The Swiss Challenge method allows private players to accept contracts from the government through the process of bidding.
For instance, independent of any instructions from the government, a private entity may present a plan for the development of an infrastructure project with exclusive Intellectual Property Rights.
The government then has two choices in place of the proposal: either it can buy the intellectual property rights from the first bidder and use competitive bidding to fund the project, or it can let private parties submit their own. In the second scenario, when the private player submits their proposals, the first bidder is also asked to match them, and if the latter party (first bidder) is unable to do so, the project is given to the highest-qualified bidder.
For instance, if a company/private player believes that a particular road project is commercially viable, the company presents a proposal i.e. a proper two-way contract with the government. The company makes a note of the timeline for the project, the kind of investment it needs, and it also states talks about the concessions it requires from the government, and economic feasibility. So, accordingly it prepares an appropriate bid document, and submits it to the government.
The government examines it, decides whether it is good or bad makes an independent review, and then makes a choice to see if it may get comparable bids from other players.
So it informs the entity who had originally proposed the idea that it is asking for comparative bids, but it also seeks bids from a number of other parties who have expressed interest. These parties provide their own projections of what the project might look like, and after a comparison to the original project to figure out which bid is best, the best bid is then chosen. Then, even before it makes this available to the lowest bidder, it asks the idea's originator if they would like to equal the bid.
Therefore, if the original bidder or entity who's idea is taken claims to have the repeatable right of refusal and says he can match the offer. In such a case, the project is awarded to him. However, if the originator claims he cannot, the second-best bidder among the other bidders wins it.
There are many different variations of this process, one of which is where the original player occasionally receives bonus points while the bid is still competitive, but he receives 20% more points than the others, at which point the bids are assessed because the premium is given to him for the idea he brings to the table.
Banks and Swiss Challenge Method
In the recent times, with banks being in focus across the globe, let's take a look at how this method can be used in the banks.
The Reserve Bank of India (RBI) allowed banks to use this technique for the selling of Non-Performing Assets (NPA) accounts in September 2016. As a result, banks are now selling NPA accounts, and the RBI has given them permission to do so.
Banks keep a list of NPAs that must be sold in accordance with their policy. Interested buyer of an NPA account, can make an offer to the bank to purchase that particular NPA account.
Further, if the offer is in cash and exceeds the minimum percentage allowed by bank policy, the bank is needs to openly request counter offers from other buyers, including Asset Reconstruction Companies. (ARCs).
Once these bids are called it becomes Swiss challenge and after receiving the offers the order of preference for sale of that NPA will be as follows;
1. Asset reconstruction companies with the largest stakes in the banks already by buying NPA from those banks will be given priority.
2. Second, the first bidder will be given preference if ARC is absent.
3. Third preference will be given to the highest bidder during counter bidding process.
Therefore, for sale of that NPA the above are the order of preference, which bank follows to sell the NPAs.