VZCZCXRO2761
RR RUEHLH RUEHPW
DE RUEHIL #3807/01 3451227
ZNR UUUUU ZZH
R 101227Z DEC 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0595
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEHKP/AMCONSUL KARACHI 0764
RUEHLH/AMCONSUL LAHORE 6495
RUEHPW/AMCONSUL PESHAWAR 5352
RUEHNE/AMEMBASSY NEW DELHI 4179
RUEHBUL/AMEMBASSY KABUL 9554
RUEHBJ/AMEMBASSY BEIJING 5039
RUEHKO/AMEMBASSY TOKYO 2464

UNCLAS SECTION 01 OF 03 ISLAMABAD 003807 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EIND ELTN EINV PK
SUBJECT: GE LOCOMOTIVE ADVOCACY TO BE DECIDED AT PRESIDENTIAL LEVEL 
 
¶1. (SBU) SUMMARY: A commercial decision to procure 75 locomotives by 
the state-owned Pakistan Railways has turned into a political 
decision after the newly appointed Minister of Railways announced 
that he would nullify a letter of intent to procure Chinese 
locomotives in favor of a General Electric/Marubeni offering.  The 
Chinese Ambassador and Foreign Minister contacted President Zardari 
to complain about this decision and President Zardari has hastily 
formed a committee to help him produce a recommendation.  A decision 
either way will surely disappoint an important ally, but the 
decision will also be an important signal to the US and Chinese 
business communities about the nature of Pakistan's public 
procurement market.  End Summary. 
 
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RAILWAY INFRASTRUCTURE IN NEED OF CAPITAL UPGRADE 
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¶2. (SBU) Within the past two years, the seriously unprofitable 
Pakistani Railways has issued international tenders in order to 
fulfill some critically needed capital improvements.  Several 
companies expressed interest in the tender for 75 new locomotives, 
but a consortium of General Electric/Marubeni and the Chinese 
manufacturer, Dalian Dong Fang, were the finalists.  At the public 
bid opening in the summer of 2008, the Chinese offering price was 
one half that of the GE/Marubeni offer. 
 
¶3. (SBU) The process of selecting the best bid quickly revealed 
fissures in the Pakistan Railways bureaucracy.  The technical 
committee that reviewed the two bids presented its evaluation to the 
official tender committee.  It found that the GE/Marubeni consortium 
met the technical specifications on the three locomotive models that 
were sought.  The Chinese offer, on the other hand, was found 
"unsuitable" on one of the three models, suitable, on a trial basis, 
for a second model, and suitable for the third model. 
 
¶4. (SBU) The newly appointed Chairman of the Railways, Kashif 
Murtaza told the DCM, Comcouns and Econoff that he was brought in to 
conclude some important tenders as soon as possible.  His recent 
appointment has coincided with a major reshuffle of the official 
tender committee, which then unanimously voted to select the Chinese 
offer.  After this decision, the Railways sent Dalian Dong Fang a 
letter of intent in September.  An internal struggle within the 
bureaucracy has ensued, which pits senior staff who are unhappy 
about the procurement process and who favor the technically superior 
GE/Marubeni bid against the chairman of the Railways and his 
handpicked team of senior managers who appear to be seduced by the 
very low Chinese price. 
 
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APPEALING TO WHAT IS IN PAKISTAN'S BEST INTEREST 
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¶5. (SBU) The low Chinese price is obscuring some serious technical 
flaws in the Chinese proposal.  Not only is one locomotive model 
unsuitable for the tender requirements, but the other models do not 
meet the required axle loads which could cause long term (and 
expensive) damage to the rail infrastructure.  The known failure 
rates of the Chinese locomotives and its fuel inefficiency also call 
into question the true life-cycle costs of the Dalian Dong Fang 
offer.  The GE/Marubeni bid also included six separate financing 
options, including one offer to finance USD 250 million over ten 
years at Libor plus 0.05 per cent with no commitment fee.  This 
highly competitive rate was aimed squarely at previously known China 
Exim financing of locomotives with 15 year terms at Libor plus 1.30 
percent. 
 
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HERE COMES THE CAVALRY 
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¶6. (SBU) Since the beginning of fall, Post has been signaling to the 
GOP concerns that Pakistan Railways has overlooked the full 
evaluation of the two offers and instead has focused on the low 
price offered by Dalian Dong Fang.  As matters were moving towards a 
final decision point on November 27, the DCM called on Minister of 
Railways Bilour on November 20 to express these concerns in person. 
The Minister was sympathetic to our arguments, and openly admitted 
that the GE/Marubeni offer was technically superior, but he fell 
back on the point that the Railways was broke and could not ignore 
 
ISLAMABAD 00003807  002 OF 003 
 
 
the lower price for the Chinese locomotives, which he felt were 
"good enough."  The Minister nonetheless invited the post to brief 
his senior management team on November 25 to ensure that all 
parties' arguments would be heard. 
 
¶7. (SBU) The day before the scheduled meeting, Comcouns and 
Econcouns learned from Salman Farruqui, Deputy Chairman of the 
Planning Commission that the recommendation to buy Chinese 
locomotives had been sent from the cabinet level National Executive 
Council back to the Railways Ministry for review and that Minister 
Bilour was fully empowered to make the final decision. 
 
¶8. (SBU) Minister Bilour opened the meeting on November 25 and 
stayed for its entire ninety minute duration.  A member of the 
Parliamentary standing committee on the Railways, which has openly 
questioned the decision to purchase Chinese locomotives, attended 
for the first twenty minutes.  The Chairman of the Railways 
conducted the meeting and he brought with him approximately 12 of 
his most senior executives.   Comcouns was accompanied by Econoff, 
an LES economic specialist and a representative of the Japanese 
Embassy.  Comcouns was given the opportunity to present a list of 
issues which focused on the technical merits of the two offers and 
on whether the Dalian Dong Fang bid was technically compliant. 
There was insufficient time to fully address a comparison of the 
life cycle costs, nor did we discuss the finance options.  Not 
surprisingly, the Pakistan Railways presenters anticipated each 
argument in a rehearsed fashion, and the meeting was less of a 
discussion and more of a presentation of how the tender committee 
rationalized its decision. 
 
¶9. (SBU) There were at least six areas where the Railways 
presentation obscured or covered up known technical advantages by 
GE/Marubeni.  Upon confirming these details, the Ambassador sent a 
letter to Prime Minister Gilani, which was copied to Minister 
Bilour.  On November 27, Minister Bilour held a final meeting with 
his senior management where he overruled their recommendation and 
instructed the Railways to award the contract to GE/Marubeni. 
 
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ALL HELL BREAKS LOOSE 
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¶10. (SBU) Within 24 hours the Chinese Ambassador had contacted 
President Zardari to complain.  The Chinese Foreign Minister also 
contacted President Zardari over the weekend to register his 
concerns.  President Zardari responded by summoning Minister Bilour, 
who explained that the government would experience a scandal if the 
tender was awarded to the Chinese.   Zardari then hastily formed a 
committee comprised of the Finance Minister, the Minister of 
Railways, the Chairman of the Railways, the deputy Chairman of the 
Planning Commission, and another Finance Ministry representative to 
produce a recommendation.  Before this committee could meet some of 
its members left for the Haj and will not be back until mid 
December.  Meanwhile, the Chinese have extended their bid validity 
until December 31. 
 
¶11. (SBU) Press reporting on this case has been negative towards the 
Chinese locomotives, which are known to be underperforming in the 
Railways fleet.  Since Minister Bilour's decision to reverse the 
contract in GE's favor, a few press articles have started to focus 
on US Embassy pressure.  Meanwhile, the Chinese Ambassador is 
reportedly making the rounds discussing soft loans for new railway 
coaches and wagons.  The chief representative in Pakistan for Dalian 
Dong Fang is also calling on officials and complaining about U.S. 
pressure, while making some questionable statements about the 
performance of his product. 
 
- - - - 
COMMENT 
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¶12. (SBU) Pakistan cannot afford to postpone the procurement of new 
locomotives since the locomotives are sorely needed and delivery 
times take more than a year.  The politically expedient decision 
would be to split the procurement and give GE the award for the more 
valuable locomotives that Dalian Dong Fang could not produce to 
specifications.  A decision, however, was reached at a bidders' 
conference early in the process not to split the procurement, and 
this option is still somewhat problematic. 
 
ISLAMABAD 00003807  003 OF 003 
 
 
A large tender like this one goes a long way to defining the 
reputation of a government for running transparent or opaque 
tenders.  If the GE/Marubeni offer succeeds, this will send a 
positive signal to US business that rules will be followed in 
Pakistani public tendering procedures.  If the Chinese bid is 
successful, US firms will find it harder to justify competing in a 
market where Chinese manufacturers apply predatory pricing and soft 
loan tactics.  Post will continue to engage in advocacy for this 
important commercial issue. End Comment. 
 
PATTERSON