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Wednesday, August 3, 2011

Tirupati theme park Swiss challenge-is it fair to other bidders?

 The public sector does not have monopoly on creative ideas. Often, the private sector creatively suggests PPP ideas/projects, and then the public sector appoints consultants to prepare the bid documents, design the entire bidding process etc. But in the case of developing a mythological theme park at Tirupati, the Andhra pradesh tourism department has taken an innovative approach of swiss challenge, where the original proponent has the Right of First Refusal(ROFR) to match the winning bid.

The facts are as follows. IL&FS suo-motu proposed this theme park to the AP Govt, which had to put it up for public bidding. However, AP Govt decided to allow IL&FS to eat its own cooking viz the winning bidder(if any) would pay the project design/consultancy fee of Rs 15 million, otherwise if IL&FS itself won, it would not get any such fee. The bid document summary gives the key conditions(http://www.ilfsindia.com/tenders/bid_sum_temples_130511.pdf) that
  1. Bidders must quote the NPV they offer to the Govt
  2. IL&FS(original project proponent) can match this bid, without further negotiations. 
  3. If IL&FS is not the winner, then the winner pays the bid cost(Rs 15 million) to IL&FS. 
Now, this is a risk free process for the Andhra Pradesh Govt. Even if there are no other bidders, it shows that IL&FS is the best. And if other bidders emerge due to the public bid, then it will only improve the price. And waste is avoided(IL&FS would have conducted its due diligence before proposing the bid, so the Govt essentially piggybacks on that, throws the data open to the private sector).

However, the other private sector bidders will have serious reservations about bidding since the risk of winner's curse is more. If IL&FS declines its right of first refusal, it means that the winning bid is probably negative NPV. And if they exercise it, then the winning bidder wastes its efforts and sees a positive NPV project slip out of its hands.

For saving Rs 150lakhs(we can argue this is wrong because AP Govt could have imposed some bid fees and absorbed the rest as costs), AP Govt has actually lowered the private sector(non IL&FS) incentives to bid. IL&FS gets a free option of ROFR without any risk(given that it would be anyway paid-either from the project OR from the winning bidders). One may view this as a 'finders fee' for IL&FS, in which case it would seem more equitable.

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