The tenders for the third phase of Mumbai metro rail for 32.5 km at Rs 231.36 bn between Cuffe Parade in South Mumbai and Santacruz Electronics Export Processing Zone at Andheri have been received. The project will be financed with a Rs 133.25 bn soft loan from JICA, Rs 34.28 bn central share in the form of equity and debt, Rs 40.17 bn state government share, and Rs 7.77 bn from the Mumbai International Airport Ltd. The stretch, expected to be completed by 2019-20, will have 27 stations, with all but one being underground.
Interestingly, among the nine selected bidders for the seven sections, there are only two Chinese contractors. Further, none of the biggest Chinese metro rail contractors, China Railway Construction Corporation (CRCC) or China Railway Rolling Stock Corporation (CRRC), which have been bidding aggressively across the world and have bagged contracts in Mexico, Argentina, and Boston, figure among the successful bidders. Given the competitive advantage of these firms, it is inconceivable that they would not have succeeded in winning atleast some of the packages. As I have blogged earlier, India's best hope of leveraging Chinese capital and construction technologies is to get Chinese contractors bid in such large construction contracts across India.
Did the central role of Japanese lending play a role in keeping them away? In any case, this raises an interesting tender design dimension. Countries like China, Japan, Germany, and South Korea have in recent months shown great interest to invest in India. There is already an established mechanism for private investments by their respective companies. But none exists for investments supported by bilateral loans from that country. Currently, bilateral loans are finalized through negotiations.
So how about a tender design where Chinese or Japanese bidders structure their bids contingent on the bilateral loan? In other words, the contractor negotiates the terms of the financing with its government and offers its bid accordingly. In a competitive bid process, each bidder has the incentive to negotiate the most favorable financing terms with their national governments. The bids become a proxy for competitive price discovery in the terms of bilateral loans. In order to avoid infringing WTO regulations, once the bids are finalized, the loan can be contracted between the two national governments. Or do the transaction costs associated with this structuring offset the gains by way of more efficient price discovery?