SRR721 - Risk Allocation in Public-Private Partnership Infrastructure

This report provides a comprehensive analysis of risk allocation in Public-Private Partnership (PPP) infrastructure projects, specifically within the Australian context. It explores the significance of risk allocation, examines risk factors leading to both success and failure, and discusses the application of fuzzy theory in risk assessment. The research aims to propose an optimum risk allocation model for PPP infrastructure projects in Australia, emphasizing the transfer of significant risks between parties. The report includes a literature review, examining risk management processes, allocation principles, and comparative studies, ultimately aiming to provide insights into effective risk management strategies for PPP projects.

Public-Private Partnership in Infrastructure Projects 1
A RESEARCH PROJECT ON
RISK ALLOCATION IN PUBLIC-PRIVATE PARTNERSHIP INFRASTRUCTURE
PROJECTS
By
Name of the Student
Name of the Professor
City/State
Date/Month/Year

Public-Private Partnership in Infrastructure Projects 2
Table of Contents
INTRODUCTION...........................................................................................................................................3
Fuzzy theory............................................................................................................................................4
Research Questions.................................................................................................................................4
Limitations of PPP projects in Australia...................................................................................................4
RESEARCH AIM AND OBJECTIVE..................................................................................................................5
Aim..........................................................................................................................................................5
Objective.................................................................................................................................................5
Significance of Research..............................................................................................................................5
Is the PPP value for money?....................................................................................................................5
Risk factors leading to the success of PPP projects.................................................................................6
Risk factors leading to the failure of PPP projects...................................................................................6
RESEARCH APPROACH.................................................................................................................................6
Concept map...............................................................................................................................................6
Timeline.......................................................................................................................................................7
LITERATURE REVIEW....................................................................................................................................8
Risk management in PPP projects...........................................................................................................8
Risk management in PPP project.............................................................................................................9
Risk allocation........................................................................................................................................10
Comparative study on risk allocation in PPP project for Australia and Hong Kong................................12
CONCLUSION.............................................................................................................................................13
Bibliography..............................................................................................................................................14

Public-Private Partnership in Infrastructure Projects 3
LIST OF TABLES
Figure 1: Concept Map for the PPP in Infrastructure …………………………………………. 8
Figure 2: Project Timeline …………………………………………………………………….. 8
Figure 3: The risk management process ………………………………………………………. 10
Figure 4: Probability versus severity ………………………………………………………….. 11
Figure 5: Risk allocation process ……………………………………………………………… 12
LIST OF FIGURES
Table 1: Allocation of risk according to Australian standard ………………………………… 13
Table 2: Comparative study on risk allocation in PPP project for Australia and Hong Kong ... 13

Public-Private Partnership in Infrastructure Projects 4
INTRODUCTION
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).

Public-Private Partnership in Infrastructure Projects 5
Fuzzy theory
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.
Research Questions
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?
Limitations of PPP projects in Australia
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

Public-Private Partnership in Infrastructure Projects 6
only carried out only after the contract have been awarded unlike a standard procurement process
(Kenny, 2014).
RESEARCH AIM AND OBJECTIVE
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.
Is the PPP value for money?
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

Public-Private Partnership in Infrastructure Projects 7
Risk factors leading to the 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.
Risk factors leading to the failure of PPP projects
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.
RESEARCH APPROACH
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.
Concept map
The figure below shows the concept paper for the Public-Private Partnership in infrastructure
projects:

Public-Private Partnership in Infrastructure Projects 8
Figure 1: Concept Map for the PPP in Infrastructure (Alfen, 2009)
Timeline
The figure below shows the Public-Private Partnership project timeline in the infrastructural
projects:
Figure 2: Project Timeline

Public-Private Partnership in Infrastructure Projects 9
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.
LITERATURE REVIEW
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

Public-Private Partnership in Infrastructure Projects 10
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).
Identification of risk
Assessment of risk
Risk Response
Implementation of risk
Monitoring of risk
Figure 3: The risk management process (Adoko, 2017)
Risk management in PPP project
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)

Public-Private Partnership in Infrastructure Projects 11
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.
PROBABILIT
Y
SEVERITY OF IMPACT
MINOR MODERATE MAJOR
FREQUENT MEDIUM HIGH HIGH
LIKELY LOW MEDIUM HIGH
REMOTE INSIGNIFICAN
T
LOW MEDIUM
Figure 4: Probability versus severity (Chimay, 2009)
Risk allocation
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;
Practice and principal of risk allocation
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

Public-Private Partnership in Infrastructure Projects 12
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)
AS2124 clause
PHYSICAL RISK Site access, Latent
conditions, weather, acts of
27,12,35.5,NSP, and 40
respectively.

Public-Private Partnership in Infrastructure Projects 13
God, quantity variations
FINANCIAL RISK Rise and fall, funding NSP and 42,43,44
respectively
LEGAL/POLITICA RISK Regulations and public
disorder
14 and NSP respectively
PERFORMANCE RISK Defective work, Accidents,
Time for completion,
Acceleration and suspension,
managerial competence,
labor, material, and
Suspension
2,NSP,33,16,NSP
respectively
Table 1: Allocation of risk according to Australian standard
Comparative study on risk allocation in PPP project for Australia and
Hong Kong
MAJOR RISK HONG KONG AUSTRALIA
RANK Weighted average
score %
RANK Weighted
average score
%
PHYSICAL RISK Site access 4 56
Latent conditions 8 55
Weather 4 61
Quantity variation 9 51
FINANCIAL RISK Rise and Fall 2 64
Funding 8 52 1 63
PERFORMANCE
RISK
NSC failure 5 59 4 56
Defective work 7 54 1 63
Managerial
Competence
2 64 4 56
Labor, material,
equipment
6 58 4 56

Public-Private Partnership in Infrastructure Projects 14
Time for completion 1 72 3 61
LEGAL/POLITICAL
RISK
Regulation 9 51
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.

Public-Private Partnership in Infrastructure Projects 15
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Scholastic.
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