EECT020 Construction Project and Cost Management

The basic principles that underpin the NPD model (as it will be applied in future privately financed infrastructure projects) and differentiate it from the traditional PFI model. 

 

An exploration of  the critical success/failure factors (reasons for success/failure) for NPD projects in the Scottish construction industry        

 

Identification of approaches to alleviate failures identified in part 2. 

 

What are the contributions to knowledge of your findings in part 1, 2 and 3?

Introduction: 

The government of a nation are under the obligation of controlling the numerous different aspects such as the overall welfare of a nation which should be maintained. Amid other responsibilities of government authorities, the basic responsibility is to create appropriate infrastructure in a country and place emphasis on the development and effective distribution of the welfare by increasing the other aspects such as health, education, monetary and other service (James and Ackerman 2013). Such benefits possess the character of public benefit that ultimately represents that they are non-excludable in nature.

Such services must be allocated to different sections of the society that requires appropriate capital and other resources and not possible for the government to support funding. To meeting the funding requirement, the government forms partnership with private and public sector. Private finance initiative is considered as the most widespread framework of public private cooperative structure which has been applied by the government authorities in several countries. Under the model of PFI, a partnership among the public and private sector is created for obtaining fund in order to develop public sector infrastructure (Boyd et al. 2017). Recently, the Scotland government has made an attempt of replacing the PFI model with a new model created by public private partnership which is known as non-profit distribution model. The study considers the overall principles of NPD model for obtaining fund and understanding the differences between PFI model and NPD model.

Overview of The non-profit distribution model: 

Scotland governing authorities have undertaken Non-Profit Distribution for procuring fund relating to infrastructural development of the public sector from the investments by private sector. The application of procurement plan under several sector has gained immense popularity by suspending the traditional private finance initiative model (Young, Hood and Hamill 2017). The authorities of Scotland have applied the NPD model in different sectors such as education and health and has even proposed to obtain fund in order to develop the transport sector of the nation.

Principles determining the NPD model of Scotland:

The NPD model applied by Scotland government currently is reliant on the principles that proposes to procure fund for public sector infrastructure and other public goods or services production with efficient distribution project. Three important principles that determines the NPD model in obtaining fund in Scotland are as stated below;

1. Having an inclusive indulgence of private sector stakeholders for administering the public sector projects that comprises of the infrastructural development along with the numerous welfare development plan such as health and education (Gardiner et al.2013).
2. The benefits from distribution system of private sector not based on equity-base dividend. This signifies that stakeholders do not form the part of risk and return of investment. Unlike pre-planned amount from the invested sum traditional investment schemes helps in obtaining fund for public sector projects.
3. The returns derived from the investment by private sector in the public sector projects are capped to a specific limit (Maddison 2014). Unlike the dividend equity system, the investors under the public sector will be getting pre-planned sum that is available under the traditional procurement system.

Difference between PFI and NPD model of obtaining funds: 

The mode of NPD has been designed and applied by the Scotland government which is different from the PFI model (Deane 2016). The theory of NPD originated from the shortcomings that was faced by both the demand and supply sector components in this respect. The central difference between the two model is private investors under the Private Finance Initiative Model that invest in public project earns equity returns from investments. This represents that the investors form the part of risk and return mechanism from the investment made by private investors in public projects. The surplus is accumulated by the investors that does not contribute to the welfare of the society. Under the Non-Profit Distribution Model of procuring fund from private sector the allocation aspect is completely different from previous model. In NPD model surplus derived from private sector investment is not accrued to investors and surplus derived is reinvested to the community largely as charity.

Critical assessment of NPD projects: Scotland Construction Industry

The NPD model is bought forward by Scottish National Party with infrastructure program is administered by Scottish Feature Trust that is independently provided with the accountability of procuring finance from the funding of private sector in infrastructural project taken by public sector (Summers 2014). Though NPD model is identical to PFI model the NPD model caps the private companies profit. Such feature of NPD model has made procedure of procurement successful particularly in the construction sector. The sector experienced heavy capital inflow with 8000 provision of employment creation.

Factor contributing to the success of NPD project:

Scotland construction industry drew investment from PFI but the international financial crisis bought the difficulties of unequal return distribution, equity related dividend, lack of transparency and scattered development of the economic condition led to decline of construction sector. However, there were several factors that contributed to the success of the NPD projects of the country are as follows;

1. One of the unique component of NPD model is that though the private sector investors forms the part of project their earnings from return on public construction project is capped to a specific level during contract signing of investors. Under the NPD policy the private sector generates profit at market equilibrium rate. The surplus is neither distributed to investors nor to government sector they simply distributed as charity to community (Stiglitz and Rosengard 2015).
2. The main advantage of NPD project is the traditional PFI model in the construction sector of industry which eliminates the chances of making big returns by the investors.
3. The system of capping in NPD provides low rate of return than the PFI model and it is considered beneficial for the construction sector in the nation to a significant extent as noticed from the rising investment in the NPD projects (Rodrik 2016). The data represents that the normal anticipations of the investors have been normally set at 13.5% to 14 returns. Whereas under the NPD model, a direct implementation of capping mechanism is done for obtaining efficient amount of fund.
4. The allocation of surplus under the NPD model in Scotland is designed to increase the welfare of the society. In the NPD model there prevails a substantial amount of existence in the public private partnership that is created for different infrastructural projects (Mazzucato 2015). This results in lower monocracy of private sector that came with little restrictions under the PFI model. This increases the profit of big private investors but does not contributes to the benefit of society. Under the NPD model the excess derived is reinvested to community as charity to other sector that contributes to the growth of other country.

In spite having numerous positive aspects of NPD program there are certain limitations that create hurdles in the construction of sector capital inflow. There are numerous components that favours the traditional PFI model and that are against the viewpoint of NPD model. Some have argued that NPD model fails to provide anything different than the PFI model however the structure of the construction sector of Scotland has resulted in negative implications in the industry (Marglin 2014). It particularly drains the investment out of the sectors further than the domestic boundaries of the country.

Factors resulting in negative implications of NPD model: 

There are several factors which is inherent to NPD model as applied by authorities of Scotland. These includes the following;

1. An important characteristics of the NPD model is the distribution of the profit from investment return of the private investors are capped. This represents that there is no scope for investors in deriving equity base earnings (Williams et al.2015). As a result, it leads to discouragement particularly for the big investors and contractors because they do not have the urgencies of going past the performance targets since the excess derived is not accrued to investors because it is reinvested to the community itself.
2. Under the NPD model there is high government involvement than under the traditional PFI structure with private investors working in more regulated framework. The public sector is represented by the Board of Special Purpose Vehicle, established for facilitating the private funding under the public infrastructure project (Arrow and Kruz 2013). This represents that decision of deriving projects is particularly done under the Board supervision of SPV. The risk involved in financial investment under these sector together with the construction sector that are shouldered by the private sector investors. Therefore, the profitability and prospects of funds invested by private sector investors under the NPD program is reliant on the decision of board that does not create a financial impact by applying their decision (Van, Bouckaert and Halligan 2015). This results in poor incentives for private sector investors to engage in such projects.
3. Even though the government of Scotland has begun implementing NPD structure in all the major infrastructural sector of Scotland there are several counties in the world that functions under the public private partnership framework of PFI model. The provision relating to equity based earnings and inappropriate transparency provides large incentives to private sector investors in order to reinvest their funds on the infrastructural projects of the such nations since there is no capping of earnings from return of investment on these projects. It can be empirically witnessed from the findings of data where Scotland private investors invest their money in construction sector of the country under the existence of PFI model that prefer to reinvest their funds in identical sector leading to higher earnings in international projects. This result in lowering of investment by private investors in construction sector of a nation.

Scopes for enhancing NPD: 

The program of NPD applied by the Scotland government has gained immense popularity in numerous sector comprising of higher education, transport, health that have significant implication on the entire welfare of the community. In the above stated discussion the limitations of the NPD model have led to loss of prospect of the unique and probable strategic framework (Bouckaert, Peters and Verhoest 2016). This is because significant sum of investment is flown out of the nation as there is a lack of incentives for several investors of the private sector investors. Such restrictions can be overcome by implementing a planned and robust framework of applying the model by the government that can be performed by taking numerous corrective measures. This includes;

1. The first step that can be considered for overcoming the problems in the NPD framework is to enhance the structure of incentive for those of private investors that are willing to invest in this sector.
2. In the present prevalence structure the consequences of the decision that is undertaken by the board is shouldered by investors. This must be changed with decisive powers must be vested in the hands of investors that are eager to invest in the nation itself.
3. The procedure of refinancing is not used for the private sector in respect of the NPD program (Faini and Melo 2015). This becomes the necessity in the present investment scenario and must be acknowledged under this framework with the efficient capital structure is created to incorporate the identical NPD framework.

Conclusion: 

On the conclusive note the model of NPD is applied by the government of Scotland as evident from the above stated discussion can pose a significant amount of alternative to the traditional PFI model, that has been present in the public private partnership relating to the infrastructural projects.

Even though the NPD has significant amount of restrictions there are several aspects of enhancing the sector since the program has the potential has strength of substituting the PFI model completely. The model of NPD possesses the provision of increasing the overall welfare of the society because it possesses a unique excess distribution mechanism which on effectively utilizing can result in overall improvement of the nation in the long run.

Reference:

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