Investment Models for Civil Services Main GS 3.

In civil services main syllabus, we have four papers of GS. In GS 3, Economy section there is a topic
titled Investment models.
So, here is an attempt from my side to collect info. related to the same and arrange this in a manner
which will suit the aspirants' study.
As this is my first such attempt, if there are some mistakes, then try to ignore them and make
maximum possible use of the write-up.
Ok, now end of formalities and all unnecessary stuff and start of the article.

Investment models.
Here is an image which gives us a fair idea about the prevailing
investment models.

DEFINITION OF 'BOTTOM-UP INVESTING'

An investment approach that de-emphasizes the significance of economic and market cycles.
This approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the

investor focuses his or her attention on a specific company rather than on the industry in which
that company operates or on the economy as a whole.
The bottom-up approach assumes that
individual companies can do well even in an
industry that is not performing very well. This
is the opposite of "top-down investing".
Making sound decisions based on a bottom-up
investing strategy entails a thorough review of
the company in question. This includes
becoming familiar with the company's
products and services, its financial stability
and its research reports.
Bottom-up approach

Top-down approach
Summary

High deployment coverage in early

Tactical, limited coverage

phases
Earlier return on investment

Delayed return on investment

High visibility of organizational

changes
Higher impact to organization

Lower impact to overall organization

Higher deployment costs
Advantages

User and business awareness of the

product. Benefits are realized in the early
Your organization realizes a focused use
phases.
of resources from the individual managed
You can replace many manual
application.
processes with early automation.
The first implementation becomes a
You can implement password
showcase for the identity management solution.
management for a large number of users.
When the phases are completed for the
You do not have to develop custom
managed application, you have implemented a
adapters in the early phases.
deeper, more mature implementation of the
Your organization broadens identity
identity management solution.
management skills and understanding during
Operation and maintenance resources
the first phase.
are not initially impacted as severely as with the
Tivoli Identity Manager is introduced to bottom-up approach.
your business with less intrusion to your
operations.
Disadvantages
The organizational structure you
establish might have to be changed in a later
roll-out phase.

The solution provides limited coverage

in the first phases.
A minimal percentage of user accounts

Bottom-up approach

Top-down approach

are managed in the first phases.

Because of the immediate changes to
You might have to develop custom
repository owners and the user population, the adapters at an early stage.
roll-out will have a higher impact earlier and
The support and overall business will
require greater cooperation.
not realize the benefit of the solution as rapidly.
This strategy is driven by the existing
The implementation cost is likely to be
infrastructure instead of the business processes.
higher.

BOT (Build Operate Transfer)

The Build--Operate--Transfer (BOT) was first coined by Ex--Prime Minister of Turkey, Turgut Ozal
in 1984. Essentially in a BOT project delivery method, a private entity, usually a consortium is
responsible for financing, construction,operation and maintenance of the facility for agreed duration
known as Concession period and at the end of the period, transfers the ownership of the facility to the
government.A BOT mechanism is a complex structure comprising multiple, inter-dependent
agreements among various participants. The concession agreement is between the government and
the concessionaire. The concession agreement is regarded as the heartof a BOT project.

BOT Basic Forms

BOT is a general term and has 3 basic forms
and dozen of variant forms
The 3 basic forms:
BOT (Build-Operate-Transfer): no ownership
BOOT (Build-Own-Operate-Transfer): the Project
Company has the ownership & BOT right -> lower
price/tariff & longer concession period
BOO (Build-Own-Operate): no transfer, lowest
price/tariff & longest concession period

BOT/PFI/PPP Nature
BOT is with a kind of Concessionary (authorization):
Best applicable to infrastructure/resource projects
Government authorizes the private/foreign developers
Government owns the ultimate ownership
Concession period 10 to 30 years after which the facility
transferred to government usually free of charge
BOT is typical Project Financing (finance through a
project instead of finance for a project)
Financing a project based on the projects future income
Limited/little recourse or even no recourse to developers
Projects income is the only source for debt (P+I) payment
BOT is a kind of Privatization

BOT/PFI/PPP Nature
Financing based on projects financial viability
instead of the developers credit & asset
Higher debt/equity ratio (usually debt>70%)
Middle to long term debt
Complex project/contract structure
Huge investment (equity and debt)
Higher financing cost
Project Company instead of the developer is the direct
borrower separate the proj. company from developer
Many risks involved
Many insurances/guarantees needed

Comparison of Traditional & BOT

Traditional Financing
Contract awarded based
on cost
Contractors main risks
include completion,
political and
performance risks
Financing risk and
revenue risk are
allocated to government
Financing is eventually
covered by government
bonds
Project Financing (BOT)
Contract is awarded base on lowest
cost & shortest time of transfer to
government
Contractor/developers main risks
includes financing, revenue and
political risks + operational cost
Contractor would gain benefit of an
additional project that would have
not been forthcoming under
traditional financing
It is user-based fee that is more
equitable
Helps government undertake more
projects

Privatization: Pros
Argument for Privatization (Pros):
Rationalization of limited financial resources of
government

 User-based fee makes it more equitable from social

point of view
Profit-motive makes it more efficient in construction
and operation
Facilitate (hard/soft) technology transfer

Privatization: Cons
Draw Backs (Cons):
Issue of role of government in providing social over
head capital
Maintenance and up-keep during operational level
may not be adequate
Since investment in infrastructure projects are
lumpy, they may require concessions. That in turn
may lead to development of monopoly
Need for Government Oversight:
Price and fees (tariff)
Quality of service
Adequacy of service

Outsourcing: Pros and Cons

Unlike the popular belief that outsourcing is a recent phenomenon, it actually has been in
existence as long time. To understand the growing debate on outsourcing, it is pertinent to
understand the pros and cons of outsourcing.
Outsourcing refers to the process wherein a business contracts with a third party service provider to
provide services that might otherwise be performed by in-house employees of the business.
Unlike the popular belief that outsourcing is a recent phenomenon, it actually has been in existence
as long as work specialization has existed. In fact, companies have been known to have used
outsourcing in some form or the other since a long long time. Typically, companies have been known
to outsource those functions that are considered non-core to the business or such functions which
needed specialized skills unavailable in the open market.
Of late, outsourcing has been attracting a lot of debates. And the main reason for the ongoing debate
is the emergence of service providers from various countries trying to provide services in foreign
locations. To understand the growing debate on outsourcing, it is pertinent to understand the pros and
cons of outsourcing.
The main advantages for business to opt for outsourcing are:
1. Cost Savings:- The costs associated with an in-house employee is always higher than the cost of an
outside service provider and this is the primary reason for most of businesses to opt for outsourcing
non-core functions.
2. Quality services:- Since most of the third party service providers excel at the services they provide,
businesses are guaranteed of better quality than an in-house employee would give. Additionally, any
service provider will always look to give the best of services since their reputation is at stake.
3. Access to specialized skills:- Any third party service provider will be expert at the service that it
provides. In fact, to beat competition, it would have to keep honing the skills of its employees. Also,

the service provider would build up specialized skills in it's niche area of operation. By outsourcing
to such a service provider, business gets access to such specialized skills, which may be of use in
some other field of operation of the business.
4. Contractual Obligation:- The liability of a service provider is higher than that of an in-house
employee. This makes working with them a safer bet for businesses.
5. Staffing issues:- By outsourcing a non-core function, a business avoids all the headache associated
with recruiting and hiring staff for such non-core function.
6. Risk Mitigation:- Many a times, non-core functions may become critical and would need skilled
intervention, which the business may be lacking. At such times, if the same function is outsourced
and becomes critical in the hands of the service provider, because of the talent pool available at the
service provider's end and because of all the experiences it would have gained by way of servicing
other clients, it would be in a much better position to counter any kind of risks.
7. Capacity Management:- There may be times when the non-core function may need additional
hands to meet deadline. In such times, it would become difficult for an in-house employee to tackle
the pressure. However, if the function is outsourced, the headache of meeting the deadline is of the
service provider. Besides, since the service provider would have a significantly large talent pool at it's
disposal, it can easily tide over such issues.
Those are some of the benefits associated with outsourcing. Let's now examine the flip side of
outsourcing.
1. Linguistic barriers:- When a function that needs handling of calls is outsourced to a foreign
location and the first language of that nation is different from the nation which outsources the
function, it may lead to low quality call handling. This concern is evidently higher in call centre
functions that are off shored. People find the the linguistic features such as accent, word use and
phrases that might be very different and hence in-understandable.
2. Social Responsibility:- When off shoring is resorted to, which means outsourcing of a process to a
foreign location, it results in reduction of employment avenues in the nation from where the function
is outsourced. This goes against the social behavior of the business outsourcing the process.
3. Company knowledge:- An in-house employee will always have a better understanding of the
nuances of a function since he/she would always have a better knowledge of the company and its
business as compared to a third party.
4. Staff Turnover:- Many people debate that quality of a service provider is as good as its people and
as and when there is a staff turnover, the quality of services will definitely suffer. In outsourcing
processes, the jobs are highly monotonous and this makes people loathe the job after a while. This is
a big factor contributing to higher turnover.
So, what do businesses do? Do they outsource or not? Is there anything that contradicts the negative
points raised against outsourcing? The answer is "YES".
Let's go by the negative points one by one.

1. Linguistic barriers:- It is correct to say that linguistic barriers do pose a threat. However, there are
number of countries which actually promote their people to learn foreign languages which help
outsourcing processes a lot. One of these countries is India, where, there are numerous institutions
that excel in teaching foreign languages. In fact, all the call centres in India have compulsory accent
training for the agents before they go "live".
2. Social Responsibility:- It is true that off shoring of processes result in growth of unemployment in
the country from where the processes are being outsourced. However, that's only one part of the
story! Outsourcing results in a higher profitability for the businesses which are then ploughed back
into the economy. This definitely has far better impact than the negative impact of growth in
unemployment. In fact the negative aspect is broadly nullified by the positive impact of profit getting
ploughed inside the economy.
3.Company Knowledge:- It's true that an employee would have a better knowledge of the business.
However, that knowledge is not built overtime. Any service provider can build the same kind of
knowledge provided there is a structured knowledge transfer from the business to the service
provider.
4. Staff Turnover:- Staff turnover is something that even a business has to handle with in-house
employee. This is something which is a common problem and hence cannot be used against
outsourcing

Pros and Cons of Joint Venture

A joint venture is a type of business arrangement.

A joint venture is an organization in which two or more individuals or companies join

together in a limited, temporary partnership. These groups will then combine their resources
in the hopes of accomplishing a specific, profitable goal. For example, two oil companies
might form a joint venture to drill a new well. Because of their many benefits, joint ventures
are very common. However, there are also a number of drawbacks.

Pro: Different Skill Sets

Joint ventures allow different parties to bring different skills to the table. Many companies
enter into joint
partnerships to gain access to new technology, capital and skills, as well
as critical business knowledge.
For example, a clothing company may want to sell
shoes to a new market. While the company may be
well-capitalized, they may be
inexperienced in the needs of the new market's consumers. By launching a joint-venture
with a knowledgeable local show company, the clothing company gains the experience
necessary to penetrate the market.
1.

PRO: ACCESS TO NEW MARKETS

Often national governments will forbid foreign companies from selling

products to its citizens so as not to take away sales from local industry. However,
some countries, such as China, will allow foreign companies to enter local markets

by making joint ventures with local businesses. This allows the country to provide
new products and services to its citizens and for the foreign companies to reach new
markets.

PRO: DIVERSIFICATION OF RISK

As companies are combining their resources in a joint venture, they also

share risk. This makes joint ventures a wise move for particularly risky transactions,
allowing companies to essentially hedge their bet.
CON: SLOWER DECISION-MAKING

Joint ventures are often structured so that all members of the venture have a
hand in making decisions. This ensures that no action is taken contrary to the wishes
of any of the partners. However, this requirement for consensus can mean that
decision making takes far longer than in other instances, as each issue must be
negotiated until all parties are in agreement.
CON: SHARED REWARDS

The flip side to sharing risks is that rewards must also be divided. In a joint
venture in which two parties have equal stakes, each party can take home only half
of the venture's profits. This presents a severe downside to forming joint ventures for
companies that believe they can conduct a successful transaction on their own.
CON: POTENTIAL FOR DISAGREEMENT

Each company has its own culture, philosophy and management style.
Unless all parties in a joint venture agree about the venture's objectives and its
leadership structure, the partnership can become mired in poor cooperation and
integration, defeating its chances for success.

by Rakesh Singh Rajput