FDI in Railways: Policy to have Caution Note on Chinese Firms’ participation

Home Ministry red flags Chinese investments in Railway projects. While DIPP revises its proposal to allow 100% FDI in railways – Expert Group under Railways and Home Ministry to evaluate FDI proposals to address national security concerns

India’s trade ministry has revised a proposal to allow 100% foreign direct investment (FDI) in railways after the home ministry flagged its concerns on Chinese firms potentially investing in projects near the international border with the Asian powerhouse.

The Department of Industrial Policy and Promotion (DIPP), an arm of the industry and commerce ministry, has now proposed setting up of a core group with requisite technical and security expertise under the railways ministry to evaluate FDI proposals in the sector to address national security concerns, according to an internal note, a copy of which was seen by Mint.

“Ministry of railways shall set up a core group with requisite technical and security expertise to evaluate proposals of railway projects with a critical view to ensure that railways projects with private/foreign investments are not detrimental to overall national interest/security, keeping in mind the strategic and security sensitivity of remote locations while formulating the specific projects in those areas,” the note said.

The department had sent a cabinet note for approval seeking allowing 100% FDI in railway transport such as elevated rail corridor projects, freight terminals, suburban corridors, dedicated freight lines and high-speed train systems to meet the urgent need to modernize and expand the railway network, which require large capital investments.

The proposal does not require approval from the Foreign Investment Promotion Board. An approval from the railways ministry will suffice, according to the original proposal. While the home ministry has expressed no reservation on foreign capital investment in railway transport infrastructure development, it has emphasised that the signalling and telecommunications of railway’s networks’ network should be entirely in the hands of Indian Railways.

“Similarly, the Railway Protection Force and the Government Railway Police should continue to be guarding force of Indian railway operations as per their charter,” the home ministry said.

However, the home ministry wrote to the DIPP that Chinese investments in sensitive and core sectors, which may pose danger to national security, should be viewed with caution.

“It is learnt from source information that some Chinese companies have shown keen interest in investing in Indian railway projects in a big way. Though India-China economic engagements continue to grow, China is generally perceived as India’s main rival not only in the economic field, but even militarily with unresolved border disputes between the two countries,” the home ministry said. “Chinese investments should not be allowed in sensitive border areas like Jammu and Kashmir, North east and Sikkim.”

The home ministry said that FDI in railway projects with involvement of the Chinese workers near the restricted areas and in vicinity of international border with China and Pakistan was not desirable from security angle. If unavoidable, Chinese workers and technicians may not be allowed to enter such areas without obtaining necessary security permits and requisite visas, it added.

China, according to the home ministry, is perceived as India’s main rival — in the economic field as well as militarily — especially with unresolved border disputes between the two countries. On that basis, the ministry is learnt to have told DIPP that investments made by Chinese firms, particularly in the core and sensitive areas, should be viewed with caution. It has said Chinese investments should also not be allowed in Jammu and Kashmir, the Northeast and Sikkim.

From the security point of view, the ministry has added, Chinese workers or technicians should not be allowed to work near the areas along the international borders India shares with China and Pakistan. They might be allowed to work in such cases but only after the government’s permission.

Also, it is leant, the home ministry has said that the overall security aspect, quality control, signalling and telecommunications for the entire railway network should be under the Indian Railways. DIPP has incorporated these changes and floated a revised draft Cabinet note — the reason why the matter was stuck and the Cabinet secretariat was not able to take it up as originally decided. Under the proposed FDI policy, the railways plan to earn around Rs 1 lakh crore through public-private partnership (PPP) projects in the 12th Five-Year Plan. Chinese firms are believed to be keenly watching the development, as they want to heavily invest here. Under the policy, the government wants to open the doors to foreign investment in areas like rail corridor projects, station development, locomotive manufacturing units, power plants related to railways, dedicated freight lines, high-speed train systems, logistics parks and freight terminals, as well as suburban corridors. Some of the Chinese names in the fray are CSR Corp and China CNR Crop.  Japanese and German firms have also shown interest to invest heavily in the world’s fifth-largest railway network.

Similar concerns of security were expressed in 2010 regarding China-made telecom equipment after which a telecom security policy was put together. As part of the policy, the telcos using the equipment are responsible for the security aspect as well and have to give an undertaking that there is no malware and spyware installed in the equipment.

The government is also in the process of setting up telecom equipment security testing labs across the country. The government introduced a new rule in 2010 that all equipment needed to be certified by International standard laboratories. From July next year, all telecom equipment should be certified by laboratories in India. This deadline was extended from May 2011 after two earlier extensions in March and October.

Most Indian telcos follow an outsourcing model where most of their operations including network setting up and management is outsourced to equipment makers and vendors like Ericsson, Nokia Siemens, Huawei and ZTE.

R.N.Das, senior fellow at think tank IDSA said the concerns expressed by the home ministry are genuine given the trust deficit and security dilemma between the two neighbouring countries. “I wish there are better investment cooperation between the two countries but the security concerns at present cannot be ignored,” he added.

The decision by the government to put a stop on the movement of executives working in Pakistan is significant, as there are many strategic sectors in which multinational companies are present or have equity stakes in both India and Pakistan.

Caveat on cards: Railway FDI policy to have a special caveat on Chinese firms; the home ministry has supported FDI in railways’ construction and maintenance segments but cautioned against investment by Chinese firms

Rationale: Ministry says China is considered India’s rival in the economic and military fields and there are unresolved border disputes with it

Out of bounds: Chinese investment may not be allowed in sensitive and core areas because that might pose danger to national security; so, J&K, the Northeast and Sikkim could be out of bounds for these companies

Limited labour: Chinese labourers and technicians may be barred from working in areas along India’s border with China and Pakistan. Permission likely only after government’s approval and proper visa procedures