Swiss Challenge model

IN NEWS:

• Frequently in news related to the resolution of non-performing assets.

SWISS CHALLENGE MODEL (SCM):

• Traditionally, the bidding process for a project involves the government identifying the project and seeking bids from private sector who will ultimately undertake the project.
• However, the SCM is a private sector-initiated procurement method. It is a reverse auction, where sellers bid.
  • It begins when a developer makes an unsolicited proposal to a government for the development and/or maintenance of a project.
  • This proposal becomes the base price for bidders, including the H1 bidder, to place counter-bids in the second round of bidding.
  • If no other bidder is able to better the H1 bid, the top bidder in the first round is declared the successful bidder.
  • If a better bid is place, the first bidder is given a right to match this. If they do so, the project goes to them.
  • If the first bidder refuses to match, the project will go to the highest bidder in the second round.

 SCM IN INDIA:

• The Ravi Development vs Shree Krishna Prathistan & Others case cements the Indian legal position on the subject. Here, the Supreme Court upheld the Swiss Challenge method for awarding public projects. It also made certain suggestions for ensuring smooth implementation of a Swiss Challenge project in the future, such as:
  • The nature of the Swiss Challenge method, nature of projects and its particulars should be published in advance by the relevant authority.
  • There must be a clear notification of the authority which is to be approached with project plans to make a Swiss Challenge project proposal.
  • The relevant authority must set clear rules regarding timelines for the approval of a project and the relevant bidding process.  
  • Ample opportunity must be provided for a participatory and adequately competitive bidding process.
• SCM is considered a viable mode of public procurement and has been used with varying levels of success in several Indian states such as Andhra Pradesh, Rajasthan, Karnataka, Madhya Pradesh, Chhattisgarh, Gujarat, Maharashtra, Punjab and Bihar. For example:
  • Jaipur Development Authority had used the SCM to develop Mega Film City Venture.
  • Indian Railways had employed the SCM to redevelop 400 stations
  • Maharashtra Housing and Area Development Authority had used SCM for a housing project in Thane.
  • The Gujarat Maritime Board in Jafrabad was able to construct a low-cost Liquefied Natural Gas terminal with a floating storage and re-gasification unit by employing the SCM.
  • The Reserve Bank of India in September 2016 had approved the use of SCM for the sale of stressed assets by banks.

ADVANTAGES OF THE SWISS CHALLENGE MODEL:

• Meet unidentified needs: SCM allows governments to spot unidentified infrastructural needs and pool innovative solutions to address the society’s needs.
• Promote innovative solutions: The private sector generally encourages induction of new technology and unique solutions which could result in value addition of the project. Many of these private sector-led technological developments tend to have the potential to address large scale public infrastructure needs.
• Foster Public-Private collaboration: SCM acts as a bridge between the government and the private sector, hence enabling both parties to collaborate and experiment with new technologies.
• Prevent predatory purchasing/acquisitions: In case of NPA resolution, SCM was proposed as an effort to curb the crab mentality among litigious bidders to acquire stressed assets under the Insolvency and Bankruptcy Code (IBC). This in turn helps in quicker resolution of debts and enhances ease of doing business in India.
• Efficient public resource utilisation: The challenge bid offers a chance to attain a better price for the services. Also, compared to other investment models, SCM incurs les transaction cost for the government. Together, it can result in better utilisation of public finance and thus foster good governance.
• Efficient project development: The identification of feasibility, financial analysis timelines, risks and their allocation along with transparent bidding criteria is easier for the government because they are done in more professional manner by the proponent.
• Shorter lead time: There is savings in time and cost in respect of pre project activities and feasibility studies as, unlike other models like PPP, they are carried out by the proponent rather than by the authority.
• Better success rates: Under this methodology, certainty of success is ensured as at least one willing private partner is available right from the beginning.

CHALLENGES OF THE SWISS CHALLENGE MODEL:

• Opaque and biased process: The biggest concerns are the lack of transparency and competition while dealing with unsolicited proposals. The same was identified by the Central Vigilance Commission (CVC) in 2015.
• Information asymmetry: The original project proponents has a time and information advantage over challenging proponents. They have no time-based restrictions to create an ideal project proposal. This eliminates chances of a fair and competitive bidding. The same was identified by the committee to review and revitalise the PPP mode of infrastructure development headed by Vijay Kelkar.
• Prone to favouritism: By allowing a bidder to initiate an idea and giving him the first right of refusal, the Swiss Challenge can promote favouritism in the award of public projects, opening the doors to corruption and crony capitalism.
• Lack of legal backing: India does not have a strong and effective legal and regulatory regime yet to deal with the challenges posed by the Swiss Challenge method. Hence, the legal validity of the SCM may be challenged. Also, bureaucrats, who ultimately sign off on such projects, continue to be afraid to take calls that might face an investigation later.
• Involves arbitrariness: The process can be highly arbitrary. Eg: In cases where counter proposals contain different specifications compared to the specification of the original proposal.
• Limited technical capability of government: Given that governments sometimes lack an understanding of risks involved in a project, direct negotiations with private players can be fraught with downsides.

WAY FORWARD:

Many governments have now started to experiment with the SCM owing to its benefits and hence it is likely that SCM may become mainstream in procuring projects in the future.

• Formulate guidelines: As observed by the Supreme Court in the Ravi Development case, it is imperative for governments to formulating standards and guidelines for implementation of SCM to ensure that SCM is adopted in a fair and transparent manner. These guidelines should incorporate the guidelines suggested by the Supreme Court of India.
• Ensure transparency: The whole process must be open to the public. This can be attained through an open list of public projects, full public disclosure of bid details etc. It can help reduce ambiguities and boost its acceptance.
• Adopt for smaller projects: As recommended by the CVC, this method may not be adopted for large scale projects but can be used for smaller projects.

PRACTICE QUESTION:

Q. ‘The Swiss Challenge method should be followed as an exception rather than a rule’. Discuss?