 "Euro 3 billion Madhepura contract will be a watershed in Indian Railways' history: Bharat Salhotra")
French multinational engineering giant Alstom has just bagged its largest order in India and India’s first foreign direct investment (FDI) in the rail sector — the Euro 3-billion (Rs 21,389-crore) contract for setting up Madhepura Locomotive Factory and supplying 800 engines to Indian Railways over 10 years. In an exclusive interview with Sudheer Pal Singh, Alstom Transport’s Managing Director Bharat Salhotra shares what the mega contract means for India and Alstom, how it will be executed, and the larger gains from the manufacturing facility in Bihar. Excerpts:
What are your first thoughts on bagging the mega order from Indian Railways?
The order is one of the strongest endorsements of the government’s Make In India Policy. It will prove to be a watershed in the history of Indian Railways and provide a major boost to the investment climate surrounding India’s transport sector. As part of the approximately €3-billion deal, we will supply 800 electric locomotives of 12,000 horsepower each to the railways over a period of 11 years. The contract includes establishment of a factory at Madhepura, two depots at Nagpur and Sharanpur and maintenance of the first 500 locomotives. The locomotives will be supplied as per the supply programme of the railways over an 11-year period with manufacturing output ramped up to reach 100 locomotives in the fifth year of supply.
What will be the price for Indian Railways of the locomotives supplied as part of the deal?
The price works out to Rs 28.4 crore for each locomotive. However, there is an expectation of a three per cent reduction in the price year-on-year. So, the overall average price works out to Rs 24.88 crore per locomotive.
What is the significance of this order for Alstom’s business in India and how is the company preparing to take up the crucial assignment?
Alstom has had a strong footprint in India’s manufacturing and engineering space. We have been present here for 100 years and are known for our cutting-edge technology to deliver the best products and solutions for the customers. This is evident from our already strong presence in both the metro and mainline railways sectors in India. With the GE’s acquisition of our energy business, we are well positioned to have an increased focus on rail transport. We have a 1,600-strong employee base and we have grown phenomenally over the past two years. The Madhepura order is certainly the largest ever for Alstom in India and among the largest contracts globally.
What will be the next set of activities and steps to be undertaken for executing this contract?
The Letter of Award was the first step and we have received it. Once we have accepted the Letter of Award, we will be setting up and incorporating a joint venture company with maximum equity participation of 26 per cent by the railways and 74 per cent by Alstom. Thereafter, we will sign the contract agreement with railways in about a month’s time. Later, a shareholders’ agreement has to be signed within 90 days. In terms of steps initiated to execute the contract, we are starting the design process for the locomotive as well as for the Madhepura factory. We are looking at establishing a robust supply chain in India that will cater to the manufacturing facility. Railways has already earmarked land for the factory as well as for the depots and we will take over this land once all the condition precedents have been met. We hope to commence the construction work for the factory in the next 8-10 months. Construction of the depots will follow with a slight time lag because we don’t require the depots from the first day. The first prototype loco will be rolled out by 2018.
Do you think the assured offtake clause of the contract could prove to be a concern in future in the event of a slackening of railways’ freight growth?
There is a significant push from the central government for ensuring a double-digit gross domestic product (GDP) growth rate and we expect the requirement for rail transport to grow at a fast pace, particularly with the construction of dedicated freight corridors. The Indian economy has a GDP-transport elasticity of 1.25 (For every one per cent growth in GDP, transport sector has to grow by 1.25 per cent). So, we expect that the rail sector will continue to grow and the potential for investment will be fully utilised. Also, if you compare the size of India’s rail network per square kilometre with other nations, we are in the moderate-to-lower end. There is scope for growth of fixed rail infra as well as growth of freight traffic. The current government has been focusing on improving infra and the railways itself is looking forward to raising funds from Life Corporation of India, from bilateral as well as multilateral funding agencies. All these steps portend well for transformation and growth of the railways as well as the rail market.
Will Alstom be looking at exports, too, from the Madhepura factory in future?
There is a possibility of utilising the Madhepura plant for exports, but our primary focus is to meet the obligations of this contract and to meet the expectations of the railways vis-à-vis product delivery and quality. We’re not envisaging any major exports from this plant at this point of time. The Indian rail market is among the largest in the world and we expect to continue to cater fully to this ever-growing domestic market. The factory itself will employ 300 persons. Of course, we’ll continue to ramp up the employee base at the Bengaluru engineering centre, which will cater to not only designing rail solutions for India, but also for the rest of the world.
What are your first thoughts on bagging the mega order from Indian Railways?
The order is one of the strongest endorsements of the government’s Make In India Policy. It will prove to be a watershed in the history of Indian Railways and provide a major boost to the investment climate surrounding India’s transport sector. As part of the approximately €3-billion deal, we will supply 800 electric locomotives of 12,000 horsepower each to the railways over a period of 11 years. The contract includes establishment of a factory at Madhepura, two depots at Nagpur and Sharanpur and maintenance of the first 500 locomotives. The locomotives will be supplied as per the supply programme of the railways over an 11-year period with manufacturing output ramped up to reach 100 locomotives in the fifth year of supply.
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The price works out to Rs 28.4 crore for each locomotive. However, there is an expectation of a three per cent reduction in the price year-on-year. So, the overall average price works out to Rs 24.88 crore per locomotive.
What is the significance of this order for Alstom’s business in India and how is the company preparing to take up the crucial assignment?
Alstom has had a strong footprint in India’s manufacturing and engineering space. We have been present here for 100 years and are known for our cutting-edge technology to deliver the best products and solutions for the customers. This is evident from our already strong presence in both the metro and mainline railways sectors in India. With the GE’s acquisition of our energy business, we are well positioned to have an increased focus on rail transport. We have a 1,600-strong employee base and we have grown phenomenally over the past two years. The Madhepura order is certainly the largest ever for Alstom in India and among the largest contracts globally.
What will be the next set of activities and steps to be undertaken for executing this contract?
The Letter of Award was the first step and we have received it. Once we have accepted the Letter of Award, we will be setting up and incorporating a joint venture company with maximum equity participation of 26 per cent by the railways and 74 per cent by Alstom. Thereafter, we will sign the contract agreement with railways in about a month’s time. Later, a shareholders’ agreement has to be signed within 90 days. In terms of steps initiated to execute the contract, we are starting the design process for the locomotive as well as for the Madhepura factory. We are looking at establishing a robust supply chain in India that will cater to the manufacturing facility. Railways has already earmarked land for the factory as well as for the depots and we will take over this land once all the condition precedents have been met. We hope to commence the construction work for the factory in the next 8-10 months. Construction of the depots will follow with a slight time lag because we don’t require the depots from the first day. The first prototype loco will be rolled out by 2018.
Do you think the assured offtake clause of the contract could prove to be a concern in future in the event of a slackening of railways’ freight growth?
There is a significant push from the central government for ensuring a double-digit gross domestic product (GDP) growth rate and we expect the requirement for rail transport to grow at a fast pace, particularly with the construction of dedicated freight corridors. The Indian economy has a GDP-transport elasticity of 1.25 (For every one per cent growth in GDP, transport sector has to grow by 1.25 per cent). So, we expect that the rail sector will continue to grow and the potential for investment will be fully utilised. Also, if you compare the size of India’s rail network per square kilometre with other nations, we are in the moderate-to-lower end. There is scope for growth of fixed rail infra as well as growth of freight traffic. The current government has been focusing on improving infra and the railways itself is looking forward to raising funds from Life Corporation of India, from bilateral as well as multilateral funding agencies. All these steps portend well for transformation and growth of the railways as well as the rail market.
Will Alstom be looking at exports, too, from the Madhepura factory in future?
There is a possibility of utilising the Madhepura plant for exports, but our primary focus is to meet the obligations of this contract and to meet the expectations of the railways vis-à-vis product delivery and quality. We’re not envisaging any major exports from this plant at this point of time. The Indian rail market is among the largest in the world and we expect to continue to cater fully to this ever-growing domestic market. The factory itself will employ 300 persons. Of course, we’ll continue to ramp up the employee base at the Bengaluru engineering centre, which will cater to not only designing rail solutions for India, but also for the rest of the world.