Introduction
Popular and emerging trends in modern times in the implementation of civil engineering projects are public-private partnerships. Public-private partnership (PPP) is an approach that has gained popularity both in developing and developed nations calling for a detailed study of the approach that is used for developing public service infrastructure. That is particularly true because of the benefits associated with the approach.
Key among the benefits experienced in the industry include the ability of the public sector or government sector to draw from the benefits of shifting the cost of construction from the government to the private sector, integration and use of the managerial efficiency evident in the private sector, enhancement of the investment approach for public and private sector capital, economic viability, and enhancement of competition enhancing the quality of services offered to the public. Hence, drawing from the irresistible benefits experienced and projected to be the future trend in the construction industry, public-private partnership (PPP) is the way now.
However, it has been argued that PPP particularly in developing countries sometimes fails. Therefore, the need to critically evaluate additional issues about developing nations in PPP projects is important.
Definitions
Though ambiguity on the definition of PPP rages on in both the academic and industrial fields, yet, PPP has been defined as “a long-term, contractually regulated cooperation between the public and private sector for the efficient fulfillment of public tasks in combining the necessary resources (e.g. knowhow, operational funds, capital, personnel) of the partners and distributing existing project risks appropriately according to the risk management competence of the project partners”( Thomas, Kalidindi & Ananthanarayanan, 2003).
However, others define PPP as a “contractual arrangement between a public sector agency and a for-profit private sector developer, whereby resources and risks are shared for the purpose of delivery of a public service or development of public infrastructure” (Thomas, Kalidindi & Ananthanarayanan, 2003). On the other hand, PPP is defined as “cooperative venture between the public and private sectors, built on the expertise of each partner, which best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards” (Thomas, Kalidindi & Ananthanarayanan, 2003). Therefore, the keywords are cooperation, risks, competence, and infrastructure.
International and Domestic PPP
It is important to note that the approach to PPP by the developed and developing nations largely vary, reinforcing the need to discuss, more importantly, international PPP, domestic PPP, issues, opportunities, and examples of PPP to reinforce the validity and importance of the investment approach as being overwhelmingly important. International PPP and domestic PPP projects vary in context from each other (Monteverde & Teece, 1982).
Among the critical differences that have keenly been identified with these PPP projects include the fact that domestic PPP projects as compared to international PPP projects in developed countries enjoy locally available and experienced expertise, political stabilities, minimum procurement costs, and periods particularly with PFI to afford a detailed discussion of PPP projects (Nelson,1991) and (Faulkner, 2004).
Public-Private Partnership Projects (PPP)
A public-private partnership (PPP) is an approach that has been increasingly adopted in the recent past with increasing popularity in the development of infrastructure projects with both public and private partnerships. Stakeholders include the government and private firms. It is an approach that has widely been used in both developing and developed countries. Typical examples of developed countries that have adopted the PPP approach in the implementation of infrastructure projects include Germany, the UK among others. On the other hand, developing countries that have adopted the approach include Vietnam, China, among others (Faulkner, 2004).
The PPP approach in the development of the much-needed infrastructure has gained a lot of impetus due to the realization by governments that these projects are capital intensive, governments have limited budgetary allocations towards these projects, governments cannot fulfill and meet the exponential demands for social infrastructure, have fiscal limitations, and lay emphasis on the need to exploit the management disciplines and expertise available in the private sector to fulfill public needs.
However, the need to realize that PPP approaches in the implementation of infrastructure projects differ widely from one part of the world to another is important. That is particularly true for developed and developing countries. It is also important to note that PPP takes various forms in both developed and developing countries due to varying market segments (Faulkner, 2004). These are based on different models.
PPP Models
These models include PPP that is based on private finance initiatives (PFI) where quality services are purchased by the public sector and the private sector is overly concerned with the development of the necessary infrastructure and gains by charging on the usage of the infrastructure, joint ventures where both the public and private sector amass their resources for the implementation of such projects, partnership companies where legislation leads to the acquisition of a specified amount of shares, partnerships investments where returns on investments are shared between the government and the private sector, and franchise PPP which requires the private sector to invest financial capital during the concession period. Each environment adopts a PPP approach that is specifically tailored for the environment (Faulkner, 2004).
International PPP in developed and developing countries
International partnerships between developed and developing largely countries differ in terms of competitiveness and funding approaches. Developed countries, enjoy superior technological advantages as opposed to developing countries, skilled manpower, and enhanced project management and implementation skills besides enhanced capital mobilization capacities (Thomas, Kalidindi & Ananthanarayanan, 2003).
On the other hand, international PPP for developed countries differs from those of developing countries in terms of governance structures, procurement laws and frameworks, and project financing. Developing countries largely rely on international funding agencies while developed countries are financially capable of providing the required capital for infrastructure development.
Domestic PPP in Developing and Developed
Thomas, Kalidindi, and Ananthanarayanan (2003) emphasize that PPP projects differ in their implementation and structure between developed and developing countries. That is particularly true of the difference in the availability of expertise in assessing the viability of such projects particularly in developing countries, limited resources, and risks associated with the PPP projects in developing countries, failure to identify strong approaches, several political risks, the inability to provide a reliable revenue base, scarce financial resources in developing countries, limited expertise, and high procurement costs particularly for PFI in developing countries with characteristically by long procurement periods ((Thomas, Kalidindi & Ananthanarayanan, 2003).
Developing countries have over time experienced an infrastructure gap with an emphasis on bridging the gap. That was especially true when several benefits began to be realized in the 1990s when PPP projects were initiated and in their infancy (Monteverde & Teece, 1982).
Israel provides a typical example of a successful PPP project in the developed world. The PPP project, known as Cross-Israel Highway stretches for 300 km and was constructed by the Derech Eretz Group using modern electronic tolling free-flow systems. The project was funded by several stakeholders including the New Israel Shekel with a 10 percent equity provided by project sponsors.
On the other hand, typical examples of successful PPP projects are evident in Thailand, China, among others.
The PPP approach comes with several benefits and reinforces the need for this approach in infrastructure development. Among the benefits include value addition to guarantees that construction will come to completion due to the financial risks associated with such projects, the need to create public policies that favor companies in PPP projects, benefits that are realized in the economic and social dimension, and the flexibility of adopting and copying PPP approaches in other countries ((Thomas, Kalidindi & Ananthanarayanan, 2003).
It has been argued with reinforced facts based on theory and practice that PPP projects are equipped to address issues of land use, and environmental conservations to provide assurance of economic activities that are stable and realizable. To successfully bring these projects to the implementation and completion stage, financing them is a critical component, calling upon the need to discuss their financing.
Financing the PPP projects
A range of opportunities in the private sector motivates private firms to exploit them. On the other hand, the public sector is interested in shifting risks and uncertainties to the private partners in a private-public partnership, besides exploiting the managerial abilities of the private partners. Therefore, the use of private funds initiates (PFI) is generally accepted as it leads to optimal use of financial resources, reduced financial burden on the government, and the public in general.
The practice identifies taxes, PPP financing, and private finance to be some of the financing methods. The financing structure calls for the government to invest borrowed money while guaranteeing lenders that the borrowed money will be paid in full. On the other hand, in the corporate sector, the private partners use their equity and guarantees repayment of the loaned money. Projections of future revenue act as a basis for raising funds and are influenced by project structure. Other funding alternatives include funding approaches that use common equity, convertible equity, and preferred equity, among others.
It is also vital to note that investor profiles vary from each other. Notably, they include non-financial institutions, banks, and even the public among others. In addition to that, PPP partners need to conduct a typical analysis of funding strategies such as the investment market and their needs, maturity of its securities, the capital structure, and its gearing ratio, the debt coverage ratio, and the financial performance of partners. However, several issues have to be investigated before a PPP project is sealed for implementation as discussed below.
A Critical and Detailed Investigation of Issues
A critical investigation of issues to be considered when investing in PPP projects needs to be discussed in detail. Several critical issues have been identified that impede or influence the viability of PPP projects. These issues vary from one environment to the other (Nkado, 1995). Among these include measurements. Contractual terms need to be clearly understood between parties engaged in the PPP project to avoid any future conflicts that may arise when any of the parties are faced with a situation that contradicts the relationship between the working parties.
Moreover, it is vital for the parties to clearly understand the extent to which private finance initiatives (PFI) will involve the public sector in the purchase of quality services while the private sector gets involved in the design and financing of such projects, and the overall cost-benefit analysis and evaluation of returns on investment. Importantly, it has been argued that the quality of services and the value achieved from the investment of PPP projects in infrastructure development is influenced by the procurement process (Monteverde & Teece, 1982).
That is particularly true when FPI is analyzed from the perspectives of financing these projects, factors that are critical to the success of such projects, and risks associated with such projects. Other issues include flexibility, where governments once bound to contracts signed between the parties involved in the projects cannot be broken, mortgaging where the complexity of fiscal deficits are minimized to enable shifting costs to the new government or administrative structures to accommodate the previous agreement, and the ability to ensure PPP projects are investment secure and free from risks ((Thomas, Kalidindi & Ananthanarayanan, 2003).
Critically, FPI is an important aspect of PPP projects for both developing and developed countries. The main objective is to design a framework that is keenly intended to optimize value for invested money by exploiting the synergy of innovation and good and experienced project management skills in the private sector, innovative reengineering skills, and precise allocation of risks in the efficient delivery of public services (Thomas, Kalidindi & Ananthanarayanan, 2003).
It is vital to note that PFI procurements have been identified to take long. In addition to that, several case studies illustrate the fact that financial and non-financial procurement schemes such as operational issues are worth taking into account.
Analytically, therefore, both international and domestic PPP projects for developing and developed countries for FPI projects should identify, besides procurement plans, critical steps that are involved in the design and development of the PPP project about strategic business goals, technical and legal expertise, the composition of project teams, clearly set down objectives and available options, the sustainability of the current market and its suitability, procurement options, and sound appraisal methods, evaluation and approval of project members, and the allocation of credit to the project partners (Ng & Loosemore, 2007).
A critical evaluation and analysis of FPI inform that project stakeholders have to sanguinely study and clearly understand the objectives and aims of the project. That includes a clear understanding of typical project inputs and outputs, sound objectives and project documentation, the legal strength of contractual agreements, typical skill requirements for implementing PPP projects, and the work breakdown structure of any project. In addition to that, a critical evaluation of the FPI process includes a critical evaluation of procurement procedures including an appointment of a well-experienced and knowledgeable project director to oversee the operational management of the organization and other operational issues (Ng & Loosemore, 2007).
Further arguments presented about additional issues include documented guidelines for the appointment of governance arrangements, a strategic project board for the ratification of project stakeholders, and a clearly outlined project timetable. Many researchers in the field of PPP identify and agree that the technical capacity of stakeholders has to be critically evaluated to determine their technical ability to provide project milestones that are consistent with project goals and objectives (Ng & Loosemore, 2007).
It is critically important to consider the issue of competitive bidding. In PFI projects, output documents play a critical role in determining the output expectations, strategies for achieving these objectives, output specifications, innovation, and standard outputs from the project in a project’s detailed procurement plan (Nkado, 1995).
For developed and developing countries, keen engineers and researchers have established the fact that the risks associated with PPP projects in both economic environments vary and are strongly influenced by the scope and nature of the project (Ng & Loosemore, 2007).
It is important to critically consider the issue of different partner goals. Researchers have identified the fact that different representatives from different stakeholders approach PPP projects with different views. In addition to that, governments also have their views of PPP projects, thus a deeper and detailed analysis of the stakeholder interests must be done. Critically, that has been identified with the interests of stakeholders particularly with the implementation timeframes considered (Ng & Loosemore, 2007).
However, a critical evaluation of both approaches in implementing PPP projects both domestic and international largely differs due to the availability of resources. Developing countries find themselves with limited budgetary allocations in comparison with developed nations. These resources are essentially defined by tangible and intangible resources. One of the critical factors includes financial resources, goodwill, reputation, and legitimacy.
In addition to that, developed countries enjoy readily available resources in terms of academic qualifications and skilled and well-experienced personnel compared with developed nations. However, it has been noted that developing nations like India and China have had qualified personnel and are competitively able to pay skilled personnel with a compensation package equivalent to that which is offered by developed nations to the respective personnel (Nkado, 1995).
On the other hand, besides the issues mentioned above, several other additional issues need to be considered to evaluate the viability of these projects is motivating both parties to get involved in the public development of infrastructure. That is especially true because, different environmental and country backgrounds provide different influences on the factors and variables to drive an organization into success (Nkado, 1995). These additional issues include the financing of the projects, the economic viability of the projects, good financial analysis, and risk apportioning.
Other critical issues to critically evaluate and investigate in PPP projects are risks PPP projects are exposed in developing and developed nations, financing of the projects, concession periods, contractual agreements, economic viability of the PPP projects, and the investment environment.
Studies indicate that risks in any project are a choice and not fate, an argument which is reinforced by the definition that “risk is adverse but an unknown by its nature can have both positive and negative effects”. Previous studies indicate that it is critically important to evaluate and investigate risks inherent in PPP projects by conducting risk identification, investigating the kind of risk assessment models used to evaluate inherent project risks, and the types of risks that may be anticipated or that may not be anticipated in the design and implantation of PPP projects in developed and developing nations. An investigative analysis of the risk assessment models and the type of risks involved in PPP projects affords one to conclude the approach to be adopted and integrated into the running of the PPP projects.
In conducting the risk identification process, it is important to consider the fact that uncertainties associated with risks determine and influence the decision to continue with a project or not. Further still, another issue to consider is where the project is to be implemented, either in a developing or a developed nation. Both areas have different risks and uncertainties associated with their localities. In addition to that, project stakeholders, which include the government and the private sector, should bear in mind the orientation of the project whether domestic or international in evaluating and analyzing risks associated with these projects.
Another issue worth investigating in detail is the financing of these projects. Research has demonstrated that governments across the world, in developed and developing nations have realized and witnessed a growing trend in the public-private partnership involvements in infrastructure development projects. A collaborative arrangement has to be made to ensure a win-win situation prevails in both public and private sector involvements.
It is important to integrate the social aspects such as social-cultural issues in the implementation of PPP projects. It is important to note that international PPP projects attract less attention than domestic PPP projects due to several reasons. One of the critical reasons is that in developing countries, systems are prone to much higher risks compared to domestic PPP projects in developed nations. These risks have a political dimension, economic dimension, technical dimensions, and other uncertainties commonly evident and always emerging in such countries. Typical examples have been observed due to political turmoil that has gripped Arab nations such as happened in Egypt and Libya, among other Arab nations.
It is important to thoroughly evaluate and investigate risks associated with the political environment since if countries deteriorate politically, losses are likely to occur in terms of loss of machinery, change of government may annul previous contractual agreements, and financial losses, among other losses that may occur due to a wide variety of reasons.
Another issue worth investigating is the concession period. Typically concession periods for developed and developing nations widely vary and are a critical factor in determining the period for generating returns for the private partner investors. To achieve the objective, qualitative and quantitative variables selectively included in the research should be identified and critically involved in the investigation.
It is vital to investigate the economic viability of investing in any economy. Sanguine investors who want to form the private-public partnership endeavor to investigate the long terms and short term demand patterns for the infrastructure projects worth investing in, the degree of competition between interested parties, the profitability of a project to afford involvement in the projects, and cash flow that may endear project sponsors into financing the projects.
Other issues include the economics of environmental impact on infrastructure development projects, health considerations due to the gradual impact of a project on the environment, agreements signed by the shareholders, design and construction agreements, insurance and loan agreements, operations and supply contracts, among others (Nelson, 1991).
Without a doubt, economic viability investigations among the other factors mentioned above are important since PPP projects are characterized by high intense capital investments, typically long project lead times, and a large long operations time that is characterized by huge risks and uncertainties which tend to be greater in developing economies and minimal in developed nations.
Project managers and stakeholders have to inquiringly note that risk adjustment approaches and the use of stochastic methods to identify and evaluate the risks are vital.
How Projects Differ in Developed and Developing Countries
A comparative analysis of projects in developed and developing nations will afford a critical crystallization of the differences between developed and developing countries in PPP projects. Much of the differences in PPP projects between developing and developed nations come in the form of the level of complexity in the design and implementation of PPP projects (Nelson, 1991).
A typical example has been the role played by the PPP approach in the development of infrastructure in England and China since 1997. Studies reveal that PPP has been largely involved in the development of infrastructure in England from the design, financing, and development of infrastructure besides owning these projects. In comparison, in China, infrastructure project developments have largely been owned by foreign private firms and other international institutions. A typical example of a successful project, Laibin, in China, was implemented through the PPP approach (Nelson, 1991).
The differences crystallize in the form of organizational cultures of the two environments, risks and uncertainties associated with the two environments, market competitiveness, and the general marketing environment.
Both theoretically and practically, it has been demonstrated that transaction costs in PPPs have been noted to be comparatively higher in developing nations than developed nations. With a specific emphasis on developing countries, several reasons reinforce the idea o higher transaction costs. Among the reasons are higher financing structures that are largely influenced politically governance structures and bureaucracies for PPP projects in developing countries and unsatisfactory risk-sharing characteristics. In addition to that contractual incompleteness leads to higher transaction costs. That translates to higher procurement fees, intensive resource usage, costly negotiations, and unanticipated and indirect economic costs (Monteverde & Teece, 1982).
Transactions costs vary due to several variables in developing or transition economies. These variables include the economic sector for the designated PPP project, the capital value of the project, the designated country, procurement process, and bidders involved in the tendering process, the period of the project, and the year when the project commenced.
Variations in the cost of transactions are evident from a comparative analysis of the cost of winning a bid in an infrastructure project in a developing country. Smaller projects are associated with higher transaction costs than projects with bigger capital values. Procurement time in developing countries is longer translating to higher transaction costs. That leads to frequent statistical breaks particularly as procurement periods exceed four years (Monteverde & Teece, 1982).
On the other hand, the number of bidders in developing nations is high as opportunities are inherently large for investing in infrastructure projects. That is particularly true as developing countries are emerging economies with a variety of opportunities in PPP projects, though the downsides of these nations are political influences.
On the other hand, it becomes increasingly clear that PPP projects are popular on the international scene where non-state participants provide legitimate services. However, it is important to note that in developing countries, nonstate actors get involved in political governance and steering by getting deeply involved in the formulation of policies. These politicize may be biased and favorable to other parties involved in PPP projects.
Issues and Opportunities
Several issues and opportunities prevail when implementing PPP projects in developed nations and more particularly in developing nations. One key characterizing element of these opportunities is the transfer of funding for infrastructure development projects from the government to the private sector. Overall, the benefits are global in that the government does not find a reason to increase taxes to raise the required capital for investing in these projects indicating that the private sector shows the better value for money. That overly implies that the private sector improves on the negative aspects inherent in publicly administered and run projects (Parmigiani, 2007).
Private investment partners always endeavor to deliver the best by utilizing better management practices that are characterized by better management and proactive consultancy efforts, an efficient organization of organizational personnel, assurances and certainties of the future, accountability in all aspects of project implementations, clearly defined roles and responsibilities, good and effective working relationships, and the sharing of risks and benefits in an explicit manner.
In addition to that, cost overruns and time is another opportunity where financial analysis is performed at an earlier stage with certainties and associated risks evaluated to determine the best approach to perform financial analysis. In addition to that, administrative issues are identified and determined earlier before the commencement of a project to efficiently and proactively get management involvement inefficient implementation of PPP infrastructure projects (Parmigiani, 2007).
Other related opportunities include an early funding arrangement where all probabilities of financial risks and uncertainties are factored in and mitigations integrated into any project to ensure it completes successfully. On the other hand, the cost of maintaining infrastructure projects at times is expensive for the public. However, when private financing initiatives are incorporated into financing public projects, the benefits are realized in terms of the flexibility of funding such projects and the effectiveness of the private sector in implementing the finding process through all stages of the project lifecycle.
It becomes more important when the private sector is given incentives to initiate and implement funding through private financing initiatives. However, FPI finding approaches suffer from several limitations (PMI, 2004).
One such limitation is the dynamically changing nature of organizational needs and requirements at different levels. That is particularly due to changes and transformations of the public sector with time. In addition to that, innovations on these projects and transferring risk eventually become more expensive for the government (PMI, 2004).
Mitigating or Enhancing these Issues
To get involved in infrastructure projects by investing in PPP projects, several approaches are necessary to mitigate and enhance several issues discussed above. That is particularly the case due to the complexity and challenging nature of PPP projects partners get involved in. That is typically true of stakeholders that are involved in PPP projects (Medda, 2007). Arguably, some researchers have proposed evaluation and analysis criteria to shield particularly the private investor from risks associated with PPP investment projects. In addition to that, it has been identified that developing nations are more susceptible to risks and uncertainties with an overall impact likely to be worse off than a private investor in a developed country (Ok & Sinha, 2006).
One such approach is the use of an analytical ranking scale of critical success factors. In that approach, parties that agree create a table consisting of critical success factors that are evaluated by both stakeholders. The ranking is gradually evaluated by the percentage degree of agreement or disagreement between the partnering parties. Then the difference between the rankings in percentages provides the degree to which both parties are ready to work together (Tah & Carr, 2000).
It is important for companies working in PPP projects to device tailored approaches of transferring risks related to typical projects to ensure a balance is established between project stakeholders and more specifically, to ensure the risks are minimal for the contractual parties. In addition to that, company executives need to select project partners with widely cultivated experience and staff for the implementation and management of the projects (Ok & Sinha, 2006).
Companies in developing nations have grown to appreciate the participatory benefits of insurance companies as one other important element in transferring risk. Project partners need to select from well-established insurance companies particularly targeting owner’s liabilities in mitigating a variety of risks. Other inherent risks associated that can be capped by insurance premiums include among others, interruptions on businesses, variations in legislation and government policies, change of laws, and risks associated with the inflation of the host country’s currency.
However, PPP stakeholders need to identify and use hedging tools to mitigate risks on the microeconomic level which are due to variations in the interest rates of risks, risks due to inflation, and risks due to foreign exchanges as discussed therebefore (Medda, 2007). Noteworthy is the fact that hedging instruments provide the ability to forward and conduct cash swaps among other risk mitigation options available in the capital market. However, the ability to accommodate and exploit all these risk mitigation tools and capabilities is based on sound governance issues, besides sound governance being another critical approach in risk mitigation.
In both developed and developing nations, it is important to realize that governance issues-particularly in developed countries are critical issues that influence the attitude, goodwill, and confidence to invest in infrastructure projects by partnering with developing nations. It has been sanguinely argued that good governance principles promote and enhance practical solutions to the issues mentioned above. One of these is clear and transparent policies in procurements.
In developing countries, bureaucratic interferences and the procurement period take long and at times are procedures that are marred with corruption and other irregularities. In addition to that when procurement policies are efficient and effective with effective promulgation, the effect is fair risk-sharing between stakeholders and leads to sustainable PPP projects. However, studies indicate that several developing nations are improved drastically on that issue (Tah & Carr, 2000).
Another principal approach in mitigating and enhancing the issues discussed elsewhere, particularly for developing nations includes building competence in the governments of developing nations. Though knowledge transfer forms the basis of capacity building, clear policies as mentioned above based on clear guidelines form the basis of an effective PPP approach in developing nations (Tah & Carr, 2000).
It is worth noting that developed nations have sufficient skilled labor whereas developing nations are transitional economies with limited expertise hence the capacity in terms of knowledge management of projects in these countries is limited. However, developing nations should establish capacity development in terms of training public administration officials to exchange programs by working in liaison with PPP agencies.
Therefore, the need to establish a good working relationship with international partners to enhance experience particularly for developing countries is another approach for enhancing PPP in implementing infrastructure projects. In addition to that, public administration training programs enhance an understanding and learning between governments, a very important element in the implementation of PPP projects.
It is important in terms of resource availability for stakeholders or partners to work closely together to pool resources, particularly in developing countries to overcome the problem of resource constraints. Noteworthy among the approaches is the expectations laid on training programs to establish a network of well-skilled and trained expertise in developing countries. That could also engender trained personnel to become training consultants for PPP projects. That is particularly true for transition economies such as China.
Developing nations have limited resources to finance large infrastructure projects. Governments and other stakeholders need to work together to pool financial resources to meet the financial demands placed on such projects in developing nations. Indonesia is one typical case study of a developing nation that has invested in PPP projects with much success. One of the critical success factors for Indonesia is the pooling of capital investment by the private sector with the direct benefits that economic growth has been stimulated over time. That is also particularly evident of the large sums of capital that Indonesia invested in infrastructure development, though it only accounts for up to 6% of its GDP.
The Indonesian government has enhanced the PPP approach in infrastructure development through several strategies. One typical example of the approach developing nations should adopt to enhance the implementation of PPP projects, by allowing and licensing for the establishment of toll stations to finance the repayment of loans invested by the private sector in the development of public infrastructure (Tan, 2004).
One other important element in enhancing and mitigating these risks is risk identification, risk assessment, risk mitigation, and risk allocation. In developing nations, projects sometimes have long procurement periods, suffer from the risk of large and unpredictable cost overruns due to factors such as unstable currencies, completion risks, and operation risks during the operation period, it is important to establish a strategy for mitigating against such risks and other risks mentioned elsewhere.
Tan (2004) argues that to mitigate against these risks and enhance the ability for stakeholders to minimize their impact, financial packages are critically tailored to address the risks associated with developing infrastructure in developing nations. Based on experience and research, it has been established that risk and financial profiles be established to critically identify financial sources and directly link the sources with each project development lifecycle (Medda, 2007).
Risk identification, risk assessment, risk mitigation, and risk allocation should be conducted with a well-tailored risk management strategy involving experienced and well-skilled personnel as a collaborative effort between the government and the private partner (Stone, 1974).
Developing and developed nations have different risk profiles and the need to conduct thorough risk identification typical of the specific country and infrastructure profile of the target country and the specific infrastructure project provides precise information about the risks associated with each project (Rumelt, 1984).
Arguments point out that risk identification leads to the classification of risks into environmentally driven risks such as political risks and project risks. Political risks keenly influence the relationship with and the support from governments for the private sector (Stone, 1974). It is important, therefore, for the project partners to operate and ensure that currency for the host country is easily convertible to other currencies.
In addition to that, PPP projects in developing countries should be enhanced by timely issuance of permits and other necessary clearance for the implementation of PPP projects. In addition to that, country risks that are associated with changes in laws and regulations, the legal framework for implementing and reinforcing the integrity of contractual laws, and the ability to appropriately calculate compensation packages make PPP projects viable in developing nations (Phillips, 1981).
It is important, as a way of mitigating risks in PPP projects particularly in developing countries to conduct a risk assessment by the stakeholders and the government in general. Researchers in the infrastructure industry has over time and with experience realized that risk assessment techniques, both qualitative and quantitative, should be performed in terms of cost and other financial risks involved in PPP projects (Soetanto & Proverbs, 2004). Therefore, sensitivity analysis models to analyze the variations in the variables that act as inputs to the model are analyzed about risks and uncertainties inherent in PPP projects. It is important to grasp the whole risk assessment and analysis environment by incorporating other risk assessment techniques such as performing a scenario analysis (Miller & Lessard, 2001).
Typically, scenario analysis will provide adequate information about the overall influence of the input variables when simultaneously used in combination with other variables to model the outputs from the inputs (Salusinszky, 2006). The scenarios, therefore, can be optimistic, pessimistic, or base. However, these risk profiles should be established about the agreement between shareholders and financial sponsors of the PPP projects, the level of credit agreements, contractual agreements between contracting parties, and supply and maintenance of operations. That will enable project participants to mitigate the likelihood of getting involved in a project with risk values that may point to a strong likelihood of incurring loss without the hope to recover from such risks (Medda, 2007).
Conclusion
From the foregoing discussion, it is can be authoritatively affirmed that PPP thrives on a partnership between the public and the private sector for the development of civil engineering public infrastructure. The partnership is due to the opportunities the private sector eyes and wants to exploit while the public sector, particularly the government’s motivation in the partnership is to transfer risks and uncertainties that characterize infrastructure development projects. In addition to that, the government intends to optimize the managerial abilities and finances available in the private sector.
That is basically due to the high costs incurred in the development of public projects. To that end, therefore, the government intends to shield the general public from higher taxes and other financial responsibilities for the development and implementation of such projects. However, these partnerships are susceptible to several risks that either party in the partnership needs to identify or strategically endeavor to mitigate upon them.
That is particularly the case with developing countries as risks and uncertainties vary from country to country. It is important, as a way of mitigating risks in PPP projects particularly in developing countries to conduct a risk assessment by the stakeholders and the government in general. Researchers in the infrastructure industry has over time and with experience realized that risk assessment techniques, both qualitative and quantitative, should be performed in terms of cost and other financial risks involved in PPP projects.
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