Talks lose steam on train purchase contract

  • 2012-10-03
  • From wire reports

RIGA - Spanish company Construcciones y Auxiliares de Ferrocariles S.A. (CAF) informed Latvian passenger rail service company Pasazieru vilciens on Sept. 27 that it would send a full letter regarding the amendments to a new train procurement contract on Oct. 3, Pasazieru vilciens board member Aigars Stokenbergs said to Pasazieru vilciens responded by reminding CAF that the two companies had to reach agreement on opportunities for amending the contract by Oct. 2 - as they had previously agreed.

Stokenbergs said he hoped that CAF would present its opinion by the deadline. He also said that if CAF did not respond by Oct. 2, when the current contract expires, both parties’ obligations under the contract would also not be binding anymore.
On Sept. 27, Pasazieru vilciens submitted a letter to CAF, where five amendments to the train procurement contract were specified.

On the same day, CAF announced that it is not prepared to sign a new train procurement contract, as proposed by the Latvian side. Instead, the Spanish company offered to amend the existing contract, signed on April 2. Company representatives said at a meeting of Saeima Economic, Agricultural, Environmental and Regional Policy Committee on Sept. 28 that they were prepared to discuss amendments to the contract. However, the Latvian side has proposed that the Spanish company first sign a new contract, and then discuss the details.

CAF representatives said that signing a new contract is impossible because it will change the legal relations between the contractual parties. The total cost of the new 34 electric trains and seven diesel trains that Pasazieru vilciens wishes to buy is 144 million lats (205.7 million euros), of which 100 million lats will be covered with funds from the Commission’s Cohesion Fund, whereas Pasazieru vilciens co-financing will be 44 million lats. Together with the train maintenance cost, the contract amount may reach 610.7 million euros, and the new trains must be manufactured by August 2015.

Stokenbergs claims that the Spanish company has not only refused to sign a new train procurement contract, but has shown little interest in implementing the necessary amendments in the original contract that meet the requirements of the European Commission.
The European Commission previously warned Latvia that if the contract was not altered, Latvia might itself have to cover the European Union Cohesion Fund co-funding.

Stokenbergs emphasized that PV submitted to CAF the new version of the train procurement contract last June, and was waiting for an answer. He added that CAF “can say what they want,” but they have not been prepared to carry out these five important amendments required by the European Commission to the original contract.
Stokenbergs also said that PV was prepared to declare a new tender after Oct. 2, and there will certainly be companies submitting their bids for it. At the same time, he added that it would be better to come to terms with CAF.
CAF representatives also said that, although this was not provided for in the contract, it could move part of the new train production to Latvia, as well as issue the Rigas Vagonbuves rupnica railcar factory a license for the manufacture of trains for CIS countries.

The Spanish firm says it has been working on the implementation of the contract since it was signed on April 2. The company has observed all the conditions of the contract and has established a subsidiary, CAF Latvia, as well as signed an agreement with a bank so it could make investments in Latvia, the company’s representatives said. CAF representatives said that their goal was to make trains, not to file lawsuits, but added that the company will protect its interests in every possible way if the contract is terminated.

CAF asserts that it does not understand why reaching agreement is taking so long, because the contract is in Latvia’s interest and will contribute to the development of production in the country. CAF also said that it invests only in developed and stable economies, and Latvia has such an economy.

If no agreement is reached with CAF, the state may be involved in risky litigation and, in a worst case scenario, lose up to hundreds of millions of euros, business daily Dienas Bizness reported on Sept. 19.
Pasazieru vilciens board member Artis Birkmanis said in a roundtable discussion organized by Dienas Bizness that the amendments proposed by Pasazieru vilciens would ensure that Latvia did not lose EU co-financing. If CAF does not accept the amendments, a new tender will be announced.

While CAF is not commenting on its plans in case the parties fail to reach agreement, if the contract is denounced or otherwise not implemented, CAF may file a lawsuit, it says.
Lawyers believe CAF has two options - demand that the losses be compensated by Pasazieru vilciens, a company that fully belongs to the State of Latvia, or by the State of Latvia itself. Since the contract has not been made public, it is also unknown who would review such a lawsuit, a court in Latvia or Spain, or an arbitration court.
Dienas Bizness says that the Spanish company’s lawsuit may claim up to 200 million euros - 30 percent of the contract amount.

A partner at the law firm Sorainen, Agris Repss, emphasizes that if a court rules in favor of CAF, it will be taxpayers who will pay the compensation in the end. Lawyers also note that if the case is reviewed by a court of arbitration, the litigation may take three to five years.
Agreement was not reached at the Oct. 2 meeting between PV and CAF.