07-11-2012, 11:46 AM
An integrated risk management system (IRMS) for PPP projects
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Abstract
Purpose – Large infrastructure projects involve many different stakeholders. Risk allocation is
negotiated between the public sector and the special purpose vehicle (SPV)/consortium. Moreover, risk
allocation is negotiated between the shareholders of the SPV and between the SPV and its contractors,
financiers/lenders and insuring companies. Since the individual understanding of risks associated with
the project differs amongst the contract partners, negotiation is often very time consuming and may not
lead to the best possible outcome. The variability of risk management approaches and a lack of coherent
practices often prove to be problematic. The purpose of this paper is to address these issues.
Design/methodology/approach – The study has been conducted using a questionnaire and expert
interviews to identify the current state of public-private partnership (PPP) risk management. As a
result, a process model for risk management for each stakeholder has been developed.
Findings – By developing an integrated risk management system (IRMS), it is possible to meet
particular project requirements, such as reducing complexity, establishing risk awareness, covering
the different perspectives of the parties involved, building on a common understanding regarding the
nature of risks and opportunities providing step-by-step contingency instructions, and enhancing the
available information.
Introduction
A literature review has shown that there is a substantial amount of research on
public-private partnership (PPP) risk management.The reviewhas revealed that research
mainly focuses on special aspects of the risk management process, but rarely on the
framework for the risk management processes (Table I). In fact, research concentrates on
single aspects, such as risk allocation (Roumboutsos and Anagnostopoulos, 2008;
Abednego and Ogunlana, 2006) or quantitative risk analysis (Ye and Tiong, 2003; Merna
andKhu, 2003; NgandXie, 2008; Wibowo andKochendo¨rfer, 2005).Although the research
so far has helped to advance the technical aspect of riskmanagement, in practice, it is also
important to stress themanagerial side of riskmanagement inPPP projects
Scope of the research
To understand all implications, it is necessary to identify and thoroughly analyse the
fundamental dimensions influencing risk management within a PPP project. Three
dimensions have been identified which strongly influence risk management activities:
(1) life cycle considerations and long-term risk allocation;
(2) stakeholder perspectives; and
(3) project risk management.
The first dimension represents the project life cycle. Considering life cycle projects is one
of the most important value drivers for PPP projects. For the purpose of this paper, four
main phases of the life cycle which are different with respect to the parties involved,
activities and risk profiles have been established. The life cycle starts with a preparation
and conception phase, followed by a tendering and awarding phase. In the construction
and operation phase, the structure is made manifest and starts to fulfill its origin
purpose. The important fact with respect to the life cycle is that the ability to influence
the cause and effect of risk is generally higher at the beginning of a project. Over time,
investigations and decisions lead to a higher level of detail, resulting in a lessening of
risks.
The second dimension comprises the project stakeholders. Mainly, there are two
groups of stakeholders: public and private parties, with the private parties represented
by the bidding consortia or the newly established special purpose vehicle (SPV).
Throughout the project life cycle, the functions, objectives, perception of risk, as well as
the ability and willingness to shoulder risks, will vary greatly among the project
stakeholders. The challenge consists in combining the various interests effectively. In
contrast to previous publications (Grimsey and Lewis, 2004), the purpose of this research
is to consider all PPP stakeholders in a functional view. With the aim to design an overall
package for the purpose of project success, each party involved has to understand the
interests and framework conditions of the other parties. Indeed, establishing a common
understanding about the inherent risks and the necessary processes will lead to more
efficient contract negotiations.
Methodology and results
An extensive literature review as well as an empirical study concerning risk
management of PPP projects in general and, in particular, of German PPP contracting
parties has been carried out. To capture a broad view of risk management, public
authorities, project sponsors, lending institutes and construction and operation
companies were invited to participate.
The first part of the empirical study consisted of a qualitative-exploratory survey
based on 12 problem-focused expert interviews and a subsequent quantitative survey
in terms of a questionnaire.
By conducting a survey among the different PPP contracting partners, the status
quo of risk management was investigated. The empirical study served to grasp the
interaction of the contracting partners as well as their interests, organisational
processes and the available possibilities of risk controlling and monitoring.
In total, 577 persons in the German PPP market were invited to participate in the
survey. After three weeks in the field, 53 completed the survey (approx. 9 percent).
Figure 2 shows the composition of the different stakeholders who participated in the
survey.
Development of the IRMS
From the information gathered through literature, survey and interviews, an IRMS is
been derived. In the IRMS, processes are analysed and defined on four process levels as
shown in Figure 5. The first level describes the interactions between the stakeholders of
a PPP project over the life cycle (as shown in Table I). The processes on the second level
deal with the project management activities of each stakeholder. Risk management
plays an important role within some of these project management activities.On the third
level, risk management processes are described in more detail pointing out relevant
flows of risk information, risk owners and risk documentation. As a result, on the fourth
level, risk management instruments are proposed to support risk management
processes within PPP projects.
Risk identification
Because of the uniqueness in the risk profile of PPP projects, comprehensive
identification is critical. The uniqueness and complexity of PPP projects has led to the
use of risk identification techniques that are based primarily on the knowledge of
experts in related fields and having experience with similar projects. Thus, discussions
and brainstorming sessions with specialists, experienced advisers, project managers,
government representatives, stakeholders and users are popular.
Risk control and monitoring
Monitoring and controlling risk is the process of implementing risk response plans
(risk mitigation strategies), tracking identified risks, monitoring residual risks,
identifying new risks and evaluating risk process effectiveness throughout the project
lifetime. This process occurs at every stage of risk management.
The major task of the private partner during the project life cycle is to consistently
observe all risks allocated to them, to direct and to initiate adequate risk strategies in
terms of reduction, avoidance, transfer or acceptance. Risk monitoring is also necessary
for the public sector during the duration of the contract, to negate or mitigate retained
risks in such a manner as to minimize the possibility of negative financial consequences.
Furthermore, it can be learned whether the risk profile of the project has changed over
time and whether the risk allocation stipulated by contract has been proved to be
efficient.
Conclusion
The implementation of PPP as a procurement method for public infrastructure by the
public sectors has recently come to be more closely examined with attention to risk
management. The increased awareness of risks constitutes a basis for further
improvements. The findings of the literature review and empirical study show, that a
consistent and common standardised definition of the named risks is still lacking. A
standardisation of the risk management process was presented as an overall concept
which provides step-by-step directions for sub-processes which are linked in an overall
structure.
This conceptual paper develops an IRMS, which serves all stakeholders. First, all
risk management processes of the different stakeholders during various project phases
are analysed. These processes are then structured as an IRMS on four levels. As part of
the IRMS, five instruments: a project database, a risk register, a set of risk methods and
techniques, a model for cash-flow and risk analysis, as well as key ratios and indicators
have been described.