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Swiss Challenge System: A Competitive Solution for Private Infrastructural Proposals

Written by: Roopam Verma - Student
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According to the India Infrastructure Report (IIR), in 2002-03 there was 5.5 percent of the GDP invested in the infrastructure sector and was targeted to reach 8 per cent by 2005-06. If we want to continue on the path of development, government has to find innovative ways by adopting modern equipment-based technology to ensure expeditious growth of infrastructure. One of the key problems in the commercialization of infrastructure is allocation or risks. The successful design of a project involves correct demarcation and allocation or risks. The task of finding such large amounts and thereafter deploying them productively calls for a close partnership between the public and private sectors. The public as well as private sector is trying to come up with all kind
of innovative ideas, one of which is the Swiss challenge system. The system has been successfully experimented in various countries and is now being used in India. The aim of this article is to analyze the working of Swiss challenge system, its functioning and its impact along with some inherent loopholes on countries including India.

Need of Private Participation
We're building three major airports in Bangalore, Hyderabad and Calicut. Also, power plants, transmission systems, roads, bridges, ports, and steel plants. What we need in present scenario is private participation in public projects. The public sector has to change its role from sole to co-producer of infrastructure services along with the private sector. However, given the all-pervasive influence of power, transport, and telecommunication, the government has to take the lead in providing a transparent regulatory framework to ensure a fair deal for consumers, and a level playing field for all private parties.

If a government actively pursues private participation in infrastructure, the private sector is likely to come forward with innovative ideas (including labour and risk management techniques). Some times governments invite cost effective proposals else even private players on their own approach government. These are called Unsolicited proposals and are written proposals submitted on the initiative of the submitter for the purpose of obtaining an award with the Government and are not in response to a formal or informal request. Although, Governments are under no obligation to accept unsolicited proposals, but economic and political conditions compel them to consider them.

The share of such unsolicited proposals is significant in many other countries, and policymakers have begun to recognize the need of formal system to regulate these proposals. Governments could use several approaches to handle unsolicited proposals. One option is simply to adopt a law prohibiting unsolicited projects. A second option is for governments to purchase the project concept and then award the project through a competitive bidding process in which no bidder has a predefined advantage. A third option the one adopted in such countries as Chile, the Republic of Korea, the Philippines, and South Africa is to offer the original proponent a predefined advantage in a competitive bidding process. Under this third option the concept of Swiss challenge system has been developed. In the past 20 years the Philippine government has received many unsolicited project proposals. Several other governments now use modified versions of the Swiss challenge system, including those of South Africa, Guam, and the India.

Swiss Challenge System

As the name itself suggest Swiss Challenge System is a new bidding process to help private sector initiative in core sector projects. It's an offer made by the original proponent to the government ensuring his process to be best (in terms of effectiveness including both the factors cost and time) by his initiative as a result of his own innovative approach or on the demand of the government to perform certain task. The Swiss challenge system, like the bonus system, further allows third parties to make better offers (challenges) for a project during a designated period with simple objective to discourage frivolous project, or to avoid exaggerated project development costs. Then accordingly, the original proponent gets the right to counter-match any superior offers given by the third party.

Working of Swiss Challenge System

The system basically works on two different patterns, its upto the government to decide as to which one they want to adopt. The two main ways are as follows:
1. The government can either purchase the intellectual property rights for a project concept from the proponent or then award the project through a competitive bidding process in which no bidder has a predefined advantage.

2. The government can offer the original proponent an advantage in a competitive bidding process. In this case the government should create rewards that satisfy the original proponent while still allowing a truly competitive process.

However it has been observed that in both bonus and Swiss challenge systems it is not easy to find the right balance between incentives to propose beneficial projects and incentives for third parties to submit counterproposals. In Korea and the Philippines, however, very few projects have been successfully challenged. In Chile the probability of a successful challenge appears to be high, though experience is limited. In an effort to find the right balance, some countries (such as Argentina) have begun to explore hybrid systems combining elements of the bonus system and the Swiss challenge system. However, in some countries the proposer does have certain advantages. Unlike, the lowest bidder will not be given the work order for the project. Instead, the participant who floats the design and concept for the project will have the first right of refusal.

There are various attributes, which the government takes into account while dealing with the Swiss challenge system it includes:

1. Offering cost reimbursement

Some countries such as Chile and South Africa allow reimbursement of original project proponents for their project concept or project development costs. The advantage given to the original proponent in the bidding is usually intended to compensate for use of the project concept. In addition, the bidding documents sometimes specify reimbursement for project development costs by the winning bidder or the government. Other countries (such as Korea and the Philippines) allow no reimbursement of project development costs.
Advantage of offering cost reimbursement maintains private sector interest during the development phase of an infrastructure project, helps to ensure that the source of ideas is not limited to large investors with deep pockets, and encourages proponents to allocate the resources needed to ensure that projects are professionally developed.

2. Setting time limits

Government often sets time limits on the approval and bidding phases. Time constraints on counterproposals give an obvious competitive advantage to the original project proponent. The proponent has already spent much time and effort preparing the project and thus is much more familiar with its characteristics. By contrast, a challenger may have as little as 60 days in some countries (such as the Philippines) to prepare a counterproposal. Many potential challengers may be unwilling to compete without sufficient time to prepare.

Problem With System

The questions relating to legal validity of using the Swiss challenge system when a counterproposal contains different specifications than the original proposal was always being raised. The problem was being observed at the time of construction of International Passenger Terminal 3 in Manila's Ninoy Aquino International Airport, where several issues relating to validity of system were being raised. Although, the challenger was eventually awarded the concession but the project is still surrounded by many controversies.

Swiss Challenge System- Indian Perspective

In order to achieve and maintain the target rate of growth of 8% in the 10th Plan and 9.3% in the 11th Plan period, a revamping of the entire infrastructure sector is absolutely essential. Unless and until the infrastructure bottlenecks are removed, such a jump in the rate of growth will not be possible. The Indian government realized early on in the process of economic reforms that without involving the private sector, it would not be able to revamp the infrastructure sector. It neither has the financial resources, nor the technical/administrative resources to undertake such a mammoth task on its own. It has therefore, undertaken several initiatives since 1991 to open up the infrastructure sector, and to provide incentives to private parties. Likewise, other developing countries India has also adopted the Swiss challenge system to attract private capital investment for infrastructural development and redensification schemes. Under the Swiss challenge system, a project proposed by a private sector company will first be vetted by the state government and if the concept is approved, the project will be awarded through a competitive bidding process in which no bidder will have a predefined advantage, in the bidding process the government would give challengers an opportunity to make better offers (for an infrastructure project) than the original proponent and then the original proponent would be allowed to counter it.

States initiative
To harness private sector initiatives for the development of the states the system has been adopted by many states. Madhya Pradesh government has decided to adopt the "Swiss challenge system" in infrastructure creation. Under which initially only the projects relating to the state Public Works Department (PWD) will be within the ambit of the system. The Andhra Pradesh government is also going to adopt the Swiss Challenge method for selection of a developer for the Outer Ring Road (ORR) project of Hyderabad. Wherein, the criteria being kept as whichever company or consortium pitches for less land will emerge as the successful bidder. The Uttaranchal government has also decided to develop the Sitarganj industrial estate in the state with private sector participation on a Swiss Challenge Approach basis. Even the Indian giant Tata group is under going through negotiation with the Bangladesh government over three issues-gas pricing, power tariff and fiscal incentives. The government negotiators from Bangladesh are adopting the Swiss Challenge system under which they will try to lure away third parties to make better offers.

At last we can say that this system provides companies with considerable incentives to propose new ideas. If they are able to propose a sufficiently innovative idea there is likelihood that the company gets the contract. However, the system also allows other companies to submit a better proposal with in due proposed time and hence this system allows a competitive platform for every one. At the same time, it protects the government from making expensive mistakes if the idea is not specific to the originating company and other companies are able to provide the services at a lower price.

However, for a government awarding private infrastructure projects, the objective should be to maximize competition and transparency. But it is not easy to find the right balance between incentives to the proposed projects and incentives for third parties to submit counterproposals in the Swiss Challenge. But still we can say that this system allows a better substitute for unplanned offer which government usually make in haste. This system offers a vista of planned move towards infrastructural development where the effective party in terms of cost and time gets the offer to proceed. At the same time it does not deprive
other parties to have their say as government always throw the offer in public to invite the party who can perform the same task more effectively.

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