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TII SPECIAL
India's Bullet Train with Japanese Aid Tramples Fiscal Transparency
By Naresh Minocha
Sep 25, 2017

Naresh Minocha, a veteran journalist, specializes in telecom, energy, chemicals, agriculture, economic reforms and governance. In his over 32-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. These include Financial Express, Indian Express, Business Standard, Business India, Tehelka, the Pioneer, erstwhile Asian Chemical News, International Chemical Information Service and erstwhile asiatele.com.

His current professional engagements include Consulting Editor, taxindiaonline.com and Associate Editor, Gfiles Magazine. At taxindiaonline.com, he has been writing a popular Column known as 'The Ice Cubes' since 2005.

Agen BandarQ

Japan-India bonhomie over the latter's maiden bullet train project can spin into a can of worms, if subjected to an independent probe.

The only 'bulletish' aspect of the project at present is its skyrocketing cost: It has shot up about five times over 11 years from Rs 20,352 crore in 2006 to Rs.1,08,000 crore in 2017. This in spite of reduction in length of high speed rail (HSR) line from 650 km to 508 km achieved through alteration in route. On per Km basis, the cost has thus shot up about seven times from Rs 31.31 crore to 212.59 crore!

The project is thus destined to become a subject of several global case studies on six major counts.

The major issues are: 1) Fiscal Transparency; 2) tied foreign credit; 3) technology transfer & project execution through bilateralism, thereby frittering competitiveness available under global competitive bidding; 4) potential response of countries that have been edged out by Japan in bullet trains lobbying 5) alternate models for introduction of bullet trains and 6) strong potential risk of corruption.

Before discussing these concerns, take a look at Japan's 30 years-long effort to market bullet trains to India that culminated in a foundation-stone laying of the maiden project on 14th September 2017 by PMs of the two nations.

The maiden project, Mumbai-Ahmedabad High Speed Rail (MAHSR) project, is slated to be completed by 2023. This target appears over-ambitious as the project has to secure separate approvals under eight environment protection & allied laws. The approval process might become messy and more time-consuming, if separate clearances are required for different packages of the project, which is bound to encounter public interest litigation on different counts. The project is thus likely to suffer time and cost overruns.

Of the total estimated cost of Rs.1,08,000 crore, 81% would be funded by Japanese soft loan with interest rate at 0.1% per annum. The bilateral loan is to be repaid over 50 years with grace period of 15 years.

The project would be promoted by National High Speed Rail Corporation Limited (NHSRC), a JV between Railway Ministry and State Governments of Gujarat and Maharashtra.

MAHSR would have maximum design speed of 350 km/hour and maximum operating speed of 320 Km/hour. HSR is normally defined as a railway system that operates at speed exceeding 250 km/hour. As many as 15 countries have HSR networks.

The Modi Government considers the project loan as "tantamount to a grant". It says that for the first an Indian infrastructure project is being funded under such "favourable terms".

It has the audacity to make this misleading claim due to its reluctance to embrace fiscal transparency. What the Government has not revealed is that the tied loan is a fundamental departure from India's external assistance policy articulated in a position paper (PP) prepared by Finance Ministry in March 2008.

PP says, "Too much reliance on any one source of bilateral funding can also be dangerous. For instance, Japanese loans account for 25% of our sovereign debt portfolio. Indiscriminate borrowing in yen will scale up our exposure to yen, thereby increasing the currency risk".

Should Indian Government not make public the risk of enhanced exposure to Yen as part of fiscal transparency? Should it disclose whether it intends to extend any special tax favours to the project in future?

The terms for MAHSR aid represent modest improvement over present conditions for Japanese official development assistance (ODA). Japan's ODA flows in different loan streams with rate of interest varying from 1.4% per annum to 0.3% per annum and repayment period ranging from 30 to 40 years with 10-years grace.

A crucial component of PP that has bearing on MAHSR is: "The disadvantages to the recipient country of credit tying by donor countries are well recognized by India. Tied aid implies that loans from a particular country have to be utilized for imports from that country alone. Though in the initial years of planning, aid to India was mostly tied, India's dependence on aid has reduced with time, and it has affirmed its stand on not accepting tied aid".

PP admits: "The absence of open market tendering means that they are denied an opportunity to get the same services and goods at a lower price elsewhere".

Notwithstanding this, Modi Government accepted tied credit under bilateral Memorandum of Cooperation (MoC) on MAHSR signed on 12th December 2015.

Explaining the terms and conditions of the project loan, MoC says: "The above-mentioned indicated terms and conditions will be applied for the packages whose prime contractor is a Japanese company, or a JV composed of a Japanese company(ies) and an Indian company(ies), or an Indian company".

International competitive bidding is thus ruled out. This has effectively ruled out scope for discovering the cost of the project through competition. How can the Government justify exorbitant rise in project cost? What is the extent of padding of sorts to recover sacrificed interest rate? How can one rule out profiteering by Japanese under such inflated project cost?

There is something fishy about MAHSR with capital cost of Rs 212.59 crore/Km, as compared to Rs.80-120 crores/Km cost for HSR projects disclosed by Government in Parliament during July 2014.

Was any attempt made to tweak the cost downward towards Rs 80-crore mark? Did Modi Government ask its counterpart to compare MAHSR cost with highly competitive cost of Chinese HSR projects.

It is here pertinent to quote a World Bank paper released in July 2014. The Paper concludes: "China Railway has accomplished a remarkable feat in building over 10,000 km of HSR network in a period of six to seven years at a unit cost that is lower than the cost of similar projects in other countries".

China opted for only transfer of HSR technology primarily from Japan firms to Chinese ones, unlike India that has obtained a de facto package deal for MAHSR.

Why did Modi Government not discover the project cost by seeking global offers for setting up standard gauge-based bullet train projects? The bidders could have been asked to give separate proposals underBuild, Own, & Operate (BOO) model and underpublic private partnership (PPP)?

This project execution approach was mooted by Vajpayee Government in 2002 to enable Government to focus on other priorities such as investment in education and healthcare.

The rationale for exploring alternative models of project development becomes evident if one reckons the fact that Modi Government has received good response to global enquiry issued in July 2016 seeking offers for "designing, building, operating and maintaining a levitation-based train system on PPP basis."

Levitation/Maglev trains run faster than HSR ones that are based on Japanese bullet train/ Shinkansen technology and its variants in other countries.

The value for money logic requires comparison of proposed investment on HSR with options to invest it on expansion of expressway, conventional rail lines and airports at Mumbai and Ahmedabad. Did the Government make such exhaustive comparison?

What is the guarantee that general consultants that prepare bid documents for different contract packages would not draft eligibility norms that are skewed in favour of Japanese firms, leaving crumbs for Indian ones?

In December 2016, Japan International Cooperation Agency (JICA) signed the Memorandum withNHSRC and a Japanese joint venture to provide General Consultancy (GC) to MAHSR.

The GC would provide design and bidding assistance for the public works and systems required for the construction of the project up to 2020. The cost of GC will be borne by JICA.

The JV comprises Japan International Consultants for Transportation Co. Ltd. (JIC), Nippon Koei Co. Ltd., and Oriental Consultants GlobalCo. Ltd.

The subject of consultancy brings us to the issue of corruption involving different Japanese consultants in JICA-aided rail projects in India and abroad.

According to a news report in Japan Times published during October 2014, Japan Transportation Consultants Inc & its three officials pleaded guilty in a Tokyo court for bribing rail officials in Vietnam, Indonesia and Uzbekistan.

India's Central Vigilance Commission (CVC) has hinted at corruption in a JICA-aided project. CVC annual report for 2016 has dealt with this case under the sub-heading: ' Some important irregularities observed during intensive examinations of various Organisations .'

CVC Report says: "In a JICA funded works contract costing approximately Rs. 6700 crore and being executed by a railway PSU fee for project management consultancy (PMC) was approximately 6% of the project cost, which appeared to be very high as compared to established norms for such high value projects".

It continues: "Prior to selection of the agency for PMC services, a consortium of six firms was engaged as Engineering Services Consultant (ES Consultant) for pre-tender engineering and preparation of detailed estimate and tender documents. As per the contract conditions for the ES Consultant, the members of this consortium were disqualified from working in any other capacity on the same project. However, two members in the consortium for Engineering Services Consultancy contract were found to be members in the consortium for the PMC contract".

It adds: "As per the loan agreement, the lead partner in any of the contracts had to be a Japanese firm only. The pre-qualification conditions resulted in pre-qualification of JV / Consortium of firms, wherein the lead partner had no relevant experience. It was found that during execution, the activities to be performed by the lead partner and the specialized agency were actually executed by non-lead partner".

There have also been other instances of corruption rocking Indian projects in which Japanese firms are participants. This includes a case of non-disclosure of commission paid by a Japanese MNC to an Indian firm in its bid documents.

With the background in mind, can one rule out payment of commission as consultancy fees by Japanese MNCs to some entities abroad to push MAHSR project to launching stage? Everyone knows the complex web of companies through which speed money flows in big-ticket projects.

If Modi Government had set up autonomous Lokpal, an institution for targeting corruption in the top echelons of the system, MAHSR might have taken a different turn.

As for implementation of seven other proposed HSR projects, would Indian Government wait for completion and operation of MAHSR or opt for parallel implementation of one or two more such projects?

If Government defers call on all proposed projects, then it would signal first-mover advantage to Japanese suppliers and their proposed 'Make In India' units including joint ventures.

If the Government decides to take up other projects during the course of MAHSR execution, then it would have to decide whether they would be implemented through bilateral deals with China, Spain and other providers of bullet trains. Would the Government opt for BOO or PPP models for implementation of other HSR projects?

All these questions drive one to the urgency for full transparency in Government's decisions on expenditure, resources mobilization and tax incentives. Mega projects without fiscal transparency are breeding ground for multiple risks including corruption.

Agen BandarQ

 
 
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