Risk Sharing Issue on Public Private Partnerships Scheme in Indonesia: Review on the Studies of Toll Road Projects
Ofi Sofyan Gumelar (T1373019)
Determining risks sharing on Public Private Partnerships (PPP) projects is one key factor to attract the investor to involve on PPP projects offered by government. Private sector need a certainty on risks that will be faced during all the stages in its implementation including preparation, construction, operation stage and access transfer stage. This point need to be assured on the contract of the projects.
Toll road projects is one of the infrastructure projects offered by Indonesian government through PPP projects since its implementation in Indonesia. This projects is considered as the attractive projects for private sectors as many as beneficial aspects on it. However, some risks are not clearly defined in managing toll road projects. Based on the past experiences, many projects was stalled along with some problems occurred when it was running. This paper will try to review risks allocation on PPP toll road projects based on previous researches.
Public Private Partnerships (PPP) scheme is an alternative way in constructing infrastructure facilities for governments having limited budget. This scheme is popular not only for developing countries, but also for developed countries. PPP scheme raised mostly in early 1990 as more and more government faced acute fiscal issues while many infrastructure projects needed to be handled, such as telecommunication, energy, transport and water services (Wibowo, 2008). Therefore, governments in around the world turn to give private sectors portion to participate in handling some projects having economic and financial values.
One issue come up in implementing PPP scheme is risk sharing allocation between public and private parties. Willingness of private sectors to take part on the projects depends on composition of risks that will be taken by them. This issue is also happened in Indonesia. It can be seen on Existing viability gap funding mechanism (i.e. direct government support) that is unwieldy and not conducive for the investor (Bastari Pandji Indra, 2011). Generally, a PPP is nothing other than a long-term arrangement of transfer of risks which are traditionally borne by the public sector to the private sector for which the latter is financially compensated for the willingness to bear the risks (Wibowo, 2008). Experiences also show that problem might happened when government paid higher than necessary to private sectors for conducting the projects. Therefore, it is important for both parties to identify the best allocation of risk sharing to run the PPP projects.
Risk Factor and Risk Sharing Allocation
Risk factor in implementing PPP project have to be determined before the risk being allocated. This factor have to be clearly understood by public and private sectors before they conduct the projects. Many researchers has put their research objectives on this issue. Karim (2011) summarized the finding of some previous researches into 10 categories, consisted of Political, construction, legal, economic, operation, market, project finance, project selection, relationship and natural factor (Karim, 2011). Table 1 shows the detail of risk issues on these categories.
Risk allocation between private and public sector is important in managing PPP Projects. Risk sharing allocation will give a balance distribution of responsibilities for both parties cooperated in conducting a PPP project. Risk allocation refers to a primary measure of assignment between the public and private sector. Risk distribution on the projects scheme will be important mostly for private sectors for measuring the feasibility of the project. Therefore, public sector should clearly presents the three factors including (1) identify the key risks, (2) evaluate the level of acceptability of each risk, and (3) allocate risk to the party involved (Lam, Wang, Lee, & Tsang, 2007).
How to allocate risks on the project has also described by several researches. Measuring risks approaches is not only in the form of PPP projects, but also in general projects construction. According to Ward et al and Flanagan and Norman which are gathered by Abednego and Ogunlana (Abednego & Ogunlana, 2006), there are several conditions that must be satisfied to determine whether project risks have been properly allocated or not. These conditions are:
a. Risk should be allocated to the party with the best capability to control the events that might trigger its occurrence.
b. Risks must be properly identified, understood and evaluated by all parties.
c. A party must have the technical/managerial capability to manage the risks.
d. A party must have the financial ability to sustain the consequences of the risk or to prevent the risk from occurring.
e. A party must be willing to accept the risk.
Based on the criteria above, Abednego and Ogunlana proposed a concept for measuring proper risk allocation. This concept determines which party (who) has the best capabilities to accept the risks (what), and also when and how factors should be considered (Abednego & Ogunlana, 2006). Figure 1 shows the concept proposed by these two researchers.
One example of risk sharing allocation on the PPP Scheme project is described by OECD institution. OECD gives different type of risk that sharing for public and private sector in implementing PPP Project. They identify risks into three aspects and allocated to which party should responsible in taking the risk. Those three aspects include macroeconomic, commercial and legal/political risks (OECD, 2012). As general rule, parties are better managing those risks which are endogenous to them. Table 2 presents risk sharing in PPP projects.
Table 2. Risk Sharing in PPP Projects according to Categories of OECC (OECD, 2012)
The Implementation of PPP Scheme in Indonesia
In Indonesia, the implementation of PPP Scheme has been established since early 1990, where private sectors was invited to take part in building toll road project through Build, Operate and Transfer (BOT) scheme. Since then, the expansion of collaboration projects between government and private projects has increased significantly (Abednego & Ogunlana, 2006). According to Word Bank data, PPP projects in Indonesia spent more than US$20 billion since 1994 to 1999 for constructing transport sector consisted of toll road and sea port projects. However, around that time toll road infrastructure was only served for 570 km (UK Commonwealth, 2012).
Since 2011, PPP scheme will be used for developing some infrastructure in Indonesia. In that year, the government of Indonesia announced the Master Plan for acceleration and expansion of Indonesia’s Economic Development (MP3EI) (Bappenas, 2013). With this blue print, PPP has accepted to fill the financing gap for the infrastructure plans. Starting this ambitious plan, in medium development term 2010-2014, government focused PPP scheme for developing infrastructure in 9 sectors such as energy, electricity, telecommunication & IT, Road and Land Transportation, Sea Transportation, Air transportation, railways, water resources, and Housing and settlement (Bastari Pandji Indra, 2011).
The general procedure for risk allocation for public and private sectors in infrastructure development is regulated by the decree of the ministry of finance (38/PMK.01/2006). This decree intended as guideline for managing and sharing risk in the provision of infrastructure in PPP method. This decree presents the government willingness to share the project risk with private sectors and guarantee the sustainability the project. In detail, the decree stated categories of risks that raise on the projects and how to manage it, and also describe the state enterprise that will guarantee the financial aids during the project is constructing. However, determining who will responsibility for risks on the project are not mentioned in this decree, and mostly it is usually negotiated in arranging contracts.
Toll Road Project under PPP Scheme in Indonesia
Indonesia has very large area with 4 big islands. As land transportation is very important to support the development and economic growth of the country, unfortunately this country still has limited road infrastructure. Until 2005, Indonesia has only 608 km of total length from 22 toll roads constructed spread the country (Santoso, Joewono, Wibowo, Sinaga, & Santosa, 2012). At the first period of national development, PT. Jasa Marga is a state enterprise that responsible for constructing and managing the toll roads in Indonesia. Since PPP scheme was introduced, other private sectors invited to take part in building toll road infrastructure.
Compare with other infrastructure projects, Toll road projects are more attractive for private companies to participate in this PPP scheme projects. The reason is that almost every 2 years government raise the toll charges following inflation rate. It is easier for investors to calculate the return fee for their money (Austalian Aid, 2012). Other benefit of toll road project is that the growth number of vehicles on the road will be a potential consumer of toll road. Moreover, in order to support PPP scheme for this toll road projects, government released act Number 2 year 2012 about Land Capping for toll development. Government also make a state enterprise to provide money for land acquisition. Those condition make toll road projects more reliable to be run.
Recently, in the end of the years 2013, Indonesia offered 3 toll road projects with PPP scheme. These projects will spend more than RP 10 Triliun consisted of Medan-Binjai, Pandaan-Malang and Manado-Bitung Toll Road Project (Fahriyadi, 2013). It is believe that in the future there are still many toll road projects that will be gathered through PPP scheme. Therefore, to understand risk on the project and how to share this risks for government and private companies, it is needed to elaborate the risk allocation of toll road projects from previous experiences.
Risk Allocation on Toll Road Projects in Indonesia
There are only limited study on risk allocation on PPP construction projects in Indonesia. Risk assessment and allocation based on private sectors perspective explored by Santoso et al (2012) and Wibowo and Mohamed (2008). Abednego and Ogunlana (2006) specified on determining the proper risk allocation through good project governance approach. Furthermore, Indonesian Ministry of Public work also has made a guideline for assessing risk in Toll road Project (Ministery of Public Work, 2005). Making a review on both researches finding will give explanation on risk allocation on toll road projects in Indonesia.
According to Ministry of Public Work guideline (2005), there are 55 risks that possible to be occurred in toll road projects. Those risks categorized into nine groups, consisted of (1) political and legislative, (2) risks to tollway companies, (3) economic and monetary, (4) design, (5) land acquisition, (6) construction, (7) traffic, (8) maintenance and operation and (9) force majeure.
Based on the finding research of Djoen San Santoso et al, there are 18 from 55 risks in the Ministry Public Work Guideline that become a major risks in toll road projects (Santoso et al., 2012). Major risks mean that those risks always occurred in the projects and took much energy for both parties. These risks are include: (1) delays in land acquisition, (2) over budget in land acquisition, (3) low traffic volume, (4) Long Procedure for decision and approval by government, (5) no increment in toll fee, (6) delays in disbursement of funds from investors, (7) project feasibility, (8) inflation, (9) credit related problems, (10) inability of government to fulfill its responsibility, (11) cost overrun in construction, (12) delays in payment related to land acquisition, (13) severe weather causes low productivity, (14) claim from community related to land right, (15) interest rate fluctuation, (16) fall in construction the road feeders, (17) delays in issuing permits by government, and (18) delays in construction.
Identifying Sector that Responsible on the Risks
From the major risks identified in toll road projects, the question that might be rose is that who will take the responsibility for each risks. Generally, many literatures mentioned that risks are divided into three groups, first group is risks handled by government (public sectors), second group is risks that handled by investors (private sectors), and the last group is shared risks group. Shared group consider the risks that having impact for both parties and cannot be handled only by one party.
Using the criteria and concept for measuring proper risk allocation proposed by Abednego and Ogunlana, this paper try to elaborate 55 risks in PPP toll road projects as gathered by Ministry of Public Work. Table 3 presents the result of analysis of the risks allocation in toll road projects divided into three groups. 18 major risks which has been identified by Santoso et al are written in bold letter. Grouping each category into one column show that those risks linked each other. For example, delays in land acquisition which is consider as share risks can be driven by inability of government to fulfill its responsibility which is consider as risk that should be controlled by government. At the same time, delays in land acquisition also can be triggered by credit related problems which is consider as private sector responsibility.
The review on risks event of toll road projects determines parties who will take the responsibility each risks event. Generally, risks allocation can be divided into three groups, risks managed by public sector, risks managed by private sector, and risks that shared by both parties. Each risk also can be possibly caused by other risks and vice versa. Knowing which party has capabilities to respond the risks will make it can be managed well.
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