Background
The government of any country in the world is a body of people who are bestowed with the responsibility to control the different aspects of a country such that the overall welfare of the country remains maintained to a consistent level and keeps on increasing. Among the various responsibilities of the governing authorities, one of the primary responsibilities is to develop proper infrastructure in the country and focus on the development and efficient distribution of welfare increasing services including health, education, monetary beneficial services and others. These goods are mainly of the nature of public good, which means that these goods and services are non-excludable and non-rival in nature (Warner and Sullivan 2017).
These services, to be built and distributed among all the sections of the society, require sufficient capital and other resources, which are often not possible for the government alone to fund. For this purpose, the government often enters into different types of negotiations and partnerships with the private sector investors and service providers to gather sufficient resources to provide these services to the residents of the country (Zhang and Chen 2013). In this context the most widespread framework of public private cooperative structure, which has been existing and implemented by the governing authorities of most of the countries, is the Private Finance Initiative. Under the PFI Model, a public private partnership is formed for the procurement of fund to deliver public sector infrastructural services, from the private sector investments. However, in the recent times, the government of Scotland has been trying to replace this PFI Model with a newer model of public private partnership, which is known as the Non-Profit Distribution Model (Oyedele 2012).
The assignment tries to take into account the overall driving principles of this NPD Model of procurement of funds, the difference of the same from the traditional PFI Model and the positive as well as the negative aspects of the NPD Model and in its implementation. The assignment also tries to find the possible way outs for the problems, which arise in the implementation of the Non-Profit Distribution Model for procurement of private sector investment for funding public sector projects, keeping into, account the economy of Scotland (Hwang and Choi 2017).
The governing authorities of Scotland have developed the Non-Profit Distribution Model for procurement, in the recent years as an alternative way of collecting funds for infrastructural and other projects in the public sector, in the form of private sector investments. Since the implementation of the procurement plan in different sectors, the same has gained immense popularity and has even superseded the traditional Private Finance Initiative Model (Scottishfuturestrust.org.uk, 2017). The government of the country has even started implementing the NPD Model in different sectors like that of education and health and has also planned to roll the same for procuring fund to develop the transport sector of the country (Asenova 2013).
Core Principles of the NPD Model
The Non-Profit Distribution Model, as is implemented by the government of Scotland, in the contemporary period, is based on several principles, which aim to make the procurement of funds for public sector infrastructural and other public good and services production and distribution project more efficient and widespread. The three core principles underpinning the Non-Profit Distribution Model procurement in Scotland are as follows:
a) More inclusive involvement of the private sector stakeholders in the management of the public sector projects which involve infrastructural development as well as in various welfare augmenting aspects like education, health and others (Scottishfuturestrust.org.uk, 2017).
b) The distribution system of the benefits from the investment of the private sector is not based on any equity-based dividend. This, in simple words, means that the stakeholders, in this system are not a part of the risk and return system of investment and they get a pre-decided amount from their invested amount, unlike the traditional investment mechanisms, especially in case of procurement of funds from the private sectors to the public sector projects. Here the equity structure of private investment is substituted by subordinated debt structure (Inderst 2017).
c) The returns from the investments made by the private sector on the public sectors projects, under this model, are capped up to a certain limit, as discussed above. This means the investors who venture in the public sector, are supposed to get a pre-decided amount unlike the dividend based equity system, which prevails in the traditional procurement systems (Ellison 2013).
The NPD Model, as has been designed and implemented by the government of Scotland, varies extensively from that of the PFI Model, which has traditionally existed in this sector for quite some time. In fact, the very concept of the NPD Model evolved from the limitations, which were faced by both the demand as well as the supply sector proponents in this aspect (Sheikh and Asher 2015). The main difference between the two models is that, while the Private Finance Initiative Model, the private investors, who invest in the public projects, usually derives equity returns from such investments. This means the investors become a part of the risk and return mechanism of such investment and in case of any surplus generation from the investments made by such private investors in the public projects, the surplus is accrued to them only, thereby not contributing to the building of the overall welfare of the society (Villalba-Romero and Liyanage 2016). However, in the framework of the Non-Profit Distribution Model for procuring funds from the private sectors, this distributional aspect is entirely different from the former model. Under the NPD Model, the surplus generated due to the investments of the private sector, is not accrued to the investors. The surplus generated in such cases is reinvested to the community itself, mainly in the form of charity. There exists capping on the returns of the investors and anything above those are treated as a surplus and is reinvested back to the community itself (Pautz and Bailey 2012).
Differences between the NPD Model and PFI Model
The Non-Profit Distribution Model was introduced by the Scottish National Party and is the infrastructure program is run by the Scottish Futures Trust, which is an independent body bestowed with the responsibility to tap finance from the private sector for funding the infrastructural projects undertaken by the public sector. In spite of bearing some similarities with the traditional PFI Model, the NPD Model caps the profit of the private companies. This trait of the NPD Model, along with several other characteristics, has made the procurement process successful to a considerable extent, especially in the construction sector of the country in the contemporary period. The construction sector not only experienced an impressive inflow of capital but also created an additional provision for 8000 jobs across the country (Inderst 2017).
The construction industry of Scotland, previously, used to draw investments in the form of PFI. However, the initiation of the Global Financial Crisis along with the problems incurred in the PFI model, including those of inequality in distribution of the returns, large firms gaining from equity based dividends, lack of transparency and unequal development in the economy deteriorated the condition of the construction sector of the country to a considerable extent. Under the PFI, barring the big investors, many private sector investors fell skeptic to invest, which in turn decreased the funding present for the construction industry (McKibbin 2016). The NPD policy, introduced by the Scottish Futures Trust, in this context, helped to a great extent in drawing funds from the private sector to the construction sector. The surplus distribution structure of the Non-Profit Distribution Model for procurement also helped the construction industry as well as the overall economy of Scotland to tackle the blow of the Global Financial Crisis and also to recover impressively.
There are several factors contributing to the success of the NPD projects in the construction sector of the country, few important of which are discussed as follows:
- The most unique attribute of the NPD Model of procurement is that though the private sector investors directly become a part of the project, however, their earnings from the returns from the investments on the public construction projects is capped at the level at which the investors sign the contract. This does not imply that the investors are devoid of any profit. In fact, under NPD policy, the private investors earn returns from their investment at the market equilibrium rate. However, the surplus is accrued neither to the investors nor completely to the government sector; it is distributed to the community itself, in the form of charity to some pre-designated sector (Ball 2014).
- The main advantage of the NPD projects over that of the traditional PFI Model in the construction sector of the country has been that it rules out the possibility of the big investors making huge profit with insignificant restrictions, as was present in the PFI Models.
- The capping system under the NPD, though promises lower rate of return than the previously PFI Model, has been proving to be beneficial for the construction sector in the country to a considerable extent, as can be seen from the increase in the investments in the sector in the NPD projects. The data shows that though the normal expectations of the people had been usually set at 13.5% to 14% returns, however, under the NPD schemes, the investors have been seen to bid much lesser, which indirectly imply that the capping mechanism under the NPD Model of procurement has been efficient to a significant extent (Bidgood 2012).
- The surplus distribution system under the NPD system in Scotland has also been designed to increase the overall welfare of the society. Under the NPD Model, which is primarily a politically motivated strategy implementation in the country, there is a substantial presence of the public sector in the private public partnership, which are built for the different infrastructural projects (construction projects in particular). This, in its turn has resulted in lesser autocracy of the private sector, which, under the PFI used to enjoy little restrictions. This increased the profitability of the large private investors but did not contribute much to the welfare aspects of the society. However, in NPD, the surplus generated is reinvested back to the community itself, in form of charity to other sectors, which in turn has facilitated the growth of other aspects of the country itself.
However, though the NPD programme in spite of having many positive aspects and advantages over the PFI Model has its own set of limitations, shortcomings, which has been creating several hurdles in the construction sector investment-flow, and there are still many proponents in favor of the traditional PFI model and against the prospects of the NPD model. Many argue that the NPD model does not offer anything substantially different or prospective than the PFI Model, but the structure of the model has led to several negative implications on the construction and other infrastructural sector of the country, especially in terms of draining of investments outside the sectors and also outside the domestic boundaries of the country itself.
Successes and Limitations of the NPD Model in the Construction Industry
There are several factors inherent to the Non-Profit Distribution Model as has been implemented in the economy of Scotland. The key factors are discussed as follows:
- One of the unique attribute of the NPD model is that the profit distributions from the returns of the investments of the private players are capped. This means there is no scope of equity-based earnings on part of the investors in this construct. This in turn, acts as a discouragement, especially for the big investors or contractors as they do not feel the urge to beat the performance targets as the surplus generated is not accrued to them but goes back as reinvestment to the community itself.
- In the NPD structure, introduced by the governing authorities of Scotland, the involvement of the government is more than that in the traditional PFI structure and the private investors work under a more regulated framework. The public sector in this case, is represented by the Board of the Special Purpose Vehicle, which is specifically created for the facilitation of private funding in the public infrastructural projects. This implies that the decisions regarding the driving of the projects are primarily done under the supervision of the Board of the SPV. However, the risks of the financial investments in these sectors, including the construction sectors are borne by the private sector investors. Thus, the profitability and prospects of the funds invested by the private sector investors under the NPD program depends upon the decisions of the Board, which is not directly affected financially, by the implications of their decisions. This in turn, adds to the lack of incentives of the private sector investors to indulge in these projects (Woollard 2014).
- Though the government of Scotland has started implementing the NPD structure in almost all the major infrastructural sector of the country, there are many countries in the world, which still works under the framework of the PFI Model of public private partnership. The provision of equity based earnings and the lack of restrictions, provides huge incentives for the private sector investors to relocate their funds to invest on the infrastructural projects of these countries as there are no capping on their earnings from the returns from the investment on these projects (Juuti and Kopra 2016). This can be empirically seen from the data findings. The findings suggest that in the recent years many of the big private investors of Scotland, who initially used to invest their money in the construction sector of the country itself, in the presence of the PFI Model, now prefer to relocate their funds to the similar sectors of other countries, thereby earning more from these international projects. This in turn has led to reduction of investments by the private investors in the construction sector of the country.
The NPD program, implemented by the government of Scotland, has already gained significant popularity in different sectors, including higher education, transport, health and also has significant implications on the overall welfare of the community of the country. However, the above discussed shortcomings in the NPD model, has resulted in the loss of prospects of the otherwise unique and potential strategic framework, as a considerable amount of investment is going out of the country due to the lack of incentives of many of the private sector investors (James and Rose-Ackerman 2013). These limitations can however be overcome with the help of a robust and planned framework of implementation of the model on part of the government, which can be done by undertaking several corrective measures:
a) The primary step, which can be taken to alleviate the problems in the NPD framework, is to improve the incentive structure for those of the private investors who are willing to venture in this sector.
b) The currently existing structure, in which the repercussions of the decisions taken by the Board is borne by the investors, has to be changed and some of the decisive powers should also be with the investors such that they feel eager to venture in the country itself.
c) The refinancing method is not advocated for the private sector under the NPD program. However, this is a necessity in the contemporary investment scenario and thus, should be acknowledged in this framework provided an efficient capital structure is built to incorporate the same in NPD framework (Della Croce and Yermo 2013).
Conclusion
The NPD model, implemented by the government of Scotland, as can be seen from the above discussion, tends to pose as a potential alternative to the traditional PFI model, which has been into existence in the public private partnership in the infrastructural projects. Though the NPD has some significant limitations and there are many scopes for improvement in this sector, the program has the potential to substitute the PFI model fully. The NPD framework also has provision for the overall increase in the societal welfare due to its unique surplus distribution mechanism, which if utilized efficiently can help in a wholesome development of the country in long run.
References
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