Make it For Railways
On November 9, 2015, a day after Prabhu’s party BJP faced a humiliating defeat in Bihar’s state assembly elections, his ministry issued a letter of awards to the US major GE and French firm Alstom. The agreement is to set up two separate locomotive manufacturing facilities at Marhowra and Madhepura districts of the state, respectively. This was critical for Indian Railways, as the message went out that the fate of projects would be measured on pure business grounds. “The file also never went to the minister. This was unthinkable just a few years ago,” says Mittal. More importantly, these were the biggest orders Indian Railways committed in several years. These projects will allow Railways to upgrade several of the existing 10,773 locomotives, and also allow some old and inefficient ones to retire. GE has committed to manufacture 1,000 four-stroke diesel locomotives, whereas Alstom will manufacture 800 electric locomotives, in 10 years from setting up of the factories.
To make this happen, Prabhu opened the doors to FDI. The ideological parent of BJP, RSS is fundamentally against FDI and initially opposed it as well. The powerful Railways unions too are sceptical of big corporates coming and “taking away” their jobs. “The private investments and FDI are not welcome. They will only lead to more exploitation in the name of more profits,” says Shiva Gopal Mishra, General Secretary, All India Railwaymen’s Federation. While he admits that to expand the network and modernise operations, Railways needs more capital, he argues this should come from government coffers. Prabhu is engaging with these unions and taking them along. Meanwhile, Prime Minister Narendra Modi convinced the top leadership of RSS. RSS leaders say the leadership agreed but insisted that the NDA government must push for technology transfer.
The international majors were pushing for assured offtake. In negotiations, Prabhu made them agree to Railways’ demand of committing to maintenance, and making the pricing formula work. More than that, Prabhu faced a challenge as this was the first time Railways was dealing with foreign players for such a big deal, and the officers were not willing to take risks. And they had their own apprehensions. For example, former chairman of Railway Board, Arunendra Kumar, who was part of the initial deliberations on allowing FDI in locomotive manufacturing, says he had his differences on pricing in comparison to domestic players. “The private entry is an experiment,” he says. “Nobody has ever given this big an order of 10 years.”
His apprehension may not be misplaced. Each locomotive manufactured at Diesel Locomotive Works ( DLW) Varanasi is priced at `13-18 crore. GE refused to share its price with BT. But Nalin Jain, President and CEO at South Asian chapter of GE (Rail, Mining, Defence & Aerospace), said that its locomotives will be of Evaluation grade –which is modern technology, and the prices are competitive. The market estimates are `14.7 crore a locomotive.
Another point of view came from Debroy: “I would have liked a model where Railways came out with their plan to procure X number of locomotives in, say, the next 10 years rather than committing the offtake.” But for Alstom and GE, it’s a good deal. With commitment of $2.6 billion investments, this is GE’S biggest bet in India, whereas, the euro 3 billion commitment is significant for Alstom, too. “The assured offtake gives us comfort of designing the whole project,” says Bharat Salhotra, Managing Director of Alstom Transport India. This also provides business opportunity for players like Bharat Forge, L&T, ABB, and Siemens.
Efforts are on to revive projects to build coaches as well. This includes expanding the Raibareli facility’s capacity to 1,200 coaches from 400 annually. But the Railways is undecided on the Palakkad rail coach factory, which is delayed since 2008, and was to be the first coach manufacturing facility with private investments. Meanwhile, Railways has decided to allow import of train sets instead of insisting on manufacturing in India. The initial requirement is of 17 train sets (316 coaches), which can run on semi-high speed,
“The Railways does not appear to have the means and the capacity to service the debt” PAWAN KUMAR BANSAL, former Railways Minister
out of which five can be brought in complete knockdown condition and assembled here, and the rest is to be made in India. The five bidders who qualified for the project are Alstom- BEML, CAF- Bombardier, HitachiAnsaldo, Siemens and Kawasaki-Toshiba- BHEL. In two rounds of financial bids, none of the contenders put in their bets. “We asked for increasing the order size from 316 to 1,000 coaches to make our investments viable,” says the CEO of one consortium partner. But Railways disagreed.
Cutting to the Core
By 2019, Indian Railways is expected to have debt of `2.5 lakh crore on its books. “Last year we spent on delegating projects, creating financial stability, improving operational efficiency,” says a Railways official. “This year is for execution. We have a clear picture from where finances for the projects will come in the next three years.”
Prabhu’s baiters believe he is biting off more than he can chew. “There is a simple rule the corporate world teaches you: if you are taking financial leverage, you (as an organisation) need to bring operational leverage to the table. This is the only way. Else a debt trap is waiting for you,” says a former railway minister. Adds Bansal: “The Railways does not appear to have the means and the capacity to service the debt. Only time will tell whether the Railways will be able to service the debt.”
According to a senior Railway official, Prabhu’s instructions to his GMS are clear: invest this money only where the IRR of the project is more than 12-14 per cent. LIC, in another first for Railways, agreed to offer debt through various instruments worth `1.5 lakh crore over the next five years. This forms an integral part of Prabhu’s `8.56 lakh crore capex. The funds are available at a rate of 30 basis points over a 10-year benchmark yield. These bonds also come with a five-year moratorium on interest and loan repayment. “Today capital is no issue for us; we need to make our projects bankable and make them earn good IRRS,” says Mittal.
That is easier said than done. Prabhu’s real test will be in the execution of his plans. And on that would ride the future of Indian Railways.~