Investment Models

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Investment: In finance, term investment is putting money into an asset to get dividends, capital appreciation, and/or interest earnings. And in economics, term investment is the accumulation of newly produced physical entities, such as machinery, factories, goods inventories and houses. Thus, the investment can be described as The process of putting money in assets for increasing production or financial gains. And, the investment models tell about how to put the money in assets.

 Investment can be brought in the form of debt like a loan from domestic, ECB (External commercial borrowing) or in the form of equity, e.g. a partnership (joint ventures 50:50 sharing), shares (FDI/ FPI). A nation should produce more goods and services to grow and generate employment opportunities to all, and hence investments in agriculture, business or industry or supporting infrastructure is highly appreciated.  So, the need for investment emerges from both government and private players, and both sides will be benefited by this.

INVESTMENT linkage with GDP:

  • Investment is total expenditure (GDP) after subtraction of consumption, government spending, and net exports.
  • Investment in productive assets can be from Public Sectors (Government), Private Sectors (Corporate) or Public-Private Partnership or PPP.

Major investment models are:

  1. Public Investment Model: It is investment by the Government in certain goods, services and infrastructure in the national interest, through central or state governments or through public sectors using Revenue (mainly tax revenue).
  2. Private Investment Model:  Due to the fiscal deficit target, the tax revenue of the Government is not enough to meet its budget expenditure, so the Government requires private investment. Private investment can be from abroad or within India. From abroad it comes in the form of FDI or FPI
  3. Public-Private Partnership Model [PPP]: PPP is an agreement/contract between public sector entity and private sector entity to build public infrastructure (highway, ports, etc.) or to provide a public utility service (electricity, gas, water, transport, health, etc.) with private funding. PPP uses the best benefit from both public and private investments. In such PPP contract the ownership, risk and rewards are well defined (unlike privatization where it’s completely transferred from the public sector to the private sector).

Public-Private Partnership Model [PPP]: 

  • Financing, a project through a PPP, can allow a project to be completed sooner or make it a possibility in the first place using private technology and innovation combined with public sector incentives.
  • Some recent announcements for PPP projects are Bharat Mala project, Jal Marg on Ganga, 8500 Kms of Highways, Ultra-Modern Solar Plants, Thermal Power Tech, Airports.
  • PPP projects can acquire land if they receive the consent of at least 70% landowners under recent law relating to land acquisition.

Commonly used PPP model: BOT (build–operate–transfer), BOOT (build–own–operate–transfer), BOO (build–own–operate), BLT (build–lease–transfer), DBFO (design-build–finance–operate), DBOT (design-build-operate–transfer),DCMF (design-construct–manage–finance).

  •  The model where ownership is transferred: BOT, DBFO/BOOT
  •  The model where ownership is not transferred: BOO, BDO, DCMF

The Build Operate and Transfer (BOT)- Annuity Model:

Under this model, a Private entity builds a highway, operates it for a contracted duration and transfers it back to the public sector. The public entity provides an annuity to the private entity after the launch of commercial operation of the project at regular intervals throughout the contract, which is usually long-term.

Engineering, Procurement and Construction (EPC) Model:

Under this model, the financing is done by the public sector only. The private players are responsible for engineering, procurement of raw material and construction, and receive lump-sum money. The private sector’s participation is minimal. Problem with the model is the high financial burden on the public sector.

The Hybrid Annuity Model (HAM):

  • The HAM is a hybrid of BOT Annuity model and EPC. The Government finances 40% of the project cost in the first five years through annuity (annual payments), and the private entity must finance the remaining 60%. HAM combines EPC (40 per cent) and BOT-Annuity (60 per cent).
  • The public entity retains the ownership as well as operation while the private entity has to provide engineering expertise. HAM is gaining prominence for highway construction.
  • The private entity cannot collect toll. Under this, Revenue is collected by the National Highways Authority of India(NHAI).    

Issues with PPP Model:

  1. Difficulty with land acquisition due to Environment groups / Civil society protest / PILs.
  2. Developers wanted the extension of toll collection period/loan restructuring/extra money to finish the remainder of projects due to fall in demand. It caused time & cost overruns for the infra-developers and occurrence of huge NPA problems.
  3. IL&FS & other NBFCs crisis in the infrastructure finance sector.
  4. In PPP projects, the fees paid by the users may be higher than when the project was government operated. Excessive reliance on PPP may eventually result in the exclusion of poor persons from infrastructure facilities.
  5. Private players are providing substandard services/construction material to keep a bigger profit margin.
  6. PPP is not appropriate for small-sized projects, e.g. building a school.
  7. In India, PPP model projects have confined mostly to airports and highways. In other sectors, the growth is either private sector-led (e.g. Telecom / ICT), or public sector-led (e.g. Railways & atomic energy) even though there is a lot of scope for synergy.
  8. PPP projects become sites of crony capitalism and a means for accumulating land by private companies and create a moral hazard by their opportunistic behaviour.

Government policies on PPP model:

  1.    Viability Gap Funding (VGF) Scheme: 
  • Ministry of Finance administrates this scheme, and it provides financial support to infrastructure projects undertaken through PPPs in the form of grants, one time or deferred, to make them commercially viable. 
  • The Government provides total Viability Gap Funding up to 20 % of the total project cost and additional grants from its budget up to further 20 % of the total project cost if the project is owned by the government entity. Both central and state governments can provide funding for the VGF.
  1.    India Infrastructure Project Development Fund (IIPDF):
  • The IIPDF under the Department of Economic Affairs, Ministry of Finance provides financial support for quality (credible and bankable) PPP projects development activities.
  1. India Infrastructure Finance company Limited (IIFCL):
  •  IIFCL was set up to provide long-term debt for infrastructure projects, which are typically long gestation projects and require debt of longer maturity and provides financial assistance to transportation, energy, water, sanitation, communication, social and commercial infrastructure sectors.
  1. Infrastructure Debt Funds (IDF):
  • Infrastructure Debt Fund (IDF) registered in India refers to a company or a Trust constituted to invest in the debt securities of infrastructure companies or Public-Private Partnership Projects.  IDFs are meant to supplement lending for infrastructure projects provide a vehicle for refinancing the existing debt of infrastructure projects presently funded mostly by commercial banks.
  1. 3P India:
  • Creation of an institution called 3P India, to provide support for mainstreaming of PPPs. The planned 3P India entity will examine issues related to regulation, financing structure, management of contracts, and stressed PPP projects.


Dr Vijay Kelkar Committee Report on Revisiting and Revitalising PPP Model:

Under chairmanship Dr Vijay Kelkar Committee on Revisiting & Revitalising the PPP model of Infrastructure Development was set-up.


Ministry of Finance should develop 3PI institution and publish a national PPP Policy document. 3PI will be a centre of excellence, research enabled, and can review and roll out activities to build capacity.

  • IPRC (Infrastructure PPP Project Review Committee) and IPAT(Infrastructure PPP Adjudication Tribunal) chaired by Judicial member (former SC Judge/Chief Justice HC) with a technical and/or a financial member should be established in order to ease the bottlenecks in PPP projects.
  • Avoid loan syndication method in which one bank asses while a group of banks give loans.
  • Develop corporate bond market and divest equity from successful PPP to create new infrastructure.
  • Ministry of Finance should promote Zero-Coupon Bonds which helps to achieve soft lending for user charges in the infrastructure sector.
  • Concession agreement should stipulate important commercial parameters like return on equity, treatment of land for non-commercial purposes.
  • Open the avenues for long-term investors, including overseas institutional investors as long-term liabilities are best suited for PPP.
  • Protection against ‘Obsolescing Bargain’ – loss of bargaining power by private players in PPP over the time period due to abrupt changes in policy or economic environment.
  • An economical utilization of viability gap funds where user charges cannot guarantee a robust revenue stream.
  • Avoid Swiss Challenge because of information asymmetries and lack of transparency.
  • Amendment of the Prevention of Corruption Act, 1988 is required to distinguish between genuine errors in decision-making and corrupt practice.
  • Establish a Special Purpose Vehicle (SPV) to encourage corporate governance audited under the Companies Act.
  • Re-bid the projects that have not achieved a prescribed percentage of progress on the ground.
  • The National Facilitation Committee (NFC)an institutionalised mechanism to ensure time-bound resolution of issues.
  • Discourage PSU participation in SPVs that implement PPP projects unless strategically essential. Encourage PPPs in important sectors like Railways, Urban, health, etc.

Way Forward:

  • PPPs are potentially viable to deliver infrastructure projects better and faster. Mega transit projects are significant for increasing mobility and for the changes in land-use patterns. Currently, PPPs are used as a tool to balance fiscal targets.
  • A serious assessment of the efficacy and benefits of PPPs projects before adopting this model.
  • ‘Strategy for New India @75 ‘ a document by NITI Aayog, increased targeted investment rates to 36 per cent by 2022-23 from 28 % (2017-2018).
  • To boost both private and public investment, active measures are required. further, increase the rate of investment (gross fixed capital formation in terms of GDP).
  • Encouragement of private investment in infrastructure through a renewed PPP mechanism as suggested by the Kelkar Committee.
  • A mature PPP framework is required to enable the government to accomplish, to a considerable extent, by promoting private sector investments and participation towards the nation-building. 

More from Us:

निश्चय Jharkhand PCS Prelims: A 50-Day Course

लक्ष्य MPPSC 2020: A 45-Day Course to Clear GS Paper

Are you preparing for State PCS exam,

Get Unlimited Access to ALL Mock Tests with Test Series Here

Check other links also:

Previous Year Solved Papers

Monthly Current Affairs

UPSC Study Material

Gist of Yojana

Daily Practice Quizzes, Attempt Here

Our Apps Playstore
SSC and Bank
Other Exams
GradeStack Learning Pvt. Ltd.Windsor IT Park, Tower - A, 2nd Floor, Sector 125, Noida, Uttar Pradesh 201303
Home Practice Test Series Premium