Risk Management in Transport PPP Projects
In the Islamic Countries
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Then, UKAS financial and technical experts evaluate the project. This assessment aims at
identifying the appropriateness of the PPPmodel for the selected project, the financial capability
of the company, the most suitable PPP type, the functionality and expected levels of quality of
the project, and the technical expertise required from the private partner.
According to section 2.2 of the PPP guidelines, the main driver of the PPP Program is Value-for-
Money (VfM), defined as “the optimal combination of whole life cost and quality to meet the
users’ requirements”. The guidelines indicate that VfM is achieved through:
 Risk transfer which allocates risks optimally between the public and private sectors;
 Long term nature of contracts (which embodies whole life costing);
 The use of output specification which allows bidders to innovate;
 Competition that provides fair value of the project;
 Performance-based payment mechanism;
 Private sector management expertise and skills.
However, the guidelines do not provide specific indications in order to calculate VfM. Therefore,
they leave the project promoters rather free to adopt their own methods.
Based on the evaluation a report is compiled by UKAS and submitted to JKAS for endorsement
and recommendation. Upon the approval of the project with the consent by the Cabinet, the
respective ministry proceeds with the procurement process.
Special arrangements for PPPs
In addition to Value-for-Money analysis (see section above), affordability assessment is also
supposed to be one of the aspects to be considered by JKAS before the tendering stage.
According to World Bank (2018), JKAS should conduct affordability assessment (including the
identification of the required long-term public commitments of PPP projects). However, there is
neither specific methodology for this assessment nor evidence that this assessment is
systematically conducted. When PPP projects foresee user-pay mechanisms, affordability
analysis should also include willingness to pay analysis. However, in the PPP guidelines, those
studies are not specifically mentioned and past projects reveal that they are not always
performed in practice.
Box 37 Consumers’ willingness to pay and tariff setting: the case of Light Rail Transit (LRT)
START- and PUTRA- LRT projects demonstrate the importance of conducting willingness-to-pay
studies to anticipate problems related to a low likelihood of the consumers to accept tariffs. For
LRT projects the tariffs were set by the government based on full-cost-recovery principle and were
meant to increase every 5 years. However, in the years following the Asian financial crisis of 1997,
consumers considered tariffs beyond their means. The result was that people did not use LRTs
and the concessionaire did not generate sufficient cash flow to meet obligations. The situation
required the intervention of the government which reduced fare cost.