Investment Models

GS III
Economy
by
Adil Baig AM
 GS III - Investment Models

Investment Models -
Agenda
• Types of Growth Models
1. Harrod - Domar Model
2. Nehru - Mahalanobis Model
• Types of Investments
• Public Private Partnership - Needs
• PPP Models
1. BOT & Variants
2. EPC Model
3. Hybrid Annuity Model
4. Swiss Challenge Model
• Committees and Recommendations
• Vijay Kelkar Committee
• 3P India
• National Infrastructure Pipeline 2020-25
 GS III - Investment Models

Models for Growth

1. Harrod – Domar Model
This model suggests that the economy’s growth rate depends on two factors:
• Level of savings; and
• Productivity of investment i.e. Capital to Output ratio.

2. Mahalanobis Strategy of Economic Growth

 There was no clear strategy in the First Five-Year Plan. But when the second plan was
being formulated Prof. P.C Mahalanobis prepared a growth model
 He showed that to achieve a self-sustained growth quickly in the country, it would be
essential to devote a major part of the development outlay to building basic heavy
industry, e.g. of capital goods industry like steel and the engineering industry for
making different types of machines, the multipurpose river valley projects for irrigation
and power.
 GS III - Investment Models

Infrastructure
 Infrastructure is the support system on which depends the efficient working of a modern
industrial economy.
 Infrastructure contributes to economic development of a country both by increasing the
productivity of the factors of production and improving the quality of life of its people
 It leads to Investment, Industrial Development, Employment Development, Trade and
Commerce
 Infrastructure  Growth

From Where the Investments for Infrastructure comes ?

 GS III - Investment Models

Types of Investments
1. Public Investment
2. Private Investment
 Domestic Firms
 Foreign Investment
3. Public - Private Partnership Model (PPP)
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Need for PPP

 Public Goods  No Exclusive consumption  No Private Investments  ‘Controlled Access goods’

 Infrastructure development is an arduous job for any country as it involves huge investments,
long gestation periods, procedural delays and returns spread over a long period of time

 Burden of Fiscal Deficit for Government

 Low Tax Collections

 Infrastructure investment might take away Public investment from more deserving Health and
Education investments

 Efficiency and Quality of Private Sector

 Latest Technology
 GS III - Investment Models

Public Private Partnership

The partners in a PPP, usually through a legally binding contract or some other mechanism, agree to
share responsibilities related to implementation and/or operation and management of an
infrastructure project.
This collaboration or partnership is built on the expertise of each partner that meets clearly defined
public needs through the appropriate allocation of:
• Resources
• Risks
• Responsibilities, and
• Rewards
Public Private Partnership
Public Private Partnership
 BOT, BOOT
 Engineering and Procurement Construction
 Hybrid Annuity Model
 Swiss Challenge Model

GS III - Investment Models

PPP Models
BOT:
 It is conventional PPP model in which private partner is responsible to design,
build, operate (during the contracted period) and transfer back the facility to the
public sector.
 Private sector partner has to bring the finance for the project and take the
responsibility to construct and maintain it.

 Public sector will allow private sector partner to collect revenue from the users.
The national highway projects contracted out by NHAI under PPP mode is a major
example for the BOT model.

GS III - Investment Models

PPP Models
EPC Model (Engineering Procurement and Construction)
 Under this system the entire project is funded by the government.
 The EPC entails the contractor build the project by designing, installing and
procuring necessary labour and land to construct the infrastructure, either directly
or by subcontracting.

 Under EPC model the contractor is legally responsible to complete the project
under some fixed predetermined timeline and may also involve scope for
penalty in case of time overrun.
 In EPC as all the clearances, land acquisition and regulatory norms have to be
completed by the government itself and the private players do not have to get
itself involved in these time taking procedures.

GS III - Investment Models

 PPP Models
Hybrid Annuity Model:
 In India, the new HAM is a mix of BOT Annuity and EPC models.
 As per the design, the government will contribute to 40% of the project cost in the first
five years through annual payments (annuity). The remaining payment will be made on
the basis of the assets created and the performance of the developer.
 Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal
installments whereas the remaining 60% is paid as variable annuity amount after the
completion of the project depending upon the value of assets created.
 As the government pays only 40%, during the construction stage, the developer should
find money for the remaining amount.
 Here, she has to raise the remaining 60% in the form of equity or loans.
 There is no toll right for the developer. Under HAM, Revenue collection would be the
responsibility of the National Highways Authority of India

GS III - Investment Models

PPP Models
Swiss Challenge
 A Swiss Challenge is a method of bidding, often used in public projects, in which
an interested party initiates a proposal for a contract or the bid for a project.
 The government then puts the details of the project out in the public and
invites proposals from others interested in executing it.

 On the receipt of these bids, the original contractor gets an opportunity to match
the best bid or Right to First Refusal
 High chances of Crony Capitalism possible
Vijay Kelkar Committee recommendations
1. Contracts need to focus more on service delivery instead of fiscal benefits.
2. Better identification and allocation of risks between stakeholders
3. Renegotiation clause of Concession Agreement

4. Infrastructure PPP Project Review Committee (“IPRC”) may be constituted to

evaluate and send its recommendations on any problems of PPP project.
5. Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial
Member (former Judge SC/Chief Justice HC) with a Technical and/or a Financial
member, where benches will be constituted by the Chairperson as per needs of
the matter in question.
6. The state owned enterprises and public sector undertakings should not be
allowed to bid for PPP projects.
GS III - Investment Models
 Kelkar Committee recommendations
7. Institutionalization of mechanism like the National Facilitation Committee
(NFC)to ensure time bound resolution of issues e.g. Clearances.
8. Unsolicited Proposals(“Swiss Challenge”)to be discouraged to avoid
information asymmetries and lack of transparency.
9. PPP structures not to be adopted for very small projects.

[Link] the Prevention of Corruption Act, 1988 to distinguish between

genuine errors in decision-making and acts of corruption.
11. Build up capacity in all stakeholders, including regulators, authority, consultants,
financing agencies, developers.
12. Set up an institute of excellence in PPP to inter alia guide the sector, provide
policy input, timely advice and undertake sustainable capacity building.
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 3P India
Finance Minister Arun Jaitley announced the decision to set up an institution named 3P India with a
corpus of Rs.500 crore, to provide support to mainstreaming PPPs.

 It is likely to be a non-profit company on the lines of the National Skill Development Council
(NSDC)

 3P India will address issues related to regulation, management of contracts, bidding process,
dispute resolution mechanism and stressed Public-Private Partnership projects in the country.

 3P India will be staffed by highly skilled professionals, who have deep knowledge of PPP projects,
which would mean that now, we would have an institutional arrangement with professionals,
someone who understands PPPs

 Once 3P India is formed, targets will be set on a weekly basis and not monthly.

GS III - Investment Models

 National Infrastructure Pipeline 2020-2025

• To achieve the GDP of $5 trillion by 2024-25, India needs to spend about $1.4 trillion (` 100 lakh
crore) over these years on infrastructure
• NIP is expected to enable well-prepared infrastructure projects which will ]
 create jobs,
 improve ease of living, and
 provide equitable access to infrastructure for all, thereby making growth more inclusive.
• The NIP has projected total infrastructure investment of ` 102 lakh crore during the period FY 2020
to 2025 in India.
 Energy (24 per cent),
 Roads (19 per cent),
 Urban (16 per cent), and
 Railways (13 per cent)
 Irrigation (7 percent)
 Rural Infra ( 7 percent)

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 National Infrastructure Pipeline 2020-2025

• Central Government (39 per cent) and State Government (39 per cent) are expected to have equal
share in funding of the projects followed by the Private Sector (22 per cent).
• It is expected that private sector share may increase to 30 per cent by 2025.
• Out of the total expected capital expenditure of ` 102 lakh crore, projects worth ` 42.7 lakh crore
(42 per cent) are under implementation, projects worth ` 32.7 lakh crore (32 per cent) are in
conceptualization stage and rest are under development.
• Hence about two-thirds of the pipeline is already firmed up.
• It is also expected that projects of certain states would be added to the pipeline in due course.
• Reforms recommended
 developing a robust bond market for infrastructure companies,
 speedy resolution of infrastructure disputes,
 optimal risk sharing through better and balanced PPP contracts, and
 sanctity and enforceability of contracts.
GS III - Investment Models