Public–private partnerships (PPPs) are currently an improved financing option and managing of projects in both developed and developing country, with better efficiency promised from the private funding of public infrastructure through the transfer of risks to private parties.
This article aims to examine the risk sharing under projects arranged under PPP. The article will also summarize some conceptual frameworks underpinning PPPs and establishes the notions of risk shifting and risk sharing that policy makers and PPP practitioners can learn in improving the performance of PPP projects in Ghana.
Analyzing responsibilities and risks sharing under PPP projects
The defined apportionment of risks among diverse actors convoluted is predictably well-defined after deliberation of a number of plethora factors. These comprise the overall public interest in the execution of the intended PPP project, as well the interest of other private investors. Both the public and private actors convoluted in the PPP arrangement have an interest in identifying all risks that a project may face and an equal stake in ensuring that these project risks do not jeopardize the project.
Funding of huge infrastructure expansion and renovation demands a suitable estimate of financial expenditures, revenues and anticipated costs, incidentals, tariffs and liabilities of projects. Operative risk sharing is premised upon the concept of apportioning obligation for allocating with the concerns of each identified risk to either the private investors or public actors through a system of shared responsibilities. Under PPP project arrangements, Risks and responsibilities are usually shared on the basis that:
- Menaces to project expenditures and risks to the project are curtailed by sharing particular risks mostly to the private investors, who are better placed than the public actors to lessen the probability of the risk being realized and in the best position to manage the consequences of the risk after it has materialized
- One party (private actors) may be better placed to diversify or absorb the risks than the other parties involved in the arrangement (see figure 1).
- Allocating a risk to a party should provide incentives for the party to spend time and resources in delivering the expected outcomes
- Not all risks can be foreseen within a PPP agreement and therefore the agreement will need to allow for mechanisms that deal with unpredictable, unforeseen or unmanageable events. This is best dealt with under the contract e.g. force majeure and other clauses for unforeseen events.
Figure 1: Conceptual framework for managing risks in PPP
Common Risk and Responsibilities
Risk allocation as discussed in the earlier section between private and public sector is critical in managing and successful implementation of 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.
Thus, in properly sharing risks there are 4 key segment that needs to be considered: (i) what risks to be allocated; (ii) Who has the willingness and ability to accept risks; (iii) When is the time to allocate the risk; (iv) and lastly How to minimize consequences (see figure 2). If most project will critically follow the four steps, it will really lessen the risks involved in the execution of the PPP project in the various sectors of Ghana.
Figure 2: Concept of Proper Risk allocation
Again, in terms of levels; we can group the level into four broad categories:
Political and Macroeconomic Risks – ‘Customary’ political risks include localization, new tax regimes and other events that impact debt service and profits. Country risk indicates to the likelihood that vicissitudes in the commercial environment will ensue that lessen the profitability of doing business in a country. These vicissitudes can unpleasantly affect operating profits as well as the value of assets as a result of political risks and macroeconomic risks.
The private investors face the risk that the project may be negatively impacted by acts of the public actors. Another political risk includes ‘Regulatory’ risks which is the nuisance of new standards or the introduction of competition, while ‘quasi-commercial’ risks include breaches by the public actors or interruptions due to changes in government regime or government plans.
Other political risks include acts of war, rebellion, default or failure of public sector entities. The public actors are conventionally the project accomplice with the utmost capability to manage the risk of change in the political climate, and so often takes this responsibility.
Sector Risks – The risk that the sector will be affected by economic or other factors which pertain to that sector more specifically than other sectors. For instance, there may be risks faced by IPP’s in the distribution of power in Ghana, which will be different from risks faced by another private investor in the water sector, road sector, health sector among other sectors.
Project Risks – Refers to those circumstances which may have an effect on the responsibilities of each party to the PPP agreement and the benefits they may achieve from the project. These include risks related to financing, design and construction and operation and maintenance.
Counterparty Risks – Relate to specific risks arising from the counterparties to the PPP agreement not being able to meet their responsibilities under the PPP agreement (in a typical PPP agreement the main counterparty if the Grantor but there may be other counterparties such as a specific a national agency that grants the developer special permits for water abstraction).
Summary and Lessons Learnt in Ghana
PPPs as explained in the other sector are the most popular financing and management option in the execution of projects. Although having progressed from customary management contracts, they are somewhat diverse in that private finance is used, they typically involve complex contractual arrangements and they also assume different governance and accountability arrangements.
PPPs may have the potential to provide infrastructure at more reasonable prices than comparative delivery through either the public sector or traditional contract arrangements, but experience to date has been mixed in Ghana. Governments have tended to view the use of PPPs as a purchasing device, and with the objective of quick delivery, have risked due process and adequate public policy consideration in doing so.
The various IPP case study examined in this article indicated that most of the sector risks were shifted through the contract to the IPPs. Outstandingly as well, consequent involvement bore out the contract outlooks, notwithstanding the many legal challenges mostly between private investors and public actors.
The tangible risk accompanying with this PPP project arrangement, conversely, was considered not so much to be in the commercial domain, where risks were carefully defined and managed, but in the governance domain, where government neglected traditional checks and balances afforded to major projects. Commercial and governance risks were confused in many of the case studies reviewed in Ghana.
The factual expense paid by Ghanaian citizens for the private investors to tolerate these risks remains indistinguishable. All acquisitions of infrastructure transactions leave Ghanaians open to political and commercial trade-offs. It is perilous that with the huge financial resources at stake in future PPPs, and with contract decisions covering dozens of future government terms, these contracts need not only to be optimal in the technical sense, but also accompanied by a priority for democratic debate, transparency and clarity.
About the Author:
The writer is a Researcher and Public Policy Analyst with considerable knowledge and expertise in Public Private Partnership, Leadership inspiration and Public Policy formulation. He is currently a Senior Management Consultant, Gimpa Consultancy and Innovation Directorate (GCID), the Consulting Division of the Ghana Institute of Management and Public Administration (GIMPA. Contact the Author on 0205012686 / [email protected]