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PPP Contracts: "Swiss Challenge Method" and The Indian Law

Bajirao 
on 11 July 2011

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Infrastructure development projects in the past were thought of as a way of providing infrastructure at no extra cost to the public. For this reason the projects used to be generally investigated, designed and financed by the Public Works Department of the State or Central Government. The projects needed several years for realization from the stage of conception to become operational.  After the need for a project would be felt, project report based on preliminary survey and investigations used to be prepared and based on the approximate estimates, its feasibility determined and administratively approved by the concerned department. After the administrative approval, provision would be made in the annual budget for sanctioning the funds for preparation of detailed investigation, designs and drawings and estimates to be given approval or technical sanction. The project would then wait for requisite finance to be provided in the annual budget. By the time budget provision was made several years used to pass rendering the estimates outdated requiring further revision and further sanctions. Even the ongoing projects were required to be suspended or slowed down for want of funds. This resulted in claims and litigations and further delays and escalation in cost. Since the public utility projects earned little or no revenue, no private parties ventured into the field of construction of such projects. When it was realized in recent times that the users of the facilities created by such projects would not mind paying for the facility, the traditional scenario changed dramatically. The law and the Courts in India too had to take cognizance of this development.

The Development in Law in India

Even as early as in 1986[1]the Supreme Court  of India held that when the State Government is granting licence for putting up a new industry, it is not at all necessary that it should advertise and invite offers for putting up such industry. The State Government is entitled to negotiate with those who have come up with an offer to set up such industry. In a later case, in 2009, the Supreme Court of India observed: [2]

Recently, there has been shift towards encouraging private participation in the government works and promoting of public-private partnership. The Ministry of Housing and Urban Poverty Alleviation in its National Urban Housing Habitat Policy, 2007 specifically mentions participation of private sector as one of its aims. It envisages that the State Government and the Central Government shall act as facilitators and enablers. Pursuant to the declared policy by the Central and State Governments, the Maharashtra State Housing Board and MHADA are well within their rights to apply the Swiss Challenge Method with respect to the MHADA lands that were lying undeveloped since the same was being applied only on trial basis as a method of encouraging private participation.

Swiss Challenge Method

As per the Swiss Challenge method the developer who has given the original proposal has the opportunity (first right of refusal). However, the said developer has to match/raise his bid (rate) with the highest proposal tendered. The original proposer shall have the opportunity to take up the project on highest offer, and in the event if he refuses, then the highest bidder shall have right to implement the project. However, if such highest bidder refuses the offer then the amount deposited shall be forfeited.

It was highlighted by the appellants in the case before the Supreme Court that Swiss Challenge Method is adopted in Chile, Coasta Rica, Guram (U.S. Territory), Indonesia, Korea, Philippines, South Africa, Sri Lanka, Taiwan (China), Virginia (U.S.) and also in India by Andhra Pradesh, Rajasthan, Madhya Pradesh, Chhattisgarh, Gujarat, Uttaranchal, Punjab States and Cochin Port authorities.

It was further held in the latter case: “The decision to apply Swiss Challenge Method clearly fell within the realm of executive discretion. It is not possible to reject the claim of State of Maharashtra and MHADA, in view of shortage of land, increasing cost in housing sector, the Central and State Governments recommended strongly for public private joint ventures and in the said category Swiss Challenge method is the acceptable democratic method as compared to other options.”       

Conclusion:

PPPs are emerging as an important means for implementation of long-term infrastructure assets and related services such as roads, under the National Highway Authority of India. Now a days a new model is also being discussed: PPCP (Public-Private Community Partnership) aimed at social welfare schemes eliminating the prime focus on profit.

 

About Author

B.S.PATIL, B.E. (Civil), LL.B. F.I.E.

Contracts and Arbitration Consultant; Author of Building and Engineering Contracts; The Law of Arbitration and Conciliation,. etc.

visit - www.bspatil.com to know more about him


[1]  State of M.P. and Others vs. Nandlal Jaiswal and Others, (1986) 4 SCC 566), (State of M.P. and Others vs. Nandlal Jaiswal and Others, (1986) 4 SCC 566),

[2] (Ravi Development v. Shree Krishna Prathisthan, AIR 2009 SC 2519):

 




Category Corporate Law
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