(Sample Material) UPSC IAS Mains GS Online Coaching : Paper 3 - "Investment Models"

Sample Material of Our IAS Mains GS Online Coaching Programme

Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Investment Models


Investment is time, energy, or matter spent in the hope of future benefits actualized within a specified date or time frame. Investment has different meanings in economics and finance. In economics, investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories. In finance, investment is putting money into an asset with the expectation of capital appreciation, dividends, and/or interest earnings.

On the basis of who invests in assets for increasing production, there are three major investment models.

Public Investment Model: 

For a government to invest, it needs revenue , but the present tax revenues of India are not sufficient enough to meet the budgetary expenditure of India.
So India cannot move ahead in the path of growth without private individuals; even for government to have a share in the investment, they need tax revenue from the private investors.

Private Investment Model: 

The private investment can come from India or abroad. If it’s from abroad – they can be as FDI or FPI.  As India’s Current Account Deficit is widening due to increased Oil Import, in this age of globalization, we cannot say NO to FDI or FPI.

Why private investment in India:  For a country to grow and increase its income, the production has to be increased. More goods and services has to be produced.
Infrastructure to support production – transport, energy and communication – should also be developed. But how can a nation with near 30% of population below poverty line, invest in production or infrastructure? Who has money to invest?

Over the years, the basic infrastructure in India has been developed to an extent, which is not sufficient enough while considering India’s geographical and economic size, its population and the pace of overall economic development. Infrastructure bottleneck has been a serious concern in India and basic infrastructure like roads, railways, ports, airports, communication and power supply are not comparable to the standards prevalent in its competitor countries.

To develop the Indian infrastructure to a world class and to remove the infrastructure deficiency in the country, the investment requirements are mammoth, which could not be met by the public sector alone due to fiscal constraints and mounting liabilities of the Government. This would call for participation of private sector in coordination with the public sector to develop the public infrastructure facilities. In this direction, the economic reforms initiated in the country provide forth the policy environment towards public-private partnership (PPP) in the infrastructure development. Sector-specific policies have also been initiated from time to time to enhance the PPP in infrastructure building. While the PPP is spreading to develop basic infrastructure world wide, in India, the participation of private sector in the infrastructure building has not been much encouraging, despite several rounds of policy reforms.

Public-Private Partnership Model:

The expression public-private partnership is a widely used concept world over but is often not clearly defined. There is no single accepted international definition of what a PPP is (World Bank, 2006). The PPP is defined as “the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector” (IMF, 2004). Any arrangement made between a state authority and a private partner to perform functions within the mandate of the state authority, and involving different combinations of design, construction, operations and finance is termed as Ireland’s PPP model. In UK’s Private Finance Initiative (PFI), where the public sector purchases services from the private sector under long-term contracts is called as PPP program. However, there are other forms of PPP used in the UK, including where the private sector is introduced as a strategic partner into a state-owned business that provides a public service.

The PPP is sometimes referred to as a joint venture in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. Typically, a private sector consortium forms a special company called a special purpose vehicle (SPV) to build and maintain the asset. The consortium is usually set up with a contractor, a maintenance company and a lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it.

Thus, the PPP combines the development of private sector capital and sometimes, public sector capital to improve public services or the management of public sector assets (Michael, 2001). The PPP may encompass the whole spectrum of approaches from private participation through the contracting out of services and revenue sharing partnership arrangement to pure non-recourse project finance, while sometime it may include only a narrow range of project type. The PPP has two important characteristics. First, there is an emphasis on service provision as well as investment by the private sector. Second, significant risk is transferred from the Government to the private sector. The PPP model is very flexible and discernible in variety of forms. The various models/ schemes and modalities to implement the PPP are set out

Schemes and Modalities of PPP



Build-own-operate (BOO)
Build-develop-operate (BDO)
Design-construct-manage-finance (DCMF)

The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design-build-finance-operate (DBFO) schemes.

Buy-build-operate (BBO)
Lease-develop-operate (LDO)
Wrap-around addition (WAA)

The private sector buys or leases an existing asset from the Government, renovates, modernises, and/ or expands it, and then operates the asset, again with no obligation to transfer ownership back to the Government.

Build-operate-transfer (BOT)
Build-own-operate-transfer (BOOT) Build-rent-own-transfer (BROT)
Build-lease-operate-transfer (BLOT) Build-transfer-operate (BTO)

The private sector designs and builds an asset, operates it, and then transfers it to the Government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the Government.

Source: Public Private Partnership, Fiscal Affairs Department of the IMF

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