Swedha Prakash

I. Introduction

Large-scale infrastructure projects are becoming increasingly significant, driven by government efforts to boost the economy, such as the National Infrastructure Pipeline (“NIP”), which has allocated an ambitious ₹108 trillion for various projects. Public-Private Partnerships (“PPP”s) have played a crucial role in this commitment to building a strong foundation for sustainable growth by enhancing efficiency in such infrastructure projects. Among the various procurement models adopted under PPPs, the Swiss Challenge Method (“SCM”) has gained prominence in recent years, emerging as one of the most sought-after bidding methods in India’s evolving infrastructure landscape.

SCM is a bidding method which elicits private participation in public projects. Under SCM, a private sector participant — referred to as the original proponent — submits an unsolicited proposal to the government for an infrastructure project. A suo moto proposal is typically submitted when the private entity identifies the need for an infrastructure project. In some cases, the government may also identify areas requiring attention but may lack the necessary budget or technical expertise to execute the project. In such situations, private sector participation becomes crucial in bridging the gap and ensuring project implementation. However, such proposals must be innovative and unique, independently originated and developed by the original proponent without government involvement, supervision, endorsement, or direction. Once the proposal is accepted, it is open to the public for counter-bidding. However, a key feature of SCM is the right of first refusal granted to the original proponent, allowing them to match or improve upon the highest counter-bid. If the original proponent succeeds, the project is awarded to them. But if they fail, the project is awarded to the highest bidder whose bid is found to be most competitive. Through this article, the author critically examines the bidding method and its effectiveness in promoting true competition. Firstly, the article discusses the advantages of the method and its legal evolution within the Indian context. Secondly, it highlights the challenges that undermine the effectiveness of the method. The article concludes by proposing a way forward to address these issues and enhance the competitive framework.

II. SCM – A Catalyst for Infrastructure Project

SCM, which gained prominence after 2015, has been adopted in countries like Sri Lanka, Argentina, and South Africa, as well as in several Indian states, including Maharashtra, Andhra Pradesh, Karnataka, Haryana and Madhya Pradesh. SCM augments Public-Private Partnerships and promotes innovation in the field of public infrastructure projects. It not only reduces the project development costs but also discourages frivolous projects, as the detailed feasibility and financial analysis conducted by the original proponent results in better project structuring. The method ensures a higher probability of success by engaging at least one willing private partner from the beginning. Moreover, it reduces the burden on the government to the extent of identifying new projects, appointing consultants and inviting bids.

Despite its advantages, the legitimacy and fairness of using SCM in public procurement have been subjected to judicial scrutiny in numerous cases.

III. Judicial Scrutiny Of SCM: Case Law Analysis

  1. Shree Ostwal Builders Ltd vs State of Maharashtra marked the first instance where the Supreme Court (“SC”) addressed a legal question regarding SCM in India. The tender issued through SCM was quashed as the unsolicited proposal did not contain any innovative development plan but it merely quantified the balance potential available on the government lands. The court concluded that the procurement process lacked transparency and that the preferential treatment given to the original proponent — merely because they approached the Chief Minister with a plan — was unjustified and violated the principles of fairness and equality.
  2. The legitimacy of SCM was upheld in the landmark judgement of Ravi Development vs Shree Krishna Prathisthan & Others. The SC held that SCM was not violative of Article 14 of the Constitution of India and affirmed that it is a permissible method for awarding tenders. However, the Court urged State Governments to formulate guidelines to mitigate the potential drawbacks of the method.
  3. In Dr.Raju Mathew vs State Of Kerala, the main contention was that the modalities prescribed for adopting SCM, as evolved by the SC in Ravi Development, had not been followed and that an adverse clause had been incorporated in the tender for providing compensation to the original proponent. The Court, while dismissing the suit, concluded that the compensation clause was not a barrier to participation in the bidding process. However, the court overlooked the short timeframe given to the participant bidders and the preferential treatment extended to the original proponent, whose project details and the rationale behind the compensation were not disclosed in the tender documents.
  4. The Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, introduced Clause 56, which mandates that when the aggregate exposure (including investment exposure) of lenders to the borrower exceeds Rs. 100 crore, bilateral negotiations must be followed by an auction through SCM. Clause 85, which outlines the broad framework of SCM, was challenged in Reliance Asset Reconstruction Company vs Reserve Bank of India. The petitioners argued that SCM was discriminatory and unfair to the counter-bidder as it provided exclusive rights to the Anchor Bidder (original proponent). For instance, the right of first refusal, they contended, gave an unfair advantage of a near-veto to the Anchor Bidder. It was also pointed out that the Anchor Bidder need not even participate in the bidding process at all, rather, they only needed to express their willingness to match the highest bid, effectively tilting the auction in their favour. The petition remains pending in the High Court.

IV. Challenges And Controversies

While the SC has upheld the legitimacy of SCM, concerns over its fairness persist. In 2015, the Committee on Revisiting and Revitalising Public Private Partnership Model of Infrastructure, in its report to the Ministry of Finance, recommended that SCM be actively discouraged, citing concerns over “information asymmetries”  lack of “transparency” and the absence of “fair and equal treatment” of potential bidders in the bidding process.

Similarly, the Central Vigilance Commission (CVC), in its Vigilance Manual 2021, highlighted several concerns associated with SCM, including the need to establish a reasonable timeframe for completing the bidding process, determining appropriate compensation for the original proponent, and addressing counterproposals that significantly deviate from the original specifications.

One of the major criticisms of SCM is the lack of fair competition in the bidding process. Once an unsolicited proposal is approved, the original proponent is granted the right of first refusal or an opportunity to match the highest counter bid, which undermines the competitive nature of the procurement process. However, there is no provision allowing other bidders to raise their bids once the original proponent agrees to match the highest offer. Moreover, the original proponent is given 15 to 30 days to match the counter bid, which further tilts the playing field in their favor. This advantage significantly reduces the likelihood of participant bidders winning the contract, with their success rate often being very low. The time allotted for the original proponent to develop the project plan and the time given to participant bidders to submit their bids can also vary significantly, impacting the fairness of the process. Secondly, there are no fixed guidelines for the implementation of SCM in India. While countries like the Philippines, Sri Lanka, and Indonesia have uniform national policies regulating SCM, its adoption in India is primarily at the state level, with different states formulating their own guidelines, leading to inconsistencies in the procurement process. In Ravi Development, the SC had directed the appropriate authority to formulate guidelines for regulating SCM. However, only a few states, such as Madhya Pradesh, Maharashtra and Karnataka, have adhered to this recommendation. Even among these states, there is no uniform implementation of guidelines. For instance, Karnataka has a mechanism for continuous interface between the project proponent and the government or relevant department throughout the concession period. This ensures smooth project execution, periodic monitoring and resolution of operational challenges that may arise post-procurement. Karnataka also uniquely mandates a structured approach to addressing environmental and social risks in pre-feasibility and detailed project reports. The framework requires these risks to be explicitly identified and addressed, making Karnataka’s approach more robust in terms of sustainable development compared to other states, where environmental and social concerns may not be primary evaluation factors.

V. Conclusion

There is a pressing need to establish a system that not only rewards the original proponent for their innovative ideas but also ensures transparency and accountability throughout the process, eliminating concerns about unfair competition. With the country witnessing a significant rise in public infrastructure projects due to technological advancements, the need for a more robust method has become crucial.

Firstly, instead of offering the original proponent a competitive advantage in bidding, the government can ensure fair competition by buying the intellectual property rights for the proposal and then awarding it through a purely competitive bidding process, where no bidder has a predefined advantage. This ensures true competition while compensating the original proponent for their time and effort in conceptualising the project.

Another alternative could be the Best and Final Offer system, which is followed in countries like South Africa.  Instead of providing the original proponent with a chance to counter the best bid, they are allowed to participate in the final round of the tendering process, which consists of multiple rounds. In the final round, the best of the two final bids is selected based on a comparative evaluation. This method strikes a balance – it provides an incentive for the original proponent while ensuring a level playing field in the final stage, fostering both fairness and healthy competition.

Secondly, there is a need for uniform national guidelines governing SCM. In 2020, NITI Aayog recommended the establishment of a national regulatory framework to standardize the procurement process across the country, however, this has not yet been implemented. At present, the compensation provided to the original proponent is not based on a fixed framework. The absence of guidelines in this regard leads to potential bias in decision-making as observed by the World bank in 2017. Therefore, clear guidelines must be framed by the government that promote fairness and competition in the procurement process, to ensure that every participant bidder has a fair chance of winning the bid.

Thirdly, strong regulatory oversight and a fair evaluation mechanism are crucial to ensure that the projects awarded through SCM align with the sustainable development goals of the country. Provisions must be made for sustainability assessment, prioritizing renewable energy, social and environmental impact of the projects and the mitigation measures taken. Thus, SCM can evolve into a transparent, competitive, and sustainable procurement model, ensuring efficiency and equity in infrastructure projects.

Swedha Prakash is a third-year law student at National Law University, Jodhpur.