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| Sunil Jain: Getting PPP back on track | |
| After years of doing PPP projects, the model still hasn’t become foolproof enough | | Sunil Jain / New Delhi February 16, 2009, 0:04 IST | |
Thanks to the excitement over the interim budget today, chances are few will even notice the bids for setting up an electric and diesel locomotive production joint venture unit with the Railways — talk about bad timing! It’s obviously foolhardy to say whether the bids will be competitive, or even whether there will even be enough bidders to set up the two joint ventures with the Railways (who will have a 26 per cent stake in the JVs), given how there were no bidders for the second phase of the Mumbai-metro which was bid out just a few days ago. However, since the orders from these two plants will be upwards of Rs 50,000 crore over their life, that possibility does appear a bit remote given there are five global suppliers (two for diesel locomotives and three for the electric one) of these locomotives.
If the Public Private Partnership (PPP) project does go through, however, it will be a stunning turnaround for a project which has languished between various government departments for more than two and a half years, and a project which has oscillated wildly from one extreme of being very pro-bidder to the other, of being completely anti-bidder! While it speaks volumes for how the inter-ministerial consultative process can help bring a project back on track, it tells you how, even after years of doing PPP projects, the model still hasn’t become foolproof enough not to require constant monitoring and tweaking.
When the project was conceived some years ago, the Railways wanted to set up the locomotive factories on its own. Not surprisingly, given that its expertise clearly lay in some other direction, this was turned down and the Railways was encouraged to look at PPP options. And this is what was done. Except, the way the contract got worded, there were several clauses that worked against the interest of the Railways. So, for instance, the performance standards of the locomotives were kept low enough to ensure that, for the first tenth or so of the production (800 electric and 1,000 diesel locomotives are to be procured over a 10-year period) by the JV, the Railways would find it very difficult to be able to terminate the contract for poor performance; delivery schedules, similarly, were relaxed; while spares are an important part of any contract, the details of how the prices were to be fixed and other norms were left vague.
Once this set of one-sided issues was fixed in the process of the usual back and forth between various ministries, other problems crept in. This time the finance wing of the Railways, which has little PPP experience, decided to play the heavy. So, for instance, bidders wanted guarantees the Railways would provide them the land to build the factories on time; the Railways, however, refused to put in a clause guaranteeing the JV a penalty payment if the land was delayed. What if payments for the locomotives were delayed beyond a reasonable credit period, the bidders wanted some guarantees in the contract. Nothing doing, said the Railways, we’re not accepting any penalty clauses. Ditto for the possibility that the Railways wouldn’t buy all the locomotives produced in the two factories even though these were being set up only to serve the Railways’ needs? It’s a business risk, was the answer. Sure, it’s a business risk but, as anyone who understands business knows, if the risks are not defrayed, they’ll just be built into the cost. That is, the Railways will end up paying an unacceptably high price for the locomotives.
After several rounds of discussions and pre-bid conferences with bidders, however, these clauses were modified to ensure the Railways also took on some of the risks (like making land available for the JV on time) and accepted standard commercial discipline (like releasing payments on time and honouring the JV’s debts if the locomotives are not bought for reasons other than poor quality). At the end of the day, bidders now have to quote just one price at which the JV will supply locomotives to the Railways in the first year; after this, the price has to fall by a certain amount each year which is already specified in the contract; the maintenance fee (for 15 years) is a fixed proportion of the first-year price … in other words, the final price bid is designed so as to ensure there is very little subjectivity in evaluating it.
Whether, after leaning too much in one direction, the Railways has tightened the screws too much in the other is something we’ll only get to know after the bids come in; but there can be little doubt this is one of the biggest contracts the Railways has signed in a long time.
That it was fraught with such problems is especially worrying.
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