ISSN 1816-9554 Surveying and Built Environment
Surveying and Built Environment
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ISSN 1816-9554 Surveying and Built Environment
Risk-Sharing Mechanism for PPP
Projects – the Case Study of the
ABSTRACT
The Cross City Tunnel in Sydney, Australia is a good example of how the improper
allocation of risks could affect the success of a Public Private Partnership (PPP)
project. It is not incorrect for risks to be passed on to the private sector, especially
when they are able to manage them. But maybe there should be a ‘partnership’ in
place when the private sector is unable to manage all the risks themselves. Some
critiques considered this project as an unsuccessful PPP as the Government has
had to cope with handling much public opinions dissatisfaction and criticisms for
their inaccurate traffic forecasts, leading to the investor making a financial loss.
This paper aims to derive a risk-sharing mechanism for projects similar to the
Cross City Tunnel, by reviewing the underlying causes leading to the ‘failure’ of
this project. In addition, the objectives are to ensure that appropriate risk allocation
is achieved in the best interests of all parties so as to make the project successful.
Unpredictable circumstances and inaccurate predictions of the Government could
make it difficult if not impossible for the private sector to handle the project. In
these situations the Government should step in, share the responsibilities and
overcome the problems encountered with the consortium. The Government should
be able to offer assistance in these circumstances in the form of finance, manpower,
governmental procedures, etc. depending on the need. In addition, this paper
advocates that such mechanism should be in place for similar projects in the future.
Benefits for both sector parties are anticipated when this mechanism is included in
the project contract. After all, a PPP is a ‘partnership’ and the parties should work
together to overcome obstacles for mutual benefit.
KEYWORDS
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Risk-Sharing Mechanism for PPP Projects – the Case Study of the Sydney Cross City Tunnel Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554
INTRODUCTION
The defini t ion of a PPP has been
reported by numerous researchers. Each
definition varies slightly depending on
the author, jurisdiction and the time.
As the Cross City Tunnel (CCT) in
Sydney, Australia is a New South Wales
Government infrastructure project, it
is therefore logical to consider their
definition of a PPP. According to the
New South Wales Government the term
‘public private partnership’ (PPP) is
used to mean:
‘An arrangement for the provision of
assets or services, often in combination
and usually for a substantial or complex
“package”, in which both private
sector supplier and public sector client
share the significant risks in provision
and/or operation’. (Infrastructure
Implementation Group, 2005).
In this definition the emphasis is on
both the public and private parties
sharing a large proportion of the risks
in a PPP project. In reality it is not
always the case that an equal split of
risks is experienced. Often the public
sector takes up minimal risk and aims
to pass on as many risks as possible to
the private sector. This occurs more
commonly in developing countries or
jurisdictions where the Government
has less experience in this alternative
procurement method. This paper
therefore aims to derive a risk-sharing
mechanism for projects similar to the
CCT. In addition the objectives are to
ensure that appropriate risk allocation is
achieved; and that the aims of all parties
are to make the project successful. The
New South Wales Government further
describes that:
‘Privately financed projects involve
prov i s ion by inves tors o f equ i ty
capital and debt capital to fund what
might otherwise be wholly publicly
funded projects financed from NSW
Government borrowings and/or budget
revenue’.
This further emphasizes the importance
of the f inancing of PPP projects .
Passing on financial risks is appealing
to governments.
The PPP form of procurement i s
recognized as an effective way of
delivering value-for-money public
infrastructure or services. It seeks to
combine the advantages of competitive
tendering and flexible negotiation,
and to allocate risk on an agreed basis
between the public sector and the
private sector (Akintoye et al. 2005).
It is essential for the public client and
the private bidders to evaluate all of the
potential risks throughout the whole
life of the project. Public and private
sector bodies must pay particular
attention to the procurement process
while negotiating contracts for a PPP
to ensure a fair risk allocation between
them. Systematic risk management
allows early detection of risks and
encourages the PPP stakeholders
to identify, analyze, quantify and
respond to the risks, as well as take
measures to introduce risk mitigation
policies (Akbiyikli and Eaton 2004).
A fundamental principle (Grimsey and
Lewis, 2002) is that risks associated
with the implementation and delivery of
services should be allocated to the party
best able to manage the risk in a cost
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Surveying and Built Environment Vol 19(1), 67-80 December 2008 ISSN 1816-9554
effective manner. A delicate balance
has to be sought amongst private
sector capacity, government regulatory
function and public satisfaction.
In general , the typical processes
for delivering PPP projects in New
South Wales include five major steps
(Figure 1): 1. project identification;
2 . p ro jec t approva l ; 3 . p lanning
assessment; 4. project delivery; and 5.
project implementation (Infrastructure
Implementation Group, 2005). Before
a project is even considered it will go
through a series of governmental in-
house procedures to decide whether
it is a public facility or service that is
needed. If it is decided to be necessary,
the project will have to be approved
via the Gateway review process and
to see which procurement option it
should adopt. Planning assessment via a
number of different line agencies would
be necessary. Finally the project will be
offered to the market, consortia will bid
for it and the Government will select
the most suitable candidate after a long
series of negotiations. The project will
typically be designed and constructed
over 3 to 5 years. It will then be put into
operation and maintained for a further
25 to 30 years as the concession period.
Thereafter, the project will normally be
returned to the Government, completely
ending its life as a PPP project.