Risk Management in Public-Private Partnership: A Knowledge-Based Approach

RISK MANAGEMENT IN PUBLIC-PRIVATE PARTNERSHIP
ABSTRACT
The aim of this thesis report is to develop a risk identification and management
strategic system in PPP projects using knowledge-based approach. The initial part
of the report involves the identification of the risk from the various literatures
followed by the proposed risk allocations as well from the different literatures
which are compared against each other. Besides, another very fundamental part of
risk management which is risk mitigation strategy is as well comprehensively
discussed.
The focus of the risk management of PPP projects is not just on projects done in
China as is the case study but also on the management of risks that often occurs in
PPP projects across the world. The main focus of the PPP projects will be on the
infrastructure projects.
Qualitative method of data collection and analysis are adopted as the scientific
method of research.
INTRODUCTION
1.1 BACKGROUND
Public-Private Partnership model has been in use in the construction industry. Just
like any other initiative or model, Public-Private Partnership has two sides: the
merits and demits. Alongside the praise and applause for its benefits, the presence
of controversy and blame are as well vivid and real for its shortcomings (Sharma
and Bindal, 2014, p. 1271). Owing to the acute financial crisis that was
experienced in the year 2008, significant amount of interest has been on the verge
of increase in carrying out Public-Private Partnership projects in most of the
countries around the globe.
Such a scenario is attributed to the inadequacy of funds as well as the realization
of the importance of the investments of the private enterprises by the various
governments of countries (Grimsey and Lewis, 2002, p. 110). The same situations
are as well experience in china, as a result of which the government of China has
engaged actively in the encouragement of construction of Public-Private
Partnership projects.
Research aim and objectives
The main aim of this thesis project is to develop a risk identification and
management strategic system in PPP projects using knowledge-based
approach. This will be achieved through the research of the following
objectives:
1. To analyse the major risks which occur both locally and internationally in
the PPP projects
2. To develop knowledge based approach in establishing the assessment of
risks in PPP projects
3. To develop a case study on PPP projects (Warner & Sullivan, 2017)
4. To develop a conceptual framework which will monitor the strategies
that will govern Public-Private Partnership in the construction industry
Two risks are undesirable which include the changes in legislation and cost
overrun. Four risks are classified as unacceptable which are the inflation, financial
closure risk, the debt servicing and force majeure risks. The other risks which were
classified as catastrophic are the usage risk and the increase in interest rates.
Worldwide Context about Private Public Partnership Projects
Various types of PPP projects have been adopted in the development of
infrastructure around the world. The limitation in the availability of financial
resources to the public sector that may be used in financing the development of
infrastructure has facilitated countries in Europe, Africa, Asia, North, South and
Central America to adopt private investment as one of the promising alternatives of
realizing various economic developments
Relevant Risks in PPP Projects
There are three main groups of PPP-specific risks: fiscal risks, bidding risks and
residual value risks all of which are further split.
Fiscal Risks: Contingent Liability and Fiscal Investment Risk
Contingent liability risk defines the variation in the fiscal expenditure initiated by
future uncertain events under the utilization of the guarantees of the government. It
is often an indirect risk and the fiscal variability is often being triggered by factors
that are associated with the project that has the guarantee extended (Cooper et al.,
2014).
entries as well have significant concerns (De Schepper, Dooms & Haezendonck,
2014).
Fiscal Management or Fiscal Investment Risk
As illustrated by the recent experience by U.S. with Chicago Skyway and Indiana Toll
Road, concession of the road infrastructure may offer a large upfront funding to a
government. Even in circumstances when the amounts of allocation of money are
less spectacular, the manner of allocation and expenditure of the money can invoke
variability and hence risk which may occur in the financial position of the
concessionaire and the government (DeCorla-Souza et al., 2013).
Large upfront payments extracted from the private partners towards the government
may have two main impacts on the ratings of the government’s debts.
Residual Value Risk
This is a risk that is related to the market prices of the future of an asset and is often
categorical to the leasing or concession contracts where the infrastructure assets are
given back to the government after a long time of operation by the private sector.
The Bidding Risk-Winner’s Curse or Opportunistic Renegotiation Risk
This risk results from the evaluation of the bidder of the other risks that are
associated with the project. There are two groups of bidding risks that are
differentiated: opportunistic behavior and winner’s curse.
Foreign Exchange Risk
This encompasses a change in the value of the domestic currency in comparison with
the major currencies of the world for example the U.S. dollar or euro.
RESEARCH METHODOLOGY
In a bid to attained the aforementioned aims and objectives, the research, secondary
data will be adopted in conjunction with literature review
Risk Types in PPP Projects
• Political risks
• Financial risks
• Operational risks
• Construction risks
Managing Risks in PPP Projects
Risks in PPP projects should be borne by both the private and public sectors (Khmel & Zhao, 2016).
At the initial stages in which a contract is signed between the public sector and the concessionaire, it
should be noted that there should be identification and allocation of risks in each phase, should there be
unbalanced duties and contention in the final phases (Busch & Givens, 2013)
There is a 5-step process that has provided ideal in carrying out risks management. The steps include: risk
identification, assessment, ranking, control and tracing.
Risk identification: Involves the identification and assortment of some of the risk which may have effects
on a PPP project (Ke, Wang & Chan, 2013). The first step of this process involves the identification of the
most common risks in the whole life cycle of the PPP project through coming up with a literature review.
Risk analysis and assessment: The risks and analysed and of them an assessment is made before they
can be ranked.
Risk evaluation and assessment: Upon establishing the possible impacts of failure to manage risks, an
evaluation and ranking of the risks is done as the third step of the 5-step process.
Risk treatment: This step is divided into two parts: risk allocation strategy and risk mitigation
1. Risk mitigation: Ccomposed of four main parts: risks to be negotiated, risk to be shared, risks to be
assigned to the private sector and risks to be allocated to be public sector (Yang, Hou & Wang, 2013).
2. Risk Mitigation: There are about 5 suggestions of mitigation strategies that can be used in handling
land acquisition and compensation risk: setting up a flexible schedule, setting aside sufficient capital for
accidents, including any imaginable terms of acquisition and compensation at the earl stages, including
the articles of termination as part of the contract so as to manage political disagreements (Chen et al.,
2013).
LITERATURE REVIEW
Background of Public-Private Partnership Project
Private Public Partnership could be defined as a long term relationship that exists
between the private and the public sectors that has the purpose of generating
public services as well as infrastructure. Private-public partnership brings together
the public and the private sector together in long term contracts. Private-public
partnership is composed of unconditional and voluntary agreements and
understanding, agreements at service levels and private and outsourcing finance
initiatives (Carbonara, Costantino & Pellegrino, 2014).
FINDINGS & DISCUSSION
Knowledge Management of PPP Projects: An activity through which knowledge in a
firm may be identified, integrated, controlled and exerted so as so explore and
establish new knowledge
Types of Knowledge and Creation
• Explicit knowledge and tactic knowledge
• The SECI model
Risk Identification by type
Knowledge Management in PPPs
A PPP project has two primary knowledge gaps; lack
of ways of getting knowledge and the variations of
various types of knowledge from both the private and
the public sectors (Liu & Wilkinson, 2014).
Risk Management in PPP Projects: A game plan kind
involving the discovery, analysis, estimation,
moderation and monitoring of the risks that are
involved with a project in a bid to formulate actions
aimed at managing and handling them effectively
(Barlow, Roehrich & Wright, 2013).
CONCLUSION
Contributions of the Research to Knowledge
The adoption of knowledge management in PPP projects can aid in the achievement of healthier
relationships as well as communication between the various partners involved in a PPP project Research
Limitations and Future work
• Lack of possibility of mediating upon all the situations and possibilities owing to the limitation of the
visions and knowledge of authors
• Time constraints owing to the limited time for doing the research and thus a limited scope of research
• The possibility of examining each of the specific countries that has adopted PP model in the report
was almost non-existing
• Inability to exploit all the potential risks since every literature is composed of various risks and the
selected ones were mainly those that are mentioned mostly
Recommendations for Further Research
Through the literature review that has been carried out, it is confirmed that there are minimal researches
that have been conducted on risk ranking and assessment especially of PPP projects. It thus a
recommendation that more studies are done on this are to enhance investigations.
Further studies may attach more concentration on the association between the challenges of PPP models
and the risks associated with PPP models
Life Cycle Consideration in PPP Risks
Risk Allocation Model