In a possible boost for the Make in India campaign and for the speedy construction of the Western Dedicated Freight Corridor (WDFC), Japanese authorities have agreed to relax the restrictive JICA loan terms such that Indian firms too can bid for the WDFC projects, without being in a consortium or in a joint venture with Japanese entities.
Currently, the fully tied-up Japanese overseas development assistance (ODA) to WDFC, of Rs 38,722 crore, is subject to the STEP (special terms of economic partnership) condition — projects can be awarded only to Japanese firms as principal contractors or JVs or consortia in which they have at least a 50% share of the work.
This has been a dampener for Indian companies even as the Japanese participation in the WFDC projects has remained dismal and restricted to a handful of firms. Players like Sojitz, Mitsui and Marubeni have been reluctant to put in bids for civil work contracts after qualifying, forcing India to take up the matter strongly with Tokyo.
Official sources told FE that in a recent round of talks in New Delhi that followed visits of some Indian officials to Tokyo, the Japanese side has said the STEP loan — the third and final tranche of which was tied up on June 30 — won’t be disrupted for the reason that the contracts are given to Indian firms or to consortia where they are the lead partners. Domestic companies like L&T, Tata, GMR, JSPL and others would benefit from the proposed easing of the JICA loan conditions.
A proposal to reduce the condition that the share of goods and services to be procured from the Japanese firms be reduced from “30% or more” to “25% or less”, was also taken up by the Indian side in the recent talks anchored by the finance ministry, sources said, adding that there was no definite commitment from the Japanese negotiators.
The JICA loan carries a nominal interest rate of 0.1% (there is an additional cost of 7% for hedging the currency risk which the Indian Railways as equity investor will pay to the finance ministry after a 10-year moratorium). It is the principle resource for the 1,502-km corridor, connecting Dadri in Uttar Pradesh to Mumbai, traversing four states — Haryana, Rajasthan, Gujarat and Maharashtra. While the total construction cost of WDFC is estimated to be around Rs 46,200 crore, a few thousand crores are being spent additionally for land acquisition. The Indian Railways is the equity investor in the project with a debt-equity ratio of 3:1 (the debt component was originally conceived to be less but was later enhanced).
While the recent talks with Japan also saw India insisting on a time-bound technology transfer to Indian firms, sources said such transfers have seamlessly been taking place in most of the contractor JVs. They added that even the norm of mandatory sourcing of 30% of materials from Japan was not much of a hassle as mostly components not manufactured in India are being imported.
The WDFC, along with the 1,840-km eastern dedicated freight corridor (EDFC) and four other corridors being planned, are expected to cut congestion in the golden quadrilateral rail line that carries 58% of the country’s freight traffic at present despite its length being just 16% of the India’s total rail network. The freight corridors on which the Delhi Mumbai Industrial Corridor would piggyback, are expected to help the railways regain its shrinking share in freight transport (36% at present) and bring huge economic gains by cutting costs of industries.
The WDFC and EDFC will be commissioned in phases, starting June 2018. These corridors, which will be well-connected with ports, will be fully commissioned by December 2019.
* Under STEP condition, projects can be awarded only to Japanese firms as JVs or consortia
* Japanese participation in WFDC, however, has remained dismal, limited to a few firms
* L&T, Tata, GMR, JSPL and others will benefit from easier STEP loan terms