Technische Universiteit Eindhoven

09
UNSOLICITED PROPOSAL
New path to Public-Private Partnership INDIAN PERSPECTIVE
Sahul Reddy-0645761 Chanakya Kalyanapu-0645756 Technische Universiteit Eindhoven | 2 INTRODUCTION 2

Table of Contents 1. INTRODUCTION ................................................................................................................................... 3 2. INDIAN SCENARIO ............................................................................................................................... 3 3. UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE ................................................................................ 4 3.1 Swiss challenge system: States initiative ..................................................................................... 5 GIDB ................................................................................................................................................... 5 APID: ................................................................................................................................................... 7 PIDB .................................................................................................................................................... 9 3.2 Examples of USP ........................................................................................................................... 9 4. USP: EFFECTIVENESS .......................................................................................................................... 11 5. LESSONS FOR NETHERLANDS: ............................................................................................................ 11 6. REFERENCES ...................................................................................................................................... 12 Technische Universiteit Eindhoven | 3 INTRODUCTION 3

1. INTRODUCTION
Governments worldwide have been increasingly looking to the private sector to fill the growing gap between the demand and supply of infrastructure services. As a result, private participation in infrastructure (PPI) in developing countries increased dramatically in the past fifteen years, accounting for more than $850 billion in committed new investment between 1990 and 2005. While the results have been mixed in some countries, many governments have recognized that the private sector can be an important mechanism for bringing technical and managerial expertise to the construction, operation, maintenance, and financing of infrastructure projects. There is specific type of PPI project called unsolicited proposals . Unsolicited proposals are not requested by a government but usually originate within the private sector. These proposals typically come from companies with ties to a particular industry such as developers, suppliers, and financiers that spend their own money to develop basic project specifications, then directly approach governments to get the required official approvals. Unsolicited proposals have been considered and put into action by countries like Argentina, Chile, Costa Rica, India, Indonesia, Korea, Philippines, South Africa, etc. Unsolicited proposals have successfully contributed to overall infrastructures of these countries particularly where governments have low technical and financial capacity to develop projects themselves. Despite their contribution, unsolicited proposals are associated with lack of competition and transparency. Much of the controversy stems from governments granting exclusive Development rights to private proponents without a transparent tendering process. However some governments have created institutional mechanisms that encourage the private sector to come forward with potentially beneficial project concepts, while at the same time introducing competitive forces to secure the benefits associated with a public tender. (John T. Hodges and Georgina Dellacha, 2007) In this report we will discuss the Indian experience with unsolicited proposals. We discuss about the laws and procedures implemented by few Indian states to successfully exploit the benefits of unsolicited proposals.

2. INDIAN SCENARIO
The Indian government realized early on in the process of economic reforms that without involving the private sector, it would not be able to revamp the infrastructure sector. It neither has the financial resources, nor the technical/administrative resources to undertake such a mammoth task on its own. It has therefore, undertaken several initiatives since 1991 to open up the infrastructure sector, and to provide incentives to private parties. India has had the most success attracting more private investment in infrastructure in 2006 than any other developing country. Private investment commitments in India were nearly twice those in its nearest rival, Brazil, and well ahead of those in China (Clive Harris, 2008). According to the Technische Universiteit Eindhoven | 4 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 4

India Infrastructure Report (IIR), in 2002-03 there was 5.5 percent of the GDP invested in the infrastructure sector and was targeted to reach 8 per cent by 2005-06. The government had to find innovative ways by adopting modern equipment-based technology to ensure expeditious growth of infrastructure. One of the key problems in the commercialization of infrastructure is allocation or risks. The successful design of a project involves correct demarcation and allocation or risks. The task of finding such large amounts and thereafter deploying them productively calls for a close partnership between the public and private sectors. (Roop Verma,2007) Figure 1: PPI investments in infrastructure in India. The public as well as private sector is trying to come up with all kind of innovative ideas, one of which is the unsolicited proposal. The system has been successfully experimented in various countries and is now used in India.

3. UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE

The Indian government is actively pursuing unsolicited proposals in infrastructure projects, the reason being that the private sector can be an important source of technical and managerial expertise. At times, these private players approach to governments with their own innovative ideas, including detailed construction, operation, maintenance, and financing plans; such proposals are called unsolicited proposals. According to a World Bank report, it is estimated that unsolicited projects accounted for about 20-50 per cent of total private infrastructure projects in Philippines (here it is normally called Expanded BOT) system, and South Korea. Basically, it is the financial capacity of the government which plays a pivotal role in deciding the fate of such proposals. (Facilitating PPP in Indian infrastructure, 2006). The Indian 11th Five-Year Plan (2007-12) mentions the competitive bidding process for unsolicited proposals as, in case of unsolicited projects proposed suo moto by private Technische Universiteit Eindhoven | 5 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 5

entrepreneurs/companies or singular bids, the merits of the proposal need to be evaluated by the Government to ensure fairness, impartiality and cost effectiveness. The 'Bonus System' or the 'Swiss Challenge System' of competitive bidding should be followed where the claims, veracity and global competitiveness of the unsolicited proposals could be put to open test by inviting competitive proposals from other market players." This statement shows that there is a need for reviewing purchase and contract procedures, to evolve new concepts like Bonus or Swiss Challenge System for reducing time delays, ensuring cost competitiveness, and improving implementation of operations. The government is all set to start taking a different approach for handling these unsolicited proposals for private infrastructure projects. Here it becomes important for us to understand the concept of unsolicited proposals, the concept of Swiss challenge system, and how this system is going to help in attending such unsolicited proposals. [Article by Roop Verma, 2007]

3.1 Swiss challenge system: States initiative

Likewise, other developing countries India has also adopted the Swiss challenge system to attract private capital investment for infrastructural development and redensification schemes. Under the Swiss challenge system, a project proposed by a private sector company will first be vetted by the state government and if the concept is approved, the project will be awarded through a competitive bidding process in which no bidder will have a predefined advantage, in the bidding process the government would give challengers an opportunity to make better offers (for an infrastructure project) than the original proponent and then the original proponent would be allowed to counter it. This procedure most well known in the Philippines is also used in the states of Andhra Pradesh and Gujarat. (International Seminar on India s Infrastructure Needs with PPPs, 2007) A wide range of institutional structures and capacity approaches have been adopted for conceptualizing and procuring PPP s across states and central agencies. States of Gujarat, AP and Punjab have developed specialized institutions and legislation. Each of these states has constituted an agency (respectively the Gujarat Infrastructure Development Board, the AP Infrastructure Authority and the Punjab Infrastructure Development Board) and passed acts to promote private sector participation in infrastructure projects across sectors. As an illustration, the Gujarat Infrastructure Development Act, 1999, gives force of law to the provision of entering into a concession agreement with a private sector developer, provides transparent procedures for selection of the developer, and provides for levying user charges for the facilities provided by the developer. (Energy and Infrastructure unit-World bank, 2006). GIDB THE Gujarat Infrastructure Development Board (GIDB) established in 1995 to facilitate infrastructure development in the State and to coordinate activities involving the private sector. Technische Universiteit Eindhoven | 6 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 6

GIDB agenda for Vision 2010 envisages an investment of 17,619,761,985 encompassing 383 projects in sectors as diverse as: power, ports, industrial parks, roads, railways, water supply & sanitation townships, urban transports, water, airport, gas grid, information infrastructure etc. To provide for a framework for private participation in financing, construction, maintenance and operation of infrastructure projects, Gujarat Infrastructure Development (GID) Act, 1999 popularly known as BOT Law was enacted in and later on amended as Gujarat Infrastructure Development (Amendment) Act, 2006. It is the first of kind institutional arrangement in India for Private Sector Participation. A concession period of maximum 35 years is allowed under this act. It provides three modes for private sector participation in Infrastructure Projects. Comparative bidding or Swiss challenge route is one of them framed for accepting unsolicited proposals without state subsidy. (GIDB) Comparative bidding/ SWISS Challenge Route (section-10 GID Act/BOT law): Unsolicited proposals which does not require state subsidy are processed through this route. It involves three stages: o acceptance of the project by the Government and that it can be delivered by the developer in a time frame o Detailed negotiations to arrive at a consensus on the project parameters including the price. competitive bidding on functional specifications of the project taken as fait accompli o If better proposal (s) is received, the original proponent is given the opportunity to make his proposal competitive with that. If he fails, the project goes to the selected bidder. The project development costs can be reimbursed According to BOT law, a private participant s unsolicited proposal should include the following: o Feasibility study consisting of market analysis, technical aspects, financial analysis, economic analysis and operational./institutional aspects; o Basic contractual terms and conditions; o Pre-qualification requirements, which include legal requirements, experience or track record and financial capability to undertake the project; o Preliminary financing plan, which describes how the project will be financed; and o Implementation plan, which would show the timeframe of construction and implementation. To encourage more private participation through unsolicited proposals the Government of Gujarat through concerned departments carries out all preparatory work for the projects and provides the following facilities: o Cost for preparing Detailed Feasibility Study o Land for Right of way and en-route facilities Technische Universiteit Eindhoven | 7 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 7

o o o o o

Relocation of utility services, resettlement and rehabilitation of the affected establishments. Environmental clearances Streamlined land acquisition procedures Extending a subsidy upto 40% on a case to case basis subject to the viability of the project Allow commercial development along the corridor to increase the revenue by a stream of projects like hotels, restaurants, warehousing, etc wherever deemed necessary. APID: Andhra Pradesh infrastructure development enabling act 2001, has developed the following Swiss challenge system is followed in the state of Andhra Pradesh to select the developer when an unsolicited proposal is submitted. (APID, 2001) 1. The Swiss Challenge Approach will be followed in any project, initiated by a Private Sector Participant who is hereinafter referred to as Original Project Proponent , by a suo-motu (unsolicited) proposal. 2. The Original Project Proponent must submit to the Government Agency or local authority: (a) Details of his technical, commercial, managerial and financial capability; (b) Technical, financial and commercial details of the proposal; (c) Principles of the Concession Agreement 3. The Government Agency or the Local Authority would first evaluate the Original Project Proponent s technical, commercial, managerial and financial capability as may be Prescribed and determine whether the Original Project Proponent s capabilities are adequate for undertaking the project. 4. The Government Agency or the Local Authority shall forward such suo-motu proposal to the Infrastructure Authority along with its evaluation within prescribed time for the approval of the Infrastructure Authority; 5. The Infrastructure Authority would then weigh the technical, commercial and financial aspects of the Original Project Proponent s proposal and the Concession Agreement, along with evaluation of the Project by the Government Agency or the Local Authority and ascertain if the scale and scope of the project is in line with the requirements of the State and whether the sharing of risks as proposed in the Concession Agreement is in conformity with the risk-sharing frame-work as adopted or proposed by the Government for similar projects if any and if the project is in conformity with long term objective of the Government. 6. If the Infrastructure Authority recommends any modification in the technical, scale, scope and risk sharing aspects of the proposal or the concession agreement, the Original Project Proponent will consider and incorporate the same and re-submit its proposal within prescribed time to the Government Agency or the Local Authority. Technische Universiteit Eindhoven | 8 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 8

7. If the Infrastructure Authority finds merit in such suo-motu proposal the Infrastructure Authority will then require the Government Agency or the Local Authority to invite competing counter proposals using the Swiss Challenge Approach giving adequate notice as may be prescribed. The Original Project Proponent will be given an opportunity to match any competing counter proposals that may be superior to the proposal of the Original Project Proponent. In case the Original Project Proponent matches or improves on the competing counter proposal, the Project shall be awarded to the Original Project Proponent; otherwise bidder making the competing counter proposal will be selected to execute the project. 8. In the event of the Project not being awarded to the Original Project Proponent and being awarded to any other Bidder, the Government Agency or the Local Authority will reimburse to the Original Project Proponent reasonable costs incurred for preparation of the suo-motu proposal and the Concession Agreement. The suo-motu proposal and the Concession Agreement prepared by the Original Project Proponent shall be the property of the Government Agency or the Local Authority as the case may be. 9. The reasonable costs of preparation of the suo-motu proposal and the Concession Agreement shall be determined as per the norms Prescribed by the Government, and shall be binding upon the Original Project Proponent. Figure2: Schematic representation of Swiss challenge system followed by APID. Technische Universiteit Eindhoven | 9 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 9

PIDB With the notification of the Punjab Infrastructure (Development and Regulation) Act, 2002, Punjab has become the first state in the country to lay down a formal statutory mechanism for the selection and award of works to contractors without following the usual tendering process. Under Section 37 of that Act, any potential contractor can submit an unsolicited proposal, according to its own choice, to the Punjab Infrastructure Development Board (PIDB) for taking up work on any infrastructure project. This act enables PIDB to accept any such proposal on a provisional basis, submitted by an individual or agency which would involve a new concept or technology. After entering into a provisional agreement, a public hearing would be conducted by the quasi-judicial body Punjab Infrastructure Regulatory Authority (PIRA) to be constituted in the next few days. The agency would play a regulatory role to safeguard the interests of construction companies. If other party comes forward to work on better conditions, the initial bidder would be allowed to amend his proposal within 30 days and the contract would be signed with him to execute the work. If he failed, the concession agreement would be signed with the second bidder. This mechanism is being followed in developed countries especially in the European countries. It is quite transparent, speedy and cost-effective mechanism to attract private investors. Due to the implementation of this act, various construction agencies, which had not turned their eyes towards Punjab so far because of cumbersome regulatory framework and selection procedures showed keen interest to invest in the state and make huge investment in projects like roads and bridges, bus terminals, solid waste management, water management, agricultural R & D facilities and others. The PIDB has decided to persuade new parties to take up infrastructure projects on various private models such as build, operate and transfer ( BOT), build, own, operate and transfer ( BOOT), build, own and operate ( BOO), build, lease and transfer ( BLT), contract, add and operate ( CAO) and Rehabilitate, operate and transfer ( ROT) basis. PIDB will recover the investments made in these projects such as levy of user charges/toll fee, commercial sale of real estate and to get financial assistance from the World Bank. Detailed information can be found under PIDB Unsolicited proposals Bye-laws, 2008. (PIDB)

3.2 Examples of USP

To harness private sector initiatives for the development of the states the system has been adopted by many states. Madhya Pradesh government has decided to adopt the "Swiss challenge system" in infrastructure creation. Under which initially only the projects relating to the state Public Works Department (PWD) will be within the ambit of the system. The Andhra Pradesh government has adopted the Swiss Challenge method for selection of a developer for the Outer Ring Road (ORR) project of Hyderabad. Wherein, the Technische Universiteit Eindhoven | 10 UNSOLICITED PROPOSALS: INDIAN PERSPECTIVE 10

criteria being kept as whichever company or consortium pitches for less land will emerge as the successful bidder.

The Uttaranchal government has also decided to develop the Sitarganj industrial estate in the state with private sector participation on a Swiss Challenge Approach basis.

Even the Indian giant Tata group is under going through negotiation with the Bangladesh government over three issues-gas pricing, power tariff and fiscal incentives. The government negotiators from Bangladesh are adopting the Swiss Challenge system under which they will try to lure away third parties to make better offers. (Article by Roop Verma, 2007)

As of April 2006, 5 project proposals all in the power sector have been presented as unsolicited under section 10 of Gujarat Infrastructure Development Act of 1999. Four proposals were accepted and preparations for conducting a tendering process are underway. The total value of the approved projects proposed is approximately $31 million. (John T. Hodges and Georgina Dellacha, 2007)

Punjab: Swiss challenge route for Punjab expressway: Punjab has received an unsolicited proposal from Reliance Energy Ltd for developing a massive expressway connecting Pathankot in Gurudaspur district to Ajmer in Rajasthan. PIDB has proposed to use the Swiss Challenge route wherein competitive bids will be solicited from other prospective bidders and the original proponents will be given a chance to match them. [Article by Venugopal Pillai, 2008]
Sr No 1 Project 45MLD Proposed Sewage Treatment Plant in Rajkot on BOOT basis Implementing agency Gujrat, Rajkot Municipal Corporation (RMC) Investment In Rupees 85 Crore Approx (1,4 million) Status Unsolicited proposal is getting finalized at RMC level for transaction under Section 10 of GID Act-1999 & Ammendment2006 Broad principles for procurement has been finalized by 52nd Executive Committee of GIDB Feasibility study under process

Unsolicited proposal of 50MLD Water Treatment Plant at Ranakpur, Gujarat on DBOOT basis Pathankot-Ajmer Expressway Bot Concessiontype Outer ring road (Hyderabad)

Gujarat Water Supply & Sewerage Board

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Punjab PWD

Rs.8600 Crore (1400 million)

Govt. Of Andhra Pradesh

Rs 600 Crore (10 million)

The government rejected the unsolicited proposal from GMR group