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 private entity. (UPSC IAS Mains 2020 General Studies Paper – 3)
In the context of economy, investment refers to the expenditure made for the creation of capital assets or capital goods that are used to generate future income and wealth. Investment is elucidated and defined as an addition to the stockpile of physical capital such as machinery, buildings, equipment, roads etc. Investment is crucial for capital formation as it leads to more capital accumulation thereby increases national economic output.
Economic Impact of Investment
- Investment leads to the addition of capital stock in the economy.
- It enhances the production capacity of the economy.
- More the production, more will be the gross domestic product (GDP).
- In the later stage, it may also encourage domestic savings.
A concession agreement is a negotiated contract that grants rights to a company by a government, local authority, or other legal entity. It basically means a Public-Private Partnership (PPP) which allows joint development and maintenance of government projects.
Factors that need to be considered while designing a concession agreement
- The time of concession agreement should be very well defined.
- It should be clear about the fees, time period and authority.
- It should be clear about the authority, who will manage, maintain and repair the project in a timely manner.
- It should be clear about timely financing including viability gap funding.
- It should be clear about requirements of environmental impact assessment and requirement of land clearance.
Concession agreements are of fundamental importance for the development of infrastructure in the country. It has reduced the time lags and costs involved in undertaking such agreements. Therefore, a well-designed concession agreement will not only help in performance improvement but also help in reducing contract disputes.
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