Public-private partnership: The Swiss Challenge conundrum

At a time when the Union government had to reinvent its highway contracts to get public-private partnership (PPP) come out of slumber, states are increasingly adopting the Swiss Challenge mode for auctioning infrastructure projects. Andhra Pradesh adopted this model for building its capital city of Amravati, while other states like Karnataka, Rajasthan, Madhya Pradesh, Bihar, Haryana, Punjab and Gujarat have taken it up for projects in road and housing sectors on a smaller scale.

Though the Supreme Court approved this method for the award of contracts in 2009, it was still open to legal challenge and, therefore, states like Andhra Pradesh, and now Maharashtra, have brought in regulations to watertight any opposition to this method. Under this method, bidders identify and propose a contract area for taking up construction. Once that is done, other players are asked to put in bids for the same area. The initial proposer is given the option to match the most eligible bid.

According to Abhimanyu Ghosh, associate partner, Khaitan & Co, the draft PPP rules, introduced by the Department of Economic Affairs, Ministry of Finance, in 2011, had sought to introduce the concept of “unsolicited bids”, albeit in exceptional circumstances. “It is likely that because these rules were not formalised, the government has not sought to come up with Swiss Challenge rules, thereafter,” he says.

How it plays out

What is the Swiss Challenge method?

Any qualified entity can submit a project proposal to the government. That proposal is made available to all, and the others can give suggestions to improve and outbid the initiator. In case the original proposer is not able to match the more attractive and competing counter proposal, the project will be awarded to the counter-proposer.

Is it new in India?

The Swiss Challenge method has been used in Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab, Haryana and Gujarat for roads and hous­i­ng projects. In 2009, the Supreme Court approved of the method for the award of contracts.

How different is it from other forms of bidding?

It can be used for projects that are taken up on a PPP basis but can also be used for sectors that are not covered under the PPP framework.

In fact, the report of the Committee on Revisiting & Revitalising the PPP model of Infrastructure Development, chaired by Vijay Kelkar, in December 2015 concluded that unsolicited Swiss Challenge proposals should be actively discouraged as these bring information asymmetries into the procurement process. 

Ghosh, however, points out that the NITI Aayog in October 2017 invited comments in relation to the draft model PPP guidelines in integrated micro-irrigation in India under a modified Swiss Challenge method. “A central Swiss Challenge Policy (either as an independent policy) or based on CVC’s procurement guidelines could be beneficial for infrastructure projects,” he adds.

The Centre’s Open Acreage Licensing Policy for oil and gas exploration is akin Swiss Challenge, since operators carve out areas and submit expressions of interest. Bids are later invited for these areas. But, the initial proposer does not get the right of first refusal.

Ghosh agrees that bids under this method can be legally challenged. “Swiss Challenge bids may be more prone to challenges because of information asymmetry. These can be mitigated by robust law and guidelines,” he says.

Vishwas Udgirkar, partner, Deloitte Touche Tohmatsu India, says there is no PPP Act but normal procurement and bidding are conducted without much issue. In the Swiss Challenge method, too, there is qualification and the final award is decided on basis of price bid. 

In the initial days of PPP, governments used to implement projects through the memorandum of understanding route, which was widely criticised, and auctioning was adopted for transparency. “Swiss Challenge removes this disadvantage and gives an opportunity to others after a proposal is made,” says Udgirkar.

Since the project reports and studies are already conducted and the government agency merely has to vet the correctness of the project reports, it makes the process cheaper for the government.

Jayant D Mhaiskar, chairman and managing director, MEP Infrastructure, says such method of giving projects should be used only when an innovative project or technology is being proposed. “It is not the right way of giving out road projects since there is enough number of players in the sector,” says Mhaiskar.

Each state policy has a list of “eligible sectors” for which the method can be used. States are also at liberty to bring under the Swiss Challenge policy any project that the government may find beneficial or which is innovative, Ghosh points out. But, caution will be required in making a choice of projects.