No fear of cartelisation by Japanese companies

Written by Rajat Arora | Updated: Jan 16 2014, 08:27am hrs
After facing hiccups in the award of contracts for the Western Freight Corridor, the Dedicated Freight Corridor Corporation of India Limited (DFCCIL) has now expedited the whole process. RK Gupta, managing director of DFCCIL, talks to Rajat Arora about the funding of the 3,300 km Eastern and Western Railway Corridor projects and the terms and condidtions of the Japanese tied loan.

There have been apprehensions about the Special Terms for Economic Partnership (STEP) loan from Japan International Cooperation Agency (JICA). Are they justified

The 1,483-km long Western Railway Freight Corridor is the first project in India to get a STEP loan of 677 billion yen from Japan. JICA has various types of loan products and every loan product has got certain conditionality and different interest rates. We wanted a long-term loan. Delhi Metro has a long-term loan which is untied. But our loan requirement was more than Delhi Metros. Our loan period is 40 years (including a

10-year moratorium) and the interest rate is 0.2% while Delhi Metro serves a 1.4% rate.

Before committing the loan, the Japanese prepared project reports for both, the Eastern and the Western Corridors. Although we already had a report by RITES, they wanted to be sure for themselves. So, they studied both the Corridors and finally went ahead with the Western one. The construction cost for the Eastern Corridor is R29,000 crore (excluding the 540-km long

Sonnagar-Dankuni stretch) and the cost for the Western one is R38,000 crore. This does not include the soft costs (taxes, interest, duties, insurance and administrative cost). They went ahead with the Western Corridor because of their interest in the Delhi Mumbai Industrial Corridor. They could have also taken up the Eastern Corridor but they wanted to concentrate their resources on one project, which also entailed construction of industrial hubs and mega cities.

What are the loan conditions


JICA is funding the entire eligible portion. Theloan it has extended is a tied one, which means that in all contracts, the lead partner has to be from Japan and that 30% of the procurement is to be made from Japanese companies. Theres a flexibility in that any Indian Joint Venture (JV) in which a Japanese firm has 10% stake will be treated as a Japanese company. But in the railway sector, there are no such JVs. Any country would have imposed such conditions for giving loans at such cheap interest rates. If India were to give a similar loan to some country, we too would have had such conditions.

What are the problems associated with STEP loan

Our project-mix is different. I have a railway line to be made, 70% of which will incur civil construction costs while the rest will be

system costs, involving telecommunications and signalling. In the civil engineering part, theres hardly anything, other than rails, which we have to import from Japanese companies

The lead partner has to be Japanese. In the past, we have seen our contract awards being delayed by six months as there was a lack of interest from Japanese firms. So, the competition is limited. When we award the contract, we see whether the contractor has the capacity to execute more contracts. Since the number of Japanese companies is limited, their capacity will get exhausted soon as these contracts are big. We were expecting major Japanese construction companies to come and bring in their system and style of working. But the companies that have come, such as

Sojitz, Marubeni and Mitsui, are primarily trading companies. They have resources but they have been doing railway works in Japan through local contractors.

How do you avoid an one-bid scenario and cartelisation when there is lack of competition

We were apprehensive that there would be a cartelisation of Japanese companies as there were only 4-5 Japanese players coming forward for the contracts, due to which the bid prices for the JICA-funded Corridor would be more than the Eastern Corridor for which we were going for a global tender. To avoid such a situation, we opened the bidding of a slice of the Eastern Corridor firstfor which we had companies participating from world overso that we get a benchmark price for per km construction of railway route. Due to this, the Japanese companies didnt quote high prices for the Western Corridor. We opened the bidding for the Western Corridor after a month of the World Bank-funded Eastern Corridor contract. We had publicised this a lot. There was intense competition among 10 bidders and the final price became a benchmark.

What is the composition of the World Bank funding of Eastern Corridor

The World Bank is financing the Eastern Corridor project from Mughalsarai to Ludhiana (around 1,100 km), the rest of the stretch from Mughalsarai to Dankuni is being financed in two modesfrom Mughalsarai to Sonnagar, the 150-km long stretch is being financed through railway equity, and the 540-km long Sonnagar-Dankuni section is to be implemented on PPP basis. The total in-principle loan commitment by the World Bank is $ 2.725 billion, which is to be released in tranches.

What are the interest and hedging cost for both the loans

The hedging for the JICA loan is being done by the finance ministry. They get the yen-denominated loan and then give us the amount in rupees, charging 7% flat. The ministry is managing the hedging as banks didnt want to do it for more than 10 years. In case of the World Bank one, the finance ministry got the first loan and passed it to us. The second loan is coming to us directly. The World Bank loan will cost us around 8%, including hedging. The loan interest for World Bank is Libor plus variable spread (varies between 0.6% to 0.8%).

Is the lack of bids for Western Corridor delaying the project

The argument was what is the harm with going ahead even if there is just one bid. We said our procurement law doesnt allow that. We can allow the one-bid scenario in case of emergency, but then all investigative agencies would look at it very suspiciously. So, we didnt go ahead with it. However, the lead partner condition could be relaxed now. It could be bilateral as well. The Indian partner can also lead. We proposed it as there was a clause in the contract that in case there are no Japanese companies coming forward, we can have Indian ones as lead partners. The proposal, at present, is with the Ministry of Railways.

Will the 30% procurement from Japanese firms rule lead to overcharging

There cant be much of a difference between their prices and ours. However, we are yet to see the price difference as the tenders for system contracts (telecommunications and signalling) are yet to be floated. The purchase of 200 electric locomotives from Japan is also a part of this STEP loan contract. The import of locos will cost us around R4,000 crore. The cost per loco roughly would be around R13-14 crore in India. The procurement is being directly handled by the Ministry of Railwaystheyll be buying high power locos. I have heard initially they were quoting R32 crore but after negotiations, it came down to R20 crore. So, overcharging cant work here.

Is there a cost difference in the funding of the two Corridors

The best way to compare costs is to compare it according to our own internal estimates. I think we have got the best deal as what they have quoted matches our estimates. The cost difference will be seen when we come to the system contracts which will start in February. Here also, we will open the bids for theWorld Bank-funded Eastern Corridor first as we will get the benchmark price so that the Japanese price also remains more or less the same.

How are you ensuring better construction quality

We have certified the performance parameters which these companies have to follow. So, they have to pass a completion test, after which the payment is released. I have been told the last bid preparation cost the Japanese R25-30 crore and six months time. So, you can gauge the quality standards from the money and the time they spent. They cant take any chances. These are huge contracts, we are expecting the best quality. There is no doubt about the Japanese quality.

What is your target for 2014

The entire Western Corridors loans negotiations are over. The loan will be coming in tranches and the reviews are over. The land and environmental clearances have been received. We have acquired 94% of the land needed. We are in a comfortable position. We have awarded around contracts for 1,000 km in all. The Rewari-Palanpur contract of the Western Corridor has been awarded to L&T and Sojitz. It is one of the most expensive contracts costing R6,700 crore. The Tata-Aldesa JV has been awarded the contract for the 343-km long double track line between Kanpur and Khurja in the Eastern Corridor for R3,300 crore. Our system contracts are in pipeline for the same route. The Western Corridor system contract is due in January and for the Eastern one we are done with the pre-qualification bids. This is going to be a very crucial year for us as by December we'll award all contracts, including the system contracts. The deadline for the entire 3,300 km Eastern and Western Corridor projects is 2017. If we dont meet the deadline, the penalty is as heavy as 0.5% per week. So we cant miss it.