Public–private partnerships (PPPs) are increasingly being used to overcome complex challenges and develop new opportunities with the private sector. High quality risk management is critical to the success of PPPs. A paper in Public Performance & Management Review identifies eight major risk factors and develops a risk management framework to mitigate them.
Understanding public–private partnerships
The paper defines PPPs as:
- cooperative arrangements between public and private partners to share resources, risks, responsibilities and rewards to mutually gain social, economic, or environmental objectives
PPPs can be distinguished by their degree of private involvement, such as:
- Build-Operate-Transfer (BOT),
- Build-Own-Operate-Transfer (BOOT)
- Design-Build-Finance-Operate (DBFO)
- Build-Own-Operate (BOO)
Figure 1 illustrates the different levels of involvement between public and private partners in these arrangements.
Figure 1: Schematic of public-private involvement
(Adapted from European Commission, 2003)
Risk management
The paper views risk as the effect of uncertainty on objectives. In other words, risks are uncertain possibilities, opportunities or threats that might happen. They are inherent to all projects and therefore robust management is required to:
- Identify the risks facing a project.
- evaluate the consequences if a risk materialises.
- mitigate the risks throughout a project lifecycle. This can include minimising the risks, eliminating the risks or transferring risks to insurances.
About the research
The research sought to answer three core questions:
- What are the most important risk factors in PPPs?
- What impact do those factors have on PPPs?
- How can the risks be mitigated in PPPs?
It involved conducting a systematic literature review and investigating 1,331 articles. From these, 159 papers formed the basis of an in-depth analysis.
Eight risk factors
The research identified eight major risk factors.
1. Contracts
Contracts represent one of the greatest challenges in PPPs. There are three main contractual risks:
- negotiation: this includes duration of negotiations; insufficient processes for getting a contractual agreement; asymmetric information flow; and imperfect information.
- incompleteness: contractual arrangements need to cover a long period and it is not possible to define a “complete” contract considering all relevant aspects and future incidents.
- contractual design: this includes contractual ambiguities and an absence of flexibility to allow changes.
2. Resources
Resource-based risks include:
- finance: particularly cost overruns due to poor initial estimates.
- staff: the quality and availability of staff and their level of experience.
- time: public and private partners’ different time horizons can create problems.
3. Objectives
Objectives refer to the strategies, visions, goals or plans of the PPPs. Conflicting goals, problems with strategy and a lack of clarity were identified as the key risks.
4. Structure
Structural aspects refer to the question of how PPPs are organised and how partners work together in an efficient way. The main risks are:
- unclear roles and responsibilities
- the complexity of decision-making and the different expectations of partners
- poor coordination
5. Commitment
Commitment refers to how strongly individuals identify with the PPP and its goals whether they are willing to contribute sufficient effort. Partners may have an incentive to run a PPP to serve their own interests before meeting the stated mutual objectives.
6. Environment
External factors can influence PPPs. These are outside the control pf partners and include political risks, demand/revenue risks and unpredictable incidents.
7. Communication
These risks include a lack of communication, the quality of information flow, the complexity of communication processes and information asymmetry.
8. Trust
Trust can influence the business performance between partners. Risk factors include
- monitoring processes and the capacity to ensure the right quality output.
- trust building which needs adequate time.
- a lack of transparency.
A conceptual risk model
The paper presents the following conceptual model to enhance the understanding of risks in PPPs.
Figure 2: Conceptual risk model
The model depicts the interrelationship between the different risk factors. It enables a more sophisticated understanding about the scope, links and temporal relevance of each factor.
The model has the following risk layers:
- the actual project (e.g., objectives or commitment)
- the participating partners (e.g., structure or resources)
- the relationship between the partners (e.g., communication or trust)
- the overall framework in which a PPP takes place (e.g., contracts or environment).
The model proposes a top-down approach regarding these layers when identifying, evaluating or mitigating risks in in the earlier stages of a PPP such as exploration and planning. Management is guided by the objectives to be achieved. Based on the objectives (risk layer: project), partners with the required resources are sought (risk layer: partners), initial communication channels are established (risk layer: relationship) in order to finally agree on a contract (risk layer: framework).
A bottom-up approach is proposed in the later stages of a PPP, such as realisation and operationalisation. In these stages, management is mainly focused on the contract the partners have agreed on. For example, based on a certain contract (risk layer: framework), formal and informal communication takes place (risk layer: relationship), which positively or negatively influences the willingness to share certain resources (risk layer: partners) to eventually achieve contractually defined objectives (risk layer: project).
The bottom line
The risk model provides a compact overview about the identified risk factors and assigns them to risk layers. Certain risk factors have varying importance over the cycle of a project. The model contributes to a better understanding of risk management which will be more effective when project partners better understand the PPP risks.
Want to read more?
Risks in Public–Private Partnerships: A Systematic Literature Review of Risk Factors, Their Impact and Risk Mitigation Strategies – Robert Rybnicek, Julia Plakolm and Lisa Baumgartner, Public Performance & Management Review, April 2020
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- Published Date: 21 March 2022