By Amy Chang
This July, Indian Prime Minister Modi’s government approved the use of the Swiss Challenge Model (SCM) as part of an effort to increase private sector investment for the renovation of 400 railways across the country. SCM is a form of public procurement in which the government publicizes unsolicited bids for projects and invites third party actors to match or exceed them. Later in October, the SCM was also adopted to develop the Andaman and Nicobar Islands—a cluster of islands due east of India in the Bay of Bengal.
The decision to adopt the SCM comes against the backdrop of a sharp plunge in private sector investment for infrastructure projects in India, and the government hopes it will help cut red tape and increase efficiency by allowing local companies and investors to craft proposals in line with their capabilities and needs. There are, however, serious concerns regarding the level of accountability that the SCM process requires, particularly when dealing with projects where public authorities have limited knowledge and experience.
The World Bank estimates that India needs $1.7 trillion to fund its infrastructure gap by 2020, but current levels of funding are insufficient to cover that cost: Private investment in infrastructure fell from $23.8 billion in 2012 to $3.6 billion last year. Under the SCM, companies present an unsolicited proposal to the government, and then the project is opened to other third-party bidders. The original proposer then has the right to counter-match any final offer. The SCM invites private investors to formulate their own projects, while still encouraging competition through an open bidding process.
While the SCM does offer an upside, namely incentivizing increased efficiency and interest from private sector actors, these unsolicited bids mean that the host country can fall victim to exploitation if the evaluation and bidding process is not sufficiently transparent. Over the past 20 years, India and other Southeast Asian countries have experimented with this model of funding with mixed results— most proposals have been unsuccessful in obtaining counter-bids, which calls into question the degree of competitiveness that the SCM really offers. The World Bank suggests that countries are better equipped to handle these unsolicited projects if a transparent management system already exists.
In India, the most recent utilization of the Swiss method has been mixed. In Mumbai, the use of SCM led to controversy, as unforeseen construction costs demanded a three-fold metro fare hike. Transforming the Andaman and Nicobar Islands, a remote island region with low economic activity, promises to be even more challenging. Public authorities need to carefully evaluate unsolicited bids not only to determine if the proposed public need actually exists, but also to make sure that the private actor can complete the project within their promised budget and timeframe. In the case of the Mumbai metro, costs were fortunately offset by a simple metro fare hike; for the islands, such unexpected outcomes will likely disrupt the lives of the local population and/or damage the surrounding natural environment.
Currently, the islands are inhabited by the Jarawa and Sentinelese tribes, and enjoy a rich diversity of flora and fauna with a very low pollution. Because of these factors, the evaluation process needs to take into account all the socio-environmental costs associated with increased economic activity from maritime infrastructure. The construction of the Great Andaman Trunk Road through the islands, for example, has already drawn criticism due to tourists’ disrespect for the Jarawa. Furthermore, the islands are located in a very strategic place between Myanmar and Indonesia. This region in the Andaman Sea may be critical in establishing presence against China’s potential interests in the Indian Ocean, and the Indian government’s efforts in promoting development may not be entirely divorced from national security concerns.
With so many vested interests in the Andaman and Nicobar Islands and the already mixed track record of the SCM, there needs to be a cautious assessment of all socio-environmental impacts of these development projects. The Indian government has outlined that a consultant will be hired to identify viable projects and budgeting before accepting private sector bids, presumably to increase transparency, but the initial evaluation process would still require a high degree of accountability.
Modi’s commitment to governance reform and private sector involvement is a step in the right direction, but an equitable and sustainable development of this region under SCM will still need to overcome significant political challenges.
Amy Chang is a research intern with the Project on Prosperity and Development at CSIS.
Photo courtesy of Wikimedia user Venkatesh K under a Creative Commons Attribution 2.0 Generic License.