Risk management of construction public private partnership projects

The Public Private Partnership (PPP) has developed as an important procurement method for delivering public services in both developed and developing countries. PPPs could be classified as service contract partnerships, leasing contracts, public private joint ventures, concession contracts, and privatisation. In the construction industry, the most important and popular approach is concession contracting, such as Build Operate Transfer (BOT) and Private Finance Initiative (PFI), where the private contractor is responsible for designing, building, financing and operating a public facility. In the UK, the PFI accounted for over 11% of total public capital expenditure in 2002. In developing countries, a total of US$ 496.2 billion PPP infrastructural projects were undertaken between 1990 and 1998. However, PPP still remains a difficult subject and is much debated. Factor analysis produced principal factors for PPP attributes: PPP attractiveness and negative factors, critical factors in adopting PPP, and measures to enhance PPP project value for money (VFM), and critical success factors (CSFs) for construction PPP projects. For example, the four principal factors that make PPP construction projects attractive are project technology and economy improvement, benefit to the public, government avoidance of regulation constraints and government savings in transaction costs; while the four principal factors that enhance PPP project VFM are cost saving, sustainability, risk transfer and public effective procurement. Risk criticality analysis showed that the critical risk groupings that have an impact on PPP projects at macro level are legal and economic, and that at meso level they are design, construction and operation. The study supports the assertion that the principal rule that should guide PPP project risk allocation is that risks are allocated to the party who is best able to manage it; and, consequently, that the public sector retains most risks involving site availability and political risk grouping, and the private sector bears most risks of a meso level nature. Risk retention and risk transfer are the two most frequently used risk treatments for a PPP project, with risk retention applied to less critical risks and risk transfer to more critical risks. The risk management framework developed consists of nine tasks based on the Office of Government Commerce (OGC) 6 Gateways for PFI projects. These are establishment of risk management strategy, identification of risk factors, assessment of risk criticality, establishment of risk matrix, risk negotiation, update of risk assessment, risk allocation, risk treatment and risk monitoring and report. The important areas that require special attention in the management of PPP projects are risk assessment, risk allocation and risk treatment.