Swiss Challenge and public-private-partnership contracts – Applicability and challenges under Indian laws

Public-private-partnership (PPP) has been a major factor in bridging the gap between demand and supply of infrastructure. Typically, this has entailed the public procurement of PPP projects through competitive bidding and the implementation of PPP projects under various models such as design-build-operate-transfer (DBOT), build-operate-transfer (BOT), build-own-operate-transfer (BOOT) and build-own-operate (BOO). A key feature of these models is the inclusion of appropriate risk allocation between the Government of India and its associated entities (Government) and private entities.

Traditionally in public procurement, the Government conceptualizes the project and determines the characteristics of the implementation model. However, in certain cases, the Government may not have the requisite expertise to do so. This is where the “Swiss Challenge Method” (SCM) for public procurement becomes relevant.

Under the SCM, private sector entities make an “unsolicited” proposal to the Government for a project which has not yet been contemplated by the Government, in circumstances where such private sector entities typically have prior experience or expertise. Technology and innovation are increasingly revolutionising and providing solutions for the growth and sustainability of the infrastructure sector. Public procurement through the SCM may be the means through which technology and innovation can more easily and quickly deliver new infrastructure.  

The SCM model of procurement has been adopted across countries including Chile, Costa Rica, Indonesia, Korea, Philippines, South Africa and Sri Lanka, as well as in various Indian States such as Andhra Pradesh, Rajasthan, Madhya Pradesh, Chhattisgarh, Gujarat, Uttaranchal and Punjab.

 

The Legal Status of the SCM in India

The Central Vigilance Commission (CVC), inter alia, provides guidelines for transparent and competitive procedures for the procurement of PPP projects. Whilst the SCM is not recognised or regulated under any specific central Government legislation or guideline, various guidelines and instructions, which provide the framework for the SCM, have been issued at the State level including:

• the Andhra Pradesh Infrastructure Development Enabling Act 2001;
• the Madhya Pradesh Infrastructure Development (Swiss Challenge) Guidelines 2014;
• the Guidelines for Project Execution/Public Procurement of Development Works under Swiss Challenge Method 2016 issued by the Government of Haryana; and
• the Guidelines for Procurement of PPP Projects through Swiss Challenge Proposals Route issued by the Government of Karnataka in 2010, along with PPP Policy for Infrastructure Projects in 2018.

The above State guidelines set out similar comprehensive procedures for bidding through the SCM which include:

• submission of a proposal by the project proponent to the authority;
• detailed examination by the authority;
• if accepted by the authority, submission of a detailed proposal by the project proponent along with suggested bid parameters as well as bid value;
• further examination by the authority; and
• release to call for competitive bids.

Notably, the above guidelines provide a “right of first refusal” to the original proposal such that if the competitive bidding process results in a superior financial offer from other interested bidders, then the project proponent will be given an opportunity to match the competing counter proposal.

Pursuant to State-level policies on the SCM, several infrastructure projects have been developed, or have been proposed to be developed, through the SCM in India. Some examples include:

• redevelopment of 400 railway stations by the Indian Railway;¹
• tender for a greenfield commercial port project in Kona Village, Andhra Pradesh in 2016;²
• proposal for development of an Industrial Model Township at Sohna Haryana;³
• proposal by Ravi Developers to Maharashtra Housing and Area Development Authority to develop certain plots of land in the Mira Road area in Maharashtra, the world’s first hyperloop between Pune and Mumbai approved by the Maharashtra Infrastructure Development Enabling Authority (Mumbai-Pune Hyperloop Project).

 

Applicability of the SCM in India

The SCM, as a concept, is not new to India and has been accepted by many States as a viable procurement method. The Supreme Court of India (Supreme Court) in its judgment, Ravi Development v. Shree Krishna Prathisthan and Others AIR 2009 SC 2519, recognised the SCM as an effective approach towards encouraging PPP whilst also stating that rules and regulations need to be followed thoroughly in the context of using this new procurement method so as to avoid any unfairness, arbitrariness or ambiguity. The Supreme Court suggested that State governments frame rules and regulations considering various factors including the nature of SCM and the projects where it was being applied, the form of the approach to relevant authorities, the time limits for approval of the project and bidding, equal and sufficient opportunity, and healthy competition among the interested participants.

While the SCM has been analysed in the PPP context in the above judgement, it is worth noting that, even outside of PPP, the SCM has been recognised by other Government entities such as the Reserve Bank of India (RBI). The RBI through its 2016 notification⁴ allowed banks to put in place board-approved policies on the SCM for implementing the sale of distressed assets by banks and for lowering the quantity of non-performing assets sold by banks. These policies set-out broad contours of SCM. The use of the SCM by the RBI denotes wide acceptability of the SCM as a procurement model in India.

 

Challenges / Criticisms of the SCM in India

Whilst the SCM has received recognition and acceptance not only from the Supreme Court but also various States (with specific legislation governing the SCM in such States), the model has also received a fair share of criticism. The key criticisms that arise out of the Government giving the green light to proposals under the SCM without using a traditional competitive bid process (as with all other PPPs) are (i) the lack of transparency and competition, and (ii) allegations in respect of collusion between the Government and the private party.  

The SCM has also been criticised by various Government agencies. In 2015, the “Committee on Revisiting and Revitalising Public Private Partnership Model of Infrastructure” (chaired by Dr. Vijay Kelkar) actively discouraged adoption of the “Swiss Challenge” model on account of its tendency to cause information asymmetries in procurement processes and a lack of transparency in the fair and equal treatment of potential bidders in the procurement process.⁵

More recently, in 2021, the CVC highlighted several issues surrounding the SCM in its Vigilance Manual⁶, including:

• consideration of an unsolicited offer from an original private proposer, if it has not been so invited;
• having adequate appreciation of the original proposal vis-à-vis actual requirements or public needs of the project;
• the scheme of receiving an unsolicited proposal from one private party may result in information asymmetries in the procurement process and absence of equal opportunities to all other parties making matching or better proposals, leading, in turn, to a lack of transparency, fair and equal treatment of other potential proposers in the procurement process;
• setting a reasonable time limit for completion of an efficient bidding phase;
• dealing with counter proposals from other parties, especially when they offer specifications very much different from those included in the original proposal;
• looking into reasonableness of the proposals ensuring that all of the risks involved are duly taken care of, and no undue benefit is extended to any of the proposers; and
• suitable compensation to the original proposer, if any, for their original concept or intellectual property.

Accordingly, the CVC, keeping in view all of the issues associated with the use of the SCM, has recommended that a strong legal and regulatory framework to award projects under the SCM needs to be in place, before this method of procurement is more widely adopted.

 

Conclusions and Way Forward

While the SCM is not devoid of potential issues and challenges, it is an effective model for ensuring time and cost efficiency in the procurement of projects, thereby benefitting the Government as well as the public at large.

The SCM is particularly useful for realising the vast opportunities for infrastructure development in a developing country like India, for which the Government may not have the expertise or resources to identify and implement that development. The SCM provides the necessary impetus for advancement of the infrastructure sector by allowing private sector parties to identify new and unique opportunities based on innovative technology and methodologies, such as the Mumbai-Pune Hyperloop Project.

Given the Indian Government’s push towards privatisation, with infrastructure and investment being a top priority under the Union Budget 2023-2024, the Government needs to enhance opportunities for private investment in infrastructure. In this context, the SCM as a procurement model, will provide the incentive to private parties to come forward and contribute to India’s infrastructure growth through the delivery of innovative solutions and technologically advanced projects.

Shivanshu Thaplyal (Partner), Tavishi Srivastava (Senior Associate) and Meher Bhatia (Associate), Khaitan & Co. The views expressed in this article are personal.

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¹400 Indian Railways stations to be redeveloped using ‘Swiss Challenge’ method: Arun Jaitley, (6 July 2015); available here.
²AP takes the Swiss Challenge route to auction greenfield port project, (9 January 2018); available here.
³CFLD submits JV proposal to develop industrial township at Sohna, (18 November 2016); available here.
⁴Guidelines on Sale of Stressed Assets by Banks, 2016 available here.
⁵Report of the Committee on revisiting and revitalising Public-Private partnership model of infrastructure, 2015 available here.
⁶Vigilance Manual, 2021 available here.