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RISK ALLOCATION IN PUBLIC PRIVATE PARTNERSHIP An Indonesian Case Master Thesis M.Sc. Environmental and Infrastructure Planning Faculty of Spatial Sciences Rijksuniversiteit Groningen January 2017 First Supervisor : Dr. Ir. W.L. Leendertse Second Supervisor : Dr. F. M. G. Van Kann and Dr. Ir. Heru Purboyo H P., DEA Author Indah Widya Astuti S2945606 ii SUMMARY PPP is a long-term collaboration between public party and private party to deliver public service provision with distinctive feature of risk allocation. This research departs from the idea that proper risk allocation and sharing can contribute to successful PPP project. There are various categories of risk that common in PPP infrastructure project, which shall be allocated to public, private, or both parties, depending on the principle on risk allocation. Risk allocation engages identifying risks and allocates either among public and private party, excluding end-users. Shared risk allocation refers to the condition where both parties bear certain risk outcome. Risk allocation is important in PPP because it can enable greater efficiency in the use of resources, establish long- term revenue stream, develop non-discriminative regulatory policies, and improve the outcomes of PPP. The principle of risk allocation is risk shall be allocated to the party that is best able to understand the risk, control the likelihood of occurrence and can manage the consequences if the risk is materialized in the most cost-effective ways. This research draws on a background case study of PPP railway infrastructure project in Indonesia. The comparison between actual risk allocation in the case project and the standard risk allocation in PPP as mentioned in literature is done to derive lessons learned that might be useful for the implementation of proper risk allocation in Indonesian PPP railway. A proper risk allocation is contributing to PPP project success in the way of influencing the achievement of project objectives. On the other hand, the improper risk allocation will not only hamper the fulfillment of project objectives but also can results in inefficiency use of resources by the form of unexpected project extension by public party. In PPP railway infrastructure project, the operation risk shall be allocated to private party, while the political or regulatory risk shall be allocated to public party. The allocation of demand risk shall be shared between public and private parties. Another point is that the role of respective local government is important especially to prevent or to handle the occurrence of site risk. Particularly in Indonesia, proper risk allocation in PPP is inevitable, as understanding between public and private parties in risk allocation will help to lay a foundation to develop non- discriminative regulatory policies. iii iv ACKNOWLEDGEMENT Voor Nico Maris, Naomi Massang Lolok, Dianita Herdiana, Muhammad Harry Nugroho, en Dwi Yuliansari, deze markeert ONZE overwinning v vi TABLE OF CONTENTS TITLE PAGE ................................................................................................................................................... i SUMMARY ................................................................................................................................................... iii ACKNOWLEDGEMENT ...............................................................................................................................v TABLE OF CONTENTS ............................................................................................................................ vii LIST OF TABLES ........................................................................................................................................ ix LIST OF FIGURES ...................................................................................................................................... xi CHAPTER 1 INTRODUCTION .................................................................................................................. 1 1.1 Research background and context ....................................................................................... 1 1.2 Research objective ..................................................................................................................... 6 1.3 Research questions .................................................................................................................... 6 1.4 Case Study: Kuala Namu airport railway ............................................................................ 7 1.5 Research Design ......................................................................................................................... 8 CHAPTER 2 METHODOLOGY ................................................................................................................ 11 2.1 Case Selection ........................................................................................................................... 11 2.2 Literature Review ..................................................................................................................... 12 2.3 Data Collection ......................................................................................................................... 13 2.4 Analysis Process ....................................................................................................................... 14 CHAPTER 3 THEORY ............................................................................................................................... 19 3.1 Public private partnership: general concept ................................................................... 19 3.2 Risk allocation and PPP ......................................................................................................... 20 3.3 Risks and risk management .................................................................................................. 22 3.4 Proper risk allocation .............................................................................................................. 26 3.5 Conceptual Framework .......................................................................................................... 29 CHAPTER 4 THE CASE STUDY ............................................................................................................. 31 4.1 General description of the case ........................................................................................... 31 4.2 The Main Stakeholders ........................................................................................................... 32 4.3 Railway network and service development: PPP and special assignment ............ 35 4.4 Relationships between the stakeholders ......................................................................... 36 4.5 Case study historical background ....................................................................................... 37 4.6 Project stages ............................................................................................................................ 40 vii 4.6.1 First stage ........................................................................................................................... 40 4.6.2 Service delivery ................................................................................................................ 41 4.6.3 Double Track Construction of Medan - Araskabu (2014 - ongoing) ................ 45 4.6.4 Double Track Construction of Araskabu to Kuala Namu (2015 - ongoing) ... 49 4.7 Perception of project success and its achievement ...................................................... 50 4.8 Summary of main developments of PPP in the case .................................................... 51 CHAPTER 5 ANALYSIS ............................................................................................................................ 52 CHAPTER 6 DISCUSSION ....................................................................................................................... 59 6.1 Risk identification and allocation ....................................................................................... 59 6.2 Evaluation of comparison ...................................................................................................... 62 6.3 Project success .......................................................................................................................... 66 6.4 Lessons learned ........................................................................................................................ 68 CHAPTER 7 CONCLUSION AND REFLECTION ................................................................................ 71 7.1 Answer to the research questions ...................................................................................... 71 7.2 Conclusion .................................................................................................................................. 73 7.3 Reflection ................................................................................................................................... 74 REFERENCES ............................................................................................................................................. 75 viii LIST OF TABLES Table 2-1 Research Methodology (Author, 2017) ........................................................................ 16 Table 5-1 Comparison of risk allocation strategy in project stage .......................................