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 phases
• Earlier return on investment
• High visibility of organizational changes
• Higher impact to organization • Tactical, limited coverage
• Delayed return on investment
• Lower impact to overall organization
• Higher deployment costs
Advantages
• User and business awareness of the product. Benefits are realized in the early phases.
• You can replace many manual processes with early automation.
• You can implement password management for a large number of users.
• You do not have to develop custom adapters in the early phases.
• Your organization broadens identity management skills and understanding during the first phase.
• Tivoli Identity Manager is introduced to your business with less intrusion to your operations. • Your organization realizes a focused use of resources from the individual managed application.
• The first implementation becomes a showcase for the identity management solution.
• When the phases are completed for the managed application, you have implemented a deeper, more mature implementation of the identity management solution.
• Operation and maintenance resources are not initially impacted as severely as with the bottom-up approach.
Disadvantages
• The organizational structure you establish might have to be changed in a later roll-out phase.
• Because of the immediate changes to repository owners and the user population, the roll-out will have a higher impact earlier and require greater cooperation.
• This strategy is driven by the existing infrastructure instead of the business processes. • The solution provides limited coverage in the first phases.
• A minimal percentage of user accounts are managed in the first phases.
• You might have to develop custom adapters at an early stage.
• The support and overall business will not realize the benefit of the solution as rapidly.
• The implementation cost is likely to be 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 ““heart””of 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 project’s future income
– Limited/little recourse or even no recourse to developers
– Project’s income is the only source for debt (P+I) payment
• BOT is a kind of Privatization
BOT/PFI/PPP Nature
• Financing based on project’s financial viability
instead of the developer’s 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
– Contractor’s 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/developer’s 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
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 phases
• Earlier return on investment
• High visibility of organizational changes
• Higher impact to organization • Tactical, limited coverage
• Delayed return on investment
• Lower impact to overall organization
• Higher deployment costs
Advantages
• User and business awareness of the product. Benefits are realized in the early phases.
• You can replace many manual processes with early automation.
• You can implement password management for a large number of users.
• You do not have to develop custom adapters in the early phases.
• Your organization broadens identity management skills and understanding during the first phase.
• Tivoli Identity Manager is introduced to your business with less intrusion to your operations. • Your organization realizes a focused use of resources from the individual managed application.
• The first implementation becomes a showcase for the identity management solution.
• When the phases are completed for the managed application, you have implemented a deeper, more mature implementation of the identity management solution.
• Operation and maintenance resources are not initially impacted as severely as with the bottom-up approach.
Disadvantages
• The organizational structure you establish might have to be changed in a later roll-out phase.
• Because of the immediate changes to repository owners and the user population, the roll-out will have a higher impact earlier and require greater cooperation.
• This strategy is driven by the existing infrastructure instead of the business processes. • The solution provides limited coverage in the first phases.
• A minimal percentage of user accounts are managed in the first phases.
• You might have to develop custom adapters at an early stage.
• The support and overall business will not realize the benefit of the solution as rapidly.
• The implementation cost is likely to be 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 ““heart””of 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 project’s future income
– Limited/little recourse or even no recourse to developers
– Project’s income is the only source for debt (P+I) payment
• BOT is a kind of Privatization
BOT/PFI/PPP Nature
• Financing based on project’s financial viability
instead of the developer’s 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
– Contractor’s 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/developer’s 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
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