Chinese Management Studies

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Equitable risks allocation of projects inside China: analyses from Delphi survey studies
Yongjian Ke ShouQing Wang Albert P.C. Chan

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Yongjian Ke ShouQing Wang Albert P.C. Chan, (2011),"Equitable risks allocation of projects inside China:
analyses from Delphi survey studies", Chinese Management Studies, Vol. 5 Iss 3 pp. 298 - 310
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A D Ibrahim, A D F Price, A R J Dainty, (2006),"The analysis and allocation of risks in public private
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Construction, Vol. 11 Iss 3 pp. 149-164 http://dx.doi.org/10.1108/13664380680001086
Patrick X.W. Zou, Shouqing Wang, Dongping Fang, (2008),"A life-cycle risk management framework for
PPP infrastructure projects", Journal of Financial Management of Property and Construction, Vol. 13 Iss 2
pp. 123-142 http://dx.doi.org/10.1108/13664380810898131
Prasanta K. Dey, Stephen O. Ogunlana, (2004),"Selection and application of risk management tools and
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CMS
5,3

Equitable risks allocation

of projects inside China: analyses
from Delphi survey studies

298

Yongjian Ke
Department of Building, National University of Singapore, Singapore

ShouQing Wang
Department of Construction Management, Tsinghua University,
Beijing, China, and

Albert P.C. Chan

Department of Building and Real Estate,
The Hong Kong Polytechnic University, Kowloon, China
Abstract
Purpose The purpose of this paper is to validate and elaborate on the preferred risk allocations for
Chinese public-private partnership (PPP) projects.
Design/methodology/approach A previous two-round Delphi survey was carried out to identify
the preferred risk allocations in Chinese PPP projects. A series of face-to-face interviews was
subsequently conducted to collect actual risk allocations in some recently completed PPP projects.
By comparing the preferred and actual allocations and discovering the reasons behind the differences,
an equitable risk allocation scheme was then obtained.
Findings The comparative analysis showed a great degree of conformity between the two
allocation schemes. These interviews effectively reinforce the rationale of the preferred risk
allocations, so that they can be considered as equitable for PPP projects in China.
Originality/value Equitable risk allocation is critical to the success of a PPP project. The findings in
this paper are hence important to investors for a better understanding of the risks of PPP projects in China.
Keywords Risk allocation, Public-private partnership, China, Project management, Investors
Paper type Research paper

1. Introduction
Public-private partnership (PPP) has been identified as an innovative tool for
financing major infrastructure projects and has huge potential for the near future.

Chinese Management Studies

Vol. 5 No. 3, 2011
pp. 298-310
q Emerald Group Publishing Limited
1750-614X
DOI 10.1108/17506141111163372

The work described in this paper was fully supported by a joint grant from the National Natural
Science Foundation of China (Project No. 70731160634) and the Research Grants Council of the
Hong Kong Special Administrative Region, China (RGC Project N_PolyU514/07). Special gratitude
is extended to those industrial practitioners who have kindly participated in the interviews
reported in this paper. This paper forms part of the research project entitled Developing an
equitable risk-sharing mechanism for public-private partnership projects in the Peoples Republic
of China, from which other deliverables have been produced with different objectives/scope but
sharing common background and methodology. The authors also wish to acknowledge the
contributions of other team members including Dr Patrick T.I. Lam, Dr Daniel W.M. Chan,
Dr Edmond W.M. Lam, Dr John F.Y. Yeung, Dr Esther Cheung, Yelin Xu, Wendy Wen, Tony Peng
and Calvin C.P. Yu.

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On 9 November 2008, the Chinese Government announced that China would relax
credit conditions, reduce taxes and embark on a massive infrastructure spending
program in a wide-ranging effort to offset adverse global economic conditions by
boosting domestic demand (Chinese Governments Official Web Portal, 2008). With the
four trillion RMB stimulus plan as announced by the Chinese Government, only
1.18 trillion came from the central government, the rest was topped up by the local
government, and/or the private sector (State Development and Reform Commission,
2009). Since most of the local governments are still subject to severe budgetary
pressure, there is a heavy reliance on the private sector investment. It is also worth
noting that Several opinions of the State Council on encouraging and guiding the
healthy development of private investment issued in May 2010 further widen the field
and scope of private investment, which include railway, water conservancy, petroleum
gas, telecommunication, land control, exploration and development of mineral
resources, policy-related housing, medical industry, education, social warfare service
and the national defense science and technology industry (State Council, 2010). These
might provide a great opportunity for private investors to get more involved in
infrastructure development via the PPP model.
However, PPP is not a panacea or a quick fix solution to deliver project financing and
realization (European Commission, 2003). The adoption of PPP may enable private
investors to charge a high tariff on the services provided, which used to be free in the
traditional procurement method (Wang, 2006); PPP projects often have high costs and take
up a long time in contract negotiation, which may not represent good value to all parties.
As a result, the deal may not materialize in the beginning or may falter in the end (Chan
et al., 2010). More importantly, the introduction of PPP has exerted much pressure on the
legal framework. In China, the PPP regulatory systems such as cost auditing, tariff
regulation, responsibility scope and boundary of regulatory agencies have not been fully
developed. These subsequently lead to a great deal of resistance from the conservative
wing, and are already slowing down some key reform projects (Zhang, 2009).
To ensure success for PPP projects in China, risk allocation should be clearly
communicated and understood between the collaborating parties. Both public and private
sectors therefore must pay particular attention to the procurement process to ensure
equitable risk allocation. The aim of this paper is to develop an equitable risk allocation
scheme for PPP implementations in China. The research findings are believed to be useful
for organizations which intend to invest in infrastructure construction in China.
2. Literature review
An equitable risk allocation and management is important to the project success of a
PPP project within a rather long concession period (Zhang, 2005; Li et al., 2005a).
Governments would state their preference as to how the project risks should be shared
in the invitation of tendering, while private investors would assess their capability of
taking these risks and then propose a bidding price. The contract negotiation would
thereafter probably focus on the risk allocation scheme. A general principle is that each
risk should be allocated to the party best able to manage it and at the least cost
(Cooper et al., 2005). In other words, an optimal risk allocation is not to pass all risks to
the private sector, but to seek a solution minimizing both the total management costs
of the public and private sectors. Unfortunately, this criterion often causes contrasting
results in the risk allocation context. Sometimes, the partner from which the risk

Equitable risks
allocation

299

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5,3

300

emanates and thus who is considered to be best able to control it, may not actually be
able to control the risk in the most efficient way and at the lowest cost (Medda, 2007).
A number of academic researchers have provided solutions to achieve equitable risk
allocation schemes. Among them, a questionnaire survey is the most common research
technique used. For instance, Li et al. (2005b) developed a preferred risk allocation
scheme for PPP projects in the UK and Roumboutsos and Anagnostopoulos (2008) and
Ke et al. (2010a) conducted a similar survey using the same questionnaire in Greece and
China, respectively, and then compared the findings to those in the UK. A case study is
another popular technique for exploring a suitable risk allocation scheme for PPP
projects, such as Abednego and Ogunlana (2006) and Ng and Loosemore (2007). Recent
researchers have developed more complicated and vigorous methods in the risk
allocation arena, such as game theory (Medda, 2007), the fuzzy synthetic allocation
model (Xu et al., 2010; Jin and Doloi, 2009), theoretical framework based on transaction
cost economics ( Jin and Doloi, 2008; Jin, 2010a) and the neuro-fuzzy decision support
system ( Jin, 2010b), etc.
3. Knowledge gap
It is easy to understand that risk allocation lessons learnt from past cases may not be
directly suitable for the future projects, as each project has its own characteristics.
Preferred allocations from experts via questionnaire surveys would be subjective and the
accuracy highly depends on the hand-on experiences of experts selected. There are also
pitfalls for the vigorous models developed recently. For example, the allocation models by
Xu et al. (2010), Jin and Doloi (2009) and Jin (2010b) mentioned hereinbefore could only deal
with one risk at one round of the complicated process. Moreover, given the observation
from previous research (Lyons and Skitmore, 2004) that there is an absence of risk
management culture and a lack of experts who are familiar with the risk management
tools in many construction companies, the potential application possibilities of these
vigorous models may not be as wide in scope as they should have been. A knowledge gap
therefore exists to develop an equitable risk allocation scheme that could be also applicable
in China. This study aims to fill the gap by furthering a previous published study (Ke et al.,
2010b), in which a two-round Delphi survey was conducted in Mainland China to analyze
the risks and their preferred allocations for PPP projects in China from the perspectives of
46 experts with in-depth knowledge and sound experience of risk management.
4. Research methodology
As mentioned above, the previous Delphi survey with experienced practitioners aimed
to seek for the preference of risk allocation in Chinas PPP projects based on their own
perceptions and understandings. The findings may not be applicable for all PPP
projects at this stage. A series of face-to-face interviews were therefore subsequently
carried out from March to May 2009 to collect actual risk allocations in some recently
completed PPP projects in China. By comparing the preferred and actual allocations
and discovering the reasons behind the differences, an equitable risk allocation scheme
for PPP projects in different sectors could be then obtained.
Instead of collecting pieces of project information and analyzing the risk allocation,
the authors requested the selected experts to provide their understandings on the
actual risk allocation in one of their successful PPP projects. Because the risk register
adopted in the previous research included 37 different risks (as presented in Table I),

ID Risk factor

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1 Corruption
2 Governments intervention
3 Expropriation and
nationalization
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Definition

Corrupt local government officials demand bribes or unjust rewards

Public sector interferes unreasonably in privatized facilities/services
Owing to political, social or economic pressures, local government takes
over the facility run by private firm without giving reasonable
compensation
Governments reliability
The reliability and creditworthiness of the government to be able and
willing to honor their obligations in future
Third-party reliability
The reliability and creditworthiness of a third party to be able and
willing to honor their obligations in future
Public/political opposition Prejudice from public due to different local living standards, values,
culture, social system, etc.
Immature juristic system The lack of national PPP law leads to different ways of PPP
implementation in different places in China
Change in law
Local governments inconsistent application of new regulations and laws
Interest rate
Unanticipated local interest rate due to immature local economic and
banking systems
Foreign exchange and
Fluctuation in currency exchange rate and/or difficulty of convertibility
convertibility
Inflation
Unanticipated local inflation rate due to immature local economic and
banking systems
Poor political decision
Government officials considers more their career achievement or shortmaking
term goals or personal interests, or with little PPP experience, etc.
resulting in a poor political decision-making process
Land acquisition
The project land is unavailable, or unable to be occupied at the required
time
Approval and permit
Delay or refusal of project approval and permit by local government
Improper contracts
Improper arrangements in the contracts including inappropriate risk
allocation among stakeholders, commitment from public/private
partners
Financial risk
Poor financial market or unavailability of financial instrument resulting
difficulty of financing
Construction/operation
Unanticipated changes and errors in the construction/ operation
changes
resulting from the improper design or poor investigation
Construction completion
Longer construction time than predicted, Construction cost overrun or
poor construction quality
Delay in supply
Subcontractors and suppliers not being able to supply labor or material
on time
Technology risk
The technology adopted not being mature or able to meet the
requirements
Ground/weather
Poor or unexpected ground/weather conditions
conditions
Operation cost overrun
Operation cost overrun resulting from improper measurement,
ill-planned schedule or low operation efficiency
Competition
The government does not offer the exclusive right, or does not honor to
(exclusive right)
its commitment and build another competitive project
Market demand change
Demand change from other factors, i.e. social, economic, etc. except the
exclusive right
Tariff change
Improper tariff design or inflexible adjustment framework leading to
the insufficient income
Payment risk
The consumer/government not being able or willing to pay, due to social
or other reasons
(continued)

Equitable risks
allocation

301

Table I.
Checklist of PPP project
risk factors

CMS
5,3

ID Risk factor

Definition

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27 Supporting utilities risk

28

302

29
30
31
32
33
34
35
36
37

Table I.

Supporting utilities, such as electricity, water, necessary for the

construction, operation and management would not be available
in a timely manner or at fair rates
Residual assets risk
Assets transferred to the government at the end of the concession period
would not be normally running
Uncompetitive tender
The tendering process and documents vary from project to project and
from province to province in China without transparent or standardized
models
Consortium inability
The consortium not being able to perform its obligations as a PPP
project company
Force majeure
The circumstances that are out of the control of both foreign and local
partners, such as flood, fires, storms, epidemic diseases, war, hostilities
and embargo
Organization and
An increase of transaction cost or a dispute may occur because of the
coordination risk
improper organization and coordination
Tax regulation changes
Central or local governments inconsistent application of the tax
regulation
Environmental protection Stringent regulation which will have an impact on construction firms
poor attention to environmental issues
Private investor change
Owing to the disputes among private investors or other reasons, one or
some investors exit/enter the consortium
Subjective evaluation
Subjective evaluation and design of the concession period, tariff
structure, market demand, etc.
Insufficient financial audit The government/lenders would not perform a careful audit to the
financial status of the project company

it would become quite troublesome and unpractical to request the interviewees to

explain the reasons behind the actual allocation of each risk. In order to improve the
interview efficiency, a structured interview process was thus adopted as follows:
(1) An invitation letter was accompanied by a structured questionnaire and sent to
the selected experts. The letter explained the purpose of the research and the
interview process. The definition of each risk as presented in the authors
previous paper (Ke et al., 2010b) was also provided at the beginning of the
questionnaire, to ensure that experts have the same understanding of these risks.
(2) These respondents were requested to allocate the described risks according to a
five-point Likert scale: 1 government takes sole responsibility; 2 government
takes the majority of responsibility; 3 both parties take equal responsibility;
4 private sector takes the majority of responsibility; and 5 private sector
takes sole responsibility.
(3) A comparative analysis of the actual and preferred allocations by the technique
of the one-sample t-test was conducted once the responses from the experts
were returned. Risks that have a significant result from the t-test and also have
different actual and preferred allocations will be identified.
(4) The interviewees were only requested to explain the specific situations of those
risks identified above. Reasons behind the actual allocation of these risks, the
commercial principles and contract terms for the actual allocation were then
collected from the interviews.

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Experts only with direct involvement in one or more PPP projects were selected as
target interviewees. A total of 38 managers agreed to be interviewed after much
persuasion and follow-up telephone calls. They were requested to choose the most
successful PPP project they have participated in. The definition of successful in this
study is that by the time of interview the project achieves the triple-project goals,
i.e. completed on or ahead of time, within budget at an acceptable level of quality and
runs well with little conflict among the parties during the operation period. Table II
shows the respondents information and their roles in the past projects that the
interviewees reported as their PPP case studies. As presented in Table II, the selected
interviewees are middle-/high-level managers in their project and have rich experience
in PPP projects.
5. Results
The interview feedback concerning the preferred and actual risk allocations is collated
and summarized in Table III. The preferred allocation as presented in Table III shows
that the public sector would take the majority of responsibility for 13 risks related to
government or government officials and their actions. A total of 14 risks that neither the
public nor private sector could be dealt with alone are preferred to be shared equally. The
private sector would take the majority of responsibility for ten risks that are at the
project level.
This paper focuses on the reasons behind the differences and discusses whether the
actual allocation would be more appropriate for PPP projects in China. In line with the
previous study (Ke et al., 2010b), the risk allocation options are presented as mean
values of participants responses. Three risk allocation categories are identified
according to the half-adjusting principle:
(1) Risks with a mean score smaller than 2.5 that should be allocated to the public
sector.
(2) Risks with a mean score greater than or equal to 2.5 and smaller than 3.5 that
should be equally shared by both parties.
(3) Risks with a mean score greater than or equal to 3.5 that should be allocated to
the private sector.
As shown in Table III, there are nine risks of which actual allocations were different
with preferred allocations.
However, as mentioned above, differences in allocations would only be considered
if the t-test returns a significant result in mean values between two sets of
allocations. The correlation coefficient of the rankings on the preferred and actual
allocations was 0.953, which is much greater than the critical value of 0.275 at a 0.05
level. This result reinforces the rationale of the preferred allocation published in the
previous paper (Ke et al., 2010b). Furthermore, the independent two-sample t-test was
undertaken to examine if there was any significant difference in mean value
responses between the two groups of allocations for each of the 37 risks discussed.
There are five risks which had different actual allocations and fell below the
significance level of 0.05, i.e. public/political opposition, foreign exchange and
convertibility, supporting utilities risk, organization and coordination risk and
tax regulation changes.

Equitable risks
allocation

303

CMS
5,3

No. Title

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1
2

304

3
4
5
6
7
8
9
10
11

No. of PPP
involved

Project type

Investment
(billion RMB)

More than 20
4

More than 6
30

Power
Power

5.6
0.3

Power

Less than 5
5
More than 20
Less than 5
Less than 5
6-10
11-15

1-3
2
More than 6
1-3
1-3
1-3
More than 6

Power
Power
Power
Power
Power
Transport
Transport

0.07
0.8
0.65
0.14
5.6

Less than 5

1-3

Transport

0.4

Project role
Project company
Government
agency
Project company
Consultant
Project company
Project company
Project company
Consultant
Contractor
Designer and
contractor
Supervisor

4
6-10

10
1-3

Transport
Transport

1.77
0.6

14
15
16

Contract
manager
Vice manager
Contract
manager
Director
Project manager
Project manager

6-10
Less than 5
3

1-3
1-3
4

0.3

0.23

17

Chief engineer

6-10

1-3

0.59

Project company

18

Consultant

Less than 5

1-3

0.6

Consultant

19
20
21
22
23

Chief engineer
Project manager
Vice president
Manager
Deputy director

6-10
Less than 5
6-10
5
7

1-3
1-3
1-3
10
2

Transport
Transport
Waste
treatment
Waste
treatment
Waste
treatment
Water
Water
Water
Water
Water

Consultant
Government
agency
Supervisor
Consultant
Lender

0.84
0.3
0.1
0.4
0.03

24
25
26
27
28

Lawyer
Consultant
Consultant
Project manager
Project manager

8
4
3
Less than 5
Less than 5

3
11
12
1-3
1-3

Water
Water
Water
Water
Water

0.07
0.4
0.65
0.3
0.1

29

Legal counsel

Water

0.645

30
31
32
33
34
35
36

2
Less than 5
Less than 5
6-10
5
8
8

5
1-3
1-3
1-3
1
40
5

Water
Water
Water
Water
Stadium
Hospital
Housing

0.043
0.06
0.103
0.84
3.465
0.046
0.3

37

Consultant
Manager
Consultant
Dean
Legal manager
General manager
Vice general
manager
Project manager

Project company
Project company
Project company
Consultant
Government
agency
Project company
Consultant
Consultant
Contractor
Government
agency
Government
agency
Consultant
Project company
Consultant
Consultant
Project company
Consultant
Consultant

Less than 5

1-3

Housing

0.16

38

Director

Less than 5

1-3

Housing

12
13

Table II.
Information of
the respondents and
selected projects

Director
Vice general
manager
Investment
manager
Consultant
Deputy dean
Director
Director
Consultant
Project manager
Director

Year of PPP
experience

Government
agency
Government
agency

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ID

Risk factor

DM

PA

IM

AA

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37

Corruption
Governments intervention
Expropriation and nationalization
Governments reliability
Third-party reliability
Public/political opposition
Immature juristic system
Change in law
Interest rate
Foreign exchange and convertibility
Inflation
Poor political decision making
Land acquisition
Approval and permit
Improper contracts
Financial risk
Construction/operation changes
Construction completion
Delay in supply
Technology risk
Ground/weather conditions
Operation cost overrun
Competition (exclusive right)
Market demand change
Tariff change
Payment risk
Supporting utilities risk
Residual assets risk
Uncompetitive tender
Consortium inability
Force majeure
Organization and coordination risk
Tax regulation changes
Environmental protection
Private investor change
Subjective evaluation
Insufficient financial audit

2.11
1.70
1.28
1.65
3.39
2.54
2.43
2.33
3.39
3.26
3.22
1.83
2.00
2.11
3.15
4.07
3.52
4.02
3.96
4.37
3.33
4.20
2.30
3.37
2.87
3.00
2.26
3.52
2.28
3.78
2.91
3.65
2.35
3.02
3.85
3.13
3.04

Public
Public
Public
Public
Share
Share
Public
Public
Share
Share
Share
Public
Public
Public
Share
Private
Private
Private
Private
Private
Share
Private
Public
Share
Share
Share
Public
Private
Public
Private
Share
Private
Public
Share
Private
Share
Share

2.05
1.52
1.41
1.67
3.16
2.32
2.53
2.54
3.60
3.57
3.41
2.04
2.04
2.24
3.29
4.19
3.46
4.16
4.03
4.63
3.21
4.23
2.47
3.12
2.99
3.28
2.55
3.56
2.41
4.25
2.88
3.33
2.61
2.97
4.12
3.30
3.28

Public
Public
Public
Public
Share
Public
Share
Share
Private
Private
Share
Public
Public
Public
Share
Private
Share
Private
Private
Private
Share
Private
Public
Share
Share
Share
Share
Private
Public
Private
Share
Share
Share
Share
Private
Share
Share

Sig.

0.449
1.410
2 1.413
2 0.145
2.525
2.794
2 0.727
2 1.724
2 1.609
2 2.343
2 2.312
2 1.694
2 0.352
2 1.089
2 1.947
2 1.052
0.575
2 1.370
2 0.636
2 2.195
1.273
2 0.285
2 1.201
2.068
2 1.109
2 2.337
2 2.414
2 0.339
2 1.033
2 2.926
0.833
2.856
2 2.390
0.397
2 2.542
2 1.510
2 1.942

0.656
0.165
0.164
0.885
0.015 *
0.008 *
0.471
0.092
0.115
0.024 *
0.025 *
0.097
0.726
0.282
0.058
0.298
0.568
0.178
0.528
0.033 *
0.210
0.777
0.236
0.044 *
0.274
0.024 *
0.020 *
0.736
0.307
0.005 *
0.409
0.006 *
0.021 *
0.693
0.015 *
0.138
0.058

Diff.

Equitable risks
allocation

305

p
p

Notes: *t-test of preferred and actual allocations for the risk returns a significant result,
the significance threshold is 0.05; DM, Delphi mean; PA, preferred allocation; IM, interview mean;
AA, actual allocation

6. Discussion
6.1 Public/political opposition
Public/political opposition risk is preferred to be shared between the public and
private sectors, but was actually allocated to the government in some PPP projects.
Interviewee from case 26 asserted that:
According to the current infrastructure project management framework, the requirements for
the bidding of a PPP project include the approvals of project feasibility, preliminary planning,
etc. In addition, the environment impact assessment report and other relevant information

Table III.
Comparative analysis
of preferred and actual
risk allocation

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306

are provided to the general public. There is no doubt about its legal validity. The cause of this
risk event is therefore the default of local government of not fulfilling its functions, and then it
is reasonable to allocate it to the government.

However, the interviewee from case 25 shared several exceptional examples of public
opposition in wastewater treatment projects, i.e. environment pollution caused by the
illegal wastewater discharge by project company, air pollution due to the improper
odor treatment, the conflict on the value deduction of near properties, etc. It is
understandable that the government should be exempt from all liability in these
mentioned matters. This paper hence recommends public/political opposition risk to
be shared between public and private sectors. More specifically, the project company
would be responsible for the communication and settlement of a conflict with the
support of local government. If the occurrence of this risk is caused by the project
companys fault, no compensation towards the loss will be provided; if it is a result of
the local governments fault, the concession agreement should include provisions
requiring the project company to be restored to the same economics position; and if the
opposition results from force majeure or other factors beyond the control of both public
and private sectors, a reasonable compensation would be negotiated according to
specific project situations. It is strongly suggested that the provisions on compensation
mechanism including preconditions and procedure in the concession agreement should
be clearly stated in order to avoid potential disputes.
6.2 Foreign exchange and convertibility
The risk of foreign exchange and convertibility is preferred to be shared. However,
it was not clearly described in many past cases. Owing to the unequal positions, this
risk was actually considered to be undertaken by the private sector. As indicated by
the interviewee in case 2:
It is useless to force local governments to be responsible for the risk of foreign exchange, as
they do not have much authority concerning this issue under the current foreign exchange
regulation framework.

According to the Regulation of the Peoples Republic of China on Foreign Exchange

Administration (State Council, 2008), the exchange rate of RMB shall be subject to a
floating rate system regulated based on the market supply and demand. In other words,
the change of foreign currency exchange rate is also beyond the control authority of local
governments. Another reality is that international companies are usually in a position to
control their foreign currency exchanges more than local governments. The interviewee
in case 25 provided some financial tools and techniques to deal with adverse currency
rate fluctuations that result in lost purchasing power and reduced profits, including
using hedging for forwards market, hedging with the money market, currency options,
or futures. Compared to local governments, market investors are more powerful in using
these tools. But, it is worth noting that these financial tools are not vigorous enough to
eliminate the exceptional currency exposure. It is recommended to set up a threshold
such as 10 percent in the concession agreement, in which local governments shall take
responsibility for part of the loss when the rate change is over the threshold percentage.
This means that both parties should share the risk of exceptional change of foreign
currency exchange rate. Local governments shall also assist the private investors in the
approval of exchange convertibility in accordance with their authority.

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6.3 Supporting utilities risk

The preferred allocation for Supporting utilities risk is to the public sector. However,
it was actually shared in many past cases. It stands to reason that private investors
usually ignore the consideration of this risk in the concession agreement, given that
local governments have finished the construction and provision of supporting utilities
such as pipe network, electricity, water and access to the site before the tendering in
most past projects. Once the risk event occurs during the construction or management
period, the project company will thereafter be responsible for the subsequent
construction and then claim for compensation. There is no doubt that it did prevent the
project company from fulfilling its obligations. Therefore, this paper recommends the
agreement among the respondents from cases 5 and 8 that:
A more equitable arrangement for this risk is that during the construction period local
governments would be responsible for: (a) the delivery of the site and completion of the
preliminary contract works and the access road; (b) coordinating and facilitating all dealings
with the appropriate government authorities; (c) obtaining the approvals required for
construction which can only be obtained by local governments; (d) providing the project
company other necessary supporting utilities such as the transmission line, start-up
electricity and steam and all fuel for testing for power projects.

6.4 Organization and coordination risk

The respondents suggested that the private sectors are preferred to undertake the
organization and coordination risk, while many experts in the interviews considered this
risk was actually shared with the government or undertaken alone by the government. A
closer observation could be seen that the common characteristic in those cases is the
strong intervention from local governments. For instance, the most important issue for
case 34 is to be completed on or ahead of time. All the organization and coordination tasks
during the construction period were actually finished by the local government. In case 30,
local government directly intervened in the coordination when a conflict among the
participants occurred because of their strong desire to project success. However, on the
other side, interviewees from cases 26 and 29 both pointed out that:
It is caused by the project company and hence should be allocated to it. The relying upon local
government will increase the possibility of over intervention from the government and then in
turn reduce the operation efficiency of the project company.

This study therefore recommends to list the past project experience and coordination
capability of a private consortium as one of the criteria of tendering evaluation and allow
the private consortium to deal with this issue alone. The private sector also suggests that
the timing and process of the governments involvement should be clearly defined so as
to avoid the risk of the governments unreasonable intervention.
6.5 Tax regulation changes
Instead of being allocated to the public sector in the perspectives of experts in the
Delphi study, the risk of tax regulation changes was actually shared in the past
projects. An interviewee in case 26 explained:
According to the law on the administration of tax collection in China (i.e. No. 49 Order of
the President of the Peoples Republic of China), no governmental entities or individuals
may be permitted without authorization to make decisions regarding the tax reduction,

Equitable risks
allocation

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exemption or refund of tax. In other words, the national tax regulation change is out of the
control of local governments. It is hence unpractical to assign the risk to local governments
alone.

308

In light of the mentioned reason, this study therefore recommends this risk to be
shared. In particular, local governments shall promise to use their best efforts to ensure
that the private consortium would be entitled to enjoy tax incentives according to the
laws and regulations of China, especially for the exemption of local income tax. It is also
recommended to set up a threshold of change of tax rate. Once the change is greater
than the prescribed threshold, the government shall be responsible for part of the loss.
6.6 Equitable risk allocations
According to the above analysis and Table III, the equitable risk allocation scheme
suggested in this paper is as follows:
.
A total of 12 risks to be mostly allocated to the public sector as depicted in Table III are:
expropriation and nationalization, governments reliability, governments
intervention, poor political decision making, land acquisition, approval and
permit, corruption, supporting facilities risk, uncompetitive tender,
competition (exclusive right), change in law and immature juristic system.
.
There are 15 risks in the equally shared risk category option, i.e. third-party
reliability, public/political opposition, interest rate, foreign exchange and
convertibility, inflation, improper contracts, ground/weather conditions,
market demand change, tariff change, payment risk, force majeure, tax
regulation changes, environmental protection, subjective evaluation and
insufficient financial audit.
.
The survey results (Table III) indicate that ten risks out of 37 should be mostly
allocated to the private sector. These risks include: financial risk, construction
completion, construction/operation changes, delay in supply, technology
risk, operation cost overrun, residual assets risk, consortium inability,
organization and coordination risk and private investor change.
7. Conclusions
In the authors previous study (Ke et al., 2010b), a two-round Delphi survey was
conducted in Mainland China to analyze the risks and their preferred allocations for PPP
projects in China from the perspectives of 46 experts with in-depth knowledge and sound
experience of risk management. However, the risk allocation preferences derived may
not be equitable for all PPP projects at this stage. This paper hence attempts to validate
and elaborate on the preferred risk allocations by furthering the research.
A series of face-to-face interviews were subsequently carried out from March to
May 2009 to collect actual risk allocation in the past successful PPP projects.
By comparing the preferred and actual allocations and discovering the reasons behind
the differences, an equitable risk allocation scheme for different sectors was obtained.
There are five risks identified with significant different allocations, i.e. public/political
opposition, foreign exchange and convertibility, supporting utilities risk,
organization and coordination risk and tax regulation changes. After uncovering
the reasons behind the actual allocations of these five risks, only the risk of
tax regulation changes was recommended to be reallocated to the shared category.

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In other words, the equitable allocations for the other 36 risks remain as the findings in
the previous study (Ke et al., 2010b). These interviews reinforce the rationale of the
preferred allocations from the Delphi study in Ke et al. (2010b), so that the re-allocation
for tax regulation changes risk and the preferred allocations for the other 36 risks in
Ke et al. (2010b) together would be considered as equitable for PPP projects in China as
described in Section 6.6.
The selected cases were regarded as the most successful project that the
interviewees were directly involved in. These projects were completed on or ahead of
time, within budget and to an acceptable level of quality, and run well with little
conflict among the parties during the operation period. But one limitation of this study
is that no successful transferred projects are available for the comparative analysis,
because PPP is a new financing modality in China.
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About the authors
Yongjian Ke is Research Fellow in the Department of Building, National University of Singapore,
Singapore and was formerly at the Department of Construction Management, Tsinghua
University, Beijing, China. Yongjian Ke is the corresponding author and can be contacted at:
bdgky@nus.edu.sg
ShouQing Wang is Professor in the Department of Construction Management, Tsinghua
University, Beijing, China.
Albert P.C. Chan is Professor and Associate Head in the Department of Building and Real
Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong Special
Administrative Region, China.
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