Swiss Challenge Model For Private Participation

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What is it?

• A ‘Swiss Challenge’ is a way to award a project to a private player on an unsolicited proposal. Such projects may not be in the bouquet of projects planned by the state or a state-owned agency, but are considered given the gaps in physical or social infrastructure that they propose to fill, and the innovation and enterprise that private players bring. 
• The government may enter into direct negotiations with a private player who submits a proposal and, if they cannot agree on the terms of the project, consider calling for bids from other interested players. 
• In one variant of the Challenge, the government awards bonus points to the project’s ideator; in another, it calls for comparative bids, but gives the first right of refusal to the original player. All this is generally disclosed upfront. 

Is this idea new to India? 

• No. At least half-a-dozen states have used the Swiss Challenge to award projects in sectors including IT, ports, power and health. 
• Done in Gujarat, Andhra Pradesh, Punjab, Rajasthan and Madhya Pradesh
• At the central level, the Draft Public Private Partnership Rules, 2011, allow the Swiss Challenge only in exceptional circumstances — that too in projects that provide facilities to predominantly rural areas or to BPL populations. 

Why is it being discussed now? 

• Last week, the Cabinet cleared a proposal to redevelop about 400 railway stations through ‘open invitation’ from interested parties. The parties will present designs and business ideas for commercial exploitation of Railways real estate — land and air space. 
• Stations are redeveloped by Indian Stations Development Corporation Ltd, a SPV set up as a joint venture between IRCON (51%) and Rail Land Development Authority (49%). 
• But given its inability to develop all stations, the SPV proposes to accept business ideas from private players. 
• This will quicken the process of awarding the projects and building the roads. 

What are the advantages? 

• South Africa, Chile, Korea, Indonesia, the Philippines and Taiwan have seriously considered, awarded and implemented unsolicited projects. 
• The obvious advantages are that it cuts red tape and shortens timelines, and promotes enterprise by rewarding the private sector for its ideas. The private sector brings innovation, technology and uniqueness to a project, and an element of competition can be introduced by modifying the Challenge. 

And what are the problems? 

• The biggest concerns are the lack of transparency and competition while dealing with unsolicited proposals. 
• Governments need to have a strong legal and regulatory framework to award projects under the Swiss Challenge method. 
• It can potentially foster crony capitalism, and allow companies space to employ dubious means to bag projects. Given that governments sometimes lack an understanding of risks involved in a project, direct negotiations with private players can be fraught with downsides. 
• In general, competitive bidding is the best method to get the most value on public-private partnership projects. The government might also end up granting significant concessions in the nature of viability gap funding, commercial exploitation of real estate, etc., without necessarily deriving durable and long-term social or economic benefits. 

Is the Swiss Challenge suited to India? 

• The jury is still out on the success of PPP in infra projects. There have been several controversies around largescale PPP projects. 
• Construction costs jumped significantly in the case of the Mumbai Metro, and then Chief Minister Prithviraj Chavan did some loud thinking on whether the government should take over the company promoted by Anil Ambani after it sought a threefold increase in fares just before commencement last year. There were serious issues related to the international airport and the Airport Metro line in Delhi. The government has now brought PPP projects under the ambit of the CAG, so there is some scrutiny of projects where significant concessions including land at subsidised rates, real estate space, viability gap funding, etc. are granted by the government. 
• But there is still no strong legal framework at the national level, and such projects may be challenged in case of a lack of transparency or poor disclosures. 
• Bureaucrats, who ultimately sign off on such projects, continue to be afraid to take calls that might face an investigation later. In the absence of transparency, and a strong element of competition, such projects may be prone to legal challenges. Smaller projects are better off in this respect.

For more understanding you may see this video:

Reference: The Indian Express