Risk Management in Transport PPP Projects
In the Islamic Countries
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PPP contractual arrangements
In line with the selection criteria specified in the tendering documents, the private partner
(typically in the form of a Special Purpose Vehicle (SPV) set up specifically for the project) is
selected for the project and the award notice is published online on UKAS website. As formalized
in the UKAS procedures (see Figure above), negotiations with the selected bidder are
performed between the award and the signature of the PPP contract.
In the negotiation process, three different committees play a role. Depending on the project’s
sector, technical experts from the government and SPV experts are selected to form a technical
committee that defines matters such as the construction design, expected time plan, functional
design, operational output, technology requirement, resource requirement (material/labor),
and costs of construction, operation and finance (Ahmad et al., 2018). Once an agreement on
technical aspects is reached a financial committee is set up to discusses financial aspects, such
as cash flow, project viability, benefits and impact to the government fiscal stability, company
profile and financial strength. Finally, a legal committee is required in order to address
regulatory and legal issues, including the ownership structure.
The reports produced by each committee are submitted to the relevant ministry for final
approval. The ministry may require the support of independent experts for final approval and
may suggest more amendments or approves the design concept. After the approval from the
relevant ministry, the PPP project agreement between the public and private party is signed. In
this stage, the risk of project cancellation can still materialize if the approval stage or if the
preparation of all necessary documents takes long.
A PPP contract standard model is not in use in Malaysia and the PPP guidelines do not
provide details in terms of the expected content and elements to be included in PPP contracts.
However, the procuring authority always includes a draft PPP contract in the request for
proposals. Among others, the agreement typically includes concession charges, obligations of
the parties, Key Performance Indicators for operation and service level, penalties of any party.
The PPP guidelines do not even provide any specific indication and tool for risk
identification and allocation . The result is that risks are identified and allocated on a case-by-
case basis. In the risk identification process the above-mentioned committees play a crucial role.
They identify risks from a technical, financial, and legal standpoint. In the risk identification
exercise, the UKAS database of all risks of PPP projects is used as a reference.
A recent study (The Economist Intelligence Unit, 2013) defines the Malaysian risk allocation
system as a mature one, at least in the road sector. The study reports that, for highways and
bridges, the government normally use build, operate, finance and maintain (BOFM) or build,
operate and transfer (BOT) contracts as well as user charges (or tolls) payment mechanisms.
However, depending on the project location, the allocation of risk varies according to the project.
For projects in disadvantaged or sparsely-populated areas, demand risk is shared between the
government and the private company.
Based on review of publicly available information, the Table below provides a summary of the
typical allocation of the risks between the public and the private sector outlining the underlying
rationale.