Shishir Asthana Moneycontrol Research
Let’s consider a case where a joint venture (JV) is formed between two companies, the customer and the supplier of an equipment. After the deal is signed the customer company sees a management change, bringing in a new manager who has worked on new technologies, who suggests that the company does not need the equipment that the JV intends to manufacture.
The manager feels better equipment will result in big savings for the company. The supplier naturally cries foul. Has the new manager worked in the interests of his company by opting for a new technology rather than using an equipment that could have resulted in losses, just in order to save the JV?
Of course he has.
This, however, is not being seen to be the case in the General Electric – Indian Railways JV. Indian Railways, under the then railway minister Suresh Prabhu, announced a JV with General Electric (GE), whereby the latter was expected to supply 1,000 diesel locomotives. GE, as part of the Rs 14,656 crore deal was to supply 100 locomotives from its factories in the US while 900 were expected to be manufactured in Bihar. These locomotives were to be supplied over a period of 10 years.
GE on its part has already shipped the first locomotive engine and is on track to complete its factory in Bihar. The US-based company says it has placed the order for USD 1 billion of machinery and already has 1,000 employees on its rolls.
This entire investment is in jeopardy after new Railways Minister Piyush Goyal, formerly the power minister, decided that Indian trains can be run entirely on cheap electricity and there is no need for diesel engines.
GE is perfectly right in saying that it is unfair on the part of the Indian government to suddenly change the rules of the game. The company has noted direly that the development would put future foreign investment at risk and undermine the government’s signature ‘Make in India’ initiative.
Some Indian commentators, too, have echoed GE’s concern.
Indian Railways faces a potential liability of Rs 1,300 crore if it exits from the JV, which is a small amount given the savings by shifting to electric vehicles. Goyal, however, says the electric locomotives would result in a saving of around Rs 8,000 to 10,000 crore a year in fuel costs. This is roughly 70 percent of the cost of buying all the diesel locomotives. Any cost accountant would call a decision to continue with the diesel engines foolish.
If Indian Railways had been a listed company, analysts would have pulled up the management if it had continued with a costly technology when efficient alternatives were available.
As for GE, the Railways Ministry has told the company that they can use the facility to produce electric locomotives or alternatively it can use the facility to export diesel engines. Prima facie it does look like GE has been given a raw deal, but the fact is that government is offering the company alternatives and not abruptly canceling the order.
As for the damage to the ‘Make in India’ image, GE should remember that in current times of subdued growth, there is no dearth of companies willing to participate in the Indian Railway growth story. The enthusiasm shown by Japan in participating in Bullet Trains and Spain’s Talgo to supply rakes to Indian Railways is an indication of how the world is viewing investments in India.
India suffered emotional blackmail nearly two decades back by a US-based company – Enron -- and agreed to buy high-cost power at the cost of the Indian taxpayer. It cannot repeat the same mistake, especially if cheaper alternatives are available.
The same set of commentators who are favouring GE now would complain about why the government did not opt for a cheaper alternative when one was available. The government is the custodian of Indian taxpayer money; spending it wisely even at the cost of a small loss of face is a small price to pay.
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