Abstract are known to be riskier than the projects

Abstract

This
study focuses on the risks involved in infrastructure projects of
Public-Private Partnership.

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The
study aims to identify many critical risk factors that are not well considered
in PPP. And because of these risks PPP cannot deliver services in the way it is
supposed to deliver. In developing countries like Pakistan, there is still need
to develop and properly implement the PPP’s policies and objectives.

“Today, the private sector is the engine of growth
for many countries and expansion

of the private sector has become a central theme in
the development agenda of many of

those countries.” (Asian Development Bank Institute
(ADBI), 2007, p.15)

 

Introduction

Pakistan,
similar to other developing countries, is facing a severe shortage of
infrastructure that hampers economic growth and development of the country. In
terms of gross domestic product (GDP), Pakistan is the second largest economy
in South Asia (World Bank, 2015), and ranks 6th as
the most populous country in the world, with a total population of 188.924
million as of, 2015 (World Bank, 2016b). The infrastructure situation in
Pakistan is relatively poor as it ranks 117 in overall infrastructure out of
140 countries.(Schwab, Sala-i-Martin, & Brende, 2015)In order to meet
the infrastructure requirements, private investment seems to offer a promising
solution to partially mitigate the above mentioned issue. PPP projects are
known to be riskier than the projects delivered through traditional procurement
methods. Research has determined that equitable risk allocation is one of the
most important driver for achieving success and Value for Money (VfM) in such
projects. Failure of projects procured under various modalities of PPP, world
over, has indicated a shortfall in effective risk management efforts by the
stakeholders involved. To better understand risks and their management on PPP
infrastructure projects in the Pakistani context, this research endeavors to
identify the critical risks, important Risk Allocation Criteria (RAC) that
determines risk management capabilities of the stakeholders in their capacity
and commitment to manage risks, and factors that determine effective risk
management (ERM) efforts on projects delivered through PPPs. The relevant risk
factors, RAC, and measures of ERM, have been determined through an extensive
review of the international research, published literature, and information
obtained from interviews with PPP experts in Pakistan, both in the power and
transport infrastructure sectors. This questionnaire constitutes stage one of
the research and solicits information on risks and measures, in this research, have been defined as event(s) that can cause
actual project circumstances to differ from those assumed and hence influence
project cost/benefits.In recent years, the use of the term “public-private
partnership” (PPP) has become quite common to describe ways in which the
state relies on private actors instead of government employees to deliver
certain infrastructure and services to the public. (Custos & Reitz, 2010)

 

Purpose of the Study

The
purpose of this study is to analyze the risks involved in Public-Private
Partnership infrastructure projects and their assessment from the PPP’s experts
to signify the importance of risk assessment and management in PPP projects.

Research Methodology

Data
was collected through questionnaires from different PPP’s experts. This method
is appropriate according to the topic because it was required to assess the
risk factors and to check the probability of occurrence of that factor and
severity of risk. Likert scale has been used to measure each risk factor in the
following way:

1 = extremely low; 2 =
very low; 3 = low; 4 = moderate; 5 = high; 6 = very high; 7 = extremely high

The
questionnaire is divided into two sections; Section A and B. Section A refers
to the detail of the respondent; name, e-mail and organization. Section B
identifies several PPP risk factors, their probability and severity.  Questionnaire was delivered to the
respondents through e-mail and respondents were required to fill the
questionnaire and return it through e-mails. The respondents were PPP experts
who have significant experience in PPP infrastructure projects.

Implementing the PPP in Pakistan

In
recognition of the severe infrastructure shortage and its effect in hampering
economic

Growth,
the Ministry of Finance established Infrastructure Project Development Facility

(IPDF)
 in 2006 and make it compulsory to
develop PPP policy and observe its implementation. The revised PPP policy of
2010 provides support for all infrastructure sectors, at the federal and
provincial level. (Regan, 2017)

PPP
infrastructure is implemented in Pakistan through power infrastructure
development and transport infrastructure development. In power infrastructure
development, Pakistan has started to work on it by contracting with different
countries like China and the current development in it by agreeing upon CPEC
(China Pakistan Economic Corridor) in which many Chinese Financed Projects will
be executed.

In
transport sector many developments have been made and many projects are in
process in different parts of the country specially in Punjab using PPP. Orange
line train is one of the example of it which is under construction and will
soon be in operation.

 

Risks Assessment in PPP

“In Pakistan, the need
for infrastructure is immense while resources and capital are scarce
commodities. The government estimates the public exchequer cannot even meet
half of the funds required for infrastructure development.” (Noor, Khalfan, & Maqsood, 2012)Project risk allocation between the
public and private sector, termed as the most criticalexercise to ensure
project success, is often done inefficiently by disregarding the necessity
ofallocating risks based on the risk management capability paradigm.(Arndt, 2000)

In general, when a
company starts a project firstly it identifies the possible risks that can
occur before starting the project, during the project and after the project.PPPs reflect a unique relationship between the
government and a private firm. While the government retains ultimate
responsibility for the delivery of the good or service, it becomes a partner
with the private sector in decision making and delivery. (Forrer, Kee,
Newcomer, & Boyer, 2010)Private Partnership (PPP) has been increasingly used
to procure infrastructure projects, such as motor ways, bridges, tunnelsand
railways. However, the risks involved in PPP projects are unique and dynamic
due to large amount of investment and long concession period.(Li & Zou, 2012) In PPP, public and
private 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 industry
lacks risk management maturity (includes all the main stakeholders i.e.,
clients, consultants andcontractors).
(Choudhry
& Iqbal, 2012) Although the risks are related to the project
but risk assessment became important in that case. Public party can have risks
like availability of project site, permits to start the project etc. and
private parties can have financial risks, lack of experts etc. both parties
after analyzing the risks, check the probability of each risk factor, and then
impact of that risk factor on the project. Private financing
promised a way to provide infrastructure without increasing the public-sector
borrowing ratio (PSBR).(Hodge & Greve, 2008)

PPP
projects in Pakistan are exposed to a myriad of risks that need to be studied
systematically. Equally important is the need to explore the current practices
towards allocation of specific risks in different sectors and the efficiency
and 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

 

 

With
regards to the factors that significantly influence risk management performance
on PPP projects, institutional capacity/maturity (public/private sector) was
highlighted as a point of major concern, the lack of which was considered as a
significant cause of problems at the pre-financial close stage for projects.
One of the interviewee held the opinion that the projects which bring foreign
investment have seen good risk management efforts, principally attributable to
foreign experience and expertise of the lenders. Local lenders were also
maturing over time, however, the local lenders may be forced to act outside principles,
at times, under political influence. The interviewees also held that public
sector lacked understanding of risks and exhibited weak contract administration
skills in privately financed power projects.(Mazher et al., 2017)

FINDINGS

According
to the experts following risk factors have high probability of occurrence and
hence 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 opposition

In context
of Pakistan, instability of government is the major risk in infrastructure
projects. Whenever government change, the new one stops the in process projects
and starts their own. Unstable political conditions have high probability of occurrence
in these conditions therefore foreign private finance institutions are
reluctant to invest in Pakistan.Poor security situation
of

Pakistan
was reported as the most important impediment to project procurement and implementation
in the country. These issues in conjunction with risk of political instability and
immaturity of public sector organizations and institutions lead to a lack of
investor interest, both domestic and foreign. (Mazher et al., 2017)

Political
intervention is the other risk factor because it is necessary that government
must have some interests in the project.The active process of political life,
the blending of interests and setting of values, must emerge within the newly
established parameters. Several conditioning factors affect this process, and
some dilemmas of political institutionalization lie ahead.(Tepper, 1974)

Payment
risk also refers to unstable political conditions if government change then
payment will be stopped to private party and it have to indulge in long legal
procedures to get the payment back. Land acquisition is the responsibility of
public sector to provide in time. The problem occurs when the land ownership
does not held by the government then acquisition of land become a major problem
and without the availability of project site, project cannot be executed. 

Corruption
is the main risk factor because of flaws in system and lack of accountability,
corruption has become significant part of every project in Pakistan. Everyone involves
in the procedure wants some benefits from the project.

Some
factors are also identified which are low probability of occurrence but high
severity of risk if occurs i-e; change in market demands, change in law,
conflicting or imperfect contract, unfavorable international economy, financing
risk, lack of skilled experts and design and construction deficiencies. These
factors can greatly affect the project work but the probability of occurrence
of these factors is low. Almost all experts ranked the same risk factors at a
high level. If a project starts and market demand changes then the severity of
risk will be very high. Similarly, financing risk on the part of the private
companies which include shortage of finance or bankruptcy of company can fail
the project from execution. Other factor of design and construction
deficiencies can create hazardous effects not only for the parties involved in
project but also for the end users. The distant kind of
multi-level political, administrative, structures, culture, and processes the
public interest in a privatized, environment are also important, provision by
market providersin a market
environment.(Johnston &
Kouzmin, 2010)

 

Learning from the Study

I
have learned a lot from this pilot study. I have learned that how to construct
a questionnaire, how to write an academic article and I have tried to maintain
the originality and quality of the study.

Conclusion

Developing
infrastructure by using PPP is gaining significance in Pakistanbut yet there is
lack of research on systematic risk assessment and evaluation. By implementing
the proper risk identification and management techniques, the project delivery
process can be improved.Risk identification, analysis, and response planning
form the core processes of the riskmanagement activity. Adequate risk analysis
and equitable risk allocation on PPP projects areessential for implementing and
delivering successful projects (Chan, Yeung, Yu, Wang, & Ke, 2010)