Risk Management in Transport PPP Projects
In the Islamic Countries
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Box 42 Operation issues: The case of Light Rail Transit (LRT)
Difficulties for START- and PUTRA- LRT projects started in 1997 as Malaysia faced financial crisis.
LRT services experienced lower passenger rate than the original estimates. Consequently, START-
LRT and PUTRA-LRT could not pay back the loans which they had taken for LRT construction
works. The Star LRT and Putra LRT projects had to be bailed out by the government through
Prasarana Malaysia Berhad, just after a few years of operation.
According to data provided by Markom and Ali (2012), in the two projects the estimated and the
actual number of daily passengers were as follow:
Year
STAR PUTRA
Estimated Actual Estimated Actual
1999 586,091 62,547 245,666 12,741
2003 659,688 107,082 419,225 154,869
The financial crisis revealed the lack of risk management in handling, among others, demand risk.
Markom and Ali (2012) highlighted different factors which led to the negative result. First, the
original fare rate was too high and negatively affected the number of passengers. This required
the Malaysian government’s intervention which led to a reduction in the fare cost. Although the
action was able to increase the number of passengers, the demand target was still not achieved in
2003. Moreover, the huge amount of the construction cost with the big value of commercial loan
exposed the companies to financial problems. The project design was also weak as commented
above.
A country-specific risk which affects PPP projects in Malaysia is operation cost overrun and
maintenance cost higher than expected. This was revealed by a comparative study of Sarvari et
al. (2014).
Bonus/malus schemes
According to publicly available information and PPP legislation, penalties and or bonuses do
not seem to be applied to the PPPs in Malaysia.
In the case of road transport, the Malaysian Highway Authority65 experimented some
mechanisms in order to implement a system of penalty/bonus payments based on actual
performance of the concessionaire against KPIs such as level of maintenance, lane availability
or accident response. Nevertheless, these mechanisms still have to be fully implemented (JICA,
2010).
65 The Malaysian Highway Authority is a statutory body under the Malaysian Ministry of Works. The agency was
founded on 24 October 1980 by the Highway Authority of Malaysia (Incorporation) Act 1980 to monitor the
works and administration of expressways.