Construction Economics and Procurement: Scotland's NPD Model Analysis

This report provides a comprehensive analysis of the Non-Profit Distribution (NPD) model implemented by the Scottish government for infrastructure projects, primarily in the construction sector. It contrasts the NPD model with the Private Finance Initiative (PFI) model, highlighting the key differences in fund procurement, profit distribution, and government involvement. The report delves into the principles governing the NPD model, emphasizing its focus on public welfare and capped returns for private investors. It critically assesses the NPD's success factors, such as increased investment and employment, while also addressing its limitations, including potential discouragement of large investors and government overreach. Furthermore, the report explores potential enhancements to the NPD model, such as incentivizing private investment and improving refinancing mechanisms, to optimize its effectiveness in fostering sustainable infrastructure development. This analysis is crucial for understanding the implications of public-private partnerships and procurement strategies in the context of construction economics and public finance.

Running head: CONSTRUCTION ECONOMICS AND PROCUREMENT
Construction Economics and Procurement
Name of the Student
Name of the University
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Table of Contents
Introduction:...............................................................................................................................2
Overview of The non-profit distribution model:........................................................................2
Principles determining the NPD model of Scotland:.................................................................3
Difference between PFI and NPD model of obtaining funds:...................................................3
Critical assessment of NPD projects: Scotland Construction Industry......................................4
Factor contributing to the success of NPD project:...................................................................4
Factors resulting in negative implications of NPD model:........................................................6
Scopes for enhancing NPD:.......................................................................................................7
Conclusion:................................................................................................................................8
Reference List:...........................................................................................................................9

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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

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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;
a. 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).
b. 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.
c. 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

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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;

5CONSTRUCTION ECONOMICS AND PROCUREMENT
a. 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).
b. 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.
c. 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.
d. 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

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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;
a. 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.
b. 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

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2015). This results in poor incentives for private sector investors to engage in such
projects.
c. 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;

8CONSTRUCTION ECONOMICS AND PROCUREMENT
a. 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.
b. 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.
c. 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.

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