Various investment models

• Here, Government makes investments in specific goods and services, with the help of Public sector
• The investment for revenue mainly comes from taxes
• Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fuelling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns
• Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns

• When there exists certain shortfall of earnings in the public sector, Government invites private players to invest in some of its ventures
• The private investment can be domestic or foreign in nature
• A foreign direct investment (FDI) can improve the current infrastructure and generate employment in the process.
  • This model is one of the most sought after when it comes to external investment
• Also, Private investment can generate more efficiency by creating more competition, realization of economies of scale and greater flexibility than is available to the public sector

• PPPs are formal arrangements between public and private counterparties to share risks and rewards in the delivery of public services and infrastructure
• These partnerships work well when private sector technology and innovation combine with public sector incentives to complete work on time and within budget
• PPP involves full retention of responsibility by the government for providing the services, and it doesn’t amount to privatization
• Private entity is chosen on the basis of open competitive bidding and receives performance linked payments
• PPP route can be alternative in developing countries where governments face various constraints on borrowing money for important projects

Public private partnership (PPP) Models

• The major types of PPP model are:
  • Management Contract Model
    • Under this model, a private entity is given the contract to manage, either in part or in whole, a public facility or a service
    • In this model, Ownership of the asset, or facility, remains with the public entity (government); while the day-to-day operations of such facility are transferred to the private entity
    • The risk exposure for the private entity is low since it is not required to make any capital investments and the private entity is allowed to collect a fee which is predetermined
  • Lease Contract Model
    • Under this model, the asset is leased, either to the private entity or to the public entity, depending on the situation
    • The private entity is allowed to earn revenue from operations
    • Build-Lease-Transfer model
      • The asset is owned by the private entity and is leased to public entity for medium term
      • Here, public entity is responsible for making the capital investment
    • Build-Operate-Transfer (BOT) Model
      • In BOT model, the public entity retains the ownership while the private entity bears the responsibility of construction(usually a greenfield project)
      • In second type, known as Under this model, the asset is leased, either to the private entity or to the public entity, depending on the situation
      • BOT Annuity
        • This model is adopted for the building highways, mainly for those projects where the potential for generating revenues is limited, by the NHAI
        • The private entity is responsible for designing, building, managing, and maintaining the asset. However, the risk for the private entity is low as it receives a fixed sum as annuity from the public entity at regular intervals throughout the duration of the contract
      • Other related PPP models
        • Engineering-Procurement-Construction(EPC) Model
          • In this model, the private entity is responsible for designing, financing and building the asset
          • After building the asset, it is transferred to the public entity which remains the owner. The private entity does not have the responsibility of operations and management and receives a lump-sum money from the public entity for its role. This model is being used for the construction of highways by the NHAI
        • Hybrid Annuity Model(HAM)
          • In this model, the public entity finances 40% of the project cost, and private entity has to finance the remaining 60%
          • The ownership, as well as operations, remain the responsibility of the public entity while the private entity only has to provide the engineering expertise