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A Swiss business model to push India's infra growth

By Vinayak Chatterjee
Last updated on: December 08, 2015 10:03 IST

The Swiss business model revolves around a private sector enterprise identifying a project it is interested in developing, then investing, operating and approaching the government with a proposal to be allowed to do so, says Vinayak Chatterjee.

Swiss franc coins are seen in a cash drawer in this picture illustration in Bern. Photograph: Thomas Hodel/ Reuters

No, this Swiss Challenge is not about stashed wealth or numbered accounts or even Maggi noodles.

It is one of the lesser known and even lesser-used methods of public procurement for core and social infrastructure projects.

Governments use a variety of public procurement methods. Over time, many variants have got added to the much vilified LCM (least cost method), and QCBS (quality and cost-based selection) options.

Recent creative additions in India include viability gap, reverse e-auctions, and hybrid annuity.

However, all these methods share one characteristic: government officials have to pre-design the project.

Such a project development requires a huge amount of intellectual capacity and bandwidth.

It also presupposes that the generalist IAS officer along with his other service counterparts has the depth of knowledge across a bewilderingly wide set of investments from super-critical power plants to low-cost housing.

In fact, the extent of the bandwidth required can be staggering.

The economy today requires around Rs 5 lakh crore or Rs 5 trillion in investments per annum by the private sector in core and social infrastructure projects.

If each project is assumed to take two years from conception to finding a private investor, then a Rs 10-lakh crore or Rs 10 trillion project development pipeline is needed at any time.

If each project is assumed to cost Rs 1,000 crore, then 1,000 projects need to be "cooked" by bureaucrats at any point of time, and readied for bidding.

And this does not take into account an equal number of public sector projects. This is where the Swiss Challenge comes in as an effective "mitigant".

The Swiss Challenge revolves around a private sector enterprise identifying a project it is interested in developing, then investing, operating and approaching the government with a proposal to be allowed to do so.

No one is quite sure where the label Swiss Challenge originated from.

It is conjectured that as "neutrality" was a pivot of Swiss national policy across World Wars I and II, this trait was meant to be communicated as a lack of bias between a project proponent and the challengers. Faced with an unsolicited proposal, the government can handle it in two ways: One, the government can either purchase the intellectual property rights for a project concept from the proponent and then award the project through a competitive bidding process in which no bidder has a pre-defined advantage.

Two, the government can offer the original proponent special rewards or advantages like "right of first refusal". Here the original proponent is allowed to match the higher bid of a challenger, yet still allow a truly competitive process to unfold.

Easier said than done though. In option one, the private sector has doubtful motivation in spending intellect, time and money on developing a project with an unclear profit path.

In the second option, there are fears of "gaming" the system through a variety of semi-legitimate ways to provide an unfair advantage to the original proponent.

But such abuses exist even in more conventional systems.

In the Indian context, the Supreme Court has upheld the validity of the Swiss Challenge as a legitimate method of public procurement subject to a series of process safeguards that the lordships have carefully laid out.

State governments such as Andhra Pradesh, Rajasthan, Karnataka, Madhya Pradesh, Chhattisgarh, Gujarat, Maharashtra, Punjab and Bihar have allowed this method to be used for public- private partnership (PPP) bids and have enshrined it in their respective state Infrastructure Development Acts.

The erstwhile Planning Commission had, however, advised state governments to adopt the Swiss Challenge route as an exception rather than a rule.

The Central Vigilance Commission still frowns on the method as it is suspicious of the potential for mischief. Attempted with varying degrees of success in South Korea, Philippines, Chile, Argentina, Indonesia, South Africa, Sri Lanka and Taiwan, real efforts in this direction in India have been few and far between.

Indian Railways, with Cabinet sanction, has correctly chosen the Swiss Challenge for getting on speedily with the redevelopment of 400 stations.

The Maharashtra Housing and Area Development Authority had used this for a housing project in Thane.

The Ministry of Road Transport and Highways is examining this route for some access-controlled expressways.

The Jaipur Development Authority is also reported to have announced the Mega Film City venture in this format.

How can the universal Swiss Challenge method be more effectively used in India? One, it should be avoided in highly commoditised bids like electricity generation or highly regulated sectors such as telecom.

It is best suited for sectors where creativity and design and innovation are key determinants to project success, for example social infrastructure sectors such as real estate, leisure and entertainment, technical education and tertiary health care.

Two, it is advisable for all "concessioning" entities to first enshrine its use in the PPP policy and then clear the specific process with the relevant vigilance commission, including enlisting their observers during the process.

Three, ensure that 100 per cent of the project details (other than proprietary information) submitted by the proponent are made available to all qualified bidders and confirm that there are no hidden advantages that accrue.

Four, on all elements of service delivery and key configuration aspects, upper and lower bounds have to be specified so that at the stage of comparison of competitive bids, one does not fall into an apples-versus-oranges trap. With all these pitfalls taken care of, this then becomes the Indian challenge.

Vinayak Chatterjee is chairman, Feedback Infra.

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