Risk Management in Transport PPP Projects
In the Islamic Countries
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Phase 4: Construction and asset delivery
Construction and asset delivery can be an extremely delicate phase as large-scale projects are
often affected by problems, typically cost overruns and late delivery. While PPP operations may
fail in the construction phase, it is worth remembering that conventional procurement is not
necessarily more successful in delivering on time and at cost. Some of the evidence indicates
that PPP do often succeed in delivering projects timely and on budget, although possibly at a
higher cost compared to conventional procurement.
Box 11 Latin American experiencewith cost overrun32
Vassallo (2015), based on Latin American experience, reports that the following actions are
recommended when cost overrun occurs: 1) in case of reasons of public interest, the public sector
should allow for cost overruns; 2) the mentioned public interest must be certified by a
commission of independent experts; 3) if the winner company does not meet its commitments,
the public party must have the moral and legal force necessary to quickly replace it with the
second-place bidder; 4) when substantial and costly changes are necessary the government
should guarantee competition in the execution of works in order to prevent such modifications
from costing taxpayers more than what is fair.
The construction phase normally starts after financial close and the pattern of risk during
construction is likely to be affected by risk management strategies applied in previous phases.
For instance, through exhaustive feasibility and technical studies and effective tendering
procedures it is possible to remove, transfer or mitigate many risk vulnerabilities. For instance,
knowing the subsoil, defining the construction method, specifying materials or finishes is all
essential to avoid cost overruns that involve renegotiating more investment.
One of the critical steps is to establish timely a contract management strategy and a suitably
capable contract management team and where necessary take appropriate measures to meet
skill and resource gaps.33 A contract management strategy should be able to address risks
emerging in the context of routine contract management as well as in unexpected circumstances
involving renegotiation, disputes and insolvency, which may occur in all implementation phases
from construction to closure.
Some of the critical risk management issues in this phase relate to the way contracts are
structured between the concession company and other entities involved in the implementation
of the project, notably the construction company. Normally the construction contract between
the concession company is a turnkey contract, where formally the construction risk is fully
transferred to the contractor in charge of the construction.
In sum, takeaways, barriers and parallel strategy options related to the construction phase can
be summarized as presented in the following Table.
32 Box based on Vassallo (2015).
33 For a comprehensive presentation of issues related to contract management see Global Infrastructure Hub
(2019), “Managing PPP Contracts After Financial Close”.