CHAPTER 2 LITERATURE REVIEW
2.1 The Concept of Public - Private Partnership ( PPP )
2.1.5 Risk Allocation
With respect to public-private partnerships, topics to be considered include risks and benefits. It is impossible that one party shall bear risks or benefits alone.
Both sectors must fairly share risks and benefits.
The public sector has encouraged the private sector to participate in providing infrastructure or public services to the public because of the many limitations of the public sector. The private sector may not have such limitations or may possess more resources than the public sector. This can help PPP projects to be efficient and effective, however, such projects cannot avoid all risk, which is a likelihood in the event of an occurrence that will affect the project (SAA, as cited in Jin & Doloi, 2008). Such situations or risks can occur at any time, so it is important to make an
agreement or understanding before-hand about risk sharing between the public and private sectors (Ke et al., 2010).
There are various issues to be aware of pertaining to public private partnerships, such as benefits, negotiations, competition and risk allocation. (Ke et al., 2010) conducted a research study to search for risks that may arise from projects in the form of public-private partnerships in China and found that there were 37 risk factors affecting project failure, such as government reliability, government intervention, corruption, law changes, tax measure adjustment, inflation and technological risks. Ke et al. (2010). also analyzed the above risks allocated to appropriate stakeholders. He classified the risks into five groups: 1) Risks that the government has to be solely responsible for, 2) Risks that the public sector should be responsible for, 3) Risks that must be equally shared between the public and private sectors, 4) Risks that the private sector shall be responsible for, and 5) Risks that the private sector has to be solely responsible for. The findings indicate that national risks are those the public sector must be responsible for, while risks associated with the public sector or government officials and public sector activities should belong to the State. Risks that the public and private sectors have to share are risks that cannot be managed alone but together. In addition, there are project level risks under the responsibility of the private sector. However, no risks were found to be under the sole responsibility of the private sector.
A study on risk allocation was also conducted by Li et al. (2005), who grouped risks into the following three levels:
1) Macro level risk refers to project risks caused by external factors that concern political, legal, economic or social conditions at the national level.
2) Meso level risk refers to risks occurring within the project and relating to implementation problems, including project damages, location, design, construction and technology.
3) Micro level risk refers to risks caused by different features of the public and private sectors. They involve risks within the project but which differ from meso level risks because they relate to some parts of infrastructure due only to the difference among project stakeholders. In other words, the public sector must be accountable to society while the private sector focuses on profits.
The study conducted by Li et al. (2005) pertains to risk allocation in public- private partnership projects in England based on 500 questionnaires collected from hospital, transport, water supply, energy, residence, police, educational institution and other projects. Bing et al. proposed that the study results divide risk allocation into four groups: risks that should belong to the public sector; risks that should belong to the private sector; risks that should be born by the public and private sectors; and risks that rely on project environmental conditions, as follows:
1) Risks that should belong to the public sector include five types:
nationalization/expropriation, poor political decision-making, political opposition, site availability and government stability. Out of the five risks, one type of meso level risk is site availability and the remaining four risks are macro level risks.
2) Risks that should belong to the private sector consist of 32 types classified into two groups:
(1) Initial risk belonging to the private sector comprises 11 types, four of which are at macro risk level: tax regulation change, inflation, the tradition of private provision of public service and influential economic events; four of these are at meso risk level: late design changes, residual risks, financial attraction of project and level of demand for a project; and three are at micro risk level: staff crisis, third party tort liability and different working methods.
(2) Risks that belong to the private sector alone include 21 types.
They include macro risk level, namely industrial regulation change, interest rate volatility, weather, environment, ground conditions and financial markets; at the meso risk level: project finance, design, construction and operation; and at the micro risk level: organization and coordination.
3) Risks that should be born by the public and private sectors consist of those at the macro risk level, namely force majeure and legislation change; risks at the micro level, namely commitment from a partner, responsibilities and risk distribution and authority distribution.
4) Risks that rely on project environmental conditions are difficult to decide which group they belong to. Such risks include the level of public support, project approval and permits, contract variation, and lack of experience.
In addition to risk management occurring at the public and private sectors, which is one factor affecting PPP project success, there are other factors that impact the success of PPP. The study of Li et al. (2005) entitled “Critical Success Factors for PPP/PFI Projects in the UK Construction Industry” gathered factors affecting the success of PPP projects relating to the construction industry. Due to the above study, there were 16 factors leading to PPP success. Li et al. used all factors in the analysis based on the statistical method in order to prioritize which factors affect the success of PPP projects.
1) Strong private consortium refers to private sector groups participating in PPP projects who have to check the strengths and weaknesses of other project partners as well as their own strengths.
2) Appropriate risk allocation and risk sharing refers to the distribution of risks to partners who can best manage the risks.
3) The private sector can easily access a financial market because easy access to sources of funds will attract the private sector to join the investment.
4) Commitment and responsibility: all partners should devote their resources (budget, personnel, etc) to the PPP project.
5) Thorough and realistic assessment of the costs and benefits.
6) Project technical feasibility will provide an opportunity for the private sector to participate in the project, that is, it must be consistent with conditions and regulations.
7) Well-organized and committed public agencies.
8) Good governance is a key to attracting the private sector investment in PPP projects.
9) Favorable legal framework: Bennett (2000, as cited in Li et al., 2005) believes that regulations and political environment are fundamental to sustainable participation of the private sector.
10) Transparency and competition: To achieve transparency, good communication between the public and private sectors and consultation are needed. A definite decision must be made by the private sector.
11) Political support.
12) Sound economic policy and a stable macro-economic environment, as economic stability can greatly reduce risk to the private sector’s investment.
13) Multi-benefit objective: Partners must understand and accept the goals of other groups.
14) Government involvement through providing guarantees: the government may offer a guarantee on subsidies.
15) Shared authority and responsibility to keep a long-term partnership.
16) Social support based on public acceptance.
Sanni (2016) studied the key factors that contribute to successful PPP projects based on PPP projects in Nigeria using 184 questionnaires. Sanni devised the factors affecting success into two groups: the public sector and the private sector. There were three factors involving the public sector - 1) leadership focus: the public sector must have leadership in PPP programs, 2) risk allocation and economic policy: the public sector must ensure that risks are allocated to those who can manage them best, and 3) project feedback: the review and study of successful projects will become ready-made information for future project implementation. As for the private sector, there were four factors, namely 1) favorable socio-economic factors: whether PPP will be successful or not depends on a favorable investment environment, 2) good governance and political support: this factor highlights the importance of political leaders who formulate policies that drive the development of infrastructure and public services in PPP projects, 3) short construction period, and 4) delivering public services that meet the demand, leading to public acceptance.
However, although the public and private sectors can cooperate on developing various forms of public projects, both of them have different or even opposite characteristics. Thus, they should be aware of this difference and achieve mutual understanding. This can help the partnership run smoothly and more likely to be successful in the future.