Risk in Public - Private Partnership Mechanisms in Malaysia - Free Essay Example

RISK IN PUBLIC- PRIVATE PARTNERSHIP MECHANISM IN MALAYSIA CHAPTER 1: INTRODUCTION Background of the study Since the era of 1980s, privatization policy was introduced under the 4th Malaysia Plan to address the deficiencies in infrastructure development in Malaysia. The privatization policy that aimed to reduce the funding of government has later motivate the government to implement the Private Finance Initiatives (PFI) and Public Private Partnership (PPP) under the 8th and 10th Malaysia Plan respectively. PPP is seen as a derivative of privatization, even though some of their characteristic sound the same but the structure and design of the mechanism different in such a way that causes PPP gaining its popularity and forms around the worlds. CIDAC (2007), had compared the differences between the privatization and PPP mechanism, it shows that the design of PPP in contract structure result in varying levels of private participation instead of private ownership. Besides that, it also promote sharing of risk, responsibility between the private and public sectors making PPPs mechanism more preferable compare to Privatization method which has only sole responsibility in general for the private sector. In Malaysia, the PPP mechanism has include Key Performance Indicator (KPI) in the contract, where the payment for services is based on private sector performance. Tan, Allen and Overy (2012), viewed PPP is an off-balance sheet method to finance and deliver the public asset by the private sector in providing and maintaining public facilities which reduce the upfront cost that need to be provided by the government. Next, the private sectors are normally better in risk management, competitive and innovate which brings greater efficiency and value for money in delivery the public structure development (Robinson, 2010). As a conclusion, PPPs are a long-term contractual agreement between the government and private sectors for the financing, developing, operation or managing of projects in providing a public asset or service to increase the efficiency in delivery public i nfrastructure (WBI PPIAF, 2012). In Malaysia, as an initiative to strength the investment of private sector in construction industry there are quite a numbers of mega infrastructure projects that delivered using PPP such as West Coast Highways, extension of Damansara-Ulu Klang Expressway (DUKE) highways, Kuala Lumpur Outer Ring Road (KLORR) highway, Second Penang Bridge, UiTM education buildings, Penang port, and hospitals (UKAS, 2015). Dato Sri Ir Dr Judin Bin Abdul Karim,Chief Executive of CIDB mentioned that the government has allocate a budget of RM230 billion expenditure and 60% or RM138 billion for physical infrastructure development in the 10th Malaysia Plan. In 2010, there are 53 projects with RM 63 billion value was announced to be implemented under PPP agreements. The Public-Private Partnership Unit in the Prime Ministers Department (UKAS) has approved 137 projects and mobilized RM 115 billion in private sector investment in between year 2010 to 2013(Belgian Foreign Tra de Agency, 2014). In 2014, it was estimated that the government has allocated up to RM 2.7 billion under the facilitation fund for PPP (BFTA, 2014). Statement of the research problem PPPs mechanism were said to be share and transfer risk to the parties which better in handling risk. In order to make sure the work carried out complied to the requirement, incentives and performance requirements to achieve value for money throughout the procurement process, the design and arrangement of PPP need to be set out clearly for the ease of control of stakeholder consultation, allocate the risk to the correct parties to achieve the aim of development of these mechanism. However, the complexity of the infrastructure projects in technical, legal, political, economic and the range of constituencies involved, it is not easy to set up a good PPP contract (Ng, Martin Loosemore, 2006). One of the case in UK, the PPP were set up to renovate and maintenance the London underground railway system. The project were awarded to two private company Metronet and Tubelines, which worth over  £17 billion. Transport for London (TfL) and the UK government was forced to terminate the con tract following Metronet failure to manage the work within the budget which ran up a deficit over  £1 billion. Metronet went bankrupt after TfL refused to provide subsidy to cover the loss. In conjunction with the collapse case, it was estimated had cost the taxpayer between  £170 million and  £410 million. The main reason for the failure are because of the poor management, ineffective cost control, poor planning and inefficient fiscal management of Metronet (PSI, 2012). In Malaysia, the Batu Pahat Bus Station which redevelop through PPP direct negotiation between the Batu Pahat Municipal Council (BPMC) and the private developer is consider as a failures as disputes happens between BPMC and the developer. The agreement took place with the condition that, the complex will be managed by the developer, and sharing of profits between the two parties. After 60 years, the council will take over the complex. However, in 1996 the council did not pay the management fee to the develo per where causes the contractual problem started to occur. To manage the expenses, the developer refused to pay assessment tax and then offered BPMC to take over complete complex and manage themselves. However, BPMC refused and took a legal action against the developer in 2008. Finally, the council took charge of BPMC and bared administration and maintenance expense of the complex. The major failure of this PPP project was the consortium partner was not selected through open bidding process (Singaravelloo, 2010). Besides that, there are also argument on that the development, bidding and ongoing costs in PPP project are likely to be greater than the traditional government procurement processes. The long concession contracts for PPPs project causes high waste rework and transaction cost due to its complexity to produce the pre and post tender work in order to secure the risk of the public sector (Ng Loosemore, 2006). For example, the Second Penang Bridge construction faced a nine- month delay and rising costs of building materials due to construction issue such as land acquisition, design issues (Zurairi, 2014). Objective To identify the key risk factor associated in PPP. To determine the potential solutions to minimise the risk. To develop a strategies to manage risk in PPP. Scope and limitations The scope of this research focuses on the Public Private Partnership mechanism implemented in Malaysia. It focuses on the risk associated in the PPP mechanism in delivering infrastructure projects in Malaysia. The study will be carry out based on theory of the success and failure PPP project in Malaysia, to find out the potential solution to minimise the risk and develop an implication or strategy to manage the risk. Research Design Data will be collected through interview, case studies and observation. The target interviewers will be the government agencies, developer, contractors, financier which has been in charge in running and working on these mechanism. The secondary sources of information such as online newspaper, articles, organisation website and books will be used for case study. Table 1.0: Table of Research Design including the types of data, sources of data and method of collection OBJECTIVE TYPE OF DATA SOURCE OF DATA METHOD OF COLLECTION 1) To identify the key risk factor associated in PPP. The problem faced in PPP projects. Type of risk Public Private Partnership Unit Malaysia (UKAS) Interview Case studies 2) To determine the potential solutions to minimise the risk. Solution and strategies to overcome or minimize the risk. Risk Analysis Public Private Partnership Unit Malaysia (UKAS) Interview Case studies 3) To develop a strategies to manage the risk. Risk management Public Private Partnership Unit Malaysia (UKAS) Interview Case studies Importance of the research findings The expected findings comprise the key risk factors associated in PPP in Malaysia. This study will analyses the hidden risk and issues in the implication of PPP in Malaysia and other countries which determine the success and failure factors for PPP. Study the possible risk and problems that might arise and need to be considered when using this mechanism. Through case studies, to determine the potential solution and thus minimise the risk and problem. The research will then concludes with a series of recommendations and strategy from the case studies on how manage the risks in PPP projects. Structure of the Thesis The report is logically organized into five (5) chapters: Chapter one is composed of background and general information, which give an overview of the working mechanism of Public Private Partnership in infrastructure project. It includes the risk, issues that associate in the mechanism which causes arise of problem in using these mechanism in Malaysia and around the world causes these mechanism less favourable. Chapter two comprises of literature review, and various related works done in this area of study. Chapter three describes in detail the methodology followed in this research study. Chapter four contains the analysis of the information gathered through the interview and case studies to identify the key risk and issues in Public Private Partnership in Selangor, Malaysia. Determine the potential solution to minimise the risk and develop a strategies to manage the risk. Chapter five provides the conclusions and recommendations of the study. CompletedIn Progress 1.8 Research Program Chart Activities Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1. Forming research ideas Explore opportunities and funding for research study topics Discuss with supervisor 2. Submission of research topic Formulate problem statement and objective Discuss with supervisor 3. Prepare research Proposal Developing the content and structure of the research Discuss with supervisor 4. Submission Chapter 1 : Introduction Proposed Working Program Chart for each Semester 5. Finding information, collecting journal articles Reading around the topic Summarize, analyse and evaluate the published work 6.Literature Review Writing Submit Chapter 2 : Literature Review (Draft) Discuss with supervisor and make amend to improve 7.Submission Chapter 2 : Literature Review Discuss with supervisor and amend to improve Table 1.1: Program Chart for Semester 5 Outstanding 1.8 Research Program Chart Continued Activities Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1. Conduct Research Methodology Method used collect data Discuss with supervisor 2. Data Collection and Analysis Evaluate and Analyse collected data Discuss with supervisor 3. Data Presentation Overview Discuss with supervisor 4. Producing the thesis Developing the content and structure of the research Discuss with supervisor Make correction and amendment to improve 5. Draw a conclusion for research paper Revising final draft Draw a conclusion, Preface, Appendix, Reference writing Check overall organisation, paragraph level and sentences level concern Documentation (Consistent use of format) 6. Final submission Prepare for examination Get ready for viva, oral and thesis defence Table 1.2: Program Chart for Semester 6 References: A.Ng, Martin Loosemore, Risk allocation in the private provision of public infrastructure, International Journal of Project Management (2006), doi:10.1016/j.ijproman.2006.06.005. Herbert Robinson, Governance and Knowledge Management for Public-Private Partnerships. Chichester, U.K.: Wiley-Blackwell, 2010. at p. 4. Singaravelloo K. PPP: The Right Marriage between Local Government and the Private Sector in Malaysia. International Journal of Institutions and Economies 2010;2(2):142-166 World Bank Institute, PPIAF (2012).Public-Private Partnerships : Reference guide version 1.0. World Bank, Washington, DC.  © World Bank. [Website] Retrieved from: https://openknowledge.worldbank.org/handle/10986/16055 Belgian Foreign Trade Agency, BFTA (2014). Construction Sector in Malaysia [Website] Retrieved from: https://www.abh-ace.be/nl/binaries/BFTA%20-%20Construction%20Sector%20in%20Malaysia%20LD_tcm448-253807.pdf Prof. Dr StÃÆ' ©phane SAUSSIER, An Economic Analysis of the Closure of Markets and other Dysfunctions in the Awarding of Concession Contracts [Website] Retrieved from: https://www.europarl.europa.eu/RegData/etudes/note/join/2012/475126/IPOL-IMCO_NT%282012%29475126_EN.pdf CIDB (2014) Keynote Address : Y.Bhg. Datoà ¢Ã¢â€š ¬Ã¢â€ž ¢ Sri Ir Dr Judin Bin Abdul Karim, Chief Executive, CIDB Malaysia for International Construction Conference 2013[Website] Retrieved from: https://www.cidb.gov.my/cidbv4/?option=com_contentview=articleid=554:keynote-address-y-bhg-dato-sri-ir-dr-judin-bin-abdul-karim-chief-executive-cidb-malaysia-for-international-construction-conference-2013catid=40Itemid=279lang=ms Public Services International: Why Public-Private Partnership (PPPs) donà ¢Ã¢â€š ¬Ã¢â€ž ¢t work [Website] Retrieved from: https://www.world-psi.org/sites/default/files/documents/research/psiru_ppps_case_studies.pdf Zurairi Ar. Longest bridge in Southeast Asia opens today in Penang. [Website] Retrieved from: https://www.themalaymailonline.com/malaysia/article/longest-bridge-in-southeast-asia-launches-today-in-penang1