Risk Management in Transport PPP Projects
In the Islamic Countries
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the public authority usually carries out a due diligence process to ascertain that the chosen site
is suitable from an environmental perspective (Global Infrastructure Hub, 2016).
Management of risks during construction
In the project life-cycle, the construction phase entails a great deal of complexity which needs to
be managed effectively. This stage requires interpretation of and compliance with numerous
laws and regulations, preparation of necessary resources (including labor, equipment and
material) as well as coordination between stakeholders. If not properly addressed, complexity
and uncertainty during the construction phase can translate into cost and time overrun.
Construction risks can be caused by several risk both internal and external to the project. On
one hand, internal risk factors include defects in the methods used, negligence by the private
partner, cost increases due for instance to inadequate cost management and inefficient
construction practices. On the other hand, external ones point to unfavorable weather
conditions, protester action, delays in obtaining approvals and permits, changes in labor and
materials costs and new taxes.
Under the construction phase, the so-called completion risk, i.e. the risk of failing to meet the
construction outcome as prescribed, including delay and cost overrun (APMG, 2016) represents
a common threat, particularly for heavy rail and airport projects (Global Infrastructure Hub,
2016). Time and cost are however not the only elements affected by risk. The quality of the asset
delivered can also be at risk, for instance because of lack of capacity to comply with standards
specified in the contract or the use of inadequate technology, especially relevant in the transport
sector.
The private party is typically responsible for the construction and operation of the project asset;
therefore, construction risk is generally borne by the private partner because it is well-placed
to manage it more efficiently. As the project company is also better positioned to engage with
different stakeholders, this enables risk transferring to a third party, which is carried out by
allocating risks to appropriate subcontractors, whose responsibility is to deliver a well-defined
asset or service as part of the overall project at the conditions agreed upon, with a particular
focus on the timeframe.
Standards of construction can help in the mitigation of construction risk as well. Complying
with well-established quality levels prevents negative outcomes of routine inspections by the
public sector. The priority of the procuring authority does not consist in a detailed monitoring
of construction, which is the responsibility of the private party. Instead, it lies in monitoring
against the indicators established in the contract. A key feature of PPP, in fact, is that
performance is specified in terms of required outputs, rather than inputs.
When preparing the contractual arrangements, the specification of responsibilities in the
collection and reporting of information is also crucial, since risk monitoring is of great
importance over the project’s lifetime. To this end, the public partner needs to design and
operate a risk monitoring system which incorporates mechanisms to review and deal with the
identified risk factors and detect unforeseen risks arising during the construction phase. Such