2020 · GS Paper 3 · Q11 · 15 marks
Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.
In short
Investment is the addition to an economy's productive capital stock, measured as capital formation, while a sound concession agreement allocates risk, tariff, tenure, performance and exit terms fairly. Delhi Airport Metro Express v. DMRC, reversed by the Supreme Court in 2024, shows the cost of vague termination clauses.
Model answer
Ghissu Editorial · Verified 4 Oct 2026 · 276 words
Flow adding to stock
Gross Capital Formation is fixed capital formation in machinery, buildings and infrastructure, plus inventories and valuables; net formation deducts depreciation.
Real versus financial
Buying an existing share only transfers ownership; it counts as capital formation only when it creates a new asset.
Link to growth
In the Harrod-Domar model, growth equals the investment rate divided by the ICOR.
Risk allocation
Construction and operation risks rest with the concessionaire, land and clearances with the authority, as the Kelkar Committee (2015) stressed.
Tenure and tariff
The concession period and indexed user charges must allow cost recovery, with Viability Gap Funding for economically sound but financially weak projects.
Performance and handback
Service standards, an independent engineer and handback conditions protect asset quality.
Termination and disputes
Clear termination payments avert disputes like Delhi Airport Metro Express v. DMRC, where the Supreme Court set aside an upheld award in 2024.
Regulators and tribunals
Independent sector regulators and the Kelkar Committee's proposed PPP adjudication tribunal would speed resolution, while Hybrid Annuity models and NaBFID finance reduce risk.
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Investment Models4 questions
Asked in 4 of 14 sittings since 2013
- 2022Why is Public Private Partnership (PPP) required in infrastructural projects ? Examine the role of PPP model in the redevelopment of Railway Stations in India.
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Question from the official UPSC Civil Services (Main) Examination 2020 paper. Answer written by Ghissu's engine and checked against our editorial standards. Found an error? Tell us and we correct it within 48 hours.