Economy Handout - 31

GS Foundation 2025
Investment Models Batch D1D2D3 - #ECO031
1. Investment:
- exchanging money for a ‘return or profit yielding asset’.
- Relation Between GDP & Investment → GDP = C + I + G + NX; C → consumption
expenditure; I → gross investment; G → government spending; NX→ net
exports(exports-imports);
- Types of Investment → Fixed Capital Formation → Land, Machines etc;
Valuables → Stones, Rare Earth Metals, Paintings etc; Inventory → Stock of
unsold goods.
2. Types of Investment models: -

- Public Investment Model → Objective → Welfare; Funding by Government;
Problems associated → Inefficient; Delayed execution; Funding issues;
Corruption etc,
- Private Investment Model → Objective → Profit; Problems → Profit overtakes
social welfare; promotes regional disparities; Issues of clearance etc,
- Public Private Partnership Model.
3. Public Private Partnership (PPP):

- collaboration of government and private sector for project construction and
management
C
- Need for PPP → to meet funding gap; time bound completion; access to high
PS
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end technology and expertise; boosting infrastructure development industry;

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reduce burden on government; creating employment in construction sector.

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-@
ID
4. Models of PPP (Public Private Partnerships):

am
gr
- BOT (Toll) → Build-Operate-Transfer; Private Party → acquires land, gets

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Te
regulatory clearances; operates & maintains the road during concession period;
collects toll & recovers cost during concession period; hands it back to
government
- BOT (Annuity) → improvement over BOT-Toll; here private party doesn’t collect
toll; government body collects toll & gives annual payment(annuity) to
developer; developer that demands minimum annuity will get the contract
- EPC (Engineering Procurement Construction) → Land Acquisition will be done
by government and all clearances will be taken care of by the government; Ex-
Road is given to NHAI after construction; 100% upfront funding by Government
- Hybrid Annuity Model → mix of EPC and BOT(Annuity); private player brings
60% of capital only and government will pay 40% of the cost; land acquisition
by the government; tender floated only after acquiring the land and getting all
the clearances; NHAI pays annuity over the concession period; private players
will take care of Operation & Maintenance of the project; Other Features → life
cycle cost will be the bidding parameter, separate provision for Operation &
Maintenance costs, provision of inflation adjustment in project cost
- Toll Operate and Transfer → Public funded projects operational for two years
shall be put to bid; right of collection and appropriation of fee shall be assigned
for a predetermined concession period (~30 years) to developers against
upfront payment of a lump sum amount to NHAI
- Swiss Challenge Method → used mainly for public projects; interested party
initiates a proposal for a contract or the bid for a project; bidder asked by the
Forum Learning Centre:Delhi - 2nd Floor, IAPL House, 19 Pusa Road, Karol Bagh, New Delhi - 110005 | Patna - 2nd floor, AG Palace, E Boring Canal
Road, Patna, Bihar 800001 | Hyderabad - 1st & 2nd Floor, SM Plaza, RTC X Rd, Indira Park Road, Jawahar Nagar, Hyderabad, Telangana 500020
9311740400, 9311740900 | https://academy.forumias.com | [email protected] | [email protected]
GS Foundation 2025
Investment Models Batch D1D2D3 - #ECO031
government to submit proposal; then other proposals invited to beat the

original proposal
5. General challenges in the existing PPP framework in India:

- existing contracts focus more on fiscal (government revenues) benefits than on
efficient service provision
- neglecting the principles of allocating risk to the entity best able to manage it.
- government has started shifting its project development responsibilities such
as land acquisition, environmental and forest clearances to the private parties
- no existing structure for renegotiation of projects in case of a failure
- certain bidders are involved in reckless bidding
- flaws in allocating risk and rigidities in contractual arrangements
- weaknesses in regulation, enforcement and monitoring of terms of Concession
Agreement
- the limited institutional capacity of government ministries
6. Suggestions:
- Kelkar Committee on Revisiting & Revitalizing the PPP model→ create
independent sector specific regulators; setup experts panel to fasten clearance
of stalled project; no state government should take part in PPP; frame guidelines
C
for Government audit on corporate account books; move away from MCA
PS
_U
(Model Concessionaire Agreement); discourage Swiss challenge method

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ge
- Simplification of Agreements to ensure faster implementation

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-@
- Plug and play readiness → land acquisition, permits and clearances be resolved
ID
ahead of the bidding process.

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gr
- There should be distinction between diligent bidders and speculative ones

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Te
- Renegotiation of agreement should be allowed in case of project failure
7. SPV– Special Purpose Vehicle:

- SPV is primarily a business association of persons or entities eligible to
participate for a single, well defined and narrow lawful purpose
- scope of operation is limited and focused
- advantage → helps in separating the risk and freeing up the capital → thus, SPV
and the sponsoring company are protected against risks like insolvency
8. Viability Gap Funding:

- VGF is a government’s initiative to assist private investors or entities of high
economic worth
- government extends its support to the investors by sharing a fraction of the
cost, making the project viable (e.g Airport construction in a remote Northeast
town)
Forum Learning Centre:Delhi - 2nd Floor, IAPL House, 19 Pusa Road, Karol Bagh, New Delhi - 110005 | Patna - 2nd floor, AG Palace, E Boring Canal
Road, Patna, Bihar 800001 | Hyderabad - 1st & 2nd Floor, SM Plaza, RTC X Rd, Indira Park Road, Jawahar Nagar, Hyderabad, Telangana 500020
9311740400, 9311740900 | https://academy.forumias.com | [email protected] | [email protected]

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GS Foundation 2025

Investment Models Batch D1D2D3 - #ECO031

2. Types of Investment models: -

3. Public Private Partnership (PPP):

end technology and expertise; boosting infrastructure development industry;

reduce burden on government; creating employment in construction sector.

4. Models of PPP (Public Private Partnerships):

- BOT (Toll) → Build-Operate-Transfer; Private Party → acquires land, gets

government to submit proposal; then other proposals invited to beat the

5. General challenges in the existing PPP framework in India:

(Model Concessionaire Agreement); discourage Swiss challenge method

- Simplification of Agreements to ensure faster implementation

ahead of the bidding process.

- There should be distinction between diligent bidders and speculative ones

- Renegotiation of agreement should be allowed in case of project failure

7. SPV– Special Purpose Vehicle:

8. Viability Gap Funding:

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