Risk Involved in Public Private Partnership Projects - Research Proposal Example

RISK INVOLVED IN PUBLIC PRIVATE PARTNERSHIP PROJECTS] Introduction Some long term projects such as projects for water provision services require the collaboration of the private and public sectors. These collaborations are referred to as Public Private Partnerships. These collaborations are meant to enhance delivery of value for money for public infrastructure or services effectively by combining the advantages associated with competitive tendering and flexible negotiation. Risk is also allocated between the public and the private sector (Ke, Wang, Chan, & Lam, 2010, p. 1). This is because some enormous projects, especially projects directed at providing the society with amenities involve numerous risks that may be too enormous for a single sector to handle. Public Private Partnerships are crucial because they are associated with an element of transparent procurement, which is a crucial factor that contributes to success. Since the risk of most public, infrastructure projects is high, risk allocation should be clearly communicated and understood between the public and private parties so that each party knows the risk that it should address. Therefore, knowledge of the potential risk associated with the whole project should be evaluated by both public and private clients and bidders. It is important to negotiate a fair risk allocation to avoid burdening either party with more risk than it can handle (Ke, Wang, Chan, & Lam, 2010, p. 1). The importance of Public Private Partnerships is that projects are run efficiently because risks are allocated and shared among private to engage in Public Private Partnerships for long term and high risk projects; especially infrastructure projects because it enhances sharing of risk between the public and private sectors and allocation of risk to the organisation that is capable to managing and mitigating it efficiently (Australian Constructors Association, 2014, p. 5). It is very important to study the types of risks that are associated with Public Private Partnership construction projects and the effects that such risks pose on construction projects. It is also vital to ascertain the amount of risk that each of the sectors, public and private, should handle during Public Private Partnership construction projects. Background The amount of risk associated with Public Private Partnerships is quite significant and it is imperative that both parties, the private and public sector, are fully aware of the amount of risk they should address in such projects. However, most public and private organisations are not aware of the most ideal risk allocation practice, which will enhance delivery of effective services and ensure value for money. Therefore, the approaches used in allocation of risk between public and private sectors may be inappropriate because of lack of sufficient information about the amount and types of risk associated with Public Private Partnerships. This is because public and private sector institutions do not analyse all the risks that any Public Private Partnership is likely to face. Currently, almost every public infrastructure project involves the private sector’s participation. For instance, in the UK and US, the private sector is reported to perform better than the private sector in provision of water services to the public (Wibowo & Mohamed, 2010, p. 505). However, the many risks that are associated with these projects are of great concern to the private sector players because, in case such risks materialise, the associated cost is likely to be very high for the private sector to shoulder. There is a need of studying the types of risks that are associated with Public Private Partnership construction projects and how such risks affect public construction projects. It is also crucial to ascertain the risks that the private sector should take and the risks that the public sector should retain. Problem Statement Little effort has been carried out to identify and systematically manage risks of Public Private Partnerships for construction projects. This is so despite the fact that there is greater risk associated with Public Private Partnerships and both the private and the public sectors are required to cater for a portion of these risks in Public Private Partnership construction projects (HM Treasury, 2012, p. 5). There is a lack of information among most private and public institutions about risk allocation, in terms of enhancing delivery of effective services and provision of value for money. Currently, most public and private sector institutions allocate risks between themselves inappropriately because they lack adequate information about the amount and types of risk that is associated with Public Private Partnership construction projects. Failure to carry out analyses on the risks that a Public Private Partnership construction project is likely to face is the main cause for this phenomenon. Public Private Partnership construction projects have been performing poorly because they lack proper funding and management. This is because private and public sectors do not engage in a rigorous risk identification program before commencing Public Private Partnership construction projects. Lack of proper identification of risks will always result in poor performance and failure to provide value for money in construction projects. Therefore, this study seeks to establish the types of risks associated with Public Private Partnership construction projects and the effects that such risks pose on construction projects, as well as investigate the amount of risk that each of the sectors, public and private, should handle appropriately in construction projects. Research Questions This study will seek to answer the following research questions. i. What are the types of risks that are associated with Public Private Partnership construction projects? ii. What are the effects that the identified types of risks on Public Private Partnership construction projects? iii. What type of risks should the public sector retain in Public Private Partnership construction projects? iv. What type of risks should be transferred to the private sector in Public Private Partnership construction projects? Objectives of the Study In this study, the following objectives will be sought. i. To identify the types of risks that are associated with Public Private Partnership construction projects. ii. To find out the effects that the identified types of risks on Public Private Partnership construction projects. iii. To identify the type of risks that the public sector should retain in Public Private Partnership construction projects. iv. To identify the type of risks that should be transferred to the private sector in Public Private Partnership construction projects. Study Hypotheses The study will seek to test the following two hypotheses. i. The types and amount of risk retained by the public sector in Public Private Partnership construction projects is adequate. The alternative hypothesis in this case will be ‘The types and amount of risk retained by the public sector in Public Private Partnership construction projects is not adequate’ ii. The types and amount of risk transferred to the private sector in Public Private Partnership construction projects is adequate. The alternative hypothesis in this case will be ‘The types and amount of risk transferred to the private sector in Public Private Partnership construction projects is not adequate’ Scope of the Study This study will involve private sector organisations and public sector organisations and therefore, will incorporate both public and private construction organisations. The following major risks; political risk, economic risk, legal risk, environmental risk, construction risk and market risk will be studied, among others. Limitation of the Study Given that this study will rely on case studies and literature, the research will be limited by the disparity in selecting study cases and elements. An example is that cases chosen for this study will be published in different years. This is likely to result in inaccurate data because risks facing Public Private Partnership construction projects keep on changing every year due to a change in factors such as inflation. Therefore, this may lead to bias in establishing the actual risks and perception about such risk. Also, given that there might have been bias among previous researchers in collecting and analysing information, inaccurate results may have been collected in prior studies and using such information may threaten the internal validity of this research. However, the researcher will evaluate the consistency and accuracy of the methodologies used on previous researches to choose the most reliable case studies. In addition, the findings of this research may only be based on the opinions of government officials and private construction organisations operators given that interviews will be conducted using questionnaires. Also, the risks that may be identified from case studies on Public Private Partnership from a given country may not be applicable in other countries because of the differences in legal systems and business environments, as well as, natural phenomena. Finally, the descriptive evaluations of this research may be affected by the constant changes in environmental, legal and economic risk and perceptions among the private and the public sectors. Assumption of the Study The study makes the following assumptions. First, it is assumed that there is open and competitive bidding for Public Private Partnership construction projects. Secondly, the study assumes that both the private and the public sectors have sufficient information about the current risks that construction projects face. Implementation of the Study The study will be implemented after a careful review of the literature on Public Private Partnership projects has been carried out. The study will then involve a review of chosen cases studies on Public Private Partnership projects to gather information. Literature Review According to Tang, Shen and Cheng (2008), Public Private Partnerships play an important role in ensuring the success of delivery public services. Cooperation between private and public sectors is enhanced through PPP projects. Such Public Private Partnership projects also lead to better risk management and enable the government to set policies that are clearer (Tang, Shen, & Cheng, 2008, p. 684). However, implementation of these projects is more complex than expected because the risks associated with construction projects are so numerous and there is lack of adequate information about appropriate allocation. In a study by Wibowo and Mohamed (2010), it was found out that the government of India had planned a sizeable number of water supply projects for almost forty cities. The private sectors were expected to finance the aforementioned projects. This was an indication that the local water industry in India was moving steadily towards privatisation. As a result, reliance on the government support has reduced because privately owned organisations have improved their technical capabilities so as to that they can manage risk that the public sector cannot retain (Wibowo & Mohamed, 2010, p. 506). The study established that the party who is best able to carry out assessment, control and management of the risk was supposed to shoulder that risk. Also, a party that owns or has the superior hedging instruments is given the priority to retain risk (Wibowo & Mohamed, 2010, p. 506). In addition, parties which can diversify the risk and those that can address the risk at the lowest cost. It should be determined which of the parties should be responsible for which risk in public projects especially construction projects (Wibowo & Mohamed, 2010, p. 509). Ke, Wang, Chan and Lam (2010) carried out a study on preferred eisk allocation in China’s Public Private Partnership projects. These researchers carried out a Delphi survey. The main participants of the study were experienced practitioners whose preference of the allocation of risk among Chinese Public Private Partnership projects was sought (Ke, Wang, Chan, & Lam, 2010, p. 482). According to the findings of this study, the public sector would shoulder the risk of nationalisation and majority of the other risks that are related to the government and government officials and their deeds (Ke, Wang, Chan, & Lam, 2010, p. 482). Also, the study established that the risks that both the public and private sectors cannot be able to deal with on their own are preferred to be shared equally between the public and private sectors. Majority of project level risks can be shouldered by the private sector, as per the study’s findings (Ke, Wang, Chan, & Lam, 2010, p. 482). A review of PPP researches published in some of the construction field journals was carried out by Tang, Shen, and Cheng (2008). The main objective of this study was to find out differences and similarities in the findings of the studies. This was aimed at providing insights for further Public Private Partnership research direction and improvement of the existing Public Private Partnerships practices. In this research, previous studies were grouped into either non-empirical researches or empirical researches (Tang, Shen, & Cheng, 2008, p. 683). A further grouping empirical studies was carried out to come up with the themes of risks, relationships and financing while non-empirical studies were classified into the themes of financing, project success factors, risks and concession period. In their study, Wibowo and Mohamed (2010) reviewed the practices of allocation of risk in water supply projects of Indonesia presently. Both regulators’ and operators’ perceptions on risk criticality and allocation were reviewed by the researcher. The study established that there are low or moderate levels of intra-group and inter-group agreement pertaining to specific project risk factors (Wibowo & Mohamed, 2010, p. 540). Public Private Partnership construction projects face legal risks, in which the government may impose punitive tax laws and restrictions in dealing with corruption cases in such projects. It should be noted that government intervention is among the most critical risks (Xu, Yeung, & Chan, 2010, p. 929). As noted earlier, Public Private Partnership construction projects are subject to economic risk that arises as a result of changes and fluctuations in the financial market and inflation. The risk associated with Public Private Partnership construction projects may also accrue as a result of changes in market demand for prices for services and natural risk, which is normally a product of environmental hazards and risks. Public Private Partnership construction projects are prone to the risk of finance, especially when there are insufficient sources of funds. There should be full risk analysis for each Public Private Partnership project by the government so as to re-balance risk allocation. This will the government with an opportunity to appropriately transfer risks associated with contracts of service outcomes to the private sector. In such cases, the private sector is charged with the responsibility of designing, constructing, operating and maintaining projects so as to reduce the whole life project cost (Australian Procurement and Construction Council, 2002). Public Private Partnership should be used in cases where it is most probable that it will deliver value for money. Due to their ability to focus on long term costs, risk management, risk transfer and delivery of specified standard services, Public Private Partnership project risks are borne partly by the public sector and private sector (Office of Government Commerce, 2008, p.10). This is done on the basis of which sector is best able to manage risks. Risk should not be transferred if the cost of transferring it is greater than the cost of retaining it just for the sake of it is not desirable (Office of Government Commerce, 2008, p.10). According to the Australian Constructors Association (2014, p. 13), there is a common optimism bias in the way that the United Kingdom government assesses the likely cost of projects because final projects often cost more than the original estimates by up to 51% for non-standard buildings. It has been noted that the allocation of risk is often inappropriate, unfair and unbalanced while the cost of bidding and delivering Public Private Partnerships is too high. This means that the private sector may not continue participating until the inequities are removed (Australian Constructors Association, 2014, p. 3). The same case applies in many countries. Governments over-estimate the benefits that are expected to accrue from Public Private Partnerships. This research will find out whether the types and amount of risk retained by the public sector in Public Private Partnership construction projects is adequate. On the other hand, this research will find out whether the types and amount of risk retained by the private sector in Public Private Partnership construction projects is adequate. Justification of the Research This study is worthy carrying out because it will provide insights on the importance of carrying out analyses on the risks that face Public Private Partnership construction projects. The research will also contribute towards the improvement of Public Private Partnership construction projects by recommending proper funding and management techniques and ways in which private and public sectors can engage in a rigorous risk identification program before commencing Public Private Partnership construction projects. In addition, this research is expected to provide information for proper identification of risks by both the public and private sectors so as to provide value for money in construction projects. Data The main data that will be collected in this research will include information on political risk, economic risk, legal risk, environmental risk, construction risk and market risk. Information pertaining to the risk of escalation of the cost of construction and the cost of land will be gathered (Wibowo & Mohamed, 2010, p. 508). Data on twenty four, PPP projects risks, as perceived by the public sector (regulators) and the private sector (operators), has been listed and ranked, on the basis of mean and standard error. Table 1: PPP Projects Risks, as Perceived by the Public Sector (Regulators) Type of Risk Mean Standard Error Rank Risk of lack of construction materials 4.23 0.41 1 Risk of interruption of construction due to equipment defect 4.15 0.36 2 Risk of increase in construction cost 4.15 0.19 4 Risk of escalation of maintenance cost 4.15 0.37 3 Risk of uncertainty in the setting of tariffs 4.08 0.45 6 Risk of changes in legislation 4.08 0.33 5 Risk of natural catastrophes 4.00 0.41 7 Risk of fluctuation in money value 3.92 0.27 8 Risk of fluctuation in interest rates 3.85 0.25 9 Risk of fluctuation of foreign exchange rate 3.77 0.26 10 Risk of termination of project by government prematurely 3.54 0.42 12 Risk of rapid elapse of construction period 3.54 0.43 11 Risk of human initiated disaster 3.38 0.35 13 Risk of lack of refinancing when project funds are exhausted 3.23 0.36 15 Risk of breach of contract by the government 3.23 0.43 14 Risk of nationalisation 3.17 0.30 16 Risk of lack of demand for constructed structures 3.15 0.36 18 Risk of abuse of office by officials of government 3.15 0.48 17 Risk of premature termination by private organisation 3.08 0.46 19 Risk of conflicted negotiation of construction land price 3.08 0.41 20 Risk of security due to terrorism 3.00 0.45 22 Risk of demonstrations and destructions 3.00 0.42 23 Risk of breach of contract by private organisation 3.00 0.47 21 Risk of strike by labour workers 2.92 0.45 24 Source: Wibowo and Mohamed, 2010. Table 2: PPP Projects Risks, as Perceived by the Private Sector (Operators) Type of Risk Mean Standard Error Rank Risk of uncertainty in the setting of tariffs 4.50 0.26 1 Risk of breach of contract by the government 4.50 0.26 2 Risk of lack of construction materials 4.47 0.26 3 Risk of rapid elapse of construction period 4.44 0.18 4 Risk of increase in construction cost 4.29 0.25 5 Risk of termination of project by government prematurely 4.13 0.29 6 Risk of premature termination by private organisation 4.13 0.29 7 Risk of fluctuation in money value 4.13 0.27 8 Risk of lack of refinancing when project funds are exhausted 4.00 0.29 10 Risk of lack of demand for constructed structures 4.00 0.34 9 Risk of escalation of maintenance cost 3.94 0.23 12 Risk of abuse of office by officials of government 3.94 0.34 11 Risk of security due to terrorism 3.88 0.33 13 Risk of natural catastrophes 3.88 0.29 14 Risk of fluctuation in interest rates 3.81 0.29 15 Risk of breach of contract by private organisation 3.75 0.34 16 Risk of fluctuation of foreign exchange rate 3.67 0.29 17 Risk of human initiated disaster 3.63 0.27 20 Risk of demonstrations and destructions 3.63 0.30 19 Risk of conflicted negotiation of construction land price 3.63 0.33 18 Risk of changes in legislation 3.63 0.20 21 Risk of interruption of construction due to equipment defect 3.56 0.26 22 Risk of strike by labour workers 3.38 0.33 23 Risk of nationalisation 3.20 0.26 24 Source: Wibowo and Mohamed, 2010. From this data, it is evident that the public sector in Indonesia ranks the risk of lack of construction materials above all the other risks in water supply projects (Wibowo & Mohamed, 2010, p. 508). On the other hand, the private sector ranks the risk of uncertainty in the setting of tarrifs the highest. This study will gather information pertaining to changes in legislation, nationalisation and foreign exchange risks, and all the outlined, twenty two risks. Research Design The research will use both qualitative and a quantitative approaches. Qualitative approach will involve information collected from previous studies about the types of risks, their effects on PPP projects and perceptions about the sector that should retain them. Qualitative information will be collected from various case studies regarding performance of past Public Private Partnership projects. Finally, interviews will be conducted on private construction organisation operators to find out their opinions while questionnaires will be sent to government officials. The Quantitative approach will focus on finding out the mean and standard error from the number of studies that prefer that a certain type of risk should be retained by a certain sector. From this quantitative information, ranking will be carried out for analysis. Breakdown of Data Collection Approach Data Collection Qualitative data will be collected from the case studies chosen for research. The findings of each case study, pertaining to each risk factor will be ranked together. After this ranking of case study findings, the researcher will be able to identify the risk factors that are associated with Public Private Partnership construction projects. Information about risks that should be retained by the public sector will be ranked under the same category while information about risks that should be transferred to the private sector will be ranked together. On the other hand, analysis of information pertaining to the number of case studies outlining the type of risks that should be retained by either sector will indicate quantitative data and will be used to calculate the mean and standard error. Data Analysis Analysis of data will involve calculation of the mean and standard error for each of the twenty four risks outlined, depending on the number of case studies. This will be carried out by using the information about risks that should be retained by the public sector and the information about risks that should be transferred to the private sector after ranking. The mean and standard error will be used to make inferences about risk and Public Private Partnership construction projects. The Researcher The researcher will be charged with the responsibility of carrying out a thorough literature survey on previous Public Private Partnership projects. The researcher will also analyse the chosen case studies to collect information. Finally the researcher will use the information collected to carry out data analysis and make inferences. To complete this research successfully, the researcher is expected to have data handling skills. For instance, the information that obtained from interviews and from the thorough literature review should be handled appropriately, given that it is qualitative. This requires the researcher to be well organised so as to be able to produce the information when it is required during compilation and analysis. Plan of the Research The research is set to carry out a comprehensive literature survey on previous Public Private Partnership projects, after which it will carry out an investigation on various case studies to identify the categories of risks specific to Public Private Partnership construction project contracts, those that should be retained by the public sector and those that should be transferred t the private sector, as well as, the effects of such risks on construction projects. Recommendations for Advanced Study This study recommends that future advanced studies should investigate all the risks that affect Public Private Partnership projects in terms of magnitude or quantified financial cost so that both the public and private sectors will be able make critical evaluations before engaging in construction projects. Research Findings It is expected that this study will establish the risks that the public sector ranks highest in public private partnership construction projects. Similarly, findings on the risks that the private sector ranks highest in public private partnership construction projects will be established. It is expected that the private sector or operators will be of the view that risks such uncertainty in tariff setting, breach of contract by the government, lack of construction materials, rapid elapse of contract period, increase in construction cost and premature termination of the projects by the government should be shouldered by the government. On the other hand, the public sector or regulators is likely to support that the private sector should retain risks such as lack of construction materials, interruption of construction due to equipment defects and escalation of maintenance costs. Conclusion It is expected that this study will attain its objectives. This means that all the research questions will be answered. Also, observation and adherence of the study’s guideline will aid in answering the research questions. In addition, the study will be expected to carry out a methodical review of the literature on PPP projects, along with a review of case studies, as a method of collecting information. Analysing the information by use of statistical methods such the mean and the standard error will enhance appropriate inferences. References Australian Constructors Association., 2014. Public Private Partnerships: Putting Guidance into Action. [Online] Available at: [Accessed 23 May, 2014]. Australian Procurement and Construction Council., 2002, November. Discussion Paper: Key Issues in Procurement through Public Private Partnerships (PPPs). [Online] Available at: [Accessed 23 May, 2014]. HM Treasury., 2012, December. A New Approach to Public Private Partnerships. [Online] Available at:[Accessed 23 May, 2014]. Ke, Y., Wang, S., Chan, A. P., & Lam, P. T., 2010. Preferred Risk Allocation in China’s Public–Private Partnership. International Journal of Project Management, pp. 482–492. Office of Government Commerce., 2008. An Introduction to Public Procurement. [Online] Available at: [Accessed 23 May, 2014]. Tang, L., Shen, Q., & Cheng, E. W., 2008. A review of studies on Public–Private Partnership projects in the construction industry. International Journal of Project Management, pp. 683-694. Wibowo, A., & Mohamed, S., 2010. Risk Criticality and Allocation in Privatised Water Supply Projects. International Journal of Project Management, pp. 540-513. Xu, Y., Yeung, J. F., & Chan, A. P. (2010). Developing a Risk Assessment Model for PPP Projects in China: A Fuzzy Synthetic Evaluation Approach. Automation in Construction, pp. 929-943. Read More