AbstractThisstudy focuses on the risks involved in infrastructure projects ofPublic-Private Partnership. Thestudy aims to identify many critical risk factors that are not well consideredin PPP. And because of these risks PPP cannot deliver services in the way it issupposed to deliver. In developing countries like Pakistan, there is still needto develop and properly implement the PPP’s policies and objectives.
“Today, the private sector is the engine of growthfor many countries and expansionof the private sector has become a central theme inthe development agenda of many ofthose countries.” (Asian Development Bank Institute(ADBI), 2007, p.15) IntroductionPakistan,similar to other developing countries, is facing a severe shortage ofinfrastructure that hampers economic growth and development of the country. Interms of gross domestic product (GDP), Pakistan is the second largest economyin South Asia (World Bank, 2015), and ranks 6th asthe most populous country in the world, with a total population of 188.924million as of, 2015 (World Bank, 2016b).
The infrastructure situation inPakistan is relatively poor as it ranks 117 in overall infrastructure out of140 countries.(Schwab, Sala-i-Martin, & Brende, 2015)In order to meetthe infrastructure requirements, private investment seems to offer a promisingsolution to partially mitigate the above mentioned issue. PPP projects areknown to be riskier than the projects delivered through traditional procurementmethods.
Research has determined that equitable risk allocation is one of themost important driver for achieving success and Value for Money (VfM) in suchprojects. Failure of projects procured under various modalities of PPP, worldover, has indicated a shortfall in effective risk management efforts by thestakeholders involved. To better understand risks and their management on PPPinfrastructure projects in the Pakistani context, this research endeavors toidentify the critical risks, important Risk Allocation Criteria (RAC) thatdetermines risk management capabilities of the stakeholders in their capacityand commitment to manage risks, and factors that determine effective riskmanagement (ERM) efforts on projects delivered through PPPs. The relevant riskfactors, RAC, and measures of ERM, have been determined through an extensivereview of the international research, published literature, and informationobtained from interviews with PPP experts in Pakistan, both in the power andtransport infrastructure sectors.
This questionnaire constitutes stage one ofthe research and solicits information on risks and measures, in this research, have been defined as event(s) that can causeactual project circumstances to differ from those assumed and hence influenceproject cost/benefits.In recent years, the use of the term “public-privatepartnership” (PPP) has become quite common to describe ways in which thestate relies on private actors instead of government employees to delivercertain infrastructure and services to the public. (Custos & Reitz, 2010) Purpose of the StudyThepurpose of this study is to analyze the risks involved in Public-PrivatePartnership infrastructure projects and their assessment from the PPP’s expertsto signify the importance of risk assessment and management in PPP projects.
Research MethodologyDatawas collected through questionnaires from different PPP’s experts. This methodis appropriate according to the topic because it was required to assess therisk factors and to check the probability of occurrence of that factor andseverity of risk. Likert scale has been used to measure each risk factor in thefollowing way:1 = extremely low; 2 =very low; 3 = low; 4 = moderate; 5 = high; 6 = very high; 7 = extremely highThequestionnaire is divided into two sections; Section A and B. Section A refersto the detail of the respondent; name, e-mail and organization. Section Bidentifies several PPP risk factors, their probability and severity.
Questionnaire was delivered to therespondents through e-mail and respondents were required to fill thequestionnaire and return it through e-mails. The respondents were PPP expertswho have significant experience in PPP infrastructure projects. Implementing the PPP in PakistanInrecognition of the severe infrastructure shortage and its effect in hamperingeconomicGrowth,the Ministry of Finance established Infrastructure Project Development Facility(IPDF) in 2006 and make it compulsory todevelop PPP policy and observe its implementation. The revised PPP policy of2010 provides support for all infrastructure sectors, at the federal andprovincial level. (Regan, 2017)PPPinfrastructure is implemented in Pakistan through power infrastructuredevelopment and transport infrastructure development. In power infrastructuredevelopment, Pakistan has started to work on it by contracting with differentcountries like China and the current development in it by agreeing upon CPEC(China Pakistan Economic Corridor) in which many Chinese Financed Projects willbe executed. Intransport sector many developments have been made and many projects are inprocess in different parts of the country specially in Punjab using PPP. Orangeline train is one of the example of it which is under construction and willsoon be in operation.
Risks Assessment in PPP”In Pakistan, the needfor infrastructure is immense while resources and capital are scarcecommodities. The government estimates the public exchequer cannot even meethalf of the funds required for infrastructure development.” (Noor, Khalfan, & Maqsood, 2012)Project risk allocation between thepublic and private sector, termed as the most criticalexercise to ensureproject success, is often done inefficiently by disregarding the necessityofallocating risks based on the risk management capability paradigm.(Arndt, 2000)In general, when acompany starts a project firstly it identifies the possible risks that canoccur before starting the project, during the project and after the project.
PPPs reflect a unique relationship between thegovernment and a private firm. While the government retains ultimateresponsibility for the delivery of the good or service, it becomes a partnerwith the private sector in decision making and delivery. (Forrer, Kee,Newcomer, & Boyer, 2010)Private Partnership (PPP) has been increasingly usedto procure infrastructure projects, such as motor ways, bridges, tunnelsandrailways.
However, the risks involved in PPP projects are unique and dynamicdue to large amount of investment and long concession period.(Li & Zou, 2012) In PPP, public andprivate both sectors are involvedand risks are identified from both ends.Public sector party has its own risks and private party have its own.Pakistan’s construction industrylacks risk management maturity (includes all the main stakeholders i.
e.,clients, consultants andcontractors).(Choudhry& Iqbal, 2012) Although the risks are related to the projectbut risk assessment became important in that case. Public party can have riskslike availability of project site, permits to start the project etc. andprivate parties can have financial risks, lack of experts etc. both partiesafter analyzing the risks, check the probability of each risk factor, and thenimpact of that risk factor on the project.
Private financingpromised a way to provide infrastructure without increasing the public-sectorborrowing ratio (PSBR).(Hodge & Greve, 2008)PPPprojects in Pakistan are exposed to a myriad of risks that need to be studiedsystematically. Equally important is the need to explore the current practicestowards allocation of specific risks in different sectors and the efficiencyand efficacy of such practices. (Mazher, Chan, & Khan, 2017) Risk category Risk factors Political Political risk (Political violence, geopolitical situation, country political stability), corruption, government intervention/interference, price change Legal Small gaps in legal and regulatory framework Natural Hydrological risks (hydropower projects), geological risks, flood risk, force majeure, environmental risk (loss of or damage to biodiversity/environment) Social Public opposition (opposition against high tolls) Development risk (late changes in government project procurement requirements/policies resulting in loss of project development costs), Development significant delays in financial closure, lack of competition, lack of international participation in bidding, land acquisition, resource assessment (wind/solar resource assessment data) Construction Technology risk, poor quality (construction), construction equipment risk (breakdown, repair and maintenance), project changes Operations and maintenance risk, availability/performance risk, power Operation evacuation risks (lack of transmission infrastructure), input/resource risk (supply/cost) Poor local economy, poor global economy (escape or lack of interest of Economic western investors), inflation, foreign exchange (availability and volatility), financing risk (local investors’ credibility/difficulty in attracting foreign investment) Market Demand risk, competition risk Institutional capacity issues (lack of skilled manpower), turnover of public sector officials (loss of corporate knowledge), high internal resistance to Capacity / PPPs (within public authorities – lack of ownership / understanding), Capability coordination issues between government departments, long and protracted public decision making process, delays in obtaining permit/licenses Withregards to the factors that significantly influence risk management performanceon PPP projects, institutional capacity/maturity (public/private sector) washighlighted as a point of major concern, the lack of which was considered as asignificant cause of problems at the pre-financial close stage for projects.
One of the interviewee held the opinion that the projects which bring foreigninvestment have seen good risk management efforts, principally attributable toforeign experience and expertise of the lenders. Local lenders were alsomaturing over time, however, the local lenders may be forced to act outside principles,at times, under political influence. The interviewees also held that publicsector lacked understanding of risks and exhibited weak contract administrationskills in privately financed power projects.(Mazher et al., 2017)FINDINGSAccordingto the experts following risk factors have high probability of occurrence andhence high severity of risk.· Government Intervention· Variation in foreign exchange rate· Delay in financial closure· Payment risk· Land acquisition· Delay in project approvals and permits· Force majeure· Corruption· Change in government and political oppositionIn contextof Pakistan, instability of government is the major risk in infrastructureprojects.
Whenever government change, the new one stops the in process projectsand starts their own. Unstable political conditions have high probability of occurrencein these conditions therefore foreign private finance institutions arereluctant to invest in Pakistan.Poor security situationofPakistanwas reported as the most important impediment to project procurement and implementationin the country.
These issues in conjunction with risk of political instability andimmaturity of public sector organizations and institutions lead to a lack ofinvestor interest, both domestic and foreign. (Mazher et al., 2017)Politicalintervention is the other risk factor because it is necessary that governmentmust have some interests in the project.The active process of political life,the blending of interests and setting of values, must emerge within the newlyestablished parameters.
Several conditioning factors affect this process, andsome dilemmas of political institutionalization lie ahead.(Tepper, 1974)Paymentrisk also refers to unstable political conditions if government change thenpayment will be stopped to private party and it have to indulge in long legalprocedures to get the payment back. Land acquisition is the responsibility ofpublic sector to provide in time. The problem occurs when the land ownershipdoes not held by the government then acquisition of land become a major problemand without the availability of project site, project cannot be executed. Corruptionis the main risk factor because of flaws in system and lack of accountability,corruption has become significant part of every project in Pakistan. Everyone involvesin the procedure wants some benefits from the project. Somefactors are also identified which are low probability of occurrence but highseverity of risk if occurs i-e; change in market demands, change in law,conflicting or imperfect contract, unfavorable international economy, financingrisk, lack of skilled experts and design and construction deficiencies.
Thesefactors can greatly affect the project work but the probability of occurrenceof these factors is low. Almost all experts ranked the same risk factors at ahigh level. If a project starts and market demand changes then the severity ofrisk will be very high. Similarly, financing risk on the part of the privatecompanies which include shortage of finance or bankruptcy of company can failthe project from execution. Other factor of design and constructiondeficiencies can create hazardous effects not only for the parties involved inproject but also for the end users. The distant kind ofmulti-level political, administrative, structures, culture, and processes thepublic interest in a privatized, environment are also important, provision bymarket providersin a marketenvironment.
(Johnston , 2010) Learning from the StudyIhave learned a lot from this pilot study. I have learned that how to constructa questionnaire, how to write an academic article and I have tried to maintainthe originality and quality of the study. ConclusionDevelopinginfrastructure by using PPP is gaining significance in Pakistanbut yet there islack of research on systematic risk assessment and evaluation. By implementingthe proper risk identification and management techniques, the project deliveryprocess can be improved.Risk identification, analysis, and response planningform the core processes of the riskmanagement activity.
Adequate risk analysisand equitable risk allocation on PPP projects areessential for implementing anddelivering successful projects (Chan, Yeung, Yu, Wang, & Ke, 2010)