Cloud over Railways $2.6 bn diesel locomotive deal: Why Centre must study rise in India-risk, examine options to mitigate it

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September 28, 2017 4:53 AM

Study the rise in India-risk, examine options to mitigate this

GE, diesel locomotive contract, indian railways, piyush goyal, pharmaceuticals, elecytricity, railway minister ,  diesel, locomotives,  Delhi,  Vodafone, relianceAssuming the maths adds up, it would be foolhardy to not recommend what Goyal is suggesting. (PTI)

Cancelling the $2.6 billion diesel locomotive contract with GE, should that happen, would be unfortunate given the questions it raises and the signals it sends. If, just two years ago, this very government thought it needed 1,000 diesel locomotives over a decade, and this is now considered unnecessary, it calls into question the type of planning being done. But if railway minister Piyush Goyal is convinced about his maths, that he will save around Rs 8,000 crore a year by full electrification, he is well within his rights to explore the option of cancelling orders for 1,000 diesel locomotives. His calculations, that the prime minister needs to independently ratify given the enormity of the decision being taken, have to include the feasibility of being able to achieve 90% electrification by 2021—from 45% right now—and factor in various scenarios that include different tax levels on diesel/electricity as well as the feasibility of using electric locomotives in all railway stretches, the need for back-up locomotives, etc. Assuming the maths adds up, it would be foolhardy to not recommend what Goyal is suggesting. After all, when there is a big technology change, both individuals and companies do scrap existing equipment/agreements and move on. In the power sector in India, right now, older PPAs that are very expensive are being sought to be scrapped and replaced with less expensive ones—one of the solutions being examined to lower Delhi’s power costs, for instance, revolves around scrapping some existing PPAs. Cancellation of agreements is a global phenomenon, so if the cancellation does happen, it is important not to portray the event as something that has never happened anywhere in the world before.

But in the final calculation, it is important to factor in the big rise in the India-risk as investors baulk at investing, especially given other unfriendly government policies that this newspaper has written about in sectors like telecom, pharmaceuticals, electricity and agriculture, among others (“Is investing in India getting riskier?” September 26, Once the cancellation takes place, both Indian and foreign investors will look for a higher reward-risk ratio before making new investments, and they will be extra-cautious in areas with a large government role; we are already seeing investor hesitation in the power sector where some electricity boards are trying to renegotiate PPAs signed just a few years ago. If, despite this, the government decides to go ahead and terminate the GE contract, it is critical that it pay all damages and not try to renege on these or negotiate to lower them. Normally, apart from the usual damages clauses that all agreements have, there is the option of going in for arbitration, whether locally or globally. India’s record here, however, is very poor—in the Cairn/Vodafone/Reliance cases, it has tried to delay proceedings several times and, in the DoCoMo case, it even argued against implementing the award even though that was against the Tatas and not the government. At the end of the exercise, India has to convince investors this is a one-off exercise, and that’s not going to be an easy task.

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