Construction Economics and Procurement Assignment

Running head: CONSTRUCTION ECONOMICS AND PROCUREMENT
Construction Economics and Procurement
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Name of the University
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1CONSTRUCTION ECONOMICS AND PROCUREMENT
Table of Contents
Introduction:...............................................................................................................................3
Overview of the non-profit distribution model:.........................................................................3
Principles involved in the NPD model of Scotland:..................................................................4
Difference between PFI and NPD model of fund procurement:................................................4
Critical evaluation of the NPD projects: Scotland Construction Industry.................................5
Factors leading to success of NPD project:................................................................................5
Factors leading to negative impact on the NPD Model:............................................................7
Scope for improving the NPD model:........................................................................................8
Conclusion:................................................................................................................................9

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Introduction:
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.
Overview of the non-profit 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

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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.
Principles involved in the NPD model of Scotland:
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;
a. 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.
b. 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 Kildienė 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.
c. 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.
Difference between PFI and NPD model of fund procurement:
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

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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.
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.
Critical evaluation of the NPD projects: Scotland Construction Industry
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.
Factors leading to success of NPD project:
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,

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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;
a. 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.
b. 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.
c. 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.
d. 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

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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.
Factors leading to negative impact on the NPD Model:
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;
a. 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.

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b. 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.
c. 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.

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Scope for improving the NPD model:
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;
a. Primarily for the investors the structure of incentive must be enhanced to attract the
private investors under the construction sector.
b. Decision making power should be vested in the hands of investors that express their
interest to invest.
c. 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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Reference List:
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and beyond. Construction Economics and Building, 12(4), pp.15-28.
Bergstrom, J.C. and Randall, A., 2016. Resource economics: an economic approach to
natural resource and environmental policy. Edward Elgar Publishing.
Bullock, J.B., Stritch, J.M. and Rainey, H.G., 2015. International comparison of public and
private employees’ work motives, attitudes, and perceived rewards. Public Administration
Review, 75(3), pp.479-489.
Finkel, G., 2015. The economics of the construction industry. Routledge.
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Gallouj, F., Rubalcaba, L. and Windrum, P. eds., 2013. Public–Private Innovation Networks
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