Public-Private Partnership in Infrastructure Projects

The public-private partnership is increasing in number worldwide and is applied when it comes to building and managing the public projects which are large in size. It assists the countries more so the one having financial restrictions to erect a construction for the public whereas reducing the financial problem incurred investment segment. Both the private and the public sector should start the risk allocation strategies for the Public-Private Partnership (PPP) projects.  

According to Australian guidelines, the party which is in a position of managing the risk effectively should be considered most. One of the greatest benefits for the government is involving the private sector to participate in certain projects where the transfer of risk can be done to the private sector (Demande, 2008). The government develops the project in a more conventional way thus the private region should be in a position of handling those risk accordingly, inexpensively and delivery of infrastructure services of high quality. The management of risk in PPP projects is sounding a little bit composite since social infrastructure projects have begun to appear in the PPP market.

The PPP will only create the value for money if there is private sector efficiency compensate sufficiently for the difference in price arising from risk-free rate and the weighted average cost of the project

In PPP projects, the public sector perceive risk as any event which jeopardize the quantity or quality of service that they have acquired for and from the government while private sectors view PPP project as an event which brings about the flow of cash profile of the project to depart from the base case and endanger the project debt ability to service (Thomas, 2003).

The classification of risk can be done as financial risks, non-financial. The financial risks entail market risk, liquidity risks, and operational risks. Non-financial risks include political and disaster risks and the severity of the risk can be done by risk rating and it is identified as a function of two parameters such as impact and likelihood.  The likelihood of occurrence can be determined in two ways such as subjective, judgment and objective analysis and all this subjective judgment are approached by fuzzy theory.

The fuzzy method assists in analyzing risk based on the risk rating equation which can either be a quantitative or qualitative analysis which deals with numerical data and decision-making group respectively. Using the fuzzy sets, the risk can be assessed based on low probability, high risk or strongly important.

Risk Factors Leading to Success/Failure of PPP

This particular paper will address the following research questions

• What is Public-Private Partnership?
• How is the risk allocated in PPP?
• What makes Private sector to be in a better position of managing risk?
• Is risk allocation essential to create value for money?

All the projects do not require PPP and therefore its application is needed where the scale of the project is adequate to validate the comparatively great bid selection procedure and where a clear definition of the project can be made (Hammami, 2013). Even after taking into account the procurement cost linked with all three stages which include design, construction, maintenance still cost related with PPPs are normally greater unlike in the case a conventional contracting model (Hartford, 2006). In PPP, the preparation of the design is limited since a detailed design is only carried out only after the contract have been awarded unlike a standard procurement process (Kenny, 2014).

Aim

The research aims at proposing an optimum risk allocation for PPP infrastructure projects in Australia and it also shows a clear transfer of the significant risk between the parties within the project.

Objective

• To find significant risk associated with Public Private Partnership projects carried out in Australia.
• Using researchers’ data or literature to identify general risks.
• Using fuzzy logic approach to assess the identified risks.

Significance of Research

This particular research conducted enables one to understand how risks are allocated in PPP projects and the benefits of the allocation.

The value for money provides a similar quality and quantity of services at a lower overall cost and according to Ball (2007). The delivery of PPP can be done through the transfer of risk, greater asset utilization, innovation and integrated whole life management. The borrowing cost of the public sector is lower therefore high efficiency is required in the private sector compared to the public sector (Quiggin, 2005).

There are certain risk factors leading to the failure or success of PPP projects

Some of the risk factors leading to the success of the Public-private partnership include favorable economic conditions in Australia, the current political regime in Australia which is stable, good acceptance from the public, good collaboration from shareholders, effective procurement, and transparency of the process.

The major risk factors leading to the failure of the Public-private partnership in the infrastructure project in Australia include lack of competition, inadequate domestic capital market, poor risk sharing and management, inappropriate feasibility study, poorly defined sector policies, and the low credibility of government policies.                                           

Centered on the objective mentioned above, in order to pinpoint significant risks within PPP projects in Australia, primarily, different books and journal papers regarding risk management and numerous PPP projects should be studied. Based on the second objective, a literature review carried out by different researchers to identify the risks written by them. (Bovaird, 2004). Associated with the third objective, after the identification of risk, they are assessed based upon the impact of risk by using a fuzzy analysis method (Alfen, 2009). The literature review provides a complete review of risk allocation literature for PPP infrastructure projects. A particular allocation of risk pattern may be condemned as improper under certain conditions because some need to be allocated contrarily from project to project.

Methodology

The figure below shows the concept paper for the Public-Private Partnership in infrastructure projects:

Figure 1: Concept Map for the PPP in Infrastructure (Alfen, 2009)

The figure below shows the Public-Private Partnership project timeline in the infrastructural projects:

Figure 2: Project Timeline

The classification of risk is done based on numerous stages which include identification of risk, assessment of risk, and allocation of risk and mitigation of risk. The assessment of risk can be done based on a literature review or fuzzy method but for this paper, I preferred to carry out literature reviews of numerous journal papers and fuzzy sets of theory to identify to identify risk rating.

Risk management in PPP projects

This part of the paper provides a complete review of risk allocation literature for PPP infrastructure projects. A particular allocation of risk pattern may be condemned as improper under certain conditions because some need to be allocated contrarily from project to project. Some risk may be common to certain projects thus sharing a similar allocation as suggested by Rahman 2002. The individual experience also makes the risk allocation to different and sometimes sub-optimality arises as a result of the improper allocation of risk among the shareholder in PPP project as articulated by Thomas 2003.

According to Debande (2002) and Quiggin (2005), the PPP benefit should compensate for the additional recurring cost in private sector financing. The private sector has a higher discount factor for two reasons such that the public sector does not default in the same manner as the private sectors thus having a lower risk. Secondly, the public sector is borne by the taxpayers.

The project risk and cost is minimized by optimal allocation of risk and this is achieved by allocating the risk to the party who is in the best condition of controlling them as mentioned by Hartford 2006. The private sector efficiency has an impact on the project and this comes as a result of superior management resulting in fewer delays, lower costs and reduction in budget overruns.

According to Bovaird (2004), he argues that PPP can dilute political control over the making of the decision and at the same time undermining the competition such that the sectors in which PPP are set up are low competition is not clear. A risk management process from research journals is shown below as shown by Adoko (2017).            

Literature Review

Figure 3: The risk management process (Adoko, 2017)

Many of the business collapse as a result of risks involved and risk management assist in the identification and evaluation of numerous significant risks to help in controlling and decreasing the influence of unsuccessful events (Chan, 2014). In PPP projects, all the risks occurring internally and externally are involved and some examples of external risk include weather, legal and economic risks and internal risks entails personal, technical and financial risks (Chimay, 2009, p. 341). The risks mentioned above can cause project delays, losses in revenue, issues in quality and cost overruns. In order for the PPP project to succeed, it depends on risk management. Obtaining better outcomes amongst the different sectors involved can only be achieved by proper managing and sharing of risks and responsibilities (Chimay, 2009)

According to Chimay (2011), he gave the relationship between risk factors and their consequences represented using a diagram. Fuzzy theory is used to represent the relationship between risk consequences and sources. The rating of risk will be high if the risk factor is retaining high impact and when likelihood retains high.    

Figure 4: Probability versus severity (Chimay, 2009)

Most of the researcher have talked about the risk allocation principle and some of the guidelines that have been suggested as the criteria for sharing based on the Australian context is as follows;

The main principle of risk allocation is to allocate the risks within the project to the respective parties who can manage them efficiently (Thomas, 2003). Owners should carry out some of the risks through site assessment in order to determine the work quantities, delays caused by payments and calamities occurring naturally for example floods and earthquake. It is the responsibility of the contractor to take care of the following risk which includes the cost of material and labor, project completion within the time stipulated, construction quality, safety, defective works and errors in construction (Werneck, 2017). The handing over of the risk allocation to the party which has the ability to control it and undertaking it financially. The steps should be taken so as to ensure that the allocation of risk takes place as planned. The chance for a reward to the party should happen for proper handling of risk in case the risk is imposed upon a party. All risk remains lawfully the owners if not transferred to or assumed by another part for a fair compensation and in case the risk is transferred then it should be considered whether the party receiving the risk has the ability to assess the risk and all the required control to minimize it

Figure 5: Risk allocation process (Delmon, 2017)

Allocation of risk according to Australian standard AS2124 is as follows (Barry, 2008)

Table 1: Allocation of risk according to Australian standard

 
Table 2: Comparative study on risk allocation in PPP project for Australia and Hong Kong

Conclusion

The public-private partnership is increasing in number worldwide and is applied when it comes to building and managing the public projects which are large in size. It assists the countries more so the one having financial restrictions to erect a construction for the public whereas reducing the financial problem incurred investment segment. The allocation of risk in PPP projects is important more where the government is not in a position of undertaking the project due to the risk involves in those projects since the private sector is in a good position of undertaking those type of projects.

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