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.

Investment is defined as the total value of capital goods produced in the economy (which is also called capital formation) plus net of export and import of capital goods. Gross fixed capital formation is defined as the production of machinery, equipment, new construction and intellectual property rights.

Capital formation is important for any economy as it helps in boosting output and income. Following is the past trend of Gross fixed capital formation (investment) in the economy in the last few years.

When the government decides that a certain project should be done through PPP model then it first selects a private party and signs a “Concession Agreement” (also called PPP Agreement) with the private party. This agreement provides details as to what would be the roles and responsibilities of the private sector and the government sector during the entire life of the project.

The following are the important factors to be kept in mind while designing these agreements:

• All the risks which could emanate in the project and who will handle it should be written in the agreement.

• All the force majeure events should be mentioned in the agreement like Covid-19 is a Force majeure event, earthquake, other natural calamities etc.

• A clause should be there for handling the impacts of any change in domestic/international laws

• The Agreement should be futuristic in nature and should be properly designed keeping in mind the possibilities and scenarios that may arise in future.

If the Concession Agreement is poorly designed then it becomes a major hurdle in the implementation of that PPP project and the project may get stuck in future. For example, the first Ultra Mega Power Project developed by Tata Power and Govt. of India under the PPP model got stuck for several years because of the increase in export duty by the Indonesian Govt.