Delhi-Mumbai corridor: FinMin opposes $4.5bn ‘Tied Aid’ from Japan

NEW DELHI: It’s proving to be a $4.5-billion headache for the Delhi-Mumbai Industrial Corridor (DMIC) with the finance and commerce & industry ministries squabbling over arranging funds for the ambitious project, which is aimed at setting up new towns and manufacturing hubs.

The finance ministry is opposing a loan from Japan, arguing that it is “tied aid” and will result in a large chunk of the contracts being awarded to companies from the Asian giant through what is called Special Terms for Economic Partnership (STEP) of Japanese Official Development Assistance Loans.

The loans will have a tenure of 40 years and will carry 0.1% interest, making them an attractive source of finance for the $90-billion DMIC project, sources familiar with the negotiations told TOI. Governments that avail of the loan have to ensure that at least 30% of the goods procured have a link with Japan, with consulting work not included in this.

While consultations between the two key economic ministries have been underway for several months, there is no outcome in sight so far. In May, the commerce and industry ministry had suggested that any company where Japanese investors hold 10% or more stake can be treated as “Japanese” , but the finance ministry is still not convinced about the proposal.

The finance ministry is of the view that “tied aid” impacts competitiveness, with officials citing studies by OECD, the Paris-based think tank, to argue their case. “A STEP loan will keep European , Korean or Chinese contractors and goods out of the race and that may not be the best case scenario for such a large project,” said an official.

In the past, including for the Delhi-Mumbai Freight Corridor, the government had settled for a similar arrangement but the finance ministry now believes that it is outdated . The freight corridor is a dedicated rail link to carry goods between the two largest cities in India with the DMIC using it as the backbone to develop industrial hubs.

What has complicated the matter for the government is the joint statement with Japan that was issued during Prime Minister Manmohan Singh’s visit to Tokyo in May. “The two leaders shared the view that all instruments of funding of the Japan Bank for International Cooperation (JBIC) and the Japan International Cooperation Agency (JICA) including the Special Terms for Economic Partnership (STEP) may be explored ,” the statement issued on May 29 said.

The PMO has sought to broker a deal but without any success so far. This has prompted the commerce & industry ministry to dash off a fresh letter to the finance ministry , saying that the $4.5 billion is needed to build trunk infrastructure in the proposed towns and the deal should be firmed up.

FIGHT OVER FUNDING

Japan govt is offering 40-year loan at 0.1% for the Delhi-Mumbai Industrial Corridor PMs of India and Japan have backed the plan Finmin says STEP loan should be avoided as it’s “tied aid” and comes with the requirement that 30% of the orders should go to Japanese companies Commerce and industry ministry wants loan expedited to push project construction.