The Need for Funding Public Infrastructure Development
The present study assesses the principles of the NPD model to derive fund and understanding of the differences between the PFI model and NPD model. Any nation’s government is assigned with the responsibility of implementing a control on several aspects of welfare development in order to maintain a country’s welfare program (Myers 2016). Among the other types of accountabilities, one of the prime responsibility of the government is to create a sufficient infrastructure in the country and greater focus must be paid on the creation and sufficient allocation of the welfare. Among the increasing aspects responsibilities, areas such as health, education, monetary benefit and other forms of service should be better paid attention. These benefits carries the character of the public benefit, which reflects the feature of non-excludable in nature.
There are services that needs appropriate support from the different sections of the society and the government alone cannot fund this. In order to fulfil the needs of sufficient funding, the government creates a partnership with the private and public sector (Azhar, Khalfan and Maqsood 2015). The initiative of private finance is regarded as the evident framework of public private partnership structure which is implemented by the government authorities of numerous countries. In the PFI model, partnership between the public and private sector is formed to derive sufficient fund for developing public sector infrastructure. Presently, the government of Scotland has endeavoured replacing the PFI model with the new model by establishing a public private partnership that is non-distribution model.
The implementation of procurement plan under numerous government sector has attained popularity by barring the traditional private finance initiative model. The government establishments of Scotland have decided to consider the Non-Profit Distribution with the objective of obtaining fund for infrastructural development of the public sector from the investment made by the private sector (Hosseini et al. 2013). The government authorities have implemented the NPD model in several sectors namely education and welfare and wished-for deriving fund to develop the transport segment of the country.
The Scotland government implements the model of NPD, which is presently dependent on the principles of procuring the funds for the infrastructure development of the public sector for efficient project distribution (Finkel 2015). There are three vital principles that are involved in determining the model of NPD for procuring fund in Scotland;
- There must be an inclusive involvement of the private sector stakeholders for managing the projects of public sector involving infrastructural expansion together with several welfare development plan namely education and health.
- The benefits derived from the investment of the private sector is not based on the equity base dividend. It represents that the stakeholders does not becomes the portion of the risk and return of investment (Zavadskas, Turskis and Kildien? 2014). Different from the pre-planned amount from the amount that is invested the scheme of traditional investment assist in deriving fund for the public sector projects.
- The return generated from the investment derived by the private sector in the public sector projects are covered up to the particular limit. Similar to the dividend equity system, the investors involved in the public sector would be obtaining pre-planned sum which is obtainable under the traditional procurement system.
The NPD model is created and implemented by the government of Scotland that is different from the model of PFI. The framework of NPD arising from the limitations faces both the components of demand and supply (Foss and Klein 2015). The major difference amid the two model is the investors of private finance initiative model that has invested in public projects derives return on equity from their investments. This signifies that investors are considered to be the part of risk and return for the investment made by the private investors in the public projects.
Private Finance Initiative Model
The investors accumulate the excess amount, which hardly forms the part of the welfare (Bergstrom and Randall 2016). The system of allocation is entirely different from the previous model in the Non-Profit Distribution Model of obtaining fund through private sector. Under the model of NPD excess amount derived through the private sector investment does not remains accrued to investors with excess amount is invested again to the society as charity.
The Scottish National Party introduces the model of NPD in order to manage the infrastructure program. The Scottish Feature Trust is independently offered with the responsibility of obtaining finance from the funding of the private sector for the development of the infrastructural project undertaken by the public sector (Poon 2013). Even though the model is similar to the model of PFI however under the NPD model the profits of the private companies are capped. Having this kind of feature the NPD model has made the procedure of procurement successful in the construction industry. As a result of this the sector derived large sum of inflow of capital with an approximate of 8000 provision of employment generation.
The construction industry of Scotland draws investment from the PFI however because of the financial crisis the difficulties such as in appropriate distribution of return, dividends associated with equity, in adequate transparency and scattered growth of the economic situation has resulted in the fall of the construction economy (Stiglitz and Greenwald 2014). nevertheless, there are numerous factors that have added in the accomplishment of the NPD projects is stated below;
- An important element of the NPD model represents that the investors that are in the private sector becomes the part of project and the revenue or earnings that is generated from the public construction project is capped up to the particular level at the time of signing contract (Kneese, Ayres and d’Arge 2015). As stated in the NPD policy the private sector produces profit that at the rate of market equilibrium. The excess amount that is produced is neither allocated to the investors nor to the government sector since they are simply distributed in the form of charity to the society.
- The primary advantage of the NPD project relating to the traditional PFI model under the industry of construction is that it reduces the chances of making bigger returns for the investors.
- The tool of capping under the model of NPD offers low rate of return than the PFI model and it is regarded as the beneficial in the construction sector for a country to a greater degree as found from the increasing rate of investment project in NPD (Fuss and McFadden 2014). The statistical data derived lay down that the normal expectations of the investors have been normally recorded at the 13.5% to 14% returns. However, under the NPD model a direct application of the capping system is performed for getting appropriate return on fund.
- The distribution of excess under the NPD model in Scotland is created to enhance the welfare of the society. Under the model of NPD there is a prevalence of substantial presence of the partnership between the public and private for differential infrastructural projects (Mazzucato 2015). This lead to low degree of monopoly of the private sector that originates from the lower restrictions under the model of PFI. This leads to a rise in the profitability of the large private investors however hardly offers any contribution to the society. In the model of NPD, the surplus amount that is derived is invested back to the society welfare as charity contributing in the development of the nation.
Even though there are several positive aspects of the NPD but there prevails a restrictions, which creates a hurdle in the capital inflow of the construction sector. A series of constituents have expressed their favour towards traditional model of PFI and are against the viewpoint stated in the NPD model (Gallouj, Rubalcaba and Windrum 2013). An argument has been bought forward by several researchers that have stated that NPD model have been a failure in offering anything different from the PFI model. Nevertheless, the construction industry of Scotland have created negative implications in the industry. It especially drains out the investment from the sectors beyond the domestic boundaries of the country.
There are numerous factors that are considered to be inherent to the NPD model as implemented by the Scotland authorities. This are as stated below;
- One of the vital feature of the NPD model is the profit distribution from the return on investment of the private sector is capped. This signifies that there is no scope for investors in generating the earnings based on equity (Bullock, Stritch and Rainey 2015). As a consequence of this, it leads to discouragement especially for the big investors and contractors since they do not possess the necessities of surpassing the targeted performance because the surplus amount derived is not accrued to the investors and the same is invested again to the society.
- As stated under the NPD model there is a greater degree of involvement of government in the traditional structure of PFI as private investors have been working with more degree of controlled framework. The board represents the public sector for relating to the Special Purpose Vehicle created for facilitating the private funding of private sector for the projects of public infrastructure (Hvidman and Andersen 2013). This signifies that the decision of deriving the projects is especially performed under the supervision of the SPV. The risk associated with the financial investment in this sector must be borne by the investors of private sector. As a result of this, the profitability and prospects associated with the investment by investors of private sector in the NPD scheme is depended on the board decisions that does not create a financial impact on implementing this decision. Consequently, this leads to the poor incentives for the investors of the private sector to indulge in the development projects.
- In spite of the fact that the Scotland government has started implementing the model of NPD in the major infrastructural sector of the Scotland there are numerous countries across the world which performs their work under the public private partnership model of the PFI model (Jang, Bang. and Sohn 2015). The provisions associated with the equity base earnings and insufficient transparency offers larger amount of incentives to the investors of the private sector so that they can reinvest funds into the projects of infrastructure development because there is hardly any capping of investment from the return of investment on these projects. As evident from the findings of the data private sector investors of Scotland invest their sum of money in the construction industry in the presence of PFI model. The investors prefer to make investment in such sector so that they can earn higher amount of return on international projects.
The model of NPD has gained significant amount of popularity in several sectors namely, transport, educations health etc. that create a noteworthy implication on the overall welfare of the society. The model however suffers from shortcomings as it lacks incentives for numerous investors. Such shortcomings can be reduced by applying corrective measures. They are as follows;
- Primarily for the investors the structure of incentive must be enhanced to attract the private investors under the construction sector.
- Decision making power should be vested in the hands of investors that express their interest to invest.
- The method of refinancing is not applied for private sector under the program of NPD. This is regarded as the necessity in the current investment situation which must be acknowledged in this framework with sufficient structure of capital to establish similar NPD program.
Conclusion:
The Scottish government to promote the public private partnership associated with the infrastructural projects implements the model of NPD. In spite of several restrictions, the model possess the potential of gaining strength for replacing the model of PFI. The NPD model has the provision of raising the overall welfare of the society since it has unique surplus allocation instrument, which can lead to overall improved performance of the country.
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