether there is a need for a new timeline.'
On 27 September, it observed that the 'requisite information is still awaited, which may kindly be sent, urgently.'
On 10 October, the Railway Board Chairman was asked to fix targets for PPP projects at Madhepura and Marhowra on priority basis after a meeting chaired by the PM's principal secretary.
Again, letters followed on 25 October and 11 November.
On 13 December, the joint secretary to the PM, wrote to the Railway Board Chairman seeking information about the status of the Madhepura factory proposal.
On 6 January, a director in the PMO said he has been 'directed to request the Ministry of Railways to expedite the finalization of bid documents.'
The PMO 'may kindly be apprised of the progress made in the matter,' he wrote on 8 February.
The Railways sent two replies, in August and December, explaining the delay. From the letter that followed, it is clear that the PMO wanted the Railways to hurry up.
Engine production by the Railways is a tale of waste. Diesel engines are made at the Varanasi factory in collaboration with EMD of the United States under a 1997 technology transfer agreement. According to information provided to the committee on public procurement, headed by former Company Affairs Secretary Vinod Dhall, as of two years ago, the Varanasi plant produced 110 engines. More than 90 per cent of the sub-assemblies and components were outsourced from private parties. Of this, more than a third was imported, mostly from EMD.
Another third was procured without competition, from single suppliers. In short, the 6,000 workers employed at the factory are doing little more than turning screws and tightening nuts and bolts (as do the 12,000 employed at the Chittaranjan electric locomotive plant in West Bengal). It seems that the Railways can live with this kind of waste. A Railway Board member told a committee of secretaries that he suspected that vested interests would scuttle the Marhowra project as it could deprive the Varanasi factory – and EMD – of more orders.
In 2009, General Electric put in a bid offering to produce diesel engines at Marhowra for Rs 11.62 crore each. This was well below the Railways' ceiling price of Rs 13.87 crore. Engines produced by the Varanasi plant cost less – Rs 11.49 crore – but are also less powerful. The plant is a fully depreciated facility. It has recovered the investment unlike the new GE factory, which would have to factor in the cost of financing.
Any buyer would have welcomed the competition but the Railways Board behaved like a hunted animal caught in the glare of spotlights. The Member Finance said the Varanasi workshop was little different from Maruti and Tata plants which outsource much of the vehicles they produce, ignoring that the latter two own key engine and gear box technologies and also have control over their suppliers. Fending charges of sweetheart deals in procurement, he cited elaborate rules when it is too well known how such rules are bent or ducked. (Why else would the government appoint a committee for transparency in procurement?).
The conduct of the Railway Board is in sharp contrast to that of the country's metro rail corporations. Chennai Metro wanted 168 cars and Alstom set up a factory in Sri City near Chennai produce them. Hyundai Rotem of South Korea is partnering BEML to produce cars for Bangalore's Namma Metro. To service Delhi Metro Rail Corporation's demand, Bombardier has set up a plant in Baroda.
The Railways are not called upon to be pioneers. China Rail hived off its production units in the 1990s as part of its reform exercise. From Alstom, Bombadier and Siemens to Kawasaki, General Electric and EMD, its vehicle production units have stitched up alliances with the promise of juicy contracts in exchange for technology. Their flair for absorbing the knowhow so impressed Sudhir Kumar, the Officer on Special Duty to Lalu Yadav (credited with improving railway finances) that he found them supplying 'MNC technology at Chinese prices.'
The decision to go in for joint ventures was not sudden. In November 2006, the Cabinet Committee on Economic Affairs gave the nod for the diesel engine plant at Marhowra. Approval for the electric engine JV at Madhepura followed early the next year. But the global financial crisis affected the response to the bids called two years later. Only single bids were received. For this reason GE's proposal for Marhowra, though attractive, was rejected. The Siemens' tender for Madhepura suffered from a flaw: it did not come with a security deposit.
Former Railway Minister Mamata Banerjee obtained Cabinet nod in February 2010 to proceed with the bids. To deal with any changes to the draft contract that eligible candidates would throw up in pre-bid consultations, the Cabinet set up an empowered committee of secretaries, including four Railway Board members, to approve such revisions. The bids were called and the revised contract documents were issued to those eligible in June 2010. The deadline for submission of bids was October 2010.
Since then, the Railway Board has repeatedly advanced the deadline, which now hangs loose. It has set up a committee of executive directors to revise the contract that has already been approved by the committee of secretaries, including four Railway Board members.
The buzz is that this committee will insert killer clauses to fend off likely bidders, such as (a) requiring them to bear the inflation risk; (b) Keeping maintenance in-house and depriving the private partners of fees which they built into the quotes for the engines. Yet the Railways want fuel efficiency and reliability (no breakdown for two lakh km) to be guaranteed; (c) Prescribing stiff penalty for supplier defaults: termination of contract and plant take over by paying 70 per cent of the debt. Assuming that 70 per cent of the investment is financed with loans, the Railways would get a plant for half the price if they invoked this clause. It would be a foolish bidder who would court the perpetual threat of expropriation.
The Railways are almost bankrupt and they need huge investments. But the men in charge would rather court ruin than open the door to private investors.
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