Wednesday, 13 July 2016

Amaravati and 400 Railway Stations - Swiss Challenge

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.

Vijay Kelkar (Ex-Finance Secretary) panel in its report on  December 29, 2015 has asked the central government to actively ‘discourage’ the ‘Swiss Challenge’ for auctioning infrastructure projects as they bring information asymmetries in the procurement process and result in lack of transparency and in the fair and equal treatment of potential bidders in the procurement process. The panel called for urgent changes to the Prevention of Corruption Act of 1988 as well as government’s vigilance and conduct rules in order to distinguish “genuine errors” in decision-making by public servants from acts of corruption, the panel has emphasized the need to guard officers against ‘witch hunt’ while taking immediate measures to punish malafide actions.

  1. Lack of transparency, information asymmetries  and competition.
  2. Foster crony capitalism.
  3. Scope for companies to employ dubious means to bag projects.
  4. Strong legal and regulatory framework needed to award projects.
  5. Understanding of risks involved in a project.
  6. Direct negotiations with private players can be fraught with downsides.
  7. Competitive bidding is the best method to get the best value on projects. 
  8. Ends up in granting viability gap funding, commercial exploitation of real estate, etc., without deriving durable and long-term social or economic benefits.
  9. Results in over sized projects resulting in investments getting blocked and funding huge maintenance expenditure.
Some Examples: 
  1. Mumbai-Pune Express way resulted in government making guaranteed toll revenues gap funding to developers for over a decade. 
  2. Enron's Dabhol Power Project resulted in robbing MSEB's revenues by 40% while contributing 15% power to Maharashtra grid, that led to cancellation of contract.
  3. Hyderabad's 160 km 8 lane ORR costing Rs.7,000 crores. Even after 6 years traffic is much below the break even mark. Ideally it should have been a 4 lane ORR in the 1st phase and expansion to 6/8 lanes in 2nd phase as and when needed. This would have saved idle investment of Rs.2000-3000 crores.
  4. Hyderabad Airport built on land parcel of 5,400 acres costed about Rs.3,000 crores became operational in 2008. This resulted in closing of Begumpet airport and no airport to come up with 150 km radius depriving Warangal & Mahboobnagar airports for a period of 30 years. Annual passenger traffic increased was from 6 million to 12 million (21%) and aircraft movement from 80,000 to over 100,000 (7%) in the past 8 years making it huge loss making venture. In contrast, Mumbai Airport is on land parcel of 1450  acres, handling 42 million passengers and 300,000 aircraft movements, annually. Even though losses are borne by the concessionaire for now, they will get compensated by allowing commercial exploitation of real estate sooner or later. Due its high charges, Lufthansa & KLM Airlines have withdrawn their operations to Hyderabad.
  5. Riyadh Airport (78,000 acres) in Saudi Arabia was built in 1983 costed $ 3 billion with over 100 gates has capacity of over 100 million passengers. The 2013 figures are 19 million passengers and 160,000 aircraft movement.

Arun Jaitley, Finance Minister announcing development of 400 railway stations and Chandrababu Naidu, CM of AP announcing handing over of 5,000 acres to Singapore contractor for development of seed capital in 1691 acres FREE of cost through 'Swiss Challenge' method speaks volumes about opaqueness of the deals and mind boggling corruption is not ruled out. Unless transparency is maintained and in the absence strong legal and regulatory framework for awarding contracts, BJP & TDP will very soon have to face allegations of corruption, crony capitalism, nepotism etc. which are not devoid of prima-facie. 

Needless to say planning, designing, preparing estimates, mobilizing institutional finances, inviting tenders and awarding contract and supervision of work being executed in phases is not only transparent but also the cheapest model of development. Any other method is not only very expensive but also end up with white elephants. Nothing comes FREE in this world. It is prudent and cheaper to pay in cash than in kind.

Finally, these developer contractor will mobilize not more than 10% of project cost as their equity and remaining 90% will come from local partner's equity and our institutional loans. Is it not a matter of shame that we bring foreign consultants & foreign contractors to execute our project with our money and walk away with huge profits, impoverishing our nation?

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