Good project governance for proper risk allocation in

publicprivate partnerships in Indonesia

Martinus P. Abednego
*
, Stephen O. Ogunlana
Construction Management and Engineering, School of Civil Engineering, Asian Institute of Technology, P.O. Box 4, Klong Luang,
Pathumthani 12120, Thailand
Abstract
Parties that are involved in an infrastructure project under publicprivate partnership (PPP) procurement system typically have dif-
ferent perceptions of proper risk allocation. Consequently, disputes may arise between those parties thus reducing the chances for the
projects success. Moreover, PPP projects are generally challenged with both project management problems which require day-to-day
supervision (short-term) as well as partnership problems which require more of a strategic approach (long-term). Consequently, PPP
projects can be considered to have governance concerns because they deal with monitoring and overseeing strategic direction as well
as strategic decision-making.
This research is conducted to discover the perception of proper risk allocation of each party involved and utilises the ndings as the
foundation to develop the concept of good project governance. Accordingly, this concept will perform as a mean to achieve proper risk
allocation in tollway projects that are developed under PPP procurement system which would enhance the projects performance. A case
study research on a tollway project in Indonesia is carried out for this purpose and the preliminary results of the analysis are presented in
this paper.
2006 Elsevier Ltd and IPMA. All rights reserved.
Keywords: Risk allocation; Publicprivate partnership; Project governance; Tollway projects; Indonesia
1. Introduction
In this globalisation era, the private sector has been
playing an active role through involvement in delivering
public services to enhance infrastructure development,
especially in the developing countries. In order to increase
private sector participation, several eorts have been made
by the government ranging from performing an outright
privatisation of previously state-owned industries [1], up
to contracting out of services or cleaning to private rms
and the use of private nance in the provision of social
infrastructure [2,3].
In the rapidly developing economies such as the coun-
tries in the East Asia region, concessions as well as build
and operate agreements for large-scale infrastructure net-
works (i.e. tollways) have been the main interest [4]. As
such, publicprivate partnership (PPP) is becoming inevita-
ble. Additionally, such relationship also oers a long-term
sustainable approach to improving social infrastructure,
enhancing the value of public assets and making a better
use of taxpayers money [4]. Compared to other developing
countries, countries in the East Asia region have experi-
enced more success in attracting private investment in
infrastructure. In the total investment made for infrastruc-
ture projects between 1994 and 1999 in East Asia, 27% of
the investments were in Indonesia the second highest in
the region [5].
In Indonesia, the private sector has been allowed to
invest in toll road projects through build, operate and
transfer (BOT) scheme since the early 1990s and the expan-
sion of private participation in infrastructure has made sig-
nicant progress since then. The study conducted by the
0263-7863/$30.00 2006 Elsevier Ltd and IPMA. All rights reserved.
doi:10.1016/j.ijproman.2006.07.010
*
Corresponding author. Tel.: +66 2 5245531; fax: +66 2 524 6059.
E-mail address: Martinus.Abednego@ait.ac.th (M.P. Abednego).
www.elsevier.com/locate/ijproman
International Journal of Project Management 24 (2006) 622634
INTERNATIONAL JOURNAL OF
PROJECT
MANAGEMENT
World Bank also found that between 1994 and 1999 the
total private investment in Indonesian infrastructure was
more than US$20 billion in which the transport sector
led in terms of number of projects with 20 infrastructure
projects (13 toll road projects and 7 seaport projects) with
private participation. However, from 1978 to 1997 Indone-
sia managed to construct only a total of 570 km of toll
roads, which is about 30 km/year.
Since Indonesia is increasingly recognising the need to
attract private investment for its toll road development
and to establish constructive partnerships between the pri-
vate and public (government) sector, it is necessary to dis-
cover the perception of proper risk allocation of each
parties involved. A common understanding of these two
sectors in terms of proper risk allocation will lay a founda-
tion to formulate unbiased and non-discriminative regula-
tory policies. These regulatory policies will sustain their
long-term partnership, thus increasing the chance to
achieve a more successful and fruitful partnership which
consequently increases project performance. The theoreti-
cal relationship used in this research can be summarised
in Fig. 1.
Following the theoretical framework in Fig. 1 the
research is conducted to investigate the dierent percep-
tions of proper risk allocation in tollway projects under
PPP procurement system. In eect, the study utilises this
knowledge to develop good project governance concept
as a guideline for proper risk allocation in PPP projects.
For this purpose, the 2nd Stage Cipularang (Cikampek
PurwakartaPadalarang) tollway project is selected as a
case study on risk allocation in tollway projects in
Indonesia.
Based on the preliminary results of the case study
research, this paper provides an insight into the owners
perspective on proper risk allocation. In particular, the
paper will attempt to:
Discover the owners perception on proper risk alloca-
tion and project success.
Develop the basic concept of good project governance
for tollway projects under PPP procurement system.
Investigate and analyse their risk allocation strategy.
Analyse the inuence of the applied risk allocation
arrangements on the project performance.
2. Data collection methodologies and analysis
The key participant in this case study is the government
as the owner of the project, who in this case is represented
by PT. Jasa Marga, and the private sector who is repre-
sented by the contractors and the end-users of the tollway.
A questionnaire was distributed to the end-users of the
tollway to understand the perception of success from the
view point of user. The survey analysed the perception of
success for the tollway project in terms of its serviceability,
functionality and safety. The rst factor assessed whether
the tollway has been able to provide the required service
for the end-users, the second factor assessed whether the
tollway has been able to function as intended and the third
factor assessed the safety measures within the tollway.
However, this paper will only discuss the owners per-
spective. To achieve this goal, multiple sources of evidences
are used, such as newspapers, articles, journals, project
documents, etc. The evidences are also supported by inter-
views with key decision makers in PT. Jasa Marga.
2.1. Interview sessions
The interview questions were developed in an open-end
format with a specic rationale which performs a guide to
keep the answer within the intended purpose. However, the
questioner provided freedom for the respondent to express
their opinion in each question. These questions were then
distributed and reviewed by professional practitioners
and academicians prior to its use. The questions are classi-
ed into four main sections with the following objectives:
First section: To get an overview and general informa-
tion of the project owner.
Second section: To explore the owners perception on
project risks as well as their risk allocation strategies.
Third section: To investigate the owners perception on
project success.
Fourth section: To discover whether the project risks
have really been allocated properly to establish good
project governance and how such governance would
produce better projects performance.
Through the analysis of the information gathered, the
factors relating to good project governance in this type of
project are determined and are analysed how they can
improve the performance in a project this nature.
3. Case study background
The JakartaBandung corridor had been recognised to
have a high trac volume for many years. Although there
are several alternative routes connecting these two cities,
they were still unable to cope with the increasing trac vol-
ume between the cities. In particular, the route through
Purwakarta experienced an increasing trac volume of
79% per year in three years [6]. The trac increase in this
particular area, which was mostly due to the vast develop-
ment of the industrial sector around the East Jakarta
region and the economic development along the corridor,
prompted the Indonesian government to develop a high
Proper risk allocation
Good project
governance
Better project
performance
Fig. 1. Theoretical relationship of the research.
M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634 623
standard primary road to increase transportation
eciency.
To further support this national plan, the Indonesian
government appointed PT. Citra Ganesha Marga Nusant-
ara (CGMN) in 1994, a local private company, as the main
investor and executor of the second stage Cipularang Toll-
way project. A concession was then created between
CGMN and Trafalgar House Construction (British inves-
tor) along with PT. Jasa Marga who owns a small share
in the concession and several other small local investors.
CGMN was the leader of the consortium and received
licensed agreement to nance, construct and operate this
tollway project, while Trafalgar provided additional nan-
cial support as well as construction technology.
However, due to the nancial crisis in 1997, this project
along with several other government projects was re-evalu-
ated. Since there was no signicant progress made by the
joint-venture, the project was then suspended and resulted
in the termination of the joint-venture and CGMN as the
investor. In 2000, a Presidential Decree No. 64/2000 was
issued by the Indonesian government to conrm the con-
tinuation of the project and appointment of PT. Jasa
Marga as the main developer.
This second stage Cipularang Tollway with a total
length of 41 km connects the Padalarang-Bypass tollway
with the JakartaCikampek tollway (Fig. 2), making it
the longest tollway network in Indonesia [7]. It was previ-
ously divided into four work packages with an average
length of 8.512 km for each package.
However, since Indonesia will be hosting the 50th Asia
Africa Conference in Bandung, Megawati Soekarnoputri,
who was the Indonesian President at the time, had
requested PT. Jasa Marga through the Indonesian Ministry
of Public Works to accelerate the construction of the pro-
ject. To meet the demand, the project was then divided into
nine packages (sections), namely North PurwakartaSouth
Purwakarta (Section 1), South Purwakarta (Section 2),
Plered-Darangdan + Ciujung Bridge (Section 3.1),
DarangdanCikalong Wetan (Section 3.2), Cisomang
Bridge (Section 3.3), Cikalong WetanCikubang (Section
4.1), Cikubang Bridge (Section 4.2), CikubangCip-
ada + Cipada Bridge (Section 4.3) and CipadaCikamun-
ing (Section 5).
Nine local contractors were selected through a tendering
process and nine project managers from PT. Jasa Marga
were selected to lead each of these sections. The entire pro-
cess was coordinated by a project director. Consultants and
several professional experts were also hired to conduct
supervisory and construction management works as well
as technical advices. Fig. 3 illustrates the organisational
structure during the construction phase of the project.
There were quite a few problems discovered during the
construction of this project and they can be classied into
two categories:
Problems experienced during construction of the project.
Problems caused by the project itself.
The problems that were experienced during the con-
struction phase of the project are mostly caused by the geo-
graphic conditions (i.e. unstable soil condition) of the
project which forced PT. Jasa Marga to redesign the struc-
ture during the construction stage, thus aecting the pro-
ject schedule. Moreover, the weather condition also
played a signicant part in causing delays during the con-
struction of the project.
Unfortunately, the project also became a source of
problems. Its existence caused an increase in the overall
trac volume in the JakartaBandung corridor. Conse-
quently, the city of Bandung experienced serious trac
problems because it does not have good road network. This
condition is also worsened by the fact that the vehicle
growth in this city had exceeded the infrastructure growth
Fig. 2. Map of Cipularang tollway.
Project Director
Project Managers
CM
Consultants
Professional
Experts
Field CM
Contractors
(General Superintendent)
Supervisory
Consultants
Suppliers Sub-Contractors
Fig. 3. Organisational structure of the project.
624 M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634
while there was no proper city and infrastructure planning
by the local government [8]. Although the local govern-
ments have started to solve these problems through various
eorts, such as expanding the existing roads, constructing
yovers/underpasses as well as planning the development
of monorails and performing better management and
proper control on land-use in Bandung, the problems could
have been avoided or minimised if they had started these
activities as soon as they became aware of the central gov-
ernments plan to develop the Cipularang tollway.
4. Analysis and ndings
As mentioned previously proper risk allocation can be
achieved through good project governance. It may enhance
the performance of a tollway project under PPP procure-
ment system. Therefore, this section will present the nd-
ings as well as the results on the analysis of three major
aspects, namely good project governance, proper risk allo-
cation and better project performance. First, the section
will proceed to a theoretical discussion on good project
governance. Second, following the theoretical discussion
a framework for proper risk allocation is established to
analyse the second stage Cipularang Tollway project devel-
oped under PPP arrangement in Indonesia. Third, better
project performance is discussed using the same case study.
4.1. Good project governance
The following section presents a theoretical discussion
on good project governance.
4.1.1. Background theory
A logical framework method (LFM) was proposed by
Baccarini [9] to provide a detailed framework for dening
and understanding of project success. According to this
method, there are two components of project success: pro-
ject management success and product success. However,
since most of the existing project management literature
have confusingly intertwined these components by pre-
senting them as a single homogeneous group, it is impor-
tant to articulate and dierentiate these two dierent
concepts.
Baccarini elaborated further that project management
success has three main components:
Meeting time, cost and quality objectives.
Quality of the project management process.
Satisfying project stakeholders needs with respect to the
project management process.
Moreover, product success also has three main compo-
nents, viz;
Meeting the project owners strategic organisational
objectives.
Satisfaction of users needs.
Satisfaction of stakeholders needs where they relate to
the product.
By comparing the above theories with what have been
encountered in this project, it was discovered that even
though the project can be considered to be completed
within the required schedule as well as within the estimated
project cost, the quality of the project management process
is below par. This condition was veried by the fact that
quite a few risks, such as unpredicted project site condition,
contractors failure and questionable construction quality,
occurred during the construction period. The consequences
of occurrences of these risks could have been prevented or
minimised if the project owner had carried out a proper
and more detailed feasibility study which would have pro-
vided them with necessary information in sucient detail
to produce a more accurate project estimate and proper
project planning.
However, this circumstance is not entirely due to the
owners lack of management and decision-making ability.
The Indonesian central government should have oered
more support by providing relevant information on how
the project is associated with the national infrastructure
development plan. The governments assistance would
have also been beneted to project for better coordination
between government agencies/departments so that the gov-
ernment may assist the project owner to properly plan and
determine the most suitable risk allocation strategy. How-
ever, due to absence of supports from the government the
project owner failed to make the right decision in terms
of risk allocation strategy.
On the other hand, the product of the project can be
considered to be successful so far, due to the opening of
new opportunities and market impact. Ever since the toll-
way was still under construction and until its current oper-
ation phase, it has managed to generate employment
opportunities for the local communities surrounding the
tollway. It has also provided opportunities for those com-
munities to develop various kinds of businesses, such as
restaurants, accommodation services, transportation ser-
vices, etc, which contribute signicantly towards local eco-
nomic growth. However, since the users satisfaction on the
tollway is still being assessed, denite conclusion on the
projects product success or otherwise cannot be reached.
Moreover, since the project is a public infrastructure
project developed under a PPP procurement system, it
has short-term as well as long-term purposes. On the
short-term, the project is generally faced with challenges
such as stakeholder management to ensure smooth ow
of construction work, client satisfaction, organisational
issues, etc. In other words, it is considered as management
concerns because it deals with tactical issues that relates to
day-to-day operations.
In contrast, the project is also confronted by strategic
issues which may inuence its performance in the long-
term. Ideally, the ability to balance the stakeholders objec-
tives in the form of proper risk allocation is an imperative.
M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634 625
However, often times it is faced by a dilemma regarding
who is given and who should have been given the advantage
in terms of risk allocation arrangements. Based on these
facts, it is clear that the project also has governance con-
cerns, because it deals with monitoring and overseeing stra-
tegic direction as well as strategic decision-making [10], in
addition to project management problems.
How can the application of these two dierent
approaches (management and strategic/governance) work
together to inuence the performance of a project? A
research done by Walker and Chau [11] provides an exam-
ple of two dierent approaches to produce more benecial
results. Based on the research and the results of the case
study analysis, it was discovered that there is a need to
combine these two dierent approaches since the combina-
tion has the ability to enhance projects performance.
Although it has been acknowledged that proper risk
allocation is one of the key success factors to achieve better
project performance while it has also been discovered that
there are two major components that can be utilised to
assess project success, there is still a missing variable in
between them. The two major components (project man-
agement and product) can only be utilised to assess the
short-term success of a project that can be achieved
through management approach. Since this kind of project
also has long-term issues which require a strategic
approach, there is a need to develop a concept which can
be utilised as a strategic approach to help the project suc-
ceed in the long-term. Thus, there is necessity for the devel-
opment of a good project governance concept. The
integration of these two approaches is expected to enhance
the performance of this kind of project because they com-
plement each other. Fig. 4 provides an illustration on the
relationship between the management approach and strate-
gic approach.
4.1.2. Concept development
The United Nations Economic and Social Commission
for Asia and the Pacic (UN-ESCAP) dene governance
as the process of decision-making and the process by which
decisions are implemented (or not implemented). More-
over, corporate governance can be dened as a companys
eort to balance between the economic and social goals
of the company as well as between the individual and col-
lective goals of the companys stakeholders [12]. An analy-
sis of governance focuses on the formal and informal
parties that are involved in the decision-making process
as well as its implementation, and it can be used in various
contexts such as corporate governance, international gover-
nance, national governance, including project governance.
According to UN-ESCAP, there are eight main charac-
teristics of good governance:
Proper
Risk
Allocation
WHAT
WHO
WHEN
HOW
Project
Performance
Management
Approach
Project
Management
Success
Product
Success
Long-term
Success
Good Project
Governance
(Strategic
Approach)
To determine whether the project had allocated
the risk properly
To evaluate whether the project had consider
long-term planning or just short-term planning
Sustainable Partnership in PPP procurement system
Fig. 4. Inclusion of good project governance (strategic approach) to enhance project performance.
626 M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634
1. Participation, by all involved parties. Participation needs
to be informed and organized.
2. Rule of law, which means fair legal frameworks are
required to be enforced impartially.
3. Transparency, which means that all decisions and their
implementation must always abide by the rules and reg-
ulations. It also means that information must be freely
available and directly accessible to those who will be
aected by the decisions.
4. Responsiveness, which requires all of the stakeholders to
be provided with a reasonable timeframe.
5. Consensus oriented, which means it requires mediation
of the dierent interests in the society to understand
what is the best interest for the whole community and
how it can be achieved.
6. Equity and inclusiveness, which means all parties are
equal and have the same opportunities to improve or
maintain their well being.
7. Eectiveness and eciency, which means that it has the
ability to produce results that meet the needs of the soci-
ety while still making the best use of available resources.
Moreover, it also covers the sustainable use of natural
resources and environment protection.
8. Accountability, which means that all parties are account-
able to those who will be aected by its decisions or
actions and must be enforced through transparency
and rule of law.
Based on this philosophy, a good project governance con-
cept is developed to evaluate the performance of this pro-
ject, especially in strategic issues. Such evaluation is
necessary to assess the projects overall success in addition
to evaluating the project management process and product
success as mentioned previously. Fig. 5 illustrates the rela-
tionship theory between proper risk allocation and project
success.
This good project governance concept has the following
characteristics:
1. Right decision at the right time, which is a form of active
participation.
2. Contract fairness.
3. Information transparency, especially between the govern-
ment and private sector.
4. Responsive, concrete action/implementation within a
reasonable time framework from any decisions made.
5. Continuous project control and monitoring, in order to
achieve the common goal and satisfying all interests.
6. Equality, between all involved parties, especially
between the government and the private sector to create
true partnerships.
7. Eectiveness and eciency.
8. Accountability, in the form of users satisfaction and
public community participation.
This concept of good project governance is then utilised
to assess the case studys risk allocation arrangements as
well as its overall performance.
4.2. Proper risk allocation
Following the above theoretical discussion this section
looks into proper risk allocation in the second stage Cipu-
larang tollway in Indonesia.
4.2.1. Project risks
According to the previous research done by Nur Wulan
[13], the risks that may occur in a tollway project in Indo-
nesia can be classied into the following categories:
1. Political risks, such as discontinuation of concession, tax
increase, inappropriate tari implementation, inappro-
priate tari increase, new government policy enforce-
ment, etc.
2. Construction risks, such as inappropriate design, land
acquisition, project delay, project site condition, con-
tractors failure, etc.
Proper
Risk
Allocation
WHAT
WHO
WHEN
HOW
Efficient & Effective
Project Risk Management
Achievement of project
goals and objectives
Project Management
Success
Product Success
Good Project
Governance
PROJECT
SUCCESS
Management issues
Strategic issues
Fig. 5. Eects of proper risk allocation on project success.
M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634 627
3. Operation and maintenance risks, such as tollway net-
work condition, operators incompetence, construction
quality, etc.
4. Legal and contractual risks, such as concession time war-
ranty, awed/inconsistent contract document, etc.
5. Income risks, such as inaccurate trac volume estimate,
inaccurate tollway tari estimate, construction of a com-
peting alternative road, etc.
6. Financial risks, such as ination, devaluation, interest
rate, changes in monetary policies, limited capital, etc.
7. Force major, such as weather condition, war, natural
disasters, etc.
In this case study, there are several risks considered by
the owner to have a signicant impact on project success.
Limited capital is one of the risks considered as the main
concern in this project. As soon as PT. Jasa Marga was
appointed by the Indonesian Ministry of Public Works to
continue this project, they immediately encountered nan-
cial challenge. Due to the high constraint on the construc-
tion time and their limited liquidity, PT. Jasa Marga was
forced to design a nancial strategy that would ensure
nancial security for the project as well as maintaining a
healthy condition on the companys cash ow.
A Contractors Pre-Finance (CPF) system was then
developed as a mean to nance the project. In this system,
several local banks (government and private) agreed to
make a commitment with PT. Jasa Marga to nance the
project by providing loan for all of the nine contractors
selected to construct the project. In addition to that, these
banks also agreed to apply a xed interest rate for the
whole loan and payback period. They were willing to pro-
vide such demanding commitment because of the guarantee
from PT. Jasa Marga, on behalf of the Indonesian govern-
ment, that they will get their money back no matter what
happens with the project. The agreement was then formu-
lated in a form of Letter of Comfort which is then used
by the contractors to request for a loan from these banks.
The CPF system applied in this project is considered to
be a privately nanced system since the contractors who
would like to be involved in this project must be willing
to pre-nance the project. Although the government made
prior agreements with the nancial institutions (public and
private) to provide loan for the qualied and appointed
contractors the government is still responsible for repaying
the debt made by the contractors to construct the project.
The dierence between the CPF system with the other
nancial strategies, such as the conventional project nanc-
ing or BOT, is that in the CPF system the project owner
does not need to look for an investor to nance the project
and they are not in debt to the banks who provide the loans
during the construction phase since the contractors bor-
rowed the money directly from the bank. Also, these debts
will only be acknowledged by the project owner after the
project is completed and handed over to the owner. As long
as it is still in the construction phase, the contractor is fully
responsible for the loan debt to the bank. After the project
is completed, the project owner has the responsibility to
repay the loans made by the contractors to the bank within
a certain period that has been agreed previously by the
owner and the banks. Fig. 6 illustrates the CPF nancing
strategies of the project.
Additionally, other risks are mostly due to inaccurate
project estimation and improper project planning. For an
example, the actual amount of soil required to move for
the cut and ll work was much greater than what was esti-
mated. As a result, additional resources were required to
solve these problems. Adding to the complexity was that
the project completion target date could not be changed
and this increased the project cost. These ndings gave
clear evidences that there were miscommunications
between the government and private sector, and some
information was also not properly distributed during the
initiation and construction stage of the project, aecting
the eectiveness and eciency of the project. The success
of the project depended on good communication and
proper information dissemination between the parties
involved.
4.2.2. Capability and willingness to accept project risks
In terms of capabilities, PT. Jasa Marga has a higher
advantage on experience and human resources, especially
its managerial capabilities, compared to other tollway
enterprises. This is due to the fact that they provide contin-
uous training for their employees, which benets both the
company and the employee itself. For the employees, it
enables them to learn dierent things and gain invaluable
experiences. As for the company, it performs as an in-
house scouting system to monitor and evaluate the
strengths as well as the weaknesses of each of their employ-
ees, which would provide long term benets for the
Project
Owner
Financial
Institution
(Bank)
Government
Warranty
Financial
Guarantee
Letter of
Comfort
Cont
I
n
c
o
m
e
L
o
a
n

R
e
q
u
e
s
t O
w
n
e
r

s

A
p
p
r
o
v
a
l
L
o
a
n

A
p
p
r
o
v
a
l
ractor
Project Supplier Sub
Contractor
Payment
Loan Repayment
Fig. 6. Contractors pre-nance (CPF) scheme.
628 M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634
company because it enables them to put the right person on
the right place and doing the right work.
Due to the companys reputation as an experienced and
procient tollway developer and operator, and also its sta-
tus as a state-owned enterprise, the nancial institutions
had no diculties trusting them and making a demanding
commitment. This condition became the nancial strength
for PT. Jasa Marga, thus increasing its nancial capabili-
ties. Therefore, PT. Jasa Marga is considered to have the
required capabilities and is more than willing to accept pro-
ject risks and will do their best to prevent or minimise the
consequences as long as the project is considered to be
nancially benecial.
4.2.3. Risk allocation strategy
According to Ward et al. [14], Edwards [15], and Flana-
gan and Norman [16], several conditions must be satised
to determine whether project risks have been properly allo-
cated or not. These conditions are:
Risk should be allocated to the party with the best capa-
bility to control the events that might trigger its
occurrence.
Risks must be properly identied, understood and eval-
uated by all parties.
A party must have the technical/managerial capability
to manage the risks.
A party must have the nancial ability to sustain the
consequences of the risk or to prevent the risk from
occurring.
A party must be willing to accept the risk.
However, these conditions are basically criteria that
must be evaluated against each party before allocating a
project risk to a particular party. In other words, it only
helps to determine where the risk should be allocated. On
the other hand, risk allocation strategy is more than just
deciding which party should accept the risk. It should go
beyond that. Proper risk allocation should also be able to
acknowledge the most appropriate time to allocate the risk
and provide an alternative solution. Therefore, besides just
determining which party (who) has the best capabilities to
accept the risk (what), the when and how factors should also
be considered to ensure proper risk allocation (Fig. 7).
Based on this perception, a risk allocation table is formed
using those four main factors to assess the actual risk allo-
cation strategy performed by the owner of this project as
well as providing the possible alternative risk allocation
strategy (Table 1).
Results from the risk allocation strategy assessment ver-
ied several issues. First, it provides evidence of the own-
ers actual capabilities to accept and control certain types
of risks. However, most of the time those risks were allo-
cated to another party. For example, the delay in the pro-
ject construction initiation was actually caused by the
inadequate results produced from the feasibility study as
well as lack of information from the owner regarding the
projects preparedness. This condition could have been pre-
vented if the project owner performs better planning and
applies information transparency during the project prepa-
ration stage. Instead, several modications in the construc-
tion methods were carried out and adjustments were made
during the construction stage, thus shifting the risk from
the project owner, who actually has the best capability to
control the risk in the rst place, to the contractor. More-
over, the implemented risk allocation strategy dealt with
the consequences of the risk by problem-solving approach
during the construction stage instead by preventive
approach during the preparation stage.
Another example concerns contractors incompetence.
The inability of a contractor to perform their share of duty
and responsibility in this particular project caused the
owner to select and assign an additional contractor to assist
contractors who under-performed. Again, the owner failed
to notice that this could have been prevented if they had
developed and implemented a better system for selecting
contractors as well as committing more time for the selec-
tion process to get the most qualied contractors.
However, all of the implemented risk allocation strate-
gies were not inappropriate. Since the owner acknowledged
the time limitation to complete the project and to prevent
or minimise the possibility of project delay due to the
unavailability of primary/main construction materials,
they developed a strategy during the preparation stage by
forming a special agreement with the suppliers of these
materials. The application of the CPF system can be con-
sidered as the best risk allocation strategy in this project.
The consequences of limited capital for the project were
overcome by developing a system which transfers the
responsibility to nance the project from the owner to
the contractors. The cash-ow and liquidity problems that
could have been experienced by the owner during the con-
struction stage were also prevented by the system because
Proper
Risk
Allocation
WHAT WHO
WHEN HOW
Risks to be
allocated
Willingness &
ability of a party
to accept risks
The right time
to allocate the
risk
Best strategy to
prevent/minimize
consequences
Fig. 7. Concept of proper risk allocation.
M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634 629
Table 1
Owners risk allocation strategy in the second stage Cipularang tollway project
Actual Risk (What) Suggestion
How When Who Category Detail Consequences Who When How
Application of value
engineering
Construction stage Contractors Construction
risks
Use of
preliminary
design to
develop the
detail design in
design-and-
build system
Additional design
work
Project owner
and design
consultants
Preparation
stage
Improve
coordination
between consultants
and owner
Practice longer
working hours
Additional design
and construction
cost
Multiple design
inspection and
evaluation
Practice 7 days/week
working days
Construction failure
Provide sucient
time allocation for
project design
Increased operation
and maintenance
cost
Conduct a more
thorough and
detailed feasibility
study
Project completion
delay
Application of value
engineering
Management of
constructions
primary/main
material
(reinforced steel
and concrete
girder)
Preparation stage Project owner and
contractors
Construction
risks
Delayed project
construction
initiation
Increase project cost Project owner Preparation
stage
Provide better
information
regarding project
preparedness
On-site construction
method
improvization
Construction stage Changes in project
planning
Conduct a more
thorough and
detailed feasibility
study
Practice longer
working hours
Changes in
construction
methods
Provide sucient
time allocation for
project planning
Practice 7 days/week
working days
Project completion
delay
Provide more
accurate project
estimation
Application of value
engineering
Construction stage Contractors Construction
risks
Unpredicted
project site
condition
Increase project cost Project owner Preparation
stage
Conduct a more
thorough and
detailed feasibility
study
On-site construction
method
improvization
Additional
construction work
Provide more
accurate project
estimation
Practice longer
working hours
Changes in
construction
methods
Practice 7 days/week
working days
Design modication
6
3
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Assign additional
contractor to
assist the
contractors with
poor performance
Construction stage Project owner and
contractors
Construction
risks
Contractors
failure
Increase project cost Project owner Preparation
stage
Improve the system
and process of
selecting a
contractor
Time wasted to
search for additional
contractor and
selection process
Structural failure
Increase probability
of quality problems
Additional/extra
maintenance work
One year maintenance
period
Contractors Operation and
maintenance
risks
Construction
quality
Increase
maintenance cost
Project owner Preparation
stage
Provide sucient
time allocation for
project design
Reduce income/
prot
Consultants Construction
stage
Provide sucient
time allocation for
project planning
Proper project
control and
monitoring
Modify trac
management
within the city
Operation stage Regional government of
Bandung
Operation and
maintenance
risks
Insucient road
network
Trac jam in the
city of Bandung
Regional
government of
Bandung
Preparation
stage
Better coordination
with the central
government
Construction of an
overpass
Construction stage Complement the
regional
infrastructure
development plan
with the national
plan
Claim submission Construction stage and
operation and
maintenance stage
contractors Legal and
contractual risks
Inconsistent
contract
document
Disputes between
parties
Project owner Preparation
stage
Development of a
more balanced and
undiscriminating
contract document
Payment delay for
contractors
Transparency during
the discussion of
contract document
Project completion
delay
Increase project cost
Application of
contractor pre-
nance (CPF
system as a
nancial strategy]
Preparation stage Contractors and
nancial institutions
Financial risks Limited capital Project cancellation Contractors and
nancial
institutions
Preparation
stage
Application of
contractor pre-
nance (CPF system
as a nancial
strategy]
Project completion
delay
Cash-ow and
liquidity problems
(continued on next page)
M
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the loan was made directly by the nancial institutions to
the contractors. Contractors were paid based on their work
progress achievement, and these loan debts would only be
acknowledged and eventually paid-back by the owner after
the project is completed and handed over to the owner.
Furthermore, the advantages obtained through the appli-
cation of CPF scheme are identied as follows:
It does not burden the project owners cash ow for the
whole construction phase.
The loan debt made by the contractor will only be
acknowledged by the project owner upon project
completion.
Financial guarantee from nancial institutions in terms
of interest rate.
All project costs and expenses are very well controlled
and monitored.
Reduce the probability of projects cost misuse by the
contractor.
Reduce time required to process payment
administration.
Provide nancial guarantee for contractors, thus
increasing productivity.
The loan interest will be calculated as soon as the project
begins, thus beneting the nancial institution.
Provide more time for project owner to plan and
develop loan repayment strategy towards nancial
institutions.
Based on the assessment of the acquired information, it
can be conrmed that even though the project owner has in
this case the best capabilities to accept and control the
risks, they failed to notice this condition most of the time,
thus resulting in an improper risk allocation time (when)
and target (who). Such action would then also inuence
the type of risk allocation strategy that will be implemented
(how), hence resulting in some form of chain reaction to
acknowledge a proper risk control. Inadequacy to control
a risk properly becomes visible if one or more of the follow-
ing occurs:
Inability to make the right decision at the right time.
Discriminative contract document which tends to pro-
vide more advantage to the project owner.
Misinformation.
Inability to provide the proper response.
Improper project planning and control.
Hierarchical relationship between the public and private
sector instead of partnership.
Ineectiveness and ineciency during construction and
operation stage.
Unsatised users.
Since most of the above circumstances occurred in this
project due to improper risk allocation, it can be concluded
that this project had not achieved good project governance.
Moreover, good project governance must be achieved to T
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632 M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634
increase projects performance and project success. How-
ever, these were absent in this project and the project can-
not be considered as a resounding success in terms of both
management process and project governance.
4.3. Better project performance
In the following section, better project performance is
discussed using the case study on second stage Cipularang
tollway in Indonesia.
4.3.1. Project success
Financial achievements in terms of prot is considered
by PT. Jasa Marga as one of the most important elements
in determining the projects level of success due to its
change of status from being a government agent to a busi-
ness oriented enterprise. The other components considered
to have the same level of importance are project quality
achievement and on-time project completion. However, it
was discovered that there are other factors that have played
a signicant part in determining the success of this project.
According to PT. Jasa Marga, a tollway project can be
considered to be successful if it is functioning according
to its planned purpose of providing service to end-users sat-
isfactorily. Nevertheless, the success of a project cannot be
valued only by its nal product since there are several other
factors that need to be considered during the preparation
as well as construction stages of the project.
During the preparation stage, it is necessary for PT. Jasa
Marga to receive support from the Indonesian central gov-
ernment which could be in the form of government policy,
government warranty or provision of information regard-
ing the national infrastructure network development plan.
These kinds of supports would enable them to produce a
more accurate project estimate and prepare a more proper
project plan. Consequently, proper project estimates and
plannings are also considered to be signicant in determin-
ing the success of this project. Furthermore, good coordi-
nation between the parties involved in the project is also
essential to ensure an eective and ecient project develop-
ment process, which can be achieved if all stakeholders
have a sense of trust.
Another valuable component for ensuring project suc-
cess is to have a proper system for selection of the most
capable contractor for constructing the project. The term
capable does not only mean having technical expertise
and possessing sucient nancial strength, but also possess
a sense of professionalism which was actually lacking in
this project. This lack of professionalism inuenced the e-
ciency and eectiveness of the particular contractor, thus
aecting project performance. As mentioned previously,
information dissemination and communication system also
played an essential part along with the project development
process. Since it is important to distribute the information
to the right party at the right time, it is necessary for the
project to have a suitable communication system to accom-
plish this objective. However, in order to achieve a success-
ful implementation of the system, it must also be supported
by compelling managerial capabilities of human resources.
Moreover, continuous control over the construction pro-
cess as well as the project management process also plays
an essential part in determining project success. Continu-
ous monitoring of the work progress in the project, proper
control on all resources required for the project and main-
taining a constructive interaction within the project will
provide contribution to achieve a successful tollway
project.
4.3.2. Project eciency
During the construction phase, value engineering was
actively practiced by PT. Jasa Marga through construction
design simplication and the application of new and inno-
vative construction technology. Such application is
expected to increase the projects eciency without reduc-
ing its product quality level, thus able to function as its
intended purpose. In addition to that, the projects e-
ciency level was also maintained by balancing the required
design change within the available budget.
However, it was also discovered that the eciency level
in this project did not reach the expectation. One major
reason is because there was no distinct dierence in terms
of obligation and responsibility between the supervisory
consultants and construction management consultants,
thus more often than not; these two dierent consultants
performed the same scope of work. One way to improve
is to upgrade the specications and requirements that are
used for selection of the consultants, experts as well as
contractors.
Another issue that causes ineciency in this project is
the insucient time for design development and project
planning. As a result of the insuciency, PT. Jasa Marga
decided to adopt a design-and-build system in some parts
of the project to be able to proceed with time schedule.
However, since only a preliminary design was produced
from the projects feasibility study, it increases the uncer-
tainty level within the system because its detail design work
is based only on a preliminary design. Although there are
basically limited limitations in the design-and-build system,
the projects circumstances make it less appropriate to
implement in the particular project. Moreover, even
though this approach also enabled acceleration in the con-
struction process, it resulted in an additional cost for repair
and maintenance work as a trade-o.
Based on the above ndings, it can be conrmed that
this project experienced diculties not only in terms of
management or day-to-day issues, but the project had to
meet with problems that had long-term consequences. This
project suers some consequences which could have been
avoided if the source of these problems had been addressed
in the earlier phase of the project. Therefore, it conrms
and supports the ndings from the previous sections
regarding the necessity for implementation of a strategic
approach in a form of good project governance that can
help achieving proper risk allocation in PPP projects.
M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622634 633
5. Summary
In order to make sure a better project performance, sus-
tainable partnership must be obtained by the public (gov-
ernment) and private sectors by applying long-term
(strategic) planning through proper risk allocation in addi-
tion to short-term planning (management approach). How-
ever, in order to achieve this, both parties must rst have a
better understanding of proper risk allocation since it will
enable them to implement the most appropriate risk alloca-
tion strategy.
The case study experienced day-to-day issues which are
considered as short-term problems as well as long-term
issues which can only be solved through strategic approach.
These ndings conrm the necessity for implementation of
a strategic approach to combine both strategic and manage-
ment approaches so that the strategic approach enhances
the performance of a project in this nature. In eect, it
results in the development of good project governance.
6. Conclusions
The good project governance concept is developed since
projects under PPP procurement system experienced strate-
gic (long-term) problems in addition to the typical manage-
ment (short-term) problems. In this project the owner tends
to work with the project risks as soon as the threats of con-
sequences emerge. Generally, solutions are sought through
the application of new construction methods, on-site design
simplication, etc., to cope with particular problems during
the construction stage. Although those solutions were more
or less ecacious, it would have been better if preventive
actions had been taken. Even though the problems were
solved and the project was nished within the schedule,
actions such as on-site construction, method modication
and design simplication during the construction stage
resulted in additional project costs. These additional costs,
in eect, aect negatively the long-run maintenance costs.
These ndings demonstrate that the owner considers that
the risk had been properly allocated as long as its conse-
quences can be minimised and show that risk management
strategy is more into problem-solving rather than preven-
tive actions.
The signicant success factors considered by the owner
for this particular project are government support, proper
project planning, good coordination between parties, trust,
good tendering system, proper information dissemination
and communication system and high managerial
capabilities.
The ndings from this case study also provide evidences
that proper risk allocation can only be achieved if it consid-
ers the type of risk (what) to be allocated, which party
should accept the risk (who), when to allocate the risk as
well as application of proper strategy to prevent or mini-
mise its consequences (how). If the involved parties in such
project failed to acknowledge this, it will result in an
improper risk control. Incapability to control risk properly
will be reected in absence of good project governance,
thus resulting in an unsuccessful project. There are eight
main criteria that need to be performed to achieve good
project governance: right decision at the right time, con-
tract fairness, information transparency, responsive, con-
tinuous project control and monitoring, equality,
eectiveness and eciency, and accountability.
Since this project is a public infrastructure project pro-
cured under PPP, it had to work with tactical issues as well
as strategic issues. Therefore, the project must be assessed
in terms of its project management process and its output
achievement. These are indicated in a good project gover-
nance to determine project success.
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