What is Swiss Challenge Method

400 Railway Stations to be Redeveloped using ‘Swiss Challenge Method’

New Delhi: Union Finance Minister Arun Jaitley on Thursday said the Cabinet Committee on Economic Affairs (CCEA) has approved the redevelopment of 400 railway stations, and added that they would be redone using the Swiss Challenge method. “The Cabinet has approved the redevelopment of railway stations. 400 railway stations to be redeveloped using the Swiss Challenge method. The Cabinet has also decided that 400 railway stations will be redeveloped across the nation,” Jaitley told media here. The stations will be offered for development by leveraging real estate development of land and air space in and around stations. The redevelopment is on “as is where is” through open invitation from interested parties with their design and ideas.

What is Swiss Challenge Method

A Swiss challenge is a form of public procurement in some (usually lesser developed) jurisdictions which requires a public authority (usually an agency of government) which has received an unsolicited bid for a public project (such as a port, road or railway) or services to be provided to government, to publish the bid and invite third parties to match or exceed it.  Some Swiss challenges also allow the entity which submitted the unsolicited bid itself then to match or better the best bid which comes out of the Swiss challenge process. It is a form of regulating public procurement. An example of this is the recently announced Mega Film City Venture by the Jaipur Development Authority (JDA) in which JDA is planning to fund the venture using Swiss Challenge Philosophy.

Swiss Challenge System

As the name itself suggests 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.

There are two different patterns. It’s up to the government to decide which one to adopt. The two main ways are:

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.

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 counter proposals. 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 counter proposals 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 counter proposal. Many potential challengers may be unwilling to compete without sufficient time to prepare.

Problems

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. The challenger was eventually awarded the concession.