good project governance for proper risk allocation in public-private partnership in indonesia

INTERNATIONAL JOURNAL OF

www.elsevier.com/locate/ijproman

International Journal of Project Management 24 (2006) 622–634

PROJECTMANAGEMENT

Good project governance for proper risk allocation inpublic–private 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 public–private 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 theproject’s success. Moreover, PPP projects are generally challenged with both project management problems which require day-to-daysupervision (short-term) as well as partnership problems which require more of a strategic approach (long-term). Consequently, PPPprojects can be considered to have governance concerns because they deal with monitoring and overseeing strategic direction as wellas strategic decision-making.

This research is conducted to discover the perception of proper risk allocation of each party involved and utilises the findings as thefoundation to develop the concept of good project governance. Accordingly, this concept will perform as a mean to achieve proper riskallocation in tollway projects that are developed under PPP procurement system which would enhance the project’s performance. A casestudy research on a tollway project in Indonesia is carried out for this purpose and the preliminary results of the analysis are presented inthis paper.� 2006 Elsevier Ltd and IPMA. All rights reserved.

Keywords: Risk allocation; Public–private partnership; Project governance; Tollway projects; Indonesia

1. Introduction

In this globalisation era, the private sector has beenplaying an active role through involvement in deliveringpublic services to enhance infrastructure development,especially in the developing countries. In order to increaseprivate sector participation, several efforts have been madeby the government ranging from performing an outrightprivatisation of previously state-owned industries [1], upto contracting out of services or cleaning to private firmsand the use of private finance in the provision of socialinfrastructure [2,3].

In the rapidly developing economies such as the coun-tries in the East Asia region, concessions as well as build

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: [email protected] (M.P. Abednego).

and operate agreements for large-scale infrastructure net-works (i.e. tollways) have been the main interest [4]. Assuch, public–private partnership (PPP) is becoming inevita-ble. Additionally, such relationship also offers a long-termsustainable approach to improving social infrastructure,enhancing the value of public assets and making a betteruse of taxpayer’s money [4]. Compared to other developingcountries, countries in the East Asia region have experi-enced more success in attracting private investment ininfrastructure. In the total investment made for infrastruc-ture projects between 1994 and 1999 in East Asia, 27% ofthe investments were in Indonesia – the second highest inthe region [5].

In Indonesia, the private sector has been allowed toinvest in toll road projects through build, operate andtransfer (BOT) scheme since the early 1990s and the expan-sion of private participation in infrastructure has made sig-nificant progress since then. The study conducted by the

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M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622–634 623

World Bank also found that between 1994 and 1999 thetotal private investment in Indonesian infrastructure wasmore than US$20 billion in which the transport sectorled in terms of number of projects with 20 infrastructureprojects (13 toll road projects and 7 seaport projects) withprivate participation. However, from 1978 to 1997 Indone-sia managed to construct only a total of 570 km of tollroads, which is about 30 km/year.

Since Indonesia is increasingly recognising the need toattract private investment for its toll road developmentand 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 eachparties involved. A common understanding of these twosectors 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 theirlong-term partnership, thus increasing the chance toachieve a more successful and fruitful partnership whichconsequently increases project performance. The theoreti-cal relationship used in this research can be summarisedin Fig. 1.

Following the theoretical framework in Fig. 1 theresearch is conducted to investigate the different percep-tions of proper risk allocation in tollway projects underPPP procurement system. In effect, the study utilises thisknowledge to develop good project governance conceptas a guideline for proper risk allocation in PPP projects.For this purpose, the 2nd Stage Cipularang (Cikampek–Purwakarta–Padalarang) tollway project is selected as acase study on risk allocation in tollway projects inIndonesia.

Based on the preliminary results of the case studyresearch, this paper provides an insight into the owner’sperspective on proper risk allocation. In particular, thepaper will attempt to:

� Discover the owner’s 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 influence 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 governmentas the owner of the project, who in this case is represented

Proper risk allocationGood projectgovernance

Better projectperformance

Fig. 1. Theoretical relationship of the research.

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 thetollway to understand the perception of success from theview point of user. The survey analysed the perception ofsuccess for the tollway project in terms of its serviceability,functionality and safety. The first factor assessed whetherthe tollway has been able to provide the required servicefor the end-users, the second factor assessed whether thetollway has been able to function as intended and the thirdfactor assessed the safety measures within the tollway.

However, this paper will only discuss the owner’s per-spective. To achieve this goal, multiple sources of evidencesare used, such as newspapers, articles, journals, projectdocuments, 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-endformat with a specific rationale which performs a guide tokeep the answer within the intended purpose. However, thequestioner provided freedom for the respondent to expresstheir opinion in each question. These questions were thendistributed and reviewed by professional practitionersand academicians prior to its use. The questions are classi-fied 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 owner’s perception on

project risks as well as their risk allocation strategies.� Third section: To investigate the owner’s perception on

project success.� Fourth section: To discover whether the project risks

have really been allocated properly to establish goodproject governance and how such governance wouldproduce better project’s performance.

Through the analysis of the information gathered, thefactors relating to good project governance in this type ofproject are determined and are analysed how they canimprove the performance in a project this nature.

3. Case study background

The Jakarta–Bandung corridor had been recognised tohave a high traffic volume for many years. Although thereare several alternative routes connecting these two cities,they were still unable to cope with the increasing traffic vol-ume between the cities. In particular, the route throughPurwakarta experienced an increasing traffic volume of7–9% per year in three years [6]. The traffic increase in thisparticular area, which was mostly due to the vast develop-ment of the industrial sector around the East Jakartaregion and the economic development along the corridor,prompted the Indonesian government to develop a high

624 M.P. Abednego, S.O. Ogunlana / International Journal of Project Management 24 (2006) 622–634

standard primary road to increase transportationefficiency.

To further support this national plan, the Indonesiangovernment appointed PT. Citra Ganesha Marga Nusant-ara (CGMN) in 1994, a local private company, as the maininvestor and executor of the second stage Cipularang Toll-way project. A concession was then created betweenCGMN and Trafalgar House Construction (British inves-tor) along with PT. Jasa Marga who owns a small sharein the concession and several other small local investors.CGMN was the leader of the consortium and receivedlicensed agreement to finance, construct and operate thistollway project, while Trafalgar provided additional finan-cial support as well as construction technology.

However, due to the financial crisis in 1997, this projectalong with several other government projects was re-evalu-ated. Since there was no significant progress made by thejoint-venture, the project was then suspended and resultedin the termination of the joint-venture and CGMN as theinvestor. In 2000, a Presidential Decree No. 64/2000 wasissued by the Indonesian government to confirm the con-tinuation of the project and appointment of PT. JasaMarga as the main developer.

This second stage Cipularang Tollway with a totallength of 41 km connects the Padalarang-Bypass tollwaywith the Jakarta–Cikampek tollway (Fig. 2), making itthe longest tollway network in Indonesia [7]. It was previ-ously divided into four work packages with an averagelength of 8.5–12 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, hadrequested PT. Jasa Marga through the Indonesian Ministryof Public Works to accelerate the construction of the pro-

Fig. 2. Map of Cipularang tollway.

ject. To meet the demand, the project was then divided intonine packages (sections), namely North Purwakarta–SouthPurwakarta (Section 1), South Purwakarta (Section 2),Plered-Darangdan + Ciujung Bridge (Section 3.1),Darangdan–Cikalong Wetan (Section 3.2), CisomangBridge (Section 3.3), Cikalong Wetan–Cikubang (Section4.1), Cikubang Bridge (Section 4.2), Cikubang–Cip-ada + Cipada Bridge (Section 4.3) and Cipada–Cikamun-ing (Section 5).

Nine local contractors were selected through a tenderingprocess and nine project managers from PT. Jasa Margawere selected to lead each of these sections. The entire pro-cess was coordinated by a project director. Consultants andseveral professional experts were also hired to conductsupervisory and construction management works as wellas technical advices. Fig. 3 illustrates the organisationalstructure during the construction phase of the project.

There were quite a few problems discovered during theconstruction of this project and they can be classified intotwo 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 theproject which forced PT. Jasa Marga to redesign the struc-ture during the construction stage, thus affecting the pro-ject schedule. Moreover, the weather condition alsoplayed a significant part in causing delays during the con-struction of the project.

Unfortunately, the project also became a source ofproblems. Its existence caused an increase in the overalltraffic volume in the Jakarta–Bandung corridor. Conse-quently, the city of Bandung experienced serious trafficproblems because it does not have good road network. Thiscondition is also worsened by the fact that the vehiclegrowth in this city had exceeded the infrastructure growth

Project Director

Project Managers

CMConsultants

ProfessionalExperts

Field CM

Contractors(General Superintendent)

SupervisoryConsultants

Suppliers Sub-Contractors

Fig. 3. Organisational structure of the project.


while there was no proper city and infrastructure planningby the local government [8]. Although the local govern-ments have started to solve these problems through variousefforts, such as expanding the existing roads, constructingflyovers/underpasses as well as planning the developmentof monorails and performing better management andproper control on land-use in Bandung, the problems couldhave been avoided or minimised if they had started theseactivities as soon as they became aware of the central gov-ernment’s plan to develop the Cipularang tollway.

4. Analysis and findings

As mentioned previously proper risk allocation can beachieved through good project governance. It may enhancethe performance of a tollway project under PPP procure-ment system. Therefore, this section will present the find-ings as well as the results on the analysis of three majoraspects, namely good project governance, proper risk allo-cation and better project performance. First, the sectionwill proceed to a theoretical discussion on good projectgovernance. Second, following the theoretical discussiona framework for proper risk allocation is established toanalyse the second stage Cipularang Tollway project devel-oped under PPP arrangement in Indonesia. Third, betterproject performance is discussed using the same case study.

4.1. Good project governance

The following section presents a theoretical discussionon good project governance.

4.1.1. Background theory

A logical framework method (LFM) was proposed byBaccarini [9] to provide a detailed framework for definingand understanding of project success. According to thismethod, there are two components of project success: pro-

ject management success and product success. However,since most of the existing project management literaturehave confusingly intertwined these components by pre-senting them as a single homogeneous group, it is impor-tant to articulate and differentiate these two differentconcepts.

Baccarini elaborated further that project managementsuccess 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 owner’s strategic organisationalobjectives.� Satisfaction of users’ needs.

� Satisfaction of stakeholders’ needs where they relate tothe product.

By comparing the above theories with what have beenencountered in this project, it was discovered that eventhough the project can be considered to be completedwithin the required schedule as well as within the estimatedproject cost, the quality of the project management processis below par. This condition was verified by the fact thatquite a few risks, such as unpredicted project site condition,contractor’s failure and questionable construction quality,occurred during the construction period. The consequencesof occurrences of these risks could have been prevented orminimised if the project owner had carried out a properand more detailed feasibility study which would have pro-vided them with necessary information in sufficient detailto produce a more accurate project estimate and properproject planning.

However, this circumstance is not entirely due to theowner’s lack of management and decision-making ability.The Indonesian central government should have offeredmore support by providing relevant information on howthe project is associated with the national infrastructuredevelopment plan. The government’s assistance wouldhave also been benefited to project for better coordinationbetween government agencies/departments so that the gov-ernment may assist the project owner to properly plan anddetermine the most suitable risk allocation strategy. How-ever, due to absence of supports from the government theproject owner failed to make the right decision in termsof risk allocation strategy.

On the other hand, the product of the project can beconsidered to be successful so far, due to the opening ofnew 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 employmentopportunities for the local communities surrounding thetollway. It has also provided opportunities for those com-munities to develop various kinds of businesses, such asrestaurants, accommodation services, transportation ser-vices, etc, which contribute significantly towards local eco-nomic growth. However, since the users’ satisfaction on thetollway is still being assessed, definite conclusion on theproject’s product success or otherwise cannot be reached.

Moreover, since the project is a public infrastructureproject developed under a PPP procurement system, ithas short-term as well as long-term purposes. On theshort-term, the project is generally faced with challengessuch as stakeholder management to ensure smooth flowof construction work, client satisfaction, organisationalissues, etc. In other words, it is considered as managementconcerns because it deals with tactical issues that relates today-to-day operations.

In contrast, the project is also confronted by strategicissues which may influence 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.


However, often times it is faced by a dilemma regardingwho is given and who should have been given the advantagein terms of risk allocation arrangements. Based on thesefacts, 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], inaddition to project management problems.

How can the application of these two differentapproaches (management and strategic/governance) worktogether to influence the performance of a project? Aresearch done by Walker and Chau [11] provides an exam-ple of two different approaches to produce more beneficialresults. Based on the research and the results of the casestudy analysis, it was discovered that there is a need tocombine these two different approaches since the combina-tion has the ability to enhance project’s performance.

Although it has been acknowledged that proper riskallocation is one of the key success factors to achieve betterproject performance while it has also been discovered thatthere are two major components that can be utilised toassess project success, there is still a missing variable inbetween them. The two major components (project man-agement and product) can only be utilised to assess theshort-term success of a project that can be achievedthrough management approach. Since this kind of projectalso has long-term issues which require a strategic

PropeRisk

AllocatWHAT

WHO

HOW

ProjecPerform

ProjecManagem

Succe

Long-termSuccess

Good ProjectGovernance(StrategicApproach)

To determine whetherthe risk properly

To evaluate whether tlong-term planning or

Sustainable Partnership in

Fig. 4. Inclusion of good project governance (strate

approach, there is a need to develop a concept which canbe 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. Theintegration of these two approaches is expected to enhancethe performance of this kind of project because they com-plement each other. Fig. 4 provides an illustration on therelationship between the management approach and strate-gic approach.

4.1.2. Concept development

The United Nations Economic and Social Commissionfor Asia and the Pacific (UN-ESCAP) define governance

as the process of decision-making and the process by whichdecisions are implemented (or not implemented). More-over, corporate governance can be defined as a company’seffort to balance between the economic and social goalsof the company as well as between the individual and col-lective goals of the company’s stakeholders [12]. An analy-sis of governance focuses on the formal and informalparties that are involved in the decision-making processas well as its implementation, and it can be used in variouscontexts 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:

r

ionWHEN

tance

ManagementApproach

tent

ss

ProductSuccess

the project had allocated

he project had consider just short-term planning

PPP procurement system

gic approach) to enhance project performance.


1. Participation, by all involved parties. Participation needsto be informed and organized.

2. Rule of law, which means fair legal frameworks arerequired to be enforced impartially.

3. Transparency, which means that all decisions and theirimplementation must always abide by the rules and reg-ulations. It also means that information must be freelyavailable and directly accessible to those who will beaffected by the decisions.

4. Responsiveness, which requires all of the stakeholders tobe provided with a reasonable timeframe.

5. Consensus oriented, which means it requires mediationof the different interests in the society to understandwhat is the best interest for the whole community andhow it can be achieved.

6. Equity and inclusiveness, which means all parties areequal and have the same opportunities to improve ormaintain their well being.

7. Effectiveness and efficiency, which means that it has theability 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 naturalresources and environment protection.

8. Accountability, which means that all parties are account-able to those who will be affected by its decisions oractions and must be enforced through transparencyand 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 isnecessary to assess the project’s overall success in additionto evaluating the project management process and productsuccess as mentioned previously. Fig. 5 illustrates the rela-tionship theory between proper risk allocation and projectsuccess.

This good project governance concept has the followingcharacteristics:

ProperRisk

AllocationWHAT

WHO

WHEN

HOW

Efficient & EffectiveProject Risk Management

Achievement of projectgoals and objectives

Pro

P

M

Fig. 5. Effects of proper risk al

1. Right decision at the right time, which is a form of activeparticipation.

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 createtrue partnerships.

7. Effectiveness and efficiency.8. Accountability, in the form of user’s satisfaction and

public community participation.

This concept of good project governance is then utilisedto assess the case study’s risk allocation arrangements aswell as its overall performance.

4.2. Proper risk allocation

Following the above theoretical discussion this sectionlooks 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 classified into the following categories:

1. Political risks, such as discontinuation of concession, taxincrease, inappropriate tariff implementation, inappro-priate tariff increase, new government policy enforce-ment, etc.

2. Construction risks, such as inappropriate design, landacquisition, project delay, project site condition, con-tractor’s failure, etc.

ject ManagementSuccess

roduct Success

Good ProjectGovernance

PROJECTSUCCESS

anagement issues

Strategic issues

location on project success.

ProjectOwner

FinancialInstitution

(Bank)

GovernmentWarranty

FinancialGuarantee

Letter ofComfort

Cont

Inco

me

Loa

n R

eque

stOw

ner’s Approval

Loan A

pproval

ractor

Project Supplier SubContractor

Payment

Loan Repayment

Fig. 6. Contractor’s pre-finance (CPF) scheme.


3. Operation and maintenance risks, such as tollway net-work condition, operator’s incompetence, constructionquality, etc.

4. Legal and contractual risks, such as concession time war-ranty, flawed/inconsistent contract document, etc.

5. Income risks, such as inaccurate traffic volume estimate,inaccurate tollway tariff estimate, construction of a com-peting alternative road, etc.

6. Financial risks, such as inflation, devaluation, interestrate, changes in monetary policies, limited capital, etc.

7. Force major, such as weather condition, war, naturaldisasters, etc.

In this case study, there are several risks considered bythe owner to have a significant impact on project success.Limited capital is one of the risks considered as the mainconcern in this project. As soon as PT. Jasa Marga wasappointed by the Indonesian Ministry of Public Works tocontinue this project, they immediately encountered finan-cial challenge. Due to the high constraint on the construc-tion time and their limited liquidity, PT. Jasa Marga wasforced to design a financial strategy that would ensurefinancial security for the project as well as maintaining ahealthy condition on the company’s cash flow.

A Contractor’s Pre-Finance (CPF) system was thendeveloped as a mean to finance the project. In this system,several local banks (government and private) agreed tomake a commitment with PT. Jasa Marga to finance theproject by providing loan for all of the nine contractorsselected to construct the project. In addition to that, thesebanks also agreed to apply a fixed interest rate for thewhole loan and payback period. They were willing to pro-vide such demanding commitment because of the guaranteefrom PT. Jasa Marga, on behalf of the Indonesian govern-ment, that they will get their money back no matter whathappens with the project. The agreement was then formu-lated in a form of Letter of Comfort which is then usedby the contractors to request for a loan from these banks.

The CPF system applied in this project is considered tobe a privately financed system since the contractors whowould like to be involved in this project must be willingto pre-finance the project. Although the government madeprior agreements with the financial institutions (public andprivate) to provide loan for the qualified and appointedcontractors the government is still responsible for repayingthe debt made by the contractors to construct the project.

The difference between the CPF system with the otherfinancial strategies, such as the conventional project financ-ing or BOT, is that in the CPF system the project ownerdoes not need to look for an investor to finance the projectand they are not in debt to the banks who provide the loansduring the construction phase since the contractors bor-rowed the money directly from the bank. Also, these debtswill only be acknowledged by the project owner after theproject is completed and handed over to the owner. As longas it is still in the construction phase, the contractor is fullyresponsible for the loan debt to the bank. After the project

is completed, the project owner has the responsibility torepay the loans made by the contractors to the bank withina certain period that has been agreed previously by theowner and the banks. Fig. 6 illustrates the CPF financingstrategies of the project.

Additionally, other risks are mostly due to inaccurateproject estimation and improper project planning. For anexample, the actual amount of soil required to move forthe cut and fill work was much greater than what was esti-mated. As a result, additional resources were required tosolve these problems. Adding to the complexity was thatthe project completion target date could not be changedand this increased the project cost. These findings gaveclear evidences that there were miscommunicationsbetween the government and private sector, and someinformation was also not properly distributed during theinitiation and construction stage of the project, affectingthe effectiveness and efficiency of the project. The successof the project depended on good communication andproper information dissemination between the partiesinvolved.

4.2.2. Capability and willingness to accept project risks

In terms of capabilities, PT. Jasa Marga has a higheradvantage on experience and human resources, especiallyits managerial capabilities, compared to other tollwayenterprises. This is due to the fact that they provide contin-uous training for their employees, which benefits both thecompany and the employee itself. For the employees, itenables them to learn different things and gain invaluableexperiences. As for the company, it performs as an in-house scouting system to monitor and evaluate thestrengths as well as the weaknesses of each of their employ-ees, which would provide long term benefits for the

ProperRisk

Allocation

WHAT WHO

WHENHOW

Risks to beallocated

Willingness &ability of a partyto accept risks

The right timeto allocate therisk

Best strategy toprevent/minimizeconsequences

Fig. 7. Concept of proper risk allocation.


company because it enables them to put the right person onthe right place and doing the right work.

Due to the company’s reputation as an experienced andproficient tollway developer and operator, and also its sta-tus as a state-owned enterprise, the financial institutionshad no difficulties trusting them and making a demandingcommitment. This condition became the financial strengthfor PT. Jasa Marga, thus increasing its financial capabili-ties. Therefore, PT. Jasa Marga is considered to have therequired capabilities and is more than willing to accept pro-ject risks and will do their best to prevent or minimise theconsequences as long as the project is considered to befinancially beneficial.

4.2.3. Risk allocation strategy

According to Ward et al. [14], Edwards [15], and Flana-gan and Norman [16], several conditions must be satisfiedto 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 itsoccurrence.� Risks must be properly identified, understood and eval-

uated by all parties.� A party must have the technical/managerial capability

to manage the risks.� A party must have the financial ability to sustain the

consequences of the risk or to prevent the risk fromoccurring.� A party must be willing to accept the risk.

However, these conditions are basically criteria thatmust be evaluated against each party before allocating aproject risk to a particular party. In other words, it onlyhelps to determine where the risk should be allocated. Onthe other hand, risk allocation strategy is more than justdeciding which party should accept the risk. It should gobeyond that. Proper risk allocation should also be able toacknowledge the most appropriate time to allocate the riskand provide an alternative solution. Therefore, besides justdetermining which party (who) has the best capabilities toaccept the risk (what), the when and how factors should alsobe considered to ensure proper risk allocation (Fig. 7).Based on this perception, a risk allocation table is formedusing those four main factors to assess the actual risk allo-cation strategy performed by the owner of this project aswell as providing the possible alternative risk allocationstrategy (Table 1).

Results from the risk allocation strategy assessment ver-ified several issues. First, it provides evidence of the own-er’s actual capabilities to accept and control certain typesof 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 theinadequate results produced from the feasibility study aswell as lack of information from the owner regarding the

project’s preparedness. This condition could have been pre-vented if the project owner performs better planning andapplies information transparency during the project prepa-ration stage. Instead, several modifications in the construc-tion methods were carried out and adjustments were madeduring the construction stage, thus shifting the risk fromthe project owner, who actually has the best capability tocontrol the risk in the first place, to the contractor. More-over, the implemented risk allocation strategy dealt withthe consequences of the risk by problem-solving approachduring the construction stage instead by preventiveapproach during the preparation stage.

Another example concerns contractor’s incompetence.The inability of a contractor to perform their share of dutyand responsibility in this particular project caused theowner to select and assign an additional contractor to assistcontractors who under-performed. Again, the owner failedto notice that this could have been prevented if they haddeveloped and implemented a better system for selectingcontractors as well as committing more time for the selec-tion process to get the most qualified contractors.

However, all of the implemented risk allocation strate-gies were not inappropriate. Since the owner acknowledgedthe time limitation to complete the project and to preventor minimise the possibility of project delay due to theunavailability of primary/main construction materials,they developed a strategy during the preparation stage byforming a special agreement with the suppliers of thesematerials. 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 wereovercome by developing a system which transfers theresponsibility to finance the project from the owner tothe contractors. The cash-flow and liquidity problems thatcould have been experienced by the owner during the con-struction stage were also prevented by the system because

Table 1Owner’s 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 valueengineering

Construction stage Contractors Constructionrisks

Use ofpreliminarydesign todevelop thedetail design indesign-and-build system

Additional designwork

Project ownerand designconsultants

Preparationstage

Improvecoordinationbetween consultantsand owner

Practice longerworking hours

Additional designand constructioncost Multiple design

inspection andevaluation

Practice 7 days/weekworking days

Construction failure

Provide sufficienttime allocation forproject design

Increased operationand maintenancecost

Conduct a morethorough anddetailed feasibilitystudy

Project completiondelay


Management ofconstruction’sprimary/mainmaterial(reinforced steeland concretegirder)

Preparation stage Project owner andcontractors

Constructionrisks

Delayed projectconstructioninitiation

Increase project cost Project owner Preparationstage

Provide betterinformationregarding projectpreparedness

On-site constructionmethodimprovization

Construction stage Changes in projectplanning



Changes inconstructionmethods

Provide sufficienttime allocation forproject planning


Project completiondelay

Provide moreaccurate projectestimation


Construction stage Contractors Constructionrisks

Unpredictedproject sitecondition



On-site constructionmethodimprovization

Additionalconstruction work

Provide moreaccurate projectestimation


Changes inconstructionmethods


Design modification

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Assign additionalcontractor toassist thecontractors withpoor performance

Construction stage Project owner andcontractors

Constructionrisks

Contractor’sfailure


Improve the systemand process ofselecting acontractor

Time wasted tosearch for additionalcontractor andselection processStructural failureIncrease probabilityof quality problems

Additional/extramaintenance work

One year maintenanceperiod

Contractors Operation andmaintenancerisks

Constructionquality

Increasemaintenance cost

Project owner Preparationstage

Provide sufficienttime allocation forproject designReduce income/

profit Consultants Constructionstage

Provide sufficienttime allocation forproject planningProper projectcontrol andmonitoring

Modify trafficmanagementwithin the city

Operation stage Regional government ofBandung

Operation andmaintenancerisks

Insufficient roadnetwork

Traffic jam in thecity of Bandung

Regionalgovernment ofBandung

Preparationstage

Better coordinationwith the centralgovernment

Construction of anoverpass

Construction stage Complement theregionalinfrastructuredevelopment planwith the nationalplan

Claim submission Construction stage andoperation andmaintenance stage

contractors Legal andcontractual risks

Inconsistentcontractdocument

Disputes betweenparties

Project owner Preparationstage

Development of amore balanced andundiscriminatingcontract document

Payment delay forcontractors

Transparency duringthe discussion ofcontract document

Project completiondelayIncrease project cost

Application ofcontractor pre-finance (CPFsystem as afinancial strategy]

Preparation stage Contractors andfinancial institutions

Financial risks Limited capital Project cancellation Contractors andfinancialinstitutions

Preparationstage

Application ofcontractor pre-finance (CPF systemas a financialstrategy]

Project completiondelayCash-flow andliquidity problems

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the loan was made directly by the financial institutions tothe contractors. Contractors were paid based on their workprogress achievement, and these loan debts would only beacknowledged and eventually paid-back by the owner afterthe project is completed and handed over to the owner.Furthermore, the advantages obtained through the appli-cation of CPF scheme are identified as follows:

� It does not burden the project owner’s cash flow for thewhole construction phase.� The loan debt made by the contractor will only be

acknowledged by the project owner upon projectcompletion.� Financial guarantee from financial institutions in terms

of interest rate.� All project costs and expenses are very well controlled

and monitored.� Reduce the probability of project’s cost misuse by the

contractor.� Reduce time required to process payment

administration.� Provide financial guarantee for contractors, thus

increasing productivity.� The loan interest will be calculated as soon as the project

begins, thus benefiting the financial institution.� Provide more time for project owner to plan and

develop loan repayment strategy towards financialinstitutions.

Based on the assessment of the acquired information, itcan be confirmed that even though the project owner has inthis case the best capabilities to accept and control therisks, 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 influencethe type of risk allocation strategy that will be implemented(how), hence resulting in some form of chain reaction toacknowledge a proper risk control. Inadequacy to controla 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.� Ineffectiveness and inefficiency during construction and

operation stage.� Unsatisfied users.

Since most of the above circumstances occurred in thisproject due to improper risk allocation, it can be concludedthat this project had not achieved good project governance.Moreover, good project governance must be achieved to


increase project’s 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 bothmanagement process and project governance.

4.3. Better project performance

In the following section, better project performance isdiscussed using the case study on second stage Cipularangtollway in Indonesia.

4.3.1. Project success

Financial achievements in terms of profit is consideredby PT. Jasa Marga as one of the most important elementsin determining the project’s level of success due to itschange of status from being a government agent to a busi-ness oriented enterprise. The other components consideredto have the same level of importance are project qualityachievement and on-time project completion. However, itwas discovered that there are other factors that have playeda significant part in determining the success of this project.According to PT. Jasa Marga, a tollway project can beconsidered to be successful if it is functioning accordingto its planned purpose of providing service to end-users sat-isfactorily. Nevertheless, the success of a project cannot bevalued only by its final product since there are several otherfactors that need to be considered during the preparationas well as construction stages of the project.

During the preparation stage, it is necessary for PT. JasaMarga 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 amore accurate project estimate and prepare a more properproject plan. Consequently, proper project estimates andplannings are also considered to be significant in determin-ing the success of this project. Furthermore, good coordi-nation between the parties involved in the project is alsoessential to ensure an effective and efficient project develop-ment process, which can be achieved if all stakeholdershave a sense of trust.

Another valuable component for ensuring project suc-cess is to have a proper system for selection of the mostcapable contractor for constructing the project. The termcapable does not only mean having technical expertiseand possessing sufficient financial strength, but also possessa sense of professionalism which was actually lacking inthis project. This lack of professionalism influenced the effi-ciency and effectiveness of the particular contractor, thusaffecting project performance. As mentioned previously,information dissemination and communication system alsoplayed an essential part along with the project developmentprocess. Since it is important to distribute the informationto the right party at the right time, it is necessary for theproject 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 supportedby compelling managerial capabilities of human resources.Moreover, continuous control over the construction pro-cess as well as the project management process also playsan essential part in determining project success. Continu-ous monitoring of the work progress in the project, propercontrol on all resources required for the project and main-taining a constructive interaction within the project willprovide contribution to achieve a successful tollwayproject.

4.3.2. Project efficiency

During the construction phase, value engineering wasactively practiced by PT. Jasa Marga through constructiondesign simplification and the application of new and inno-vative construction technology. Such application isexpected to increase the project’s efficiency without reduc-ing its product quality level, thus able to function as itsintended purpose. In addition to that, the project’s effi-ciency level was also maintained by balancing the requireddesign change within the available budget.

However, it was also discovered that the efficiency levelin this project did not reach the expectation. One majorreason is because there was no distinct difference in termsof obligation and responsibility between the supervisoryconsultants and construction management consultants,thus more often than not; these two different consultantsperformed the same scope of work. One way to improveis to upgrade the specifications and requirements that areused for selection of the consultants, experts as well ascontractors.

Another issue that causes inefficiency in this project isthe insufficient time for design development and projectplanning. As a result of the insufficiency, PT. Jasa Margadecided to adopt a design-and-build system in some partsof the project to be able to proceed with time schedule.However, since only a preliminary design was producedfrom the project’s feasibility study, it increases the uncer-tainty level within the system because its detail design workis based only on a preliminary design. Although there arebasically limited limitations in the design-and-build system,the project’s circumstances make it less appropriate toimplement in the particular project. Moreover, eventhough this approach also enabled acceleration in the con-struction process, it resulted in an additional cost for repairand maintenance work as a trade-off.

Based on the above findings, it can be confirmed thatthis project experienced difficulties not only in terms ofmanagement or day-to-day issues, but the project had tomeet with problems that had long-term consequences. Thisproject suffers some consequences which could have beenavoided if the source of these problems had been addressedin the earlier phase of the project. Therefore, it confirmsand supports the findings from the previous sectionsregarding the necessity for implementation of a strategicapproach in a form of good project governance that canhelp achieving proper risk allocation in PPP projects.


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 first have abetter understanding of proper risk allocation since it willenable them to implement the most appropriate risk alloca-tion strategy.

The case study experienced day-to-day issues which areconsidered as short-term problems as well as long-termissues which can only be solved through strategic approach.These findings confirm the necessity for implementation ofa strategic approach to combine both strategic and manage-ment approaches so that the strategic approach enhancesthe performance of a project in this nature. In effect, itresults in the development of good project governance.

6. Conclusions

The good project governance concept is developed sinceprojects 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 tendsto work with the project risks as soon as the threats of con-sequences emerge. Generally, solutions are sought throughthe application of new construction methods, on-site designsimplification, etc., to cope with particular problems duringthe construction stage. Although those solutions were moreor less efficacious, it would have been better if preventiveactions had been taken. Even though the problems weresolved and the project was finished within the schedule,actions such as on-site construction, method modificationand design simplification during the construction stageresulted in additional project costs. These additional costs,in effect, affect negatively the long-run maintenance costs.These findings demonstrate that the owner considers thatthe risk had been properly allocated as long as its conse-quences can be minimised and show that risk managementstrategy is more into problem-solving rather than preven-tive actions.

The significant success factors considered by the ownerfor this particular project are government support, properproject planning, good coordination between parties, trust,good tendering system, proper information disseminationand communication system and high managerialcapabilities.

The findings from this case study also provide evidencesthat proper risk allocation can only be achieved if it consid-ers the type of risk (what) to be allocated, which partyshould accept the risk (who), when to allocate the risk aswell as application of proper strategy to prevent or mini-mise its consequences (how). If the involved parties in suchproject failed to acknowledge this, it will result in animproper risk control. Incapability to control risk properly

will be reflected in absence of good project governance,thus resulting in an unsuccessful project. There are eightmain criteria that need to be performed to achieve goodproject governance: right decision at the right time, con-tract fairness, information transparency, responsive, con-tinuous project control and monitoring, equality,effectiveness and efficiency, and accountability.

Since this project is a public infrastructure project pro-cured under PPP, it had to work with tactical issues as wellas strategic issues. Therefore, the project must be assessedin terms of its project management process and its outputachievement. These are indicated in a good project gover-nance to determine project success.

References

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