RISK MANAGEMENT IN PUBLIC PRIVATE PARTNERSHIP PROJECTS IN HEALTH CARE: APPLICATION OF CURRENT APPROACH AND ITS IMPROVEMENT.

Author:Maslova, Svetlana V.
Position::Report
 
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INTRODUCTION

Public-private partnership refers to forms of cooperation between public authorities and the world of business, which aims at ensuring the funding, construction, renovation, management or maintenance of infrastructure or the provision of a service (Commission, 2004). In many countries, PPP is a popular mechanism for the establishment and operation of social, transport and engineering infrastructure. This is explained by several advantages of PPP. One of them is the transfer of risks of the PPP project from the public sector to the private party, as opposed to public procurement, when public sector bears all the risks of the project. "Adequate risk allocation is essential to reducing project costs and to ensuring the successful implementation of the project. Conversely, an inappropriate allocation of project risks may compromise the project's financial viability or hinder its efficient management, thus increasing the cost at which the service is provided" (UNCITRAL, 2001). However, risk allocation is not the only significant mechanism. Balanced allocation of risks should be preceded by their identification and assessment and succeeded by their efficient prevention and mitigation. All of these actions are interrelated and form a risk management process, which therefore is a very important factor for the success of PPP projects. This highlights the relevance of a deep theoretical and practical study of risk management process in PPP projects. In particular, the author believes that it is necessary to resolve the following issues:

  1. Does the existing understanding of risks, their classification and description give a complete picture of risks in PPP Projects?

  2. Does the process of risk management cover all possible adverse events and does it protect the PPP project and its participants from the unsuccessful outcome?

  3. How and what could be improved?

    These are quite difficult questions and search for the answers to them is the goal of this article. This goal determines the structure of the article. First, we present the current approach to risk management in PPP projects and some of its flaws. Second, we provide literature review on the concept and types of risks in PPP projects, which is the theoretical basis for our research. It is followed by the search and description of criteria in order to define the concept of risks and classify them. It enables to distinguish a new type of risks-specific medical risks which become the subject of the further study. We continue the paper by giving a brief background of PPP development and PPP experience in Russia and St. Petersburg. Furthermore, we describe main parameters of PPP projects in health care, which are planned to be implemented in St. Petersburg. Finally, third, we present the list of risks that are inherent in PPP projects in health care and their description using the author's risk classification. Also we present several measures for mitigation and prevention of identified medical risks.

    RESEARCH METHODOLOGY

    Current Approach to Risk Management in PPP Projects: Overview and Flaws

    Currently, the prevalent approach to risk management in PPP projects consists of the following stages (Akintoye, Beck & Hardcastle, 2008):

  4. Risk identification: a process of identifying all the risks relevant to the project, either during its construction or operation phase;

  5. Risk assessment: determining the likelihood of them at serialization of identified risks and the magnitude of their consequences if they do materialize;

  6. Risk allocation: allocating the responsibility for dealing with the consequences of each risk to one of the parties to the PPP agreement or agreeing to deal with the risk through a specified mechanism which may involve the risk sharing;

  7. Risk mitigation: an attempt to reduce the likelihood of the risk occurrence and the degree of its consequences for the risk-taker; and

  8. Risk monitoring and reviewing: monitoring and reviewing the identified risks and managing new risks as the PPP project develops and its environment changes. This process continues during the life cycle of the PPP contract (Guidance, 2011; Victoria, 2001).

    Some time ago, this approach was considered as being comprehensive. But the review of the research literature and expert discussions, guidelines, PPP databases and the analysis of risk matrices have made evident series of shortcomings of this approach, including:

  9. Ambiguity of views on the concept of risks in PPP projects, their description and classification,

  10. Absence of the structured methodology of risk identification in PPP projects,

  11. Disregard to the specific risks,

  12. Insufficient description of measures aimed at preventing and minimizing negative effects of risks.

    Primarily, it is necessary to solve the problem of the definition of risk, which, as we see it, has two aspects.

    First, not all of those researchers writing about risks explain what they include in this concept. As a result, without defining the subject of the conversation, many experts argue on risks and their management, including not always the same, coinciding, meaning in this concept (Hodge, 2004; Loosemore, 2007).

    Second, there is a discrepancy in understanding the term "risk". For instance, "risk is defined as the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefit and costs" (Furnell, 2000). It follows that the term "risk" is applied generally to all events, both negative and positive, that alter initial parameters of the PPP project.

    In our opinion, such a broad interpretation of the term risk causes confusion and does not correspond to the ultimate goal of risk management-to prevent risks and minimize their consequences. Therefore, we propose not to define risks of PPP projects as all the potential events that may occur in the implementation of PPP. We believe that risk management (identification, assessment, allocation, mitigation of risks) is needed for only those events that negatively affect the PPP project (for example, those that can lead to financial losses and additional costs for participants of the PPP project, lost revenue, as well as delays in the PPP project) which impede the achievement of the desired general results. Although successful events during the PPP project (for example, unscheduled revenues for participants or reduction of the duration of construction) may influence the project, it will not be a problem for project participants and should not be the subject of efforts to manage them. Such understanding of risks in PPP projects is generally consistent with the following statement: "a risk is defined as any factor, event or influence that threatens the successful completion of a project in terms of time, cost or quality" (Hodge & Greve, 2007). Agreeing with this, we think that it is necessary to complement this chain of objects (time, cost, quality) being under threat by the goals of the PPP project.

    It is impossible to leave another fact without mentioning. The majority of studies contain the description of financial, legal, political, environmental, social, construction and commercial risks only, that is, those that may arise in each PPP project (Delmon, 2017; Kabashkin, 2010; Vassallo & Gallego, 2005). That is true, but PPP projects have many other features, therefore, there are much more risks in PPP projects in real life. These risks also require special attention and a thorough analysis using different research methods. The following example is very illustrative. It is well known that one of the features of PPP projects is a complicated two-stage procedure for selecting the private partner by conducting pre-qualification and setting requirements for the experience of PPP projects' financing, qualification of the private partner in a certain area, experience of similar projects implementation, etc. At the same time, events associated with changes in the structure of the project company (private partner) may occur during the implementation of the PPP project and as a result the private partner will not satisfy these requirements. It could negatively affect the PPP project. A similar case is described in the Legislative Guide on Privately Financed Infrastructure Projects prepared by the United Nations Commission on International Trade Law: "The contracting authority may be concerned that the original members of the bidding consortium maintain their commitment to the project throughout its duration and that effective control over the project company will not be transferred to entities unknown to the contracting authority ... Contracting authorities are therefore concerned that, if the concessionaire's shareholders are entirely free to transfer their investment in a given project, there will be no assurance as to who will actually be delivering the relevant services" (UNCITRAL, 2001). In our opinion, this situation is a risk for the PPP project, which can be summarized in the risk matrix as follows (Table 1):

    Table 1 RISK MATRIX Risk Description of risk Negative consequences of risk Risk of Possible sale, transfer or Decrease of quality, changes in the other disposition of rights failure to achieve structure of for the share of capital of goals of the PPP the private the private partner (SPV) project partner by its initial founders Risk Risk Measures of risk mitigation allocation Risk of Private 1) Establishment of changes in the partner limitations for such changes in structure of the structure of the private the private partner (SPV) in PPP partner agreement for a particular period of time; 2) Execution of such changes only with the consent of the public partner; 3) Sale, pledging or other disposition of rights for the share of capital is possible only to the qualified successor (an entity meeting the requirements for the participants of the contest for the right to conclude a PPP agreement) Continuing to examine this...

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