Canada: The Swiss Auction Challenge System: An Efficient Solution For Developing And Delivering Challenging Infrastructure Projects Worldwide

This article was co-authored with Alberto Jaramillo of Falja Trading Ltd.

  • The Swiss Auction Challenge is an approach to public procurement successfully used in numerous jurisdictions around the world in response to unsolicited proposals from the private sector.
  • This approach can be used to develop constructive solutions to address distressed public infrastructure projects or services.
  • It requires a public authority which has received an unsolicited bid to publish the bid and invite third parties to match or exceed the bid.
  • The original proponent is then granted the right to counter-match any subsequent third party best offer and secure the contract.

Overview

Public infrastructure projects across the globe are commonly challenged by deficits of experience, capacity, and resources that burden the responsible public authority, in addition to political and economic circumstances which may complicate oversight of infrastructure development and maintenance. The complexities associated with defining the scope of a project, the preparation of tender documentation, project management and financing, and the sourcing of human and material resources often result in deficient procurement processes and distressed infrastructure projects. In response, public authorities have increasingly partnered with private sector entities as a means to address the demand and supply of infrastructure projects and services. Such partnerships commonly arise from the submission of proposals by private sector entities in the absence of a formal solicitation or request by public authorities, as well being utilized as a means of re-energizing the unfortunate growing trend of key infrastructure projects which are stalled or distressed. 

While the perceived benefits of such approaches to public authorities are many, unsolicited proposals and their associated projects are often troubled by a lack of competition and transparency.  Accordingly, there is a growing impetus to implement mechanisms that channel unsolicited proposals into public, competitive processes. The Swiss Auction Challenge ("Swiss Challenge") is one of the more effective of several approaches adopted by public authorities as they seek to improve governance and transparency in the procurement of public infrastructure projects.1

Following a brief discussion of the challenges associated with unsolicited proposals, this briefing note explores the procedures, merits, and limitations of the Swiss Challenge before turning to best practices designed to enhance the effectiveness of the Swiss Challenge.

Unsolicited Proposals: perceptions and inherent challenges

An unsolicited proposal ("USP") refers to a project proposal submitted to a public authority by a private sector entity ("USP Proponent") in the absence of a formal solicitation or request by the public authority.  USPs are commonly prepared by companies with ties to particular industries — such as developers, suppliers, and financiers — that utilize their own resources to identify prospective projects and develop basic project parameters and specifications.  They then directly approach public authorities, requesting that the prospective project and the requisite approvals be granted to the USP Proponent. 

Upon receiving a USP, the public authority might wish to take any number of actions.  In many jurisdictions, USPs are not processed through a competitive bidding process.  However, the public authority may seek to purchase the intellectual property rights for a project concept from the USP Proponent and then award the project through a competitive bidding process in which no bidder has a predefined advantage.2  Alternatively, the public authority can offer the original USP Proponent – so long as it proves experience and capability to accompany its initiative – an advantage in a competitive bidding process.3

Research conducted by the Public-Private Infrastructure Advisory Facility4 ("PPIAF") concluded that reliance on USPs by public authorities is often motivated by a perception that such partnerships can:

  • overcome the public authority's lack of financial and human capacity to identify, prioritize, prepare, and procure projects;
  • avoid a lengthy competitive process in order to implement projects more quickly;
  • address the government's inability to plan and fund necessary infrastructure development; and
  • tap into the private sector's innovation, knowledge, and resources to identify value-for-money project solutions.5

Such perceptions often originate — perhaps unsurprisingly — with the USP Proponents themselves, who commonly argue that they own the intellectual property rights to project concepts, that they are the only developer interested in the project, or that they can save the government time and money by the sole-source negotiating of project details.  Unfortunately, public authorities are often susceptible to such arguments, despite increasing awareness of serious risks associated with USPs. 

Experience has shown that projects originating from USPs have often failed to garner political legitimacy in the eyes of the public due to their association with corruption, a lack of competition, and compromised transparency.  Moreover, as the PPIAF notes, USPs often include preparatory studies performed by USP Proponents that are nearly always plagued by:

  • incomplete technical and inaccurate cost bases of the project; and
  • inadequate exposure of the risks associated with the project, the outcomes of which may end up being borne by the public authority.6

Despite these inherent challenges, it does not appear that reliance on USPs will decrease in the short to medium term.  Accordingly, the focus has turned to improving the governance, competition, and transparency of USPs.  Such "process improvement" is where the Swiss Challenge becomes a relevant and material consideration for both procuring authorities and USP Proponents.

The Swiss Challenge

The Swiss Challenge is an open tender process in which the USP Proponent has the right to match the winning bid (from the tender process that follows the initial USP) in order to win the contract.  As the name itself suggests, the Swiss Challenge was first utilized by the Swiss over four decades ago, and it has since become a proven procurement method described as "one of the lesser known and even lesser-used methods of public procurement for core and social infrastructure projects."7

Application

The Swiss Challenge has been adopted with some variations and with varying degrees of success in Switzerland, Ireland, Canada, the USA, South Korea, the Philippines, Chile, Argentina, Indonesia, South Africa, Sri Lanka, and Taiwan.  Notably, the Swiss Challenge has been successfully adopted by various states in India  — where the traditional bidding and award process is well known for being one of the more complex and time consuming in the world —  including Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab and Gujarat.  Within the past two years, four hundred A1- and A-category8 existing/operating railway stations in India are being re-developed using the Swiss Challenge.  Another successful undertaking of the Swiss Challenge can be found in Colombia, where it was used successfully to implement the recovery and rehabilitation of the country's 125 year-old railway system.  That project, undertaken in the mid-1980s, was valued at US$ 2.3+ billion (1990 dollars) and effectively transformed some 3,000 kilometers of narrow gauge rail roads. 

Procedure of Swiss Challenge9

Once a USP is accepted, the Swiss Challenge is engaged to facilitate a competitive process.  Public authorities would then generally follow the following process:

  • The project is announced in an official register or gazette and opened to public bid under the traditional tendering process, which is outlined in the tender documents.
  • In some jurisdictions, during this period, the original USP Proponent must also submit a bid bond equivalent to that required in the tender documents for a potential challenger; this bid bond is intended to confirm that the USP Proponent has adequate means to execute the project if granted. 
  • The public authority involved has the discretion to publish information regarding the original proposal (such as original project pricing and specifications) or to conduct a blind challenge.
  • In some jurisdictions, when a lower price proposal is submitted and approved, the original USP Proponent will have thirty (30) working days to match the price.  However, not all jurisdictions impose such deadlines.  Certain jurisdictions do not specify a timeframe for the original USP Proponent to match the best bid.
  • If the original USP Proponent does not match the price, then the project is awarded to the lowest priced, qualified bidder of the Swiss Challenge. 
  • In some jurisdictions, the project will be immediately awarded to the original USP Proponent, if the original USP Proponent matches the lowest price under the tender.  In other jurisdictions, when another proponent submits a lower price proposal and the original proponent matches that price within thirty (30) working days, then the public authority will identify which proposal has greater technical merit and submit its recommendations to the oversight board for disposition.

Further Considerations

  • Some countries allow reimbursement to the original project proponent for its project concept or project development costs.  Such compensation encourages private sector engagement during the development phase of a project.  Moreover, the prospect of such compensation encourages developers to make adequate investment (time, money, and human resources) in the USP, and it helps to ensure that the source of ideas is not limited to large developers with deep pockets.

Benefits

Besides reducing opportunities for corruption by increasing transparency, the Swiss Challenge contributes to achieving the best value-for-money and lends itself well to generating a perception of procedural fairness amongst stakeholders. It also improves governance, as it requires public authorities to set out clearly the requirements and procedure by which it will receive and evaluate USPs. The PPFIA has noted that, in tender procedures where price is the single award criterion, the Swiss Challenge approach is very simple to implement by reducing or eliminating the need for additional analysis or (possibly subjective) decisions on the part of the procuring public authority.  

However, it is important to note that the Swiss Challenge is one potential tool at the disposal of public authorities; experience in the above noted jurisdictions has showcased both the benefits and limitations of the approach.

Limitations

Despite introducing efficiencies to public procurement, the advantages of the Swiss Challenge may decrease as the number of evaluation criteria imposed by the public authority increases. The more decision criteria imposed, the greater "knowledgeable customer" capability that must be demonstrated by the procuring authority, the more time invested in the evaluation, and the more subjectivity in the decision-making process. Essentially, the more complex the project, the more need for multiple selection criteria.   Nevertheless, such limitations can be overcome if certain minimum technical criteria are stipulated in advance by the procuring authority, such that the final selection is based only on price (and perhaps schedule).

Moreover, while the time periods established for third party responses to USPs may contribute to a more efficient public procurement process, they can also eliminate incentives for competitive bidding. In those jurisdictions utilizing specific time limits for submission of counter-bids, competitors may perceive their chances of winning the contract to be compromised as a result of the relatively limited time to prepare competing proposals and the close relationships already developed between the USP Proponent and public authority officials during the development and consideration of the USP. 

These disadvantages have been referred to as informational asymmetry and bidding asymmetry, with each of these having important implications for the ability of public authorities to obtain meaningful counter-offers from potential competitors.10

Fortunately, with solid policies in place that balance judging criteria with minimum requirements (i.e., bidding "hurdles") and that consider reasonable response periods for competitors, these issues are manageable, thereby enabling public authorities to consider USPs combined with the Swiss Challenge system without compromising the public interest.

Going Forward – Global Best Practices

Unsurprisingly, transparent and competitive bidding is considered best practice in most countries, not only in the public sector but also for corporations and institutions.  As the Swiss Challenge approach becomes widely utilized in response to the high costs inherent in traditional international bidding and procurement practices, multilateral institutions have begun to implement procedures to complement their contributions to Public Private Partnership infrastructure projects.  Led by initiatives from the PPIAF and the World Bank Group, there is a growing body of best practices that public authorities can adopt. 

When deciding whether to accept USPs, public authorities should consider several important issues, including:

  • How can USP Proponents take part in fair, competitive bids on projects that they designed?
  • How can USP Proponents be compensated for the time and resources they put into developing the proposal?
  • What controls can be implemented to prevent fraud and corruption?

Where, then, can the public authorities look to apply the Swiss Challenge approach?

  • Needed projects (as clearly defined and chosen by public authorities);
  • Projects previously identified by national, regional, or state public authorities as "needed projects" (but that have not progressed or are in distress); and
  • Projects for which a public authority is ready, willing, and able to contribute at least part (usually between 10% and 50%) of the funding required.

Once such projects are determined as possible beneficiaries of the Swiss Challenge approach, then:

  • The public authority should create "rewards" that satisfy the original proponent while still allowing a truly competitive process;
  • The "rewards" would arise, naturally, if the procedure utilized is based on the Public Private Partnership infrastructure project model, with such rewards in the form of Power Purchase Agreements, Take-or-Pay Agreements, or Concessions; and
  • The "rewards" would be accompanied by a public authority guarantee and a term of at least 25 to 40 years (depending on the asset class and financing considerations (both debt and equity)).

The PPIAF guidance can be used as a way to encourage target public authorities to use the Swiss Challenge system and also serve as a guidebook for proponents that want to use the Swiss Challenge approach.  In addition, existing legislation in the applicable jurisdiction will need to be considered in order to determine whether or not the Swiss Challenge approach can be used (or if amendments to such legislation is needed).  Ultimately, the procuring authority will need to decide if it is comfortable with such an approach, but, clearly, ample data exists to build a Swiss Challenge model that is based on "lessons learned" from existing applications of the concept.

Concluding Thoughts

There is no single, preferred way to run procurements for large infrastructure projects.  Any procurement process will need to consider project- and country-specific factors, which will then inform the process that is chosen.  The reality is that public authorities are often ill-suited to manage complicated infrastructure procurements (and public procurement rules are often too rigid, lengthy, and formulaic for large scale infrastructure development), resulting in delays (due to timing required to build capabilities or resulting from mistakes made through inexperience) and failed attempts at project development.  With the overwhelming demand for infrastructure projects globally, new approaches must be considered to bring such projects to market through efficient, expedited, and fair processes that promote project deliverability and financeability.  The Swiss Challenge approach represents a very efficient and proven method for moving necessary and time-sensitive projects forward.  As such, it merits further, serious consideration by procuring authorities, as well as providing entrepreneurial project developers with a means of fast-tracking their proposals, reducing costs, and avoiding unnecessarily time-consuming procurement processes that are often ill-suited to the complexities of large infrastructure projects.

Footnotes

1 It is important to note that a Swiss Challenge is not the sole mechanism by which to responds to unsolicited bids.  Other methods include the Bonus system, the Automatic Short-listing system, the Full Competition system, and several hybrid approaches, all of which are beyond the scope of this article.  See http://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/PPIAF_UnsolicitedProposals_EN.pdf.

2 The competitive bidding process is a common practice throughout the world; yet, it often results in millions of dollars of public and private funds spent in the pursuit of a project without any certainty that the project will go ahead or be completed.  A "rule of thumb" based on practice suggests that, in such instances, one percent (1%) of the total project CAPEX is spent by a bidder in responding to a tender.  Considering the current funding magnitude of large projects, such practices can result in hundreds of millions of dollars wasted worldwide per annum and incentivize corrupt practices. 

3 Arguably, the Swiss Challenge approach discussed later in this note does create a competitive advantage for the original proponent, considering the response time for third parties and the right to match by the original proponent.

4 The Public-Private Infrastructure Advisory Facility (PPIAF) is a multi-donor technical assistance facility working closely with and housed inside the World Bank Group.

5 http://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/PPIAF_UnsolicitedProposals_EN.pdf.

6 PPIAF, "Unsolicited Proposals", Toolkit  for Public - Private Partnerships in roads &  Highways, available at: https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/6/pdf-version/5-42.pdf.

7 http://www.business-standard.com/article/opinion/vinayak-chatterjee-swiss-challenge-indian-style-115120701266_1.html

8 Classification based on annual revenue earned.

9 Procedure summarized from:  Hodges, John T.; Dellacha, Georgina.  2007.  Unsolicited infrastructure proposals: how some countries introduce competition and transparency.  Public-Private Infrastructure Advisory Facility (PPIAF) working paper series.  Washington, DC:
World Bank. http://documents.worldbank.org/curated/en/142981468777252745/pdf/417300Unsolici1als0PPIAF0101PUBLIC1.pdf.

10 Verma, Sandeep "Government Obligations in Public-Private Partnership Contracts" Journal of Public Procurement, Volume 10, Issue 4, 564-598 Winter 2010, at pp.  568-569.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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